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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, 2003, 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
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Commission File Number 33-64325
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REUNION INDUSTRIES, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 06-1439715
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(State of Incorporation) (I.R.S. Employer Identification No.)
11 STANWIX STREET, SUITE 1400, PITTSBURGH, PENNSYLVANIA 15236
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(Address of principal executive offices, including zip code)
(412) 281-2111
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(Registrant's telephone number, including area code)
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
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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.
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Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Act). Yes No X
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At June 30, 2003, 16,278,519 shares of common stock were issued and
outstanding. As of June 30, 2003, 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
$1,151,414.
DOCUMENTS INCORPORATED BY REFERENCE: Part III, Items 10 through 13 are
incorporated from the Registrant's definitive proxy statement.
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REUNION INDUSTRIES, INC.
TABLE OF CONTENTS
Page No.
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PART I
Item 1. Business 4
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 18
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 43
Item 8. Consolidated Financial Statements and Supplementary Data 44
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosures 44
Item 9a. Controls and Procedures 44
PART III
Item 10. Directors and Executive Officers of the Registrant 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial
Owners and Management 45
Item 13. Certain Relationships and Related Transactions 45
Item 14. Principal Accounting Fees and Services 45
PART IV
Item 15. Exhibits, Financial Statements Schedules,
and Reports on Form 8-K 46
SIGNATURES 47
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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 that are intended to be covered by the safe harbors created thereby. The
forward-looking statements contained in this report are enclosed in brackets
[] for ease of identification. Note that all forward-looking statements
involve risks and uncertainties. Factors which could cause the future results
and shareholder values to differ materially from those expressed in the
forward-looking statements include, but are not limited to, the strengths of
the markets which the Company serves, the Company's ability to generate
liquidity and the Company's ability to service its debts and meet financial
covenants. Although the Company believes that the assumptions underlying the
forward-looking statements contained in this report are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurances
that the forward-looking statements included or incorporated by reference in
this report will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included or
incorporated by reference herein, the inclusion of such information should not
be regarded as a representation by the Company or any other person that the
Company's objectives and plans will be achieved. In addition, the Company
does not intend to, and is not obligated to, update these forward-looking
statements after filing and distribution of this report, even if new
information, future events or other circumstances have made them incorrect or
misleading as of any future date.
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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. The
terms "Company" and "We" refer to Reunion after the merger. 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 industrial manufacturing operations that
design and manufacture engineered, high-quality products for specific customer
requirements, such as large-diameter seamless pressure vessels, hydraulic and
pneumatic cylinders, leaf springs and precision plastic components. Until
December 2001, the Company's products also included heavy-duty cranes, bridge
structures and materials handling systems. These businesses were sold during
2002 and are reported as discontinued operations.
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 product
categories:
* Metals manufactures and markets fabricated and machined industrial metal
parts and products including large-diameter seamless pressure vessels,
hydraulic and pneumatic cylinders and leaf springs.
* Plastics manufactures precision molded plastic parts and provides
engineered plastics services.
Metals includes two reportable segments: Pressure vessels and springs;
and Cylinders. Plastics is a single segment.
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.
METALS
Our Metals businesses include:
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
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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
Libertyville, Illinois, 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. [We plan to
combine Hanna's Chicago operations with operations in the facility in
Libertyville as liquidity permits.]
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. Metals operates in mature markets. Except for
pressure vessels, Metals' 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. CPI is the dominant provider of pressure
vessels in the U.S. Many of our competitors have financial and other
resources that are substantially greater than ours. [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.]
Individual customers sometimes account for more than 10% of Metals'
sales. During 2003, one customer in our cylinders product line accounted for
approximately 10% of Metals' sales. We believe our relationship with this
customer is good. [However, loss of this customer could negatively affect the
Company's results of operations.]
Sales and Marketing. Metals 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 independent distributors that specialize in metal
products.
Raw Materials. The major raw materials used by Metals include 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 were stable during 2003. [Increases in the prices
of raw materials could negatively affect our operating results if they can not
be passed on to our customers.]
Backlog. Metals backlog, which the Company believes is firm, was $11.2
million at December 31, 2003 and $14.9 million at December 31, 2002. As of
February 2004, Metals backlog increased to $14.4 million, or 28%, since
year-end 2003.
Research and Development. Our Metals research and development activities
relate to improving the quality and performance of our products. We also
develop ways to meet the design requirements and specifications of customers
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that require customized products. To do this, there are engineering
departments at all major metals manufacturing divisions. Metals' products are
not materially dependent on any patents, licenses or trademarks.
PLASTICS
Our Plastics businesses include two divisions: thermoplastics and
thermoset plastics. We do business under the name ORCplastics.
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 as Rostone, the thermoset plastics division compounds and
molds thermoset polyester resins. The thermoset plastics division's principal
products consist of specially designed and manufactured components for
original equipment manufacturers in the electrical, transportation, appliance
and office equipment industries. The thermoset plastics division is also a
compounder of proprietary fiberglass reinforced materials used in a number of
customer applications.
Thermoplastics Division
Markets and Customers. The markets for thermoplastics' products
exceeded $25 billion annually and are very competitive. The competitors are
international companies with multi-plant operations based in the United
States, Germany, France and Japan, and 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. About 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.
During 2003, one customer accounted for approximately 17% of the
thermoplastics division's sales (10% of Plastics sales). [Loss of this
customer could adversely affect our results of operations]. The
thermoplastics division is trying to diversify its customer base and has
approximately 500 customers. ORCplastics wants more customers in the business
machines, consumer products and medical products industries. [We believe that
growth opportunities exist in these industries.]
Sales and Marketing. Sales are made through an internal sales staff and
a network of independent manufacturers' representatives working from regional
offices throughout the eastern United States. We pay commissions of between
2% and 5% percent of sales based upon volume.
Raw Materials. The thermoplastics division uses thermoplastic polymers
which are available from a number of suppliers. Prices for these materials
are affected by changes in market demand. Although many of our contracts
provide that price increases can be passed through to the customers,
[increases in the prices of raw materials could negatively affect our
operating results if they can not be passed on to our customers.]
Research and Development. Thermoplastics' research and development
activities relate to meeting design requirements and specifications of
customers that require customized products. To meet these objectives, the
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division has engineering personnel at each of its manufacturing locations.
The division's business is not materially dependent on any patents, licenses
or trademarks.
Thermoset Plastics Division
Markets and Customers. The thermoset plastics division 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 2003, one customer accounted for approximately 22% of the thermoset
plastics division's sales (9% of Plastics sales). [The loss of this customer
could adversely affect our operating results.] The thermoset plastics
division continues to seek new customers not only in the same industries as
thermoplastic, but in other industries including automotive.
Sales and Marketing. Sales are made through an internal sales staff and
a network of independent representatives throughout the central United States.
We pay commissions of between 3% and 5% of sales based on volume.
Raw Materials. The thermoset plastics division uses styrene, polyester
resins, fiberglass and commercial phenolics, which are available from a number
of suppliers. Prices and availability of these materials are affected by
changes in market demand. [Increases in the prices of raw materials could
negatively affect our operating results if they can not be passed on to our
customers.] When possible, if shortages occur, the thermoset plastics
division engineers new products to provide its customers a cost-effective
alternative to the material in short supply.
Research and Development. The thermoset plastics division is focused on
the development of proprietary thermoset materials under the trade name
Rosite. This division compounds a wide range of Rosite materials to satisfy
its customers' various needs. The thermoset plastics division also provides
services in meeting customers' design requirements and specifications of their
customized products. Other than Rosite, the thermoset plastics division's
business is not materially dependent on any patents, licenses or trademarks.
Backlog. Plastics backlog, which the Company believes is firm, was $6.0
million at December 31, 2003 and $5.4 million at December 31, 2002. As of
February 2004, Plastics backlog increased to $6.5 million, or almost 10%,
since year-end 2003.
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REPORTABLE SEGMENT DATA - Segment data for the years ended December 31, 2003,
2002 and 2001 (in thousands except for related notes):
Capital Total
Net Sales EBITDA(1) Spending Assets(2)
--------- --------- --------- ---------
2003:
- -----
Metals:
Pressure vessels and springs $ 23,531 $ 3,677 $ - $ 13,407
Cylinders 17,891 353 101 7,877
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Subtotal Metals 41,422 4,030 101 21,284
Plastics 27,087 1,522 178 14,516
Corporate and other (3) - (3,440) 3 15,723
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Totals $ 68,509 2,112 $ 282 $ 51,523
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Gain on extinguishment of debt 10,991
Depreciation (6) (2,582)
Interest expense (6,939)
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Income from continuing operations
before income taxes $ 3,582
========
2002:
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Metals:
Pressure vessels and springs $ 20,135 $ 1,103 $ 52 $ 13,725
Cylinders 18,087 (286) 92 9,700
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Subtotal Metals 38,222 817 144 23,425
Plastics 32,577 1,914 126 16,536
Corporate and other (4) - (3,482) 2 15,357
Discontinued operations - - 230 -
-------- -------- -------- --------
Totals $ 70,799 (751) $ 502 $ 55,318
======== ======== ========
Depreciation (6) (2,762)
Interest expense (8,020)
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Loss from continuing operations
before income taxes $(11,533)
========
2001:
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Metals:
Pressure vessels and springs $ 41,594 $ 6,085 $ 260 $ 17,936
Cylinders 19,369 (2,182) 26 9,662
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Subtotal Metals 60,963 3,903 286 27,598
Plastics 38,532 (1,123) 1,066 18,443
Corporate and other (4) - (3,660) 10 14,572
Discontinued operations - - 1,535 23,803
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Totals $ 99,495 (880) $ 2,897 $ 84,416
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Write-off of impaired goodwill (2,946)
Depreciation and amortization (5)(6) (5,392)
Interest expense (7,057)
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Loss from continuing operations
before income taxes $(16,275)
========
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(1) EBITDA is presented as it is the primary measurement used by management
in assessing segment performance and not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a
widely accepted financial indicator of a company's ability to incur and
service debt.
(2) Corporate and other assets at December 31, 2003, 2002 and 2001 includes
$8.0 million of goodwill that relates to the Company's pressure vessel and
springs segment. For evaluation purposes under SFAS No. 142, this
goodwill is included in the carrying value of pressure vessels and
springs.
(3) Includes gains totaling $0.2 million on sales of property and equipment.
(4) Includes gain of $0.4 million on sale of equipment with no carrying value.
(5) Excludes amortization of deferred financing costs of $999,000 for the
year ended December 31, 2001, which is included in interest expense.
(6) The Company ceased amortizing goodwill effective January 1, 2002.
Employees
At December 31, 2003, Reunion Industries employed 545 full time
employees, of whom 248 were employed in Metals and 285 were employed in
Plastics. There were 12 corporate employees. The Company believes its
relations with its employees are good. A breakdown of the Company's workforce
by location and function at December 31, 2003 is as follows.
General and
Group Location Manufacturing Administrative Total
- -------- -------- ----------------- ----------------- -----
Union Non-Union Union Non-Union
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Metals:
McKeesport, PA 85(1) 5 8(2) 15 113
Chicago, IL 63 18 81
Libertyville, IL 29 4 33
Miami, OK 16 4 20
Beijing, China 1 1
Plastics:
Oneida, NY 60 12 72
Phoenix, NY 51 8 59
Siler City, NC 38 5 43
LaFayette, IN 94(3) 7 10 111
Corporate:
Pittsburgh, PA 12 12
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Totals 179 269 8 89 545
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(1) United Steelworkers of America - Contract expires May 31, 2006.
(2) United Steelworkers of America - Contract expires May 31, 2006.
(3) International Brotherhood of Electrical Workers - Contract expires
February 26, 2006.
The employees in Beijing, China are Chinese nationals and relate to
seamless pressure vessel sales efforts in that region. These employees are
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not covered by a union nor are they covered by any benefit or insurance plans
sponsored by the Company.
As of December 31, 2003, approximately 34% of the Company's workforce was
covered by collective bargaining agreements, none of which expire within one
year of December 31, 2003.
Available Information
Reunion's website is http://www.reunionindustries.com. Reunion makes
available free of charge, through its website, its annual, quarterly and
current reports, and any amendments to those reports, as soon as reasonably
practicable after electronically filing such reports with the Securities and
Exchange Commission. Information contained on Reunion's website is not part
of this report.
ITEM 2. PROPERTIES
The Company has a total of 93.8 acres and approximately 1.3 million
square feet under roof being used for ongoing operations. Except for CPI's
sales office in Beijing, China and the Company's corporate offices sites in
Pittsburgh, PA, which are administrative, all locations are both manufacturing
and administrative facilities:
Approx.
Square Land Expiration
Group Location Feet Acres Title Date
- -------- -------- ------- ----- ----- ----------
Metals: McKeesport, PA 603,000 37.0 Owned -
Beijing, China 1,000 - Leased 10/31/04
Chicago, IL 85,000 - Leased monthly
Libertyville, IL 56,000 - Leased 12/31/13
Milwaukee, WI 68,000 3.2 Owned -
Miami, OK 39,000 13.5 Owned -
Plastics: Oneida, NY 84,000 9.8 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 8,000 - Leased 4/30/05
The operations of the Company's Milwaukee, WI facility have been
relocated to its leased facility in Libertyville, IL. [We plan to dispose of
or lease out this facility. We also plan to combine Hanna's Chicago
operations with operations in the facility in Libertyville as liquidity
permits.]
We also own certain oil and gas properties in Louisiana that were
retained when we disposed of our oil and gas operations in 2000. We retained
these properties because of litigation concerning environmental matters. [We
plan to operate the wells on the property for the net production revenues as
required by a litigation settlement agreement discussed in Item 3. Legal
Proceedings under the heading "Louisiana Environmental."]
We also hold 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
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yielded any significant revenues from mining operations or any other
significant revenues. [We plan to pursue the sale or farm out of these
interests.]
All of our facilities have been in operation for a sufficient period of
time to demonstrate their suitability for manufacturing and administrative
purposes. [The production capacities of our facilities are sufficient for
future needs.]
ITEM 3. LEGAL PROCEEDINGS
The Company is and has been involved in a number of lawsuits and
administrative proceedings, which have arisen in the ordinary course of
business of the Company and its subsidiaries. A summary of such legal
proceedings follows.
Louisiana Environmental
In connection with the sale of its former oil and gas operations,
pre-merger Reunion retained certain oil and gas properties in Louisiana
because of litigation concerning environmental matters. The Company is in the
process of environmental remediation under a plan approved by the Louisiana
Department of Natural Resources Office of Conservation (LDNROC). The Company
has recorded an accrual for its proportionate share of the remaining estimated
costs to remediate the site based on plans and estimates developed by the
environmental consultants hired by the Company. During 1999, the Company
conducted remediation work on the property. The Company paid $172,000 of the
total cost of $300,000. Regulatory hearings were held in January 2000 and
2001 to consider the adequacy of the remediation conducted to date. In August
2001, LDNROC issued its order for the Company to complete the soil remediation
under the plan approved in 1999 and to perform additional testing to determine
to what extent groundwater contamination might exist. No remediation was
performed in 2000, 2001 or 2002 pending the decision. However, the Company
has paid $434,000 for its share of consulting services in connection with the
hearings. Most recently, the Company's environmental consultants filed with
the LDNROC updated amendments to the prior approved plan for sampling and
remediation. If approved, the plan will be implemented. At December 31,
2003, after accruing an additional $40,000 in December 2002, the balance
accrued for these remediation costs is approximately $831,000. The Company
believes that future remediation costs will not exceed the amount accrued and
will be funded by net production revenues of the producing wells on the
property as part of the settlement agreement discussed below.
Litigation on this matter had been stayed pending the determination by
the LDNROC as to the extent of remediation that would be required. Such stay
was lifted and the District Court had established a jury trial for September
22, 2003 to determine the necessity for any further remediation and the extent
of damages, if any, suffered by the plaintiff owners of the property.
However, an agreement to settle the litigation between the plaintiff owners of
the property and the other involved parties, including the Company, has been
reached and finalized. The Company's share of the settlement costs were
funded by the other defendants to the litigation. The terms of the agreement
are that the Company must reimburse the other defendants to the litigation at
least $120,000 per year for ten years, but that such amount can be paid from
net production revenues from operation of the producing wells owned by the
Company on the property. However, this is a non-recourse agreement such that,
should the wells be depleted before all such costs are reimbursed, the Company
is not required to fund the unreimbursed balance. During 2003 and 2002, net
production revenues totaled $248,000 and $181,000, respectively. Based on
past operation results of the producing well, the Company believes that future
net production revenues will be sufficient to fund the minimum required under
the settlement agreement.
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Gambonini Environmental
On March 15, 2002, the Company received a Request for Information from
the United States Environmental Protection Agency (USEPA) regarding the
Gambonini Mine Site (Site) outside Petaluma, Marin County, California. The
Company gathered and forwarded the information the USEPA requested. On May
16, 2002, the Company, as the successor to Buttes Gas & Oil Company (BGO),
received from the USEPA a notice of potential liability and demand for payment
of $3,909,614.37 for reimbursement of costs related to the USEPA's removal and
environmental restoration efforts at the Site initiated in 1998 pursuant to
the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA).
BGO, predecessor by merger to the Company, leased the site for mining
purposes and operated a mercury mine there from 1965 to 1970. BGO's mining
operations were terminated in 1970. Subsequently, under the supervision of
the environmental and planning representatives of Marin County, BGO completed
closure and environmental restoration activities at the site, including
stabilization and re-vegetation of the site. BGO then quitclaimed the mining
lease to the Site owners, the Gambonini's, in 1973. Because of apparent
overgrazing at the Site subsequent to BGO's restoration efforts, a storm in
1982 caused severe flooding, which resulted in the failure of a dam built to
retain mining materials. Runoff from the flood released mining materials into
the creek below and, ultimately, into the Tomales Bay, a local recreation and
fishing area.
In March 2003, the Company and the USEPA reached an agreement in
principle to settle the USEPA's claim for payment by the Company of $100,000
plus interest at the Superfund rate (which is currently 1.27%), payable in
three installments over a two-year period. This amount is accrued as of
December 31, 2003 and 2002. This settlement agreement will resolve the
USEPA's claims for reimbursement of past environmental response costs under
CERCLA, but does not resolve all possible claims the United States may have
with respect to the Gambonini mine site which could include, but not be
limited to, claims for natural resource damages. The United States has given
no indication as to whether or not it will pursue such claims. The Company
has agreed to toll the statute of limitations with respect to any natural
resource damages claims, if any, from August 30, 2002 to April 1, 2008.
Asbestos (Hanna)
During 2003, Reunion Industries was named as defendant in 32 actions in
the state of Georgia and one action in the state of Alabama. Such actions
claim that cylinders manufactured by the Hanna division of Reunion Industries
contained asbestos that caused severe illness. Since most of the plaintiffs'
exposure occurred prior to the purchase of the assets of this business by
Reunion's predecessor in 1980, and since there is no evidence that asbestos
was used in Hanna products after 1980, the Company's position is that it has
no liability in these suits. The plaintiffs' attorney has tentatively agreed
to dismiss Reunion from these suits, subject to his review of certain
information we have provided to him about our predecessor and if Reunion will
assist the plaintiffs in their case against the pre-1980 owner of the
business. Reunion has agreed to and is currently providing the requested
assistance to plaintiffs' attorney.
Asbestos (ORC)
Since July 10, 2001, various legal actions, some involving multiple
plaintiffs, alleging personal injury/wrongful death from asbestos exposure
have been filed in multiple states, including California, Oregon, Washington,
New York and Mississippi, against a large number of defendants, including
Oneida Rostone Corporation (ORC), pre-merger Reunion's Plastics subsidiary and
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the Company's Plastics segment. In October 2001, Allen-Bradley Company, a
former owner of the Rostone business of ORC, accepted Reunion Industries'
tender of its defense and indemnification in the first such lawsuit filed,
pursuant to a contractual obligation to do so. Subsequent to the acceptance
of the tender of defense and indemnification in the first lawsuit,
Allen-Bradley Company has accepted the Company's tender of defense and
indemnification in a total of 101 separate actions, all of which have been
defended by Allen-Bradley Company.
Wheeling-Pitt Preference Claims
In the 2002 fourth quarter, Wheeling-Pittsburgh Steel Corporation
(debtor) filed suit against the Company in U.S. Bankruptcy Court for the
Northern District of Ohio, seeking to compel the return of certain
preferential transfers pursuant to 11 U.S.C 547. The debtor sought a judgment
in the amount of $2,705,541. The Company filed an answer alleging that such
payments are not avoidable because (a) the transfers were made by the Debtor
in the ordinary course of business and (b) the Company extended new value to
the Debtor after the transfers were made in an amount exceeding the original
payments. A status conference was held before the court on April 21, 2003.
The parties agreed to stay discovery pending settlement discussions. After
such discussions, in November 2003, the parties agreed to a settlement of
$60,000 to be paid by the Company in seven installments. Half of the
settlement was due in December 2003 and the balance is payable in six equal
monthly payments beginning January 2004. As of March 30, 2004, all amounts
owed by the Company under this settlement arrangement have been paid.
SFSC Litigation
The Company has been named as a defendant in fifteen consolidated
lawsuits filed in December 2000 or early 2001 in the Superior Court for Los
Angeles County, California, three of which are purported class actions
asserted on behalf of approximately 200 payees. The plaintiffs in these
suits, except one, are structured settlement payees to whom Stanwich Financial
Services Corp. (SFSC) is indebted. The Company and SFSC are related parties.
In addition to the Company, there are numerous defendants in these suits,
including SFSC, Mr. Charles E. Bradley, Sr. (Mr. Bradley), who is Chairman of
the Board, Chief Executive Officer and a director of the Company (Mr. Bradley)
and the sole shareholder of SFSC's parent, several major financial
institutions and certain others. All of these suits arise out of the
inability of SFSC to make structured settlement payments when due. Pursuant
to the court's order, plaintiffs in the purported class actions and plaintiffs
in the individual cases actions filed a model complaint. Except for the class
allegations, the two model complaints are identical. The plaintiffs seek
compensatory and punitive damages, restoration of certain alleged trust
assets, restitution and attorneys' fees and costs.
The plaintiffs in one of the suits are former owners of a predecessor of
SFSC and current operators of a competing structured settlement business.
These plaintiffs claim that their business and reputations have been damaged
by SFSC's structured settlement defaults, seek damages for unfair competition
and purport to sue on behalf of the payees.
The plaintiffs allege that the Company borrowed funds from SFSC and has
not repaid these loans. The plaintiffs' theories of liability against the
Company are that it is the alter ego of SFSC and Mr. Bradley and that the
Company received fraudulent transfers of SFSC's assets. The plaintiffs also
assert direct claims against the Company for inducing breach of contract and
aiding and abetting an alleged breach of fiduciary duty by SFSC.
- 13 -
On May 25, 2001, SFSC filed a Chapter 11 Bankruptcy Petition in the U.S.
Bankruptcy Court for the District of Connecticut. SFSC filed an adversary
proceeding in the bankruptcy case against the plaintiffs seeking a declaration
that the structured settlement trust assets are the property of the bankruptcy
estate. On July 16, 2001, the bankruptcy court granted a temporary
restraining order enjoining the plaintiffs from prosecuting their claims
against the Company, SFSC, Mr. Bradley and others. As a result of this
restraining order of the bankruptcy court, the Company entered a standstill
agreement with the plaintiffs on August 22, 2001. Pursuant to the standstill
agreement and the stipulation of the parties to the SFSC bankruptcy case, the
plaintiffs, while not agreeing to waive or release their direct claims against
the Company for damages, agreed to cease and desist the prosecution of their
claims against the Company until no earlier than sixty days following service
of written notice to the Company stating that they have elected to
unilaterally terminate the standstill.
Plaintiffs filed second amended model complaints in the class actions and
individual cases on August 24, 2001. The court granted plaintiffs' motion for
class certification on February 13, 2002 and certified a class consisting of
unpaid structured settlement payees. Both model complaints allege causes of
action against the Company for interference with contract and aiding and
abetting breach of fiduciary duty. However, pursuant to the standstill
agreement, the plaintiffs are taking no action to prosecute these claims
against the Company at this time.
Certain of the financial institution defendants have asserted
cross-complaints against the Company for implied and express indemnity and
contribution and negligence. The Company denies the allegations of the
plaintiffs and the cross-complainant financial institutions and intends to
vigorously defend against these actions and cross-actions.
A settlement (the "State Court Settlement") has been reached among the
plaintiffs and the following defendants (collectively, the "Financial
Institution Defendants") in the state court action: Bankers Trust Co., U.S.
Trust Co., Wells Fargo Bank, Bank of America, Bear Stearns and Settlement
Services, Inc. Under the settlement, the Financial Institution Defendants
would pay the plaintiffs $90,630,969 and Bankers Trust would receive an
assignment of the claims of the plaintiffs and the other Financial Institution
Defendants against the Company and certain other defendants.
In the SFSC bankruptcy, the Company and certain others have entered into
a settlement (the "Bankruptcy Settlement") with SFSC and Bankers Trust (for
itself and as expected assignee of the claims of the state court plaintiffs
and the other Financial Institution Defendants). The Bankruptcy Settlement,
which has been approved by the Bankruptcy Court, is subject to the
satisfaction of ceratin conditions, including the order entered by the court
in the state court action approving the State Court Settlement becoming final.
Under the Bankruptcy Settlement, the Company (1) would be obligated to pay to
SFSC $4.6 million (less a setoff of approximately $310,000) by December 31,
2006, plus interest at 10% per annum from the date on which SFSC's Plan of
Reorganization becomes effective and (2) would be released from all claims
that have been made or could have been made by the plaintiffs and the
Financial Institution Defendants in the state court action and by SFSC in its
bankruptcy proceeding. The settlement amount would not constitute a new
liability of the Company, as the settlement relates to indebtedness that is,
and has been for some time, included as a liability on the Company's balance
sheet.
Kingway Arbitration
On September 24, 2002, we sold Kingway, our discontinued materials
handling systems operations. Finalization of this sale was subject to a
- 14 -
post-closing working capital adjustment. This amount was in dispute between
the Company and the buyer. The buyer alleged it was owed approximately
$905,000 based on its calculation of working capital on the closing date.
Pursuant to the asset purchase agreement, both parties agreed to submit this
dispute to a mutually agreed-upon independent accounting firm for resolution
in arbitration. The arbitrator for the dispute determined that, of the
$905,000 working capital deficiency claimed by the buyer, $704,000 was not
valid. The Company and the Buyer entered into a payment arrangement for a
total of $200,000 to be paid in $50,000 installments by the Company beginning
January 1, 2004. As of March 1, 2004, the final payment of $50,000 was owed
by the Company under this arrangement.
LTV Preference Claims
In connection with the Chapter 11 bankruptcies of LTV Steel Company, Inc.
(LTV), et al, pending in the United States Bankruptcy Court for the Northern
District of Ohio, Youngstown Division, LTV has filed a complaint for avoidance
and recovery of preferential transfers against Alliance Machine Division, a
former division of the Company. Pursuant to an adversary proceeding filed in
the LTV Case on December 17, 2002, LTV seeks recovery of $385,000 in alleged
preferential transfers, together with costs and attorney's fees. Counsel for
Reunion has recently engaged in settlement negotiations with LTV and we have
reached an agreement in principle to settle the action for a one-time payment
of $1,000 and a waiver by Reunion of an administrative counterclaim. LTV is
currently drafting the settlement agreement for review by our counsel. No
amount has been accrued for this matter in the Company's financial statements.
U.S. Customs Service
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 has been no activity related to this matter since 1997.
Shareholder Suit
In December 1999, a stockholder of Reunion filed a purported class-action
lawsuit in Delaware Chancery Court alleging, among other things, that
Reunion's public stockholders would be unfairly diluted in the merger with
Chatwins Group. The lawsuit sought to prevent completion of the merger and,
the merger having been completed, seeks rescission of the merger or awarding
of damages. The lawsuit remains in the initial stages of discovery. Reunion
intends to vigorously contest the suit.
Asbestos (Alliance)
The Company has been named in approximately 1,250 separate asbestos suits
filed since January 1, 2001 by three plaintiffs' law firms in Wayne County,
Michigan. The claims allege that cranes from the Company's crane
manufacturing location in Alliance, OH were present in various parts of
McLouth and Great Lakes Steel Mills in Wayne County, Michigan and that those
cranes contained asbestos to which plaintiffs were exposed over a 40 year
span. Counsel for the Company has filed an answer to each complaint denying
- 15 -
liability by the Company and asserting all alternative defenses permitted
under the Court's Case Management Order. Counsel for the Company has
successfully resolved 401 cases with little or no cost to the Company. The
Company denies that it manufactured any products containing asbestos or
otherwise knew or should have known that any component part manufacturers
provided products containing asbestos. It has been further denied that the
Company was otherwise advised by component part manufacturers that component
parts could be hazardous, or otherwise constitute a health risk. The Company
intends to vigorously defend against these lawsuits.
Putman Properties
In the 2002 fourth quarter, in the Court of Common Pleas of Stark County,
Ohio, Putman Properties, Inc. filed a complaint against the Company asserting
breach of an exclusive listing contract in connection with the sale of certain
property ancillary to the divestiture of the Company's Alliance Machine
division in Alliance, Ohio. The plaintiff is a broker who claims entitlement
to a commission in the amount of $230,000. The Company has answered the
complaint, denies any liability and intends to vigorously defend against this
lawsuit. No amount has been accrued for this matter in the Company's
financial statements.
Suit Against Paquet and Paquet Counterclaim
In the 2002 fourth quarter, the Company filed suit in the District Court
for New Jersey against Paquet, a general contractor doing business in the
state of New Jersey. The Company contends that it is owed approximately $1.5
million in overdue payments and backcharges related to the supply of
structural steel for the construction of a bridge in New Jersey. The
defendant has asserted a counterclaim against the Company in the amount of
$2.5 million. Discovery is in process. The Company intends to vigorously
pursue its suit against the defendant and defend against its counterclaim. No
amount has been accrued for this matter in the Company's financial statements.
Dick Corporation
In the 2002 fourth quarter, Dick Corporation (Dick) filed an action
against the Company in the Court of Common Pleas of Allegheny County, PA.
Dick alleges that the Company breached a contract to supply it with structural
steel for use in a construction project for the PA Department of
Transportation. Dick seeks damages of approximately $351,000, representing
the extra costs allegedly incurred by Dick for Dick to secure structural steel
from another vendor. The Company has filed an answer to Dick's complaint in
which it denies any liability. Pleadings are closed and discovery has begun.
The Company believes it has meritorious defenses against Dick's suit and
intends to vigorously defend against it. No amount has been accrued for this
matter in the Company's financial statements.
Rostone Environmental
In February 1996, Reunion was informed by a contracted environmental
services consulting firm that soil and ground water contamination exists at
its Lafayette, Indiana site. Since then, the Company has expended $419,275 of
remediation costs. The Company estimates completion of this remediation
effort to be $15,000.
NAPTech Suit
On or about March 16, 2004, Shaw NAPTech, Inc. ("NAPTech"), as successor
by merger to NAPTech, Inc. and NAPTech PS Corporation, filed a suit against
the Company in state court in Baton Rouge, Louisiana, to collect payment on a
subordinated note issued to NAPTech and assumed by the Company in a January
- 16 -
2001 acquisition. NAPTech claims the amounts due under this note are
$3,145,403 in principal plus $1,207,875 in unpaid interest through November
30, 2003 plus interest at 15% per annum on the unpaid principal thereafter.
Such amounts are consistent with amounts recorded as payable to NAPTech by the
Company in the accompanying consolidated balance sheet. The Company is
investigating what defenses, if any, it may have in regards to this suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None in the fourth quarter of 2003.
- 17 -
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Reunion Industries' common stock is traded on the American Stock
Exchange. As of March 1, 2004, there were 1,175 holders of record of Reunion
Industries' common stock with an aggregate of 16,278,519 shares outstanding.
The table below reflects the high and low sales prices for the quarterly
periods for 2003 and 2002.
QUARTER ENDED High Low
- ------------- ------ ------
2003
March 31.......................................$0.200 $0.110
June 30........................................$0.350 $0.150
September 30...................................$0.500 $0.170
December 31....................................$0.890 $0.180
2002
March 31.......................................$0.844 $0.281
June 30........................................$0.594 $0.109
September 30...................................$0.450 $0.109
December 31....................................$0.320 $0.100
No cash dividends have been declared or paid during the past three years.
Cash dividends are limited by the availability of funds, including limitations
contained in our lending agreements. [We do not anticipate paying cash
dividends on our common stock in the foreseeable future.]
Equity Compensation Plan Information
Equity Compensation Plans
---------------------------
Approved by Not Approved
Security by Security
Holders Holders
------------ ------------
Number of Securities to be issued upon
exercise of outstanding options,
warrants and rights 614,000 -
========= =========
Weighted-average exercise price of
outstanding options, warrants
and rights $0.51 -
========= =========
Number of Securities remaining available
for future issuance under equity
compensation plans (excluding outstanding
options, warrants and rights) 161,100 -
========= =========
- 18 -
ITEM 6. SELECTED FINANCIAL DATA
All data is reported in thousands, except for per-share data. The data
is derived from the consolidated financial statements presented in Item 15
which also should be read. Effective January 1, 2002, we ceased amortizing
goodwill.
Year Ended December 31, 2003 2002 2001 2000 1999(1)
-------- -------- -------- -------- --------
EARNINGS DATA:
Net sales $ 68,509 $ 70,799 $ 99,495 $104,721 $ 59,691
Cost of sales 58,178 61,843 84,457 81,485 46,353
-------- -------- -------- -------- --------
Gross profit 10,331 8,956 15,038 23,236 13,338
Selling, general and
administrative expenses 10,969 13,256 15,718 16,388 7,864
Gain on extinguishment of debt (10,991) - - - -
Provision for restructuring - - 6,811 - -
Other (income) expense, net (168) (787) 1,727 (6,251) 305
-------- -------- -------- -------- --------
Operating profit (loss) 10,521 (3,513) (9,218) 13,099 5,169
Interest expense, net(2) 6,939 8,020 7,057 6,972 5,261
Equity in loss from continuing
operations of affiliate - - - 296 566
-------- -------- -------- -------- --------
Income (loss) before income
taxes from continuing
operations 3,582 (11,533) (16,275) 5,831 (658)
Provision for (benefit from)
income taxes - - 12,678 (616) (922)
-------- -------- -------- -------- --------
Income (loss) from
continuing operations $ 3,582 $(11,533) $(28,953) $ 6,447 $ 264
======== ======== ======== ======== ========
Income (loss) from continuing
operations applicable to
common stockholders(3) $ 3,582 $(11,533) $(28,953) $ 6,352 $ (192)
======== ======== ======== ======== ========
Weighted average common shares
outstanding(4) - basic 16,279 15,591 15,587 13,236 9,500
======== ======== ======== ======== ========
Weighted average common shares
outstanding(4) - diluted 16,654 15,591 15,612 13,306 9,500
======== ======== ======== ======== ========
Income (loss) from continuing
operations per common share
- basic and diluted(4) $ 0.22 $ (0.74) $ (1.86) $ 0.48 $ (0.02)
======== ======== ======== ======== ========
OPERATING AND OTHER DATA:
Cash flow from (used in)
operating activities(5) $ (2,665) $ (979) $ 5,050 $ 5,507 $ (4,168)
======== ======== ======== ======== ========
Cash flow from (used in)
investing activities(5) 173 27,931 (2,532) 27,997 34,494
======== ======== ======== ======== ========
Cash flow from (used in)
financing activities(5) 2,440 (27,337) (3,863) (31,385) (30,249)
======== ======== ======== ======== ========
Depreciation and
amortization(6) 2,582 2,762 5,392 4,639 1,648
======== ======== ======== ======== ========
- 19 -
Capital expenditures(7) 282 272 1,362 1,752 1,207
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Total assets 51,523 55,318 84,416 116,439 67,681
======== ======== ======== ======== ========
Debt in default - 40,049 64,389 - -
======== ======== ======== ======== ========
Revolving credit facility 9,214 - - 19,367 5,834
======== ======== ======== ======== ========
Long-term debt(8) 31,915 61 3,793 50,732 49,971
======== ======== ======== ======== ========
Redeemable preferred stock - - - - 8,938
======== ======== ======== ======== ========
Stockholders' equity
(deficit) (27,755) (30,840) (17,245) 21,559 (7,870)
======== ======== ======== ======== ========
EBITDA(9): $ 2,112 $ (751) $ (880) $ 17,738 $ 6,817
======== ======== ======== ======== ========
(1) Represents historical financial data of Chatwins Group as Chatwins Group
was considered the acquirer in the merger. The Company has restated such
financial data for the classifications of its bridges and cranes and materials
handling systems segments as discontinued operations.
(2) Includes amortization of debt issuance expenses and estimated warrant
value in 2003 of the following amounts for the following years: 2003: $97;
2002: $752; 2001: $1,011; 2000: $897 and 1999: $1,308.
(3) 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 1999.
(4) Weighted average shares outstanding for the year ended December 31, 1999
was restated to give retroactive effect to the recapitalization of Chatwins
Group in connection with the merger.
(5) Not restated for discontinued operations.
(6) Excludes amortization of debt issuance expenses and depreciation and
amortization related to discontinued operations. See note (2) above.
(7) Excludes capital expenditures of discontinued operations.
(8) Excludes borrowings under revolving credit facilities and includes
current maturities of 13% senior notes for 1999 through 2000.
(9) EBITDA is calculated as follows:
2003 2002 2001 2000 1999(1)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before taxes $ 3,582 $(11,533) $(16,275) $ 5,831 $ (658)
Interest expense, net(2) 6,939 8,020 7,057 6,972 5,261
Depreciation and
amortization(6) 2,582 2,762 5,392 4,639 1,648
Gain on extinguishment of debt (10,991)
Write-off of impaired goodwill - - 2,946 - -
Equity loss from continuing
operations of affiliate - - - 296 566
-------- -------- -------- -------- --------
EBITDA $ 2,112 $ (751) $ (880) $ 17,738 $ 6,817
======== ======== ======== ======== ========
- 20 -
EBITDA is presented in the Selected Historical Financial Data, not as an
alternative measure of operating results or cash flow from operations as
determined by accounting principles generally accepted in the United States,
but because it is a widely accepted financial indicator of a company's ability
to incur and service debt and due to the close relationship it bears to
Reunion's financial covenants in its borrowing agreements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is provided to assist readers in
understanding the Company's financial performance during the periods presented
and significant trends which may impact the future performance of the Company.
It should be read in conjunction with the consolidated financial statements
and accompanying notes included elsewhere in this Form 10-K.
GENERAL
The Company owns and operates industrial manufacturing operations that
design and manufacture engineered, high-quality products for specific customer
requirements, such as large-diameter seamless pressure vessels, hydraulic and
pneumatic cylinders, leaf springs and precision plastic components. Until
December 2001, the Company's products also included heavy-duty cranes, bridge
structures and materials handling systems. These businesses were sold during
2002 and are reported as discontinued operations.
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 product
categories:
* Metals manufactures and markets fabricated and machined industrial metal
parts and products including large-diameter seamless pressure vessels,
hydraulic and pneumatic cylinders and leaf springs.
* Plastics manufactures precision molded plastic parts and provides
engineered plastics services.
Metals' includes two reportable segments: Pressure vessels and springs;
Cylinders. Plastics is a single segment.
RECENT EVENTS
Refinancing
On December 3, 2003, the Company announced that it was successful in
refinancing its bank loan facilities and restructuring its 13% senior notes.
On that date, the Company entered into a new $25.0 million revolving and term
loan bank credit facility with Congress Financial Corporation (Congress) that
replaced its then existing revolving and term loan facility with Bank of
America (BOA). At the same time, the Company also entered into $5.2 million
of new loan facilities with two private capital funds through a $4.2 million
secured term loan and a $1.0 million increase in a then existing subordinated
note payable. Proceeds from these refinancing activities totaled $13.0
million, including $4.6 million under the revolving credit facility, $3.2
million under the term loan facility and $5.2 million of financing from the
private capital funds. At the time of the refinancing, the Company's
indebtedness to BOA totaled $11.7 million, including $10.8 million of
- 21 -
revolving credit debt and a term loan of $0.9 million. Proceeds from the
refinancing were used to repay our then existing BOA facilities, fund $0.7
million of consent fees payable to our 13% senior noteholders and pay $0.6
million of transaction related fees and expense to our new lenders. All
defaults that existed under the BOA facilities at the time of the refinancing
were removed as the result of the full repayment of amounts then outstanding.
Congress Financial Corporation Revolving and Term Loan Credit Facility
On December 3, 2003, the Company entered into a new revolving and term
loan bank credit facility with Congress Financial Corporation. This credit
facility consists of revolving credit, term loan and letter of credit
accommodations up to a maximum credit of $25.0 million. At December 31, 2003,
the Company had outstanding borrowings under this facility totaling $12.4
million, including $9.2 million of revolving credit and a term loan of $3.2
million. The $3.2 million term loan amortizes to the revolving credit
availability at a rate of $53,000 per month beginning on January 31, 2004
until fully paid. This facility has a three-year initial term and
automatically renews for additional one-year increments unless either party
gives the other notice of termination at least 90 days prior to the beginning
of the next one-year term.
Interest on loans outstanding under the Congress facility is payable
monthly at a variable rate tied to the prime rate publicly announced from time
to time by Wachovia Bank, National Association, plus 2.50%. The facility also
provides for a default interest rate of the prime rate plus 4.50%.
The Congress facility is collateralized by a continuing security interest
and lien on substantially all of the current and after-acquired assets of
Reunion including, without limitation, all accounts receivable, inventory,
real property, equipment, chattel paper, documents, instruments, deposit
accounts, contract rights and general intangibles.
The Congress facility requires Reunion to comply with financial covenants
and other covenants, including a minimum amount of earnings before interest,
taxes, depreciation and amortization (EBITDA) and a minimum fixed charge
coverage ratio. The minimum EBITDA covenant began in 2004 and requires the
Company to maintain minimum monthly amounts of EBITDA ranging from $450,000 in
January 2004 to $600,000 in December 2004 with $50,000 to $100,000 increments
or decrements occurring during the year. There are also minimum monthly
EBITDA amounts required during 2005 and 2006. Through February 2004, the
Company achieved the minimum monthly EBITDA required for compliance with this
covenant. The minimum fixed charge coverage ratio 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 March 31,
2004, for the year-to-date period starting on January 1, 2004. For quarters
ended on and after December 31, 2004, the components of the calculation are on
a rolling, twelve-month basis. The ratio is defined as EBITDA divided by
fixed charges (defined as interest expense, capital expenditures, regularly
scheduled or required principal payments on debt and taxes paid). For the
ratio calculation period ended March 31, 2004 and for each year-to-date period
during 2004 ended on quarters thereafter, the required minimum fixed charge
coverage ratio is 0.65:1, 0.77:1, 0.77:1 and 0.80:1, respectively. There are
also minimum fixed charge coverage ratio amounts required during 2005 and
2006. [Management believes, based on forecast data available as of mid-March
2004, that the Company will be in compliance with the minimum fixed charge
coverage ratio covenant for the period ended March 31, 2004.]
In addition, the facilities contain various other affirmative and
negative covenants. As of the date of this report, the Company was in
compliance with all other covenants. The facilities require Reunion to pay
- 22 -
the reasonable expenses incurred by Congress in connection with the
facilities. Available borrowings under the revolving credit portion are based
upon a percentage of eligible receivables and inventories.
Private Capital Fund Financing
On August 11, 2003, Reunion borrowed $2.5 million from a private capital
fund by executing a senior subordinated secured promissory note payable in the
amount of and with cash proceeds of $2.5 million. The note bears interest at
10% per annum, such interest being payable on the last day of every month in
arrears commencing on August 31, 2003. The principal amount of $2.5 million
was due on August 11, 2005 with voluntary prepayments permitted but was
extended to December 5, 2006 as discussed below. The note is secured by a
majority of the assets of Reunion, provided that such security interest is
subordinate to the security interest of Congress. In addition to its
subordinated security interest, the fund received a warrant to purchase
625,000 shares of the Company's common stock and registration rights with
respect to the warrant and shares issuable thereto at a price of $0.01 per
share. The cash proceeds were used for working capital and other general
corporate purposes.
In connection with the refinancing on December 3, 2003, this same private
capital fund amended and restated its senior subordinated secured promissory
note to provide an additional $1.0 million of financing to the Company at the
same interest rate but changed the maturity date from August 11, 2005 to
December 5, 2006. No additional warrants were issued.
In connection with the refinancing on December 3, 2003, a separate
private capital fund provided the Company with a $4.2 million loan evidenced
by a senior subordinated secured promissory note payable with net cash
proceeds of $4.0 million after fees and expenses. The note bears interest at
a rate of the greater of 12%, or the prime rate as published in the Wall
Street Journal plus 8%. Interest is payable on the first day of every month
commencing on January 1, 2004. The principal amount of $4.2 million is due on
December 1, 2006. Prepayments in whole or in part are permitted without
penalty commencing in May 2004. The note is secured by mortgage liens and/or
deed of trust security interests totaling $4.2 million encumbering all
premises owned by the Company. In addition to its security interest, the fund
received a warrant to purchase 500,000 shares of the Company's common stock
and registration rights with respect to the warrant and shares issuable
thereto at a price of $0.50 per share.
13% Senior Notes
We had a total of $24.855 million of 13% senior notes outstanding. The
senior notes required semi-annual interest payments every November 1st and May
1st and sinking fund payments of $12.5 million on May 1, 2002 and $12.355
million on May 1, 2003. Since November 1, 2001, we were unable to make the
required semi-annual interest payments or the sinking fund payments due May 1,
2002 and 2003. As a result, an event of default, as defined in the indenture
governing the 13% senior notes, had existed since December 1, 2001 as we were
not able to make the November 1, 2001 semi-annual interest payment within the
30-day cure period provided for in the indenture.
In November 2003, we solicited the consent of our noteholders to certain
provisions and waivers of the indenture governing the 13% senior notes in an
effort to facilitate the refinancing. The significant provisions of the
solicitation requested that the noteholders consent to permanently waive all
then existing defaults under the indenture, cancel all accrued and unpaid
interest, cancel 12% of the principal amount of senior notes and extend the
maturity of the notes to December 2006. In order for the consent to be
effective, we needed noteholders comprising at least 90% of the principal
- 23 -
amount of outstanding senior notes to consent. As of December 1, 2003, the
end of the consent period, $23,250,700 of the $24,855,000 principal amount of
senior notes, or 93.55%, had consented.
In exchange for their consent, each consenting noteholder received a
consent fee of $27.625, warrants to purchase 76.18 shares of the Company's
common stock at $0.01 per share for each $1,000 of principal amount of notes
owned and a junior priority lien on the Company's assets. In the refinancing
that took place on December 3, we placed in escrow with the trustee of the
senior notes, $686,619 for payment of consent fees, of which $642,301 has been
or will be disbursed to consenting senior noteholders. Warrants to purchase
the Company's common stock totaling 1,771,217 have been reserved for future
issuance to consenting noteholders. Effective with having obtained the
consents of holders of at least 90% of the principal amount of outstanding
senior notes, all previously existing defaults under the indenture for the 13%
senior notes have been permanently waived.
RESULTS OF OPERATIONS
Year Ended December 31, 2003 Compared to
Year Ended December 31, 2002
Continuing Operations
Net sales, gross margins and EBITDA percentages for 2003 and 2002 are as
follows:
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2003 2002 2003 2002 2003 2002
--------- --------- ------ ------ ------ ------
Pressure vessels
and springs $ 23,531 $ 20,135 21.0% 14.9% 15.6% 5.5%
Cylinders 17,891 18,087 13.6% 10.8% 0.2% (1.6%)
Plastics 27,087 32,577 10.9% 12.3% 5.6% 5.9%
--------- --------- ------ ------ ------ ------
Totals $ 68,509 $ 70,799 15.1% 12.6% 8.1% 3.9%
========= ========= ====== ====== ====== ======
Pressure vessels and springs sales were up in 2003 compared to 2002.
This increase is due to this segment's return to almost normal production and
shipment levels during the first half of 2003 compared to management's
decision to shut-down our pressure vessels facility for the first two months
of 2002 with a limited production schedule. We made this decision in 2002 to
reduce spending due to our liquidity problems and to lessen the strain on this
segment's raw material vendors. This segment's backlog has increased 46%
since year-end 2003 through February 2004, including a 55% increase in the
pressure vessels product line. Based on an increased level of customer
inquiries and quote activity, [the Company believes this increase in order
levels will be sustained into the second quarter of 2004.]
Cylinder sales were flat for 2003 compared to 2002 due to weak fourth
quarter 2003 shipments caused by temporary customer facility shutdowns and a
resulting decrease in order levels. This segment's backlog has increase 10%
since year-end 2003 through February 2004. However, this segment continues to
be affected by softness in its markets, [a trend which may continue during
2004.]
The decrease in Plastics revenues in 2003 compared to 2002 began in the
second quarter of 2003 and is the result of several reasons including our
reduced ability to access raw materials, which was affected by tight
- 24 -
liquidity, and a continued lag in certain customers' decisions on newly quoted
programs, which are intended to replace finished programs, caused by the
uncertainty surrounding our current financial condition. This segment's
backlog has increased almost 10% since year-end 2003 through February 2004 due
to the start of a few new customer programs. However, [this segment may
continue to be affected by an overall lag in new program starts.]
The increase in gross margin as a percentage of sales in the pressure
vessel and springs segment in 2003 compared to 2002 is primarily due to
increased sales and to management's decision to shut-down our pressure vessels
facility for the first two months of 2002 as discussed above, resulting in a
reduction in production activity for the second quarter 2002 causing
underabsorption of overheads and a lower gross margin as a percentage of sales
than would normally be expected. The increase in gross margin as a percentage
of sales at cylinders is the result of actions to reduce costs through
workforce reductions taken in the 2002 third quarter to better match
production resources with volume levels. Although the same actions to reduce
costs were also taken at plastics, the benefits were more than offset by the
decreased volume level and the resulting effect of fixed costs on gross
margin.
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation, which is presented, not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a widely
accepted financial indicator of a company's ability to incur and service debt
and due to the close relationship it bears to Reunion's financial covenants in
its borrowing agreements. EBITDA and EBITDA as a percentage of sales
increased during 2003 compared to 2002 primarily due to the same factors
affecting gross profit margin discussed above and our continued focus on
reducing selling, general and administrative costs in Plastics. A
reconciliation of EBITDA to operating income (loss) in 2003 and 2002 by
segment and corporate and other is as follows (000's):
Operating
Profit Deprec- Amortiz-
(Loss) iation ation EBITDA
--------- --------- --------- ---------
2003:
- -----
Pressure vessels and springs $ 2,986 $ 691 $ - $ 3,677
Cylinders 107 246 - 353
Plastics (73) 1,595 - 1,522
Corporate and other(1)(2) (3,490) 50 - (3,440)
-------- -------- -------- --------
Totals $ (470) $ 2,582 $ - $ 2,112
======== ======== ======== ========
2002:
- -----
Pressure vessels and springs $ 366 $ 737 $ - $ 1,103
Cylinders (609) 323 - (286)
Plastics 279 1,635 - 1,914
Corporate and other(3) (3,549) 67 - (3,482)
-------- -------- -------- --------
Totals $ (3,513) $ 2,762 $ - $ (751)
======== ======== ======== ========
(1) - Includes gains totaling $226,000 on sales of property and equipment.
(2) - Excludes gain on debt extinguishment of $10,991,000. See "Gain on Debt
Extinguishment" below.
(3) - Include gain of $375,000 on sale of equipment.
- 25 -
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for 2003 were $11.0
million, compared to $13.3 million for 2002. This decrease in SGA is due to
2002 including approximately $1.0 million of incremental legal, audit and
consultant costs related to the default on our bank financing that did not
recur in 2003. The remaining decrease is related to cost cutting measures
taken during 2002, including trimming the executive payroll and reductions in
administrative positions. SGA as a percentage of sales decreased to 16.0% for
2003 compared to 18.7% in 2002. Despite the decrease in sales, SGA as a
percentage of sales was lower in 2003 compared to 2002 due to lower
incremental bank-induced costs and previously described cost-cutting measures.
Gain on Debt Extinguishment
In November 2003, we solicited the consent of our noteholders to certain
provisions and waivers of the indenture governing the 13% senior notes in an
effort to facilitate the refinancing. The significant provisions of the
solicitation requested that the noteholders consent to waive all then existing
defaults under the indenture, cancel all accrued and unpaid interest, cancel
12% of the principal amount of senior notes and extend the maturity of the
notes to December 2006. In order for the consent to be effective, we needed
noteholders comprising at least 90% of the principal amount of outstanding
senior notes to consent. As of December 1, 2003, the end of the consent
period, $23,250,700 of the $24,855,000 principal amount of senior notes, or
93.55%, had consented. Accordingly, 12% of the $23,250,700 principal amount
of senior notes of noteholders that had consented to the various provisions
and waivers, or $2.8 million, was extinguished pursuant to the provisions of
the consent.
As of December 1, 2003, accrued and unpaid interest related to the 13%
senior notes totaled $8.8 million, of which $8.2 million related to the
$23,250,700 principal amount of senior notes of noteholders that had consented
to the various provisions and waivers. Such interest was extinguished
pursuant to the provisions of the consent. The remaining $0.6 million of
accrued and unpaid interest is included in accrued interest in the
accompanying consolidated balance sheet as of December 31, 2003.
[The Company is currently investigating other recapitalization scenarios
that include, among other things, the use of additional private capital fund
financing to repurchase at discounts with waivers of all accrued and unpaid
interest some portion or all of our senior and unsecured suboridinated notes
payable.] The Company believes that, as the result of recent events related
to our refinancing and senior notes and, in view of our continuing efforts to
investigate other recapitalization scenarios, resulting gains from such
activities do not meet the criteria pursuant to APB 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" for classification as extraordinary.
- 26 -
Other Income
Other income for 2003 was $168,000, compared to other income of $0.8
million for 2002. The components are as follows:
2003 2002 Change
-------- -------- --------
Gain on sale of property $ (138) $ - $ (138)
Reduction of the lease termination reserve (117) - (117)
Gain on sale of equipment (88) (375) 287
Provision for bad debt 130 - 130
Write-off of assets 117 - 117
Other income, net (72) (412) 340
-------- -------- --------
Total other income, net $ (168) $ (787) $ 619
======== ======== ========
Other income in 2003 includes gains on sales of idle farmland in Boone
County, IL of $138,000 and excess manufacturing equipment of $88,000. We also
adjusted the lease termination reserve, resulting in a reduction of $117,000.
The lease termination reserve was reduced as the result of the execution of a
sublease agreement with another party resulting in a new estimate of future
lease termination costs. We also provided for a bad debt from a customer in
plastics that declared bankruptcy and wrote-off assets of an inactive
subsidiary deemed to have no value. In January 2002, we sold equipment that
had no book value. The decrease in the remaining other income is primarily
due to higher levels of sales of scrap and miscellaneous parts in 2002 due to
cleaning out idled facilities.
Interest Expense
Interest expense for 2003 was $6.9 million compared to $8.0 million for
2002. For 2002, a total of $2.5 million of interest expense has been
allocated to or actually incurred in discontinued operations. On a combined
basis interest expense was $10.5 million in 2002. Average debt during 2003
was significantly less than 2002 levels due to pay-downs with proceeds from
asset sales in June 2002 and September 2002. Also, in 2002 compared to 2003,
the Company was paying a higher default rate on the BOA revolving credit and
term loan facilities and we paid $1,675,000 in amendment and overadvance fees
to BOA in 2002. These decreases from 2002 were partially offset by more than
$800,000 in fees and costs charged to interest expense incurred during our
continuing refinancing efforts during 2003 with other lenders.
Income Taxes
There was no tax provision from continuing operations in 2003 or 2002.
The Company has net operating loss carryforwards for Federal tax return
reporting purposes totaling $115.2 million at December 31, 2003, $53.1 million
of which expire by the end of 2004. [The Company may be able to utilize its
loss carryforwards against possible increased future profitability.] However,
management has determined to fully reserve for the total amount of net
deferred tax assets as of December 31, 2003 [and to continue to do so during
2004 until management can conclude that it is more likely than not that some
or all of our loss carryforwards can be utilized.]
Discontinued Operations
There was a loss from discontinued operations for 2003 of $0.9 million
compared to a loss from discontinued operations of $1.3 million in 2002. The
loss from discontinued operations of $0.9 million in 2003 relates to an
evaluation of legacy healthcare costs, which increased substantially in the
third quarter of 2003. The adjustment in 2003 is to recognize these
- 27 -
unanticipated healthcare costs, totaling $0.7 million, which significantly
exceeded the accrual for such costs established at year-end 2002. [Such costs
should decrease significantly in 2004 as the healthcare coverage benefit
period for the former employees of our discontinued bridges and cranes
operation provided by law in the Consolidated Omnibus Budget Reconciliation
Act of 1985 ended at year-end 2003.] The remaining $0.2 million loss from
discontinued operations in 2003 represents legacy legal costs relating to
litigation surrounding our discontinued bridges and cranes operations. The
loss from discontinued operations in 2002 relates to a $3.1 million gain on
disposal of the discontinued materials handling systems operations in
September 2002 partially offset by a loss from its discontinued operations of
$0.5 million, which includes allocated interest expense of $2.0 million, and a
loss on disposal of the discontinued bridges and cranes operations of $3.9
million, which includes allocated interest expense of $0.5 million.
Year Ended December 31, 2002 Compared to
Year Ended December 31, 2001
Continuing Operations
Net sales, gross margins and EBITDA percentages for 2002 and 2001 are as
follows.
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2002 2001 2002 2001 2002 2001
--------- --------- ------ ------ ------ ------
Pressure vessels
and springs $ 20,135 $ 41,594 14.9% 23.3% 5.5% 14.6%
Cylinders 18,087 19,369 10.8% 5.0% (1.6%) (11.3%)
Plastics 32,577 38,532 12.3% 11.4% 5.9% (2.9%)
--------- --------- ------ ------ ------ ------
Totals $ 70,799 $ 99,495 12.6% 15.1% 3.9% 2.8%
========= ========= ====== ====== ====== ======
Pressure vessels and springs sales were down significantly in 2002
compared to 2001. This decrease is due primarily to management's decision to
shut-down our pressure vessels facility during the first quarter of 2002 and
also in July 2002. We made these decisions to reduce spending due to our
liquidity problems and to lessen the strain on this segment's raw material
vendors. The decrease was also caused by the fact that the first quarter of
2001 included the recognition of $2.8 million of revenues on a large NASA
contract manufactured in 2000 but shipped in the first quarter of 2001. We
have made significant progress in correcting vendor-related issues with cash
proceeds from asset sales resulting in greater raw material availability.
Sales of cylinders in 2002 was affected by the temporary manufacturing
disruption caused by the relocation of our former Milwaukee, WI cylinder
operations to Libertyville, IL and continues to be affected by a softness in
this market.
The decrease in Plastics revenues is the continuation of a downward trend
which began in 1999 and resulted from several factors, including certain
customers relocating manufacturing operations to Mexico and Asia, reduced
customer orders for continuing programs, end of product cycles and delays in
new program starts, which affected all Plastics facilities. Plastics also
lost a top ten customer in the second half of 2001 to competitive bidding on
the internet. Management is seeking to expand Plastics' product offerings in
the business machines, consumer products and medical products industries to
mitigate this trend.
- 28 -
Gross margins in 2001 were negatively affected by inventory charges of
$1.3 million at pressure vessels and springs, $0.9 million at cylinders and
$350,000 at Plastics. Excluding these charges, the decreases in gross margins
across all segments is related to volume declines resulting in a decrease in
production activity and our inability to absorb costs. We have responded to
these conditions by completing our plan to restructure, including disposing of
assets, combining certain operations and eliminating various administrative
and management positions. The benefits of these actions have only been
partially realized to date.
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation, which is presented, not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a widely
accepted financial indicator of a company's ability to incur and service debt
and due to the close relationship it bears to Reunion's financial covenants in
its borrowing agreements. EBITDA and EBITDA as a percentage of sales in 2001
were negatively affected by charges totaling $2.2 million at pressure vessels
and springs, $1.5 million at cylinders and $2.7 million at Plastics.
Excluding these charges, EBITDA and EBITDA as a percentage of sales decreased
during 2002 compared to 2001 primarily due to the same factors affecting gross
profit margin discussed above. Total EBITDA as a percentage of sales in 2002
and 2001 exclude corporate and other EBITDA of negative $3.2 million and $3.7
million, respectively. A reconciliation of EBITDA to operating losses in 2002
and 2001 by segment and corporate and other is as follows (000's):
Operating Deprec- Amortiz-
Loss iation ation EBITDA
--------- --------- --------- ---------
2002:
- -----
Pressure vessels and springs $ 366 $ 737 $ - $ 1,103
Cylinders (609) 323 - (286)
Plastics 279 1,635 - 1,914
Corporate and other(1) (3,549) 67 - (3,482)
-------- -------- -------- --------
Totals $ (3,513) $ 2,762 $ - $ (751)
======== ======== ======== ========
2001:
- -----
Pressure vessels and springs $ 5,056 $ 918 $ 111 $ 6,085
Cylinders (2,798) 417 199 (2,182)
Plastics (3,101) 1,978 - (1,123)
Corporate and other(1) (5,429) 71 1,698 (3,660)
Goodwill impairment (2,946) - 2,946 -
-------- -------- -------- --------
Totals $ (9,218) $ 3,384 $ 4,954 $ (880)
======== ======== ======== ========
(1) - Include gain of $375,000 on sale of equipment.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for 2002 were $13.3
million, compared to $15.7 million for 2001. This decrease in SGA is directly
related to the decreasing trend in sales, resulting in lower commissions
expense, cost cutting measures taken during June 2001 and progress made on the
restructuring, both of which included personnel reductions in sales and
administration. Management estimates the savings from these reductions to be
approximately $2.0 million annually. However, the benefits of these cost
cutting measures are being more than offset by the continuation of the
negative trend in sales and the resulting effect on the Company's ability to
- 29 -
absorb costs. SGA expenses as a percentage of sales increased to 18.7% for
2002 compared to 15.8% in 2001. SGA as a percentage of sales was higher in
2002 compared to 2001, which was due to the faster rate at which volume
decreased compared to decreases in relatively fixed administrative costs.
Other (Income) Expense
Other income for 2002 was $0.8 million, compared to other expense of $1.7
million for 2001. The components are as follows:
2002 2001 Change
-------- -------- --------
Amortization of goodwill and other intangibles $ - $ 2,008 $ (2,008)
Gain on sale of equipment with zero book value (375) (375) -
Other (income) expense, net (412) 94 (506)
-------- -------- --------
Total other (income) expense, net $ (787) $ 1,727 $ (2,514)
======== ======== ========
We stopped amortizing goodwill effective January 1, 2002. In both
December 2001 and January 2002, we sold two items of equipment at $375,000
neither of which had book value. The increase in the remaining other income
is primarily due to higher levels of sales of scrap and miscellaneous parts
due to cleaning out idled facilities. There were no significant offsetting
items netted into other (income) expense, net, in either period.
Interest Expense
Interest expense, net, for 2002 was almost $8.0 million compared to $7.1
million for 2001. For 2002 and 2001, a total of $2.5 million and $3.1
million, respectively, of interest expense has been allocated to or actually
incurred in discontinued operations. On a combined basis, interest expense
was $10.5 million in 2002 compared to $10.4 million in 2001. Although our
debt has decreased by $24.4 million using cash from asset sales, and prime
lending rates have decreased from the end of 2001 levels to the end of 2002
levels, the effect on interest expense resulting from these decreases was more
than offset by the increased default rate being paid on the BOA revolving
credit and term loan facilities and $1.675 million in overadvance fees paid in
2002.
Income Taxes
There was no tax provision from continuing operations in 2002 compared to
a tax provision of $12.7 million for 2001. The Company has net operating loss
carryforwards for Federal tax return reporting purposes totaling $124.1
million at December 31, 2002, $79.2 million of which expire by 2004. In 2001
and 2002 and continuing until and if the Company returns to profitability and
it is more likely than not that the Company will realize some benefit from its
loss carryforwards, management has determined to fully reserve for the total
amount of net deferred tax assets as of December 31, 2002 and 2001.
Discontinued Operations
There was a loss from discontinued operations for 2002 of $1.3 million
compared to a loss from discontinued operations of $9.2 million in 2001. The
loss from discontinued operations in 2002 relates to a $3.1 million gain on
disposal of the discontinued materials handling systems operations in
September 2002 partially offset by a loss from its discontinued operations of
$0.5 million, which includes allocated interest expense of $2.0 million, and a
loss on disposal of the discontinued bridges and cranes operations of $3.9
million, which includes allocated interest expense of $0.5 million. The loss
on disposal of the discontinued bridges and cranes operations differed from
- 30 -
the 2001 due to adjustments of the carrying values to net realizable value,
primarily machinery and equipment and receivables, of assets retained from the
sale of the discontinued bridges and cranes operations.
There was a loss from discontinued operations for 2001 of $9.2 million.
The Company recorded a fourth quarter 2001 charge for estimated loss on
disposal of discontinued operations ($6.4 million) related to estimated
phase-out period operating losses, lease termination costs and asset
writedowns of the discontinued bridges and cranes business as management
expected that the materials handling systems business would be sold at a price
exceeding its carrying value.
There was a loss from discontinued bridges and cranes operations during
2001 ($5.3 million) and income from discontinued materials handling systems
operations ($3.0 million). Management adjusted the reserve for estimated
expenses related to Chatwins Group's former grating business ($0.3 million)
due to an increase in estimated future operating lease commitments. There was
a loss from discontinued agricultural operations ($135,000) during 2001.
For 2001, discontinued operations includes a total of $3.1 million of
interest expense. Interest expense is allocated to discontinued operations on
the basis of the percentage of total average assets of discontinued operations
to gross total assets for the period presented.
Other Comprehensive Loss
There was another comprehensive loss in 2002 of $0.9 million compared to
$1.1 million in 2001. Both other comprehensive losses relate to additional
minimum pension liabilities recorded as the result of the decline in the fair
market value of the assets of the Company's two defined benefit pension plans.
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.
Recent Events
Refinancing
On December 3, 2003, the Company announced that it was successful in
refinancing its bank loan facilities and restructuring its 13% senior notes.
On that date, the Company entered into a new $25.0 million revolving and term
loan bank credit facility with Congress Financial Corporation (Congress) that
replaced its then existing revolving and term loan facility with Bank of
America (BOA). At the same time, the Company also entered into $5.2 million
of new loan facilities with two private capital funds through a $4.2 million
secured term loan and a $1.0 million increase in a then existing subordinated
note payable. Proceeds from these refinancing activities totaled $13.0
million, including $4.6 million under the revolving credit facility, $3.2
million under the term loan facility and $5.2 million of financing from the
private capital funds. At the time of the refinancing, the Company's
indebtedness to BOA totaled $11.7 million, including $10.8 million of
revolving credit debt and a term loan of $0.9 million. Proceeds from the
- 31 -
refinancing were used to repay our then existing BOA facilities, fund $0.7
million of consent fees payable to our 13% senior noteholders and pay $0.6
million of transaction related fees and expense to our new lenders. All
defaults that existed under the BOA facilities at the time of the refinancing
were removed as the result of the full repayment of amounts then outstanding.
Congress Financial Corporation Revolving and Term Loan Credit Facility
On December 3, 2003, the Company entered into a new revolving and term
loan bank credit facility with Congress Financial Corporation. This credit
facility consists of revolving credit, term loan and letter of credit
accommodations up to a maximum credit of $25.0 million. At December 31, 2003,
the Company had outstanding borrowings under this facility totaling $12.4
million, including $9.2 million of revolving credit and a term loan of $3.2
million. The $3.2 million term loan amortizes to the revolving credit
availability at a rate of $53,000 per month beginning on January 31, 2004
until fully paid. This facility has a three-year initial term and
automatically renews for additional one-year increments unless either party
gives the other notice of termination at least 90 days prior to the beginning
of the next one-year term.
Interest on loans outstanding under the Congress facility is payable
monthly at a variable rate tied to the prime rate publicly announced from time
to time by Wachovia Bank, National Association, plus 2.50%. The facility also
provides for a default interest rate of the prime rate plus 4.50%.
The Congress facility is collateralized by a continuing security interest
and lien on substantially all of the current and after-acquired assets of
Reunion including, without limitation, all accounts receivable, inventory,
real property, equipment, chattel paper, documents, instruments, deposit
accounts, contract rights and general intangibles.
The Congress facility requires Reunion to comply with financial covenants
and other covenants, including a minimum amount of earnings before interest,
taxes, depreciation and amortization (EBITDA) and a minimum fixed charge
coverage ratio. The minimum EBITDA covenant began in 2004 and requires the
Company to maintain minimum monthly amounts of EBITDA ranging from $450,000 in
January 2004 to $600,000 in December 2004 with $50,000 to $100,000 increments
or decrements occurring during the year. There are also minimum monthly
EBITDA amounts required during 2005 and 2006. Through February 2004, the
Company achieved the minimum monthly EBITDA required for compliance with this
covenant. The minimum fixed charge coverage ratio 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 March 31,
2004, for the year-to-date period starting on January 1, 2004. For quarters
ended on and after December 31, 2004, the components of the calculation are on
a rolling, twelve-month basis. The ratio is defined as EBITDA divided by
fixed charges (defined as interest expense, capital expenditures, regularly
scheduled or required principal payments on debt and taxes paid). For the
ratio calculation period ended March 31, 2004 and for each year-to-date period
during 2004 ended on quarters thereafter, the required minimum fixed charge
coverage ratio is 0.65:1, 0.77:1, 0.77:1 and 0.80:1, respectively. There are
also minimum fixed charge coverage ratio amounts required during 2005 and
2006. [Management believes, based on forecast data available as of mid-March
2004, that the Company will be in compliance with the minimum fixed charge
coverage ratio covenant for the period ended March 31, 2004.]
In addition, the facilities contain various other affirmative and
negative covenants. As of the date of this report, the Company was in
- 32 -
compliance with all other covenants. The facilities require Reunion to pay
the reasonable expenses incurred by Congress in connection with the
facilities. Available borrowings under the revolving credit portion are based
upon a percentage of eligible receivables and inventories.
Private Capital Fund Financing
On August 11, 2003, Reunion borrowed $2.5 million from a private capital
fund by executing a senior subordinated secured promissory note payable in the
amount of and with cash proceeds of $2.5 million. The note bears interest at
10% per annum, such interest being payable on the last day of every month in
arrears commencing on August 31, 2003. The principal amount of $2.5 million
was due on August 11, 2005 with voluntary prepayments permitted but was
extended to December 5, 2006 as discussed below. The note is secured by a
majority of the assets of Reunion, provided that such security interest is
subordinate to the security interest of Congress. In addition to its
subordinated security interest, the fund received a warrant to purchase
625,000 shares of the Company's common stock and registration rights with
respect to the warrant and shares issuable thereto at a price of $0.01 per
share. The cash proceeds were used for working capital and other general
corporate purposes.
In connection with the refinancing on December 3, 2003, this same private
capital fund amended and restated its senior subordinated secured promissory
note to provide an additional $1.0 million of financing to the Company at the
same interest rate but changed the maturity date from August 11, 2005 to
December 5, 2006. No additional warrants were issued.
In connection with the refinancing on December 3, 2003, a separate
private capital fund provided the Company with a $4.2 million loan evidenced
by a senior subordinated secured promissory note payable with net cash
proceeds of $4.0 million after fees and expenses. The note bears interest at
a rate of the greater of 12%, or the prime rate as published in the Wall
Street Journal plus 8%. Interest is payable on the first day of every month
commencing on January 1, 2004. The principal amount of $4.2 million is due on
December 1, 2006. Prepayments in whole or in part are permitted without
penalty commencing in May 2004. The note is secured by mortgage liens and/or
deed of trust security interests totaling $4.2 million encumbering all
premises owned by the Company. In addition to its security interest, the fund
received a warrant to purchase 500,000 shares of the Company's common stock
and registration rights with respect to the warrant and shares issuable
thereto at a price of $0.50 per share.
13% Senior Notes
We had a total of $24.855 million of 13% senior notes outstanding. The
senior notes required semi-annual interest payments every November 1st and May
1st and sinking fund payments of $12.5 million on May 1, 2002 and $12.355
million on May 1, 2003. Since November 1, 2001, we were unable to make the
required semi-annual interest payments or the sinking fund payments due May 1,
2002 and 2003. As a result, an event of default, as defined in the indenture
governing the 13% senior notes, had existed since December 1, 2001 as we were
not able to make the November 1, 2001 semi-annual interest payment within the
30-day cure period provided for in the indenture.
In November 2003, we solicited the consent of our noteholders to certain
provisions and waivers of the indenture governing the 13% senior notes in an
effort to facilitate the refinancing. The significant provisions of the
solicitation requested that the noteholders consent to permanently waive all
then existing defaults under the indenture, cancel all accrued and unpaid
interest, cancel 12% of the principal amount of senior notes and extend the
maturity of the notes to December 2006. In order for the consent to be
- 33 -
effective, we needed noteholders comprising at least 90% of the principal
amount of outstanding senior notes to consent. As of December 1, 2003, the
end of the consent period, $23,250,700 of the $24,855,000 principal amount of
senior notes, or 93.55%, had consented.
In exchange for their consent, each consenting noteholder received a
consent fee of $27.625, warrants to purchase 76.18 shares of the Company's
common stock at $0.01 per share for each $1,000 of principal amount of notes
owned and a junior priority lien on the Company's assets. In the refinancing
that took place on December 3, we placed in escrow with the trustee of the
senior notes, $686,619 for payment of consent fees, of which $642,301 has been
or will be disbursed to consenting senior noteholders. Warrants to purchase
the Company's common stock totaling 1,771,217 have been reserved for future
issuance to consenting noteholders. Effective with having obtained the
consents of holders of at least 90% of the principal amount of outstanding
senior notes, all previously existing defaults under the indenture for the 13%
senior notes have been permanently waived.
Summary of 2003 Activities
Cash and cash equivalents totaled $0.8 million at both December 31, 2003
and 2002. For 2003, $2.7 million of cash used by operating activities was
provided by $0.2 million of investing activities and almost $2.5 million of
financing.
Operating Activities
Cash used by operating activities of $2.7 million in 2003 was the result
of interest payments and operating losses, excluding non-cash items of income
and expense, exceeding cash provided by a decrease in net working capital.
Investing Activities
The Company sold idle property and equipment, generating $0.5 million in
cash proceeds. Capital expenditures were $0.2 million.
Financing Activities
The Company made repayments of debt totaling $4.0 million, which included
$3.4 million in full repayment of the BOA term loan A, $0.5 million on a note
payable to the Shaw Group, former owner of Naptech Pressure Systems acquired
by Reunion in January 2001, and other debt repayments totaling $94,000 on
capital lease obligations and other debt. Revolving credit facility
borrowings decreased $2.6 million during the year and we paid $2.2 million in
financing costs and fees. These financing activities were funded by $11.4
million in new debt, including the $3.2 million Congress term loan, a total of
$7.7 million of subordinated financing provided by two private capital funds
and $0.5 million provided by Mr. Bradley to fund the Shaw Group payment
discussed above.
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CONTRACTUAL OBLIGATIONS
The following represents a tabular summarization of the Company's
contractual obligations at December 31, 2003 (in thousands):
Less
Than 1 to 3 4 to 5 After
Description Total 1 Year Years Years 5 Years
- -------------------------- -------- -------- -------- -------- --------
Congress term loan $ 3,175 $ 636 $ 1,272 $ 1,267 $ -
Note payable 4,200 4,200 -
Note payable 3,500 3,500 -
13% senior notes 22,065 - 22,065 - -
Notes payable 4,161 4,161 - - -
Notes payable - related
parties 5,115 5,115 - - -
Capital lease obligations
and SBA loans 56 47 9 - -
Noncancellable operating
lease commitments 11,820 2,129 2,462 1,687 5,542
-------- -------- -------- -------- --------
Total contractual
obligations $ 54,092 $ 12,088 $ 33,508 $ 2,954 $ 5,542
======== ======== ======== ======== ========
The above table shows the contractual aggregate maturities of debt,
excluding $9.2 million of revolving credit facility borrowings, and
commitments under noncancellable operating leases. As of December 31, 2003,
holders of $1.6 million of principal amount of 13% senior notes had not yet
consented to the provisions and waivers in the November 2003 solicitation.
However, since the Company succeeded in obtaining the consent of holders of
more than 90% of the principal amount of senior notes, and since such holders
have directed the trustee to refrain from exercising any remedies in respect
of past, present or future defaults, the $1.6 million principal amount of
senior notes held by non-consenting holders is classified as being due in
December 2006. The notes payable totaling $7.7 million and the 13% senior
notes shown as contractual obligations in the 1 to 3 years category are due at
various times during December 2006. Notes payable and notes payable - related
parties, although contractually due either currently or during 2004, may not
be paid due to restrictions imposed by the Congress loan and security
agreement.
CRITICAL ACCOUNTING POLICIES
Use of Estimates
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States.
When more than one accounting principle, or method of its application, is
generally accepted, management selects the principle or method that is
appropriate in the Company's specific circumstances. Application of the
accounting principles requires the Company's management to make estimates
about the future resolution of existing uncertainties and that affect the
reported amounts of assets, liabilities, revenues, expenses which in the
normal course of business are subsequently adjusted to actual results. Actual
results could differ from such estimates. In preparing these financial
statements, management has made its best estimates and judgments of the
amounts and disclosures included in the consolidated financial statements
giving due regard to materiality.
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Revenue Recognition, Accounts Receivable and Allowance for Doubtful Accounts
Sales are recorded when title and risks of ownership transfer to the
buyer. Shipping and handling fees charged to customers are recorded as
revenues and the related costs are recorded as cost of sales.
The Company markets its products to a diverse customer base in the United
States and in other countries. Credit is extended after a credit review by
management, which is based on a customer's ability to perform its obligations.
Such reviews are regularly updated. The allowance for doubtful accounts is
based upon agings of customer balances and specific account reviews by
management. Reunion Industries has no concentration of credit risks and
generally does not require collateral or other security from its customers.
Accounts receivable are presented net of a reserve for doubtful accounts
of $300,000 at December 31, 2003 and $485,000 at December 31, 2002, which
represented 5.3% and 2.6%, respectively, of gross trade receivables (excluding
other non-trade receivables).
Inventories and Inventory Reserves
At December 31, 2003, inventories are stated at the lower of cost or
market, at costs that approximate the first-in, first-out method of inventory
valuation. During the third quarter of 2003, for those locations of the
Company that had been using the last-in, first-out method of inventory
valuation, we changed the method of valuing inventory to th