-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FhM2QH0m95mPLSSLi6SfTOJnx18mp9Lr3YeOEx2Ynk++frRoq+ZwYwhoEroRGAeg YKS6Nk+j7jUUgV62p5Xwvg== 0000899243-98-001557.txt : 19980814 0000899243-98-001557.hdr.sgml : 19980814 ACCESSION NUMBER: 0000899243-98-001557 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: REUNION INDUSTRIES INC CENTRAL INDEX KEY: 0001003429 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 061439715 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-64325 FILM NUMBER: 98684987 BUSINESS ADDRESS: STREET 1: ONE STAMFORD LANDING STREET 2: 62 SOUTHFIELD AVE CITY: STAMFORD STATE: CT ZIP: 06902 BUSINESS PHONE: 2033248858 MAIL ADDRESS: STREET 1: ONE STAMFORD LANDING STREET 2: 62 SOUTHFIELD AVE CITY: STAMFORD STATE: CT ZIP: 06902 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-Q [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-7726 REUNION INDUSTRIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 06-1439715 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 62 SOUTHFIELD AVENUE ONE STAMFORD LANDING SUITE 208 STAMFORD, CT 06902 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (203) 324-8858 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . As of July 31, 1998 the Registrant had 3,900,065 shares of common stock, par value $.01, outstanding. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets--June 30, 1998 (Unaudited) and December 31, 1997.............................................. 2 Consolidated Statements of Operations (Unaudited) Three Months and Six Months Ended June 30, 1998 and 1997.................... 4 Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 1998 and 1997................................... 5 Notes to Consolidated Financial Statements (Unaudited).......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................... 13 Item 6. Exhibits and Reports on Form 8-K................................ 14 Signature............................................................... 15
FORWARD LOOKING STATEMENTS This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements speak only as of the date of this Form 10-Q, and the Company expressly disclaims any obligation or undertaking to publicly release any updates or revisions to any forward- looking statements contained herein. Although the Company believes that its expectations are based on reasonable assumptions, it cannot assure that the expectations contained in such forward-looking statements will be achieved. Such statements involve risks, uncertainties and assumptions which could cause actual results to differ materially from those contained in such statements. The Company's operations are affected by domestic and international economic conditions which affect the volume and pricing of sales of business and consumer goods, for which the Company produces components, the cost and availability of materials, labor and other goods and services used in the Company's operations and the cost of interest on the Company's debt. 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS REUNION INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, DECEMBER 31, 1998 1997 ----------- ------------ (UNAUDITED) ASSETS ------ CURRENT ASSETS Cash and Cash Equivalents........................... $ 314 $ 2,085 Accounts Receivable, Less Allowance for Doubtful Accounts of $323 and $375, respectively............ 12,991 12,284 Inventories......................................... 8,314 7,570 Customer Tooling-in-Process......................... 618 1,773 Other Current Assets................................ 505 495 ------- ------- Total Current Assets.............................. 22,742 24,207 ------- ------- PROPERTY, PLANT AND EQUIPMENT--NET.................... 35,777 35,293 ------- ------- OTHER ASSETS Goodwill............................................ 8,712 9,060 Investment in Joint Venture......................... 1,622 1,622 Other............................................... 2,058 1,877 ------- ------- 12,392 12,559 ------- ------- $70,911 $72,059 ======= =======
See Accompanying Notes to Consolidated Financial Statements 2 REUNION INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, DECEMBER 31, 1998 1997 ----------- ------------ (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Current Portion of Long-Term Debt................... $ 12,718 $11,568 Accounts Payable.................................... 10,807 9,328 Advances From Customers............................. 984 2,484 Accrued Bargo Judgment.............................. 8,825 -- Other Current Liabilities........................... 5,669 4,654 -------- ------- Total Current Liabilities......................... 39,003 28,034 LONG-TERM DEBT........................................ 8,719 11,112 LONG-TERM DEBT--RELATED PARTIES....................... 1,494 1,542 OTHER LIABILITIES..................................... 3,635 3,054 -------- ------- Total Liabilities................................. 52,851 43,742 -------- ------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common Stock ($.01 par value; 20,000 authorized; 3,900 and 3855 issued and outstanding, respectively)...................................... 39 38 Additional Paid-in Capital.......................... 29,332 29,242 Retained Earnings (Since January 1, 1989)........... (10,837) (578) Foreign Currency Translation Adjustments............ (474) (385) -------- ------- Total Shareholders' Equity........................ 18,060 28,317 -------- ------- $ 70,911 $72,059 ======== =======
See Accompanying Notes to Consolidated Financial Statements 3 REUNION INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- ----------------- 1998 1997 1998 1997 --------- --------- -------- ------- NET SALES.............................. $ 24,704 $ 23,471 $ 51,072 $48,143 COST OF SALES.......................... 21,279 20,251 43,635 41,090 --------- -------- -------- ------- GROSS PROFIT........................... 3,425 3,220 7,437 7,053 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.............................. 3,082 2,901 6,034 5,762 --------- -------- -------- ------- OPERATING INCOME....................... 343 319 1,403 1,291 OTHER INCOME AND (EXPENSE) Interest Expense..................... (758) (786) (1,494) (1,540) Provision for Bargo Judgment......... (8,825) -- (8,825) -- Other, Including Interest Income..... (67) 133 (65) 262 --------- -------- -------- ------- (9,650) (653) (10,384) (1,278) --------- -------- -------- ------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES........ (9,307) (334) (8,981) 13 Income Tax Expense................... (23) (84) (75) (136) --------- -------- -------- ------- LOSS FROM CONTINUING OPERATIONS........ (9,330) (418) (9,056) (123) LOSS FROM DISCONTINUED OPERATIONS...... (1,200) -- (1,200) -- NET LOSS............................... (10,530) (418) (10,256) (123) Foreign currency translation adjustment.......................... 58 (144) (89) (218) --------- -------- -------- ------- COMPREHENSIVE INCOME (LOSS)............ $(10,472) $ (562) $(10,345) $ (341) ========= ======== ======== ======= NET LOSS PER SHARE--BASIC AND DILUTED Loss from Continuing Operations...... $ (2.41) $ (0.11) $ (2.35) $ (0.03) Loss from Discontinued Operations.... (0.31) -- (0.31) -- --------- -------- -------- ------- Net Loss........................... $ (2.72) $ (0.11) $ (2.66) $ (0.03) ========= ======== ======== ======= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Basic and diluted.................... 3,865 3,855 3,861 3,855 ========= ======== ======== =======
See Accompanying Notes to Consolidated Financial Statements 4 REUNION INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ----------------- 1998 1997 -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss.................................................. $(10,256) $ (123) Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Depreciation............................................. 1,795 1,439 Goodwill Amortization.................................... 347 347 Debt Issue Cost Amortization ............................ 171 154 Provision for Bargo Judgment............................. 8,825 -- Provision for environmental liability.................... 1,200 -- -------- ------- 2,082 1,817 Changes in Assets and Liabilities: Increase in Accounts Receivable.......................... (707) (1,178) Increase (Decrease) in Inventory......................... (744) 263 Decrease in Other Current Assets......................... 1,145 333 Increase in Accounts Payable............................. 1,479 1,661 Increase (Decrease) in Other Current Liabilities......... (1,315) 202 Other.................................................... (106) (488) -------- ------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......... 1,834 2,610 CASH FLOWS FROM INVESTING ACTIVITIES: Collection of Note Receivable from Sale of Oil and Gas Business................................................. -- 2,200 Capital Expenditures...................................... (2,274) (2,590) -------- ------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......... (2,274) (390) CASH FLOWS FROM FINANCING ACTIVITIES: Increase (Decrease) in Revolver Borrowings................ 91 (603) Proceeds from Issuance of Debt Obligations................ -- 1,162 Payments of Debt Obligations.............................. (1,512) (1,781) Proceeds from exercise of stock options and warrants...... 90 -- -------- ------- NET CASH USED IN FINANCING ACTIVITIES....................... (1,331) (1,222) INCREASE IN CASH AND CASH EQUIVALENTS....................... (1,771) 998 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 2,085 1,407 -------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 314 $ 2,405 ======== =======
See Accompanying Notes to Consolidated Financial Statements 5 REUNION INDUSTRIES AND SUBSIDIARIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NOTE 1. CONSOLIDATED FINANCIAL STATEMENTS PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Reunion Industries, Inc. ("RII") and its majority owned subsidiaries. As used herein, the term "Company" refers to RII, its predecessors and its subsidiaries, unless the context indicates otherwise. All intercompany transactions and accounts are eliminated in consolidation. FINANCIAL STATEMENTS AT JUNE 30, 1998 The Consolidated Balance Sheet at June 30, 1998, and the Consolidated Statements of Operations and Cash Flows for the three and six months ended June 30, 1998 and 1997 included herein are unaudited; however, in the opinion of management of the Company, they reflect all adjustments necessary to present fairly the results for the interim periods. Such results are not necessarily indicative of results to be expected for the year. The Consolidated Balance Sheet at December 31, 1997 has been derived from the audited financial statements at that date. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. EARNINGS PER SHARE Basic earnings per share is computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to all dilutive potential common shares outstanding during this period. Potential common shares include shares issuable upon exercise of the Company's stock options and warrants. ACCOUNTING PRONOUNCEMENTS The Company has adopted FASB Statement No. 130, "Reporting Comprehensive Income" which establishes standards for reporting and displaying comprehensive income and its components. The Financial Accounting Standards Board (FASB) has issued several accounting pronouncements which the company will be required to adopt in future periods. FASB Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information" requires that a publicly-held company report financial and descriptive information about its operating segments in financial statements issued to shareholders for interim and annual periods. Although the Company operates in only one segment, the Statement also requires additional disclosures with respect to products and services, geographic areas of operation, and major customers which have not previously been presented in the consolidated financial statements and related notes. The company will adopt Statement No. 131 for 1998 year end reporting purposes. FASB Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" revises employers' disclosures about pension and other postretirement benefit plans. The Statement does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other postretirement benefits and eliminates certain disclosures that are no longer as useful as they previously were. The Company will adopt Statement No. 132 for 1998 year end reporting purposes. 6 REUNION INDUSTRIES AND SUBSIDIARIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NOTE 2. INVENTORIES Inventories consisted of the following:
JUNE 30, DECEMBER 31, 1998 1997 -------- ------------ Raw Materials........................................ $4,147 $3,461 Work-in process...................................... 1,317 1,440 Finished Goods....................................... 2,850 2,669 ------ ------ Total.............................................. $8,314 $7,570 ====== ======
NOTE 3. CONTINGENCIES On April 24, 1998, a jury in state district court in Harris County, Texas returned jury verdict findings that Bargo Energy Company had a right to terminate a November 1995 stock purchase agreement with Reunion and that Reunion fraudulently induced Bargo into entering into the agreement. The November 1995 stock purchase agreement concerned the sale of Reunion's subsidiary, Reunion Energy Company ("REC"), which operated Reunion's discontinued oil and gas business. The jury recommended that an award of $5,000 in punitive damages be assessed against Reunion. In July 1998, the court entered judgment affirming the $5,000 jury verdict and awarding approximately $3,000 in attorneys' fees and costs. Reunion maintained at trial and continues to maintain that all requirements to closing under the contract were met, and that Bargo was required to close the transaction. Reunion also maintains that no evidence sufficient to support a jury finding of fraud or the related punitive damages finding was presented at trial. Reunion intends to continue to vigorously oppose this judgment, including by appeal if necessary. Once the final activities in the trial court have been concluded, Reunion will be required to post a bond in the approximate amount of $8,800, including one year's anticipated interest, in order to appeal. Although management believes, based on consultation with counsel, that it is more likely than not that the judgment will be overturned on appeal, Reunion has recorded an accrual for the amount of the bond with a charge to continuing operations in the 1998 second quarter in accordance with generally accepted accounting principles. In early 1996, the State of California Franchise Tax Board initiated an audit of the Company's franchise tax returns for the years 1991, 1992 and 1993. In October 1996, the Company received a formal notice of assessment from the taxing authority in the aggregate amount of $716 plus interest. Of this amount, $645 results from the auditor's conclusion that income from gains on sales of certain Canadian assets in 1991 should be reclassified from nonbusiness to business income. The Company believes its classification of such income was correct, and has appealed the assessment of tax. If the Company's positions prevail on this issue, management believes that the amounts due would not exceed amounts previously paid or provided for. No additional accruals have been made for any amounts that may be due if the Company does not prevail because the outcome cannot be determined. The Company recorded a provision for $85 for certain other proposed adjustments. In connection with the sale of REC, the Company retained certain oil and gas properties in Louisiana because of litigation concerning environmental matters. The Company is in the process of environmental remediation under a plan approved by the Louisiana Office of Conservation. The Company has recorded an accrual for its proportionate share of the remaining estimated costs to remediate the site based on plans and estimates developed by the environmental consultants hired by the Company. During the quarter ended June 30, 1998 the Company increased this accrual by a charge of $1,200 to discontinued operations, based on revised estimates of the remaining remediation costs. At June 30, 1998, the balance accrued for these remediation costs 7 REUNION INDUSTRIES AND SUBSIDIARIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) is approximately $1,600 which is recorded in other current liabilities on the accompanying balance sheet. Owners of a portion of the property have objected to the Company's proposed cleanup methodology and have filed suit to require additional procedures. The Company is contesting this litigation, and believes its proposed methodology is well within accepted industry practice for remediation efforts of a similar nature. No accrual has been made for any costs of any alternative cleanup methodology which might be imposed as a result of the litigation. The Company and its directors have been named as defendants in two class action lawsuits filed in the Delaware Court of Chancery by certain Reunion stockholders, purportedly on behalf of all public stockholders of Reunion, seeking to prevent or rescind the merger with Chatwins Group, Inc. and /or obtain damages from Reunion, Chatwins and the directors of Reunion on account of the merger. The lawsuit alleges breaches of fiduciary duty by the defendants in setting the exchange ratio of the merger. Reunion believes the exchange ratio fixed for the merger fairly reflected the relative values of Chatwins and Reunion when the merger terms were agreed. Reunion therefore believes that these lawsuits are without merit and intends to pursue their dismissal vigorously. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's principal operations are in the plastic products industry. The Company, through its wholly owned subsidiary Oneida Rostone Corp. ("ORC"), manufactures high volume, precision plastic products and provides engineered plastic services. As part of its ongoing growth strategy, the Company regularly considers additional acquisitions in the plastics industry to increase its customer base and expand its product offerings and service capabilities. In addition, the Company may consider acquisitions in other industries. The Company participates in the wine grape agriculture industry through its equity investment in the Juliana Preserve joint venture. The Company and Chatwins Group, Inc., a Delaware corporation that owns 38% of the issued and outstanding shares of common stock of the Company ("CGI" or "Chatwins"), have executed a merger agreement providing for a stock-for-stock merger of CGI with and into the Company. The Company is in the process of negotiating the terms of a commitment letter from potential lenders to finance the merger and the ongoing operations of the Company including Chatwins. Delays in these discussions caused the Company to adjourn, until September 1, 1998, the portion of its August 4 stockholders' meeting that was to vote upon this merger. The Company anticipates that the necessary financing will be arranged so that the requisite approval of the stockholders can be sought and the merger consummated later this year. There can be no assurances that these transactions will be arranged, approved or consummated. RESULTS OF CONTINUING OPERATIONS Three months ended June 30, 1998 ORC: Revenues and operating income of ORC were $24.7 million and $1.0 million, respectively, for the three months ended June 30, 1998. This compares to revenues and operating income of $23.5 million and $0.8 million, respectively, for the three months ended June 30, 1997. The 5.1% increase in revenues is attributable to increased sales from new customer programs at ORC's subsidiary in Ireland, partially offset by lower sales at certain U.S. operations. Tooling sales for the three months ended June 30, 1998 were $1.9 million, versus tooling sales of $1.1 million for the prior year period. During the second quarter of 1997 ORC experienced a one month strike at its Rostone division. Although the Company used replacement and temporary workers during the strike, resultant effects of the strike were such that sales and operating income were approximately $2.0 million and $1.0 million less that expected for the second quarter of 1997. ORC backlog totaled $21.7 million at June 30, 1998, compared to backlog of $21.9 million at December 31, 1997 and backlog of $22.1 million at June 30, 1997. Cost of sales totaled $21.3 million, or 86.2% of net sales, for the three months ended June 30, 1998 compared to $20.3 million, or 86.4% of net sales for the three months ended June 30, 1997 . As a result of the increase in sales, gross margins increased to $3.4 million for the three months ended June 30, 1998 from $3.2 million in the prior year period. Selling, general and administrative expenses were $2.4 million for the three months ended June 30, 1998, compared to $2.4 million for the three months ended June 30, 1997. Operating income was $1.0 million for the three months ended June 30, 1998 compared to $0.8 million in the comparable 1997 period. Operating income for the 1997 period was adversely affected by approximately $1.0 million by the effects of the one month strike as discussed above. 9 CORPORATE GENERAL AND ADMINISTRATIVE EXPENSE: Corporate general and administrative expenses, consisting primarily of executive and administrative salaries and benefits, professional fees and other public company costs, totaled $0.6 million for the three months ended June 30, 1998 compared to $0.5 million for the three months ended June 30, 1997. OTHER INCOME AND (EXPENSE): Interest expense was $0.8 million for the three months ended June 30, 1998 compared to $0.8 million for the prior year period. The Company recorded a charge of $8.8 million during the three months ended June 30, 1998 to record entry of a judgment in the Company's litigation with Bargo Energy Company. The Juliana Preserve results are seasonal with the majority of revenues and expenses realized after harvest in the fourth quarter. The Company recognized break-even results during the three months ended June 30, 1998 from its equity interest in the Preserve. The Company recognized loss from continuing operations of $9.3 million during the three months ended June 30, 1998 compared to net loss of $0.4 million for the comparable prior year period. SIX MONTHS ENDED JUNE 30, 1998 ORC: Revenues and operating income of ORC were $51.1 million and $2.5 million, respectively, for the six months ended June 30, 1998. This compares to revenues and operating profit of $48.1 million and $2.2 million, respectively, for the six months ended June 30, 1997. The 6.2% increase in revenues is attributable to increased sales from new customer programs at ORC's subsidiary in Ireland, partially offset by lower sales at certain U.S. operations. Tooling sales for the six months ended June 30, 1998 were $3.7 million, versus tooling sales of $2.5 million for the prior year period. During the second quarter of 1997 ORC experienced a one month strike at its Rostone division. Although the Company used replacement and temporary workers during the strike, resultant effects of the strike were such that sales and operating income were approximately $2.0 million and $1.0 million less than expected for the second quarter of 1997. ORC backlog totaled $21.7 million at June 30, 1998, compared to backlog of $21.9 million at December 31, 1997 and backlog of $22.1 million at June 30, 1997. Cost of sales totaled $43.7 million, or 85.5% of net sales, for the six months ended June 30, 1998 compared to $41.1 million, or 85.3% of net sales for the six months ended June 30, 1997. As a result of the increase in sales, gross margins increased to $7.4 million for the six months ended June 30, 1998 from $7.1 million in the prior year period. Selling, general and administrative expenses were $4.9 million for the six months ended June 30, 1998, compared to $4.8 million for the six months ended June 30, 1997. Operating income was $2.5 million for the six months ended June 30, 1998 compared to $2.2 million in the comparable 1997 period. Operating Income for the 1997 period was adversely effected by approximately $1.0 million by the effects of the one month strike as discussed above. CORPORATE GENERAL AND ADMINISTRATIVE EXPENSE: Corporate general and administrative expenses, consisting primarily of executive and administrative salaries and benefits, professional fees and other public company costs, totaled $1.1 million for the six months ended June 30, 1998 compared to $1.0 million for the six months ended June 30, 1997. OTHER INCOME AND (EXPENSE): Interest expense was $1.5 million for the six months ended June 30, 1998 compared to $1.5 million for the prior year period. The Company recorded a charge of $8.8 million during the six months ended June 30, 1998 to record entry of a judgment in the Company's litigation with Bargo Energy Company. The Juliana Preserve results are seasonal with the majority of revenues and expenses realized after harvest in the fourth quarter. The Company recognized break-even results during the six months ended June 30, 1998 from its equity interest in the Preserve. The Company recognized a loss from continuing operations of $9.1 million during the six months ended June 30, 1998 compared to a loss of $0.1 million for the comparable prior year period. 10 DISCONTINUED OPERATIONS After the sale of its oil and gas operations in May 1996, the Company retained certain oil and gas properties in Louisiana because of litigation concerning environmental matters. The Company is in the process of environmental remediation of these properties. Based on further testing requested by the Louisiana Office of Conservation in connection with consideration of the Company's remediation plan for approval, the Company's environmental consultants have estimated that the total costs to remediate the site are approximately $2.0 million. The Company has increased its existing accrual for its portion of the estimated remaining remediation costs through a $1.2 million charge to discontinued operations in the 1998 second quarter. LIQUIDITY AND CAPITAL RESOURCES Summary of 1998 Activities Cash and cash equivalents totaled $0.3 million at June 30, 1998. During the six months ended June 30, 1998, cash decreased $1.8 million, with $1.8 million provided by operations, $2.3 million used in investing activities and $1.3 million used in financing activities. INVESTING ACTIVITIES: Capital expenditures were $2.3 million in the six months ended June 30, 1998. FINANCING ACTIVITIES: Principal payments reduced long-term obligations by $1.5 million in the six months ended June 30, 1998. Net revolving loan borrowings in the period totaled $0.1 million. Proceeds from exercise of stock options and warrants were $0.1 million. Factors Affecting Future Liquidity Because of various restrictions included in the Company's loan arrangements, management must separately consider liquidity and financing for corporate requirements, ORC and agricultural operations. CORPORATE: Corporate expenses, including salaries and benefits, professional fees and other public company costs, are expected to approximate $1.6 million annually. Legal costs to contest the class action securities litigation against the Company and to appeal the Bargo litigation and cash required to collateralize the Bargo appeal bond as described below will add to corporate requirements. In addition, a significant portion of the $1.6 million accrued for environmental remediation of the Louisiana properties, described herein, is expected to be expended during the next twelve months. The Company's source of funds for these expenses and for future acquisitions, other than from additional borrowings, are from cash balances and permitted payments by ORC. The Corporate cash balance at June 30, 1998 was $0.3 million. ORC's credit facility with Congress Financial Corporation ("Congress") limits payments to Reunion by ORC. If certain levels of availability (as defined in the loan agreements) are maintained, ORC is permitted to pay Reunion annual management fees of up to $0.3 million, dividends on preferred stock of up to $0.6 million, and tax sharing payments of up to 50% of the tax savings realized by ORC because of Reunion's net operating loss carryovers. There can be no assurances that ORC will be able to maintain the required levels of availability and be permitted to make the management fee and tax sharing fee payments to Reunion. In any event, the maximum amount of such payments is not expected to be sufficient for Reunion's corporate operating and debt service requirements. Without additional financing, management believes that the Company will not have sufficient resources to meet its corporate expenses and legal and environmental costs as they become due over the next twelve months. In the Company's discussions with potential lenders for new financing arrangements in connection with the merger with Chatwins, the Company is pursuing financing terms that will not include restrictions on transfers between it and its subsidiaries. If the merger with Chatwins and related financing do not materialize, the Company will consider alternative funding sources. Due to the delay of the merger financing Reunion is presently investigating temporary financing alternatives. 11 ORC: ORC borrows for its operating requirements under a credit facility with Congress. The credit facility as amended provides for maximum borrowings of $20.0 million under a term loan in the original amount of $7.7 million and revolving loans based on the eligible balances of accounts receivable and inventory. Management believes that ORC's cash flow from operations, together with this credit facility and permitted levels of capital and operating leases, will be sufficient for ORC's operating requirements, including capital expenditures and debt service, over the next twelve months. At June 30, 1998 ORC had $1.1 million in revolving credit availability. AGRICULTURAL OPERATIONS: The Company has agreed in principle with its joint venture partner, Washington Federal Savings, ("WFS"), for the Company to buy the WFS 28.3% interest in the Juliana Preserve joint venture for $5.86 million. The Company also plans to undertake a limited wine grape development effort, which management believes will enhance the value of the property. Based on projections of farming costs and capital requirements for the 1998 crop year, the Company believes that it will need to obtain outside financing to fund the purchase of the WFS interests and development effort. The Company is working with present and prospective lenders to refinance existing agricultural debt and fund the WFS interest acquisition and development efforts, but there can be no assurances that such financing will be arranged. Collateral for any new borrowings is expected to be provided by the underlying agricultural assets and vineyard acreage. Management expects the combination of farming revenues plus prospective borrowings to be sufficient to fund the agricultural operations over the next twelve months. CONTINGENCIES AND UNCERTAINTIES On April 24, 1998, a jury in state district court in Harris County, Texas returned jury verdict findings that Bargo Energy Company had a right to terminate a November 1995 stock purchase agreement with Reunion and that Reunion fraudulently induced Bargo into entering into the agreement. The November 1995 stock purchase agreement concerned the sale of Reunion's subsidiary, REC, which operated Reunion's discontinued oil and gas business. The jury recommended that an award of $5.0 million in punitive damages be assessed against Reunion. In July 1998, the court entered judgment affirming the $5.0 million jury verdict and awarding approximately $3.0 million in attorneys' fees and costs. Reunion maintained at trial and continues to maintain that all requirements to closing under the contract were met, and that Bargo was required to close the transaction. Reunion also maintains that no evidence sufficient to support a jury finding of fraud or the related punitive damages finding was presented at trial. Reunion intends to continue to vigorously oppose this judgment, including by appeal if necessary. Once the final activities in the trial court have been concluded, Reunion will be required to post a bond in the approximate amount of $8.8 million, including one year's anticipated interest, in order to appeal. Although management believes, based on consultation with counsel, that it is more likely than not that the judgment will be overturned on appeal, Reunion has recorded an accrual for the amount of the bond with a charge to continuing operations in the 1998 second quarter in accordance with generally accepted accounting principles. In early 1996, the State of California Franchise Tax Board initiated an audit of the Company's franchise tax returns for the years 1991, 1992 and 1993. In October 1996, the Company received a formal notice of assessment from the taxing authority in the aggregate amount of $0.7 million plus interest. Of this amount, $0.6 million results from the auditor's conclusion that income from gains on sales of certain Canadian assets in 1991 should be reclassified from nonbusiness to business income. The Company believes its classification of such income was correct, and has appealed the assessment of tax. If the Company's positions prevail on this issue, management believes that the amounts due would not exceed amounts previously paid or provided for. No additional accruals have been made for any amounts that may be due if the Company does not prevail because the outcome cannot be determined. The Company recorded a provision for $0.1 million for certain other proposed adjustments. In connection with the sale of REC, the Company retained certain oil and gas properties in Louisiana because of litigation concerning environmental matters. The Company is in the process of environmental remediation under a plan approved by the Louisiana Office of Conservation. The Company has recorded an 12 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 the quarter ended June 30, 1998 the Company increased this accrual by a charge of $1.2 million to discontinued operations, based on revised estimates of the remaining remediation costs. At June 30, 1998, the balance accrued for these remediation costs is approximately $1.6 million which is recorded in other current liabilities on the accompanying balance sheet. Owners of a portion of the property have objected to the Company's proposed cleanup methodology and have filed suit to require additional procedures. The Company is contesting this litigation, and believes its proposed methodology is well within accepted industry practice for remediation efforts of a similar nature. No accrual has been made for any costs of any alternative cleanup methodology which might be imposed as a result of the litigation. The Company and its directors have been named as defendants in two class action lawsuits filed in the Delaware Court of Chancery by certain Reunion stockholders, purportedly on behalf of all public stockholders of Reunion, seeking to prevent or rescind the merger with Chatwins Group, Inc. and /or obtain damages from Reunion, Chatwins and the directors of Reunion on account of the merger. The lawsuit alleges breaches of fiduciary duty by the defendants in setting the exchange ratio of the merger. Reunion believes that the exchange ratio fixed for the merger fairly reflected the relative value of Chatwins and Reunion when the merger terms were agreed. Reunion therefore believes that these lawsuits are without merit and intends to pursue their dismissal vigorously. PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company filed suit in the 125th Judicial District Court of Harris County, Texas against Bargo and its general partners, Chisos Corporation, Austin Resources Corporation, Shearwave, Inc., Brazos Oil & Gas Corporation, and Schroder Oil Financing & Investment Company, on January 16, 1996 for damages and relief arising out of Bargo's repudiation of its agreement to purchase all outstanding shares of the capital stock of the Company's subsidiary, REC. Bargo had agreed to pay the Company $15.1 million for REC's capital stock, subject to certain potential adjustments in the purchase price as set forth in the Stock Purchase Agreement between the Company and Bargo and had deposited $0.5 million with a contractual escrow agent in accordance with the terms of the stock purchase agreement. The Company alleged in its complaint that Bargo tortiously interfered with a prospective stock purchase agreement with another purchaser of REC's stock, and then wrongfully repudiated its agreement to purchase REC's stock. The Company also asserted claims against Bargo for breach of contract and breach of duty of good faith and fair dealing, and sought damages under these theories of liability. Bargo also filed suit against the Company claiming that the Company, its investment bankers, and certain individuals fraudulently misrepresented information and fraudulently induced Bargo into signing the Stock Purchase Agreement. Bargo also asserted claims for breach of contract and warranty, return of its escrow, and for unspecified damages under these theories of liability. The cases were consolidated in the 334th Judicial District Court of Harris County, Texas, and the consolidated case was realigned with the Company as plaintiff. On April 24, 1998, after a three week trial, a jury returned jury verdict findings that Bargo had a right to terminate the stock purchase agreement with Reunion and that Reunion fraudulently induced Bargo into entering into the agreement. The jury recommended that an award of $5.0 million in punitive damages be assessed against Reunion. In July 1998, the court entered judgment affirming the $5.0 million jury verdict and awarding approximately $3.0 million in attorneys' fees and costs. Reunion maintained at trial and continues to maintain that all requirements to closing under the contract were met, and that Bargo was required to close the transaction. Reunion also maintains that no evidence sufficient to support a jury finding of fraud or the related punitive damages finding was presented at trial. Reunion intends to continue to vigorously oppose this judgment, including by appeal if necessary. Once the final activities in the trial court have been concluded, Reunion will be required to post a bond in the approximate amount of $8.8 million, including one year's anticipated interest, in 13 order to appeal. Management believes, based on consultation with counsel, that it is more likely than not that any judgment based on a finding of fraud, the award of attorneys' fees based on a finding of fraud and punitive damages would be overturned on appeal. If the judgment is not overturned on appeal, the Company intends to pay its obligations with respect to such judgment out of the proceeds of the refinancing which is anticipated to be consummated in connection with the proposed merger with Chatwins. If such merger or refinancing were not consummated, however, the Company would be obligated to seek alternative funding sources, including a sale of assets. The Company and its directors have been named as defendants in two class action lawsuits filed in the Delaware Court of Chancery by certain Reunion stockholders, purportedly on behalf of all public stockholders of Reunion, seeking to prevent or rescind the merger with Chatwins and /or obtain damages from Reunion, Chatwins and the directors of Reunion on account of the merger. The lawsuit alleges breaches of fiduciary duty by the defendants in setting the exchange ratio of the merger. Reunion believes that the exchange ratio fixed for the merger fairly reflected the relative values of Chatwins and Reunion when the merger terms were agreed. Reunion therefore believes that these lawsuits are without merit and intends to pursue their dismissal vigorously. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 2.1 --Merger Agreement, dated as of May 31, 1998, between Reunion Industries, Inc. and Chatwins Group, Inc. (included as Annex A to the Proxy Statement/Prospectus) Incorporated by reference to Registration Statement on Form S-4 (No. 333-56153) 2.2 --1998 Stock Option Plan of Reunion Industries, Inc. (included as Annex B to Proxy Statement/Prospectus) Incorporated by reference to Registration Statement on Form S-4 (No. 333-56153) 11.1 --Computation of Earnings Per Share 27 --Financial Data Schedule
(b) Current Reports on Form 8-K During the quarter ended June 30, 1998, the Company filed no reports on Form 8-K. 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. REUNION INDUSTRIES, INC. (Registrant) By /s/ Richard L. Evans ----------------------------------- Richard L. Evans Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: August 13, 1998 15 EX-11.1 2 COMPUTATION Exhibit 11.1 REUNION INDUSTRIES, INC. COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER DATA)
Three Months Six Months Ended June 30, Ended June 30 -------------------- ------------------- 1998 1997 1998 1997 -------- --------- -------- -------- Net (loss) $(10,530) $ (418) $(10,256) $ (123) ======== ====== ======== ====== Weighted average common shares outstanding--Basic 3,865 3,855 3,861 3,855 Net additional shares outstanding assuming all stock options exercised using the Treasury Stock Method -- -- -- -- -------- ------ -------- ------ Average common shares and common share equivalents outstanding--Diluted 3,865 3,855 3,861 3,855 ======== ====== ======== ====== Net (loss) per share: Basic $ (2.72) $(0.11) $ (2.66) $(0.03) ======== ====== ======== ====== Diluted $ (2.72) $(0.11) $ (2.66) $(0.03) ======== ====== ======== ======
Notes: EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE PERIOD ENDED 6/30/98 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 JUN-30-1998 314 0 13,314 323 8,314 22,742 41,509 5,731 70,911 39,003 10,213 0 0 39 18,021 70,911 51,072 51,072 43,635 43,635 0 0 1,494 (8,981) 75 (9,056) (1,200) 0 0 (10,256) (2.66) (2.66)
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