-----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, S4UDh/J0b8JZcUke5XcY+LzLU+jofPkKRSSgHaMli8Q2S+dlTFaOKd+WFkrj8WmO d8tnp/y2GvVUr4lpgNDrMA== 0000899243-99-002348.txt : 19991117 0000899243-99-002348.hdr.sgml : 19991117 ACCESSION NUMBER: 0000899243-99-002348 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99754910 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 FOR THE QUARTER ENDING 9/30/99 ================================================================================ 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 SEPTEMBER 30, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO _____________ COMMISSION FILE NUMBER 33-64325 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 September 30, 1999 the Registrant had 3,940,100 shares of common stock, par value $.0l, outstanding. ================================================================================ TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1999 (Unaudited) and December 31, 1998 2 Consolidated Statements of Operations (Unaudited) Three Months and Nine Months Ended September 30, 1999 and 1998 4 Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 1999 and 1998 5 Notes to Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Qualitative and Quantitative Disclosures About Market Risk 18 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURE 20 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 include any statements preceded by, followed by or that include the words "believes," "expects," "anticipates," "intends," or similar expressions. 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 you that the expectations contained in such forward-looking statements will be achieved. Such statements involve risks, uncertainties and assumptions which could cause actual results to differ materially from those contained in such statements. Such factors include, but are not limited to, domestic and international economic conditions which affect the volume of sales of business and consumer goods by the Company's customers and, therefore, the volume of sales of component parts produced by the Company; the cost and availability of materials, labor and other goods and services used in the Company's operations; actions of the Company's competitors and industry trends, which affect the pricing of the Company's products; the cost of interest on the Company's debt; and the effects of our, or parties with whom we do business, failure to achieve Year 2000 compliance. In addition, the Company's plans and objectives with respect to financing, asset sales and the proposed merger with Chatwins Group, Inc. are conditioned on the occurrence of certain events, some of which are beyond the control of the Company. 1 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS REUNION INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (In Thousands)
September 30, December 31, 1999 1998 -------- -------- (Unaudited) ASSETS Current Assets Cash and Cash Equivalents $ 1,211 $ 2,009 Accounts Receivable, Less Allowance for Doubtful Accounts of $146 and $360, respectively 12,277 12,389 Inventories 6,732 7,104 Customer Tooling-in-Process 97 897 Deferred crop costs 1,039 - Other Current Assets 1,763 803 -------- -------- Total Current Assets 23,119 23,202 -------- -------- Property, Plant and Equipment---- Net 38,541 41,353 -------- -------- Other Assets Goodwill 7,841 8,371 Other 1,675 1,948 -------- -------- Total Other Assets 9,516 10,319 -------- -------- TOTAL ASSETS $ 71,176 $ 74,874 ======== ========
See Accompanying Notes to Consolidated Financial Statements 2 REUNION INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (In Thousands)
September 30, December 31, 1999 1998 --------------- --------------- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current Portion of Long-Term Debt $ 12,015 $ 11,155 Short Term Term Debt - Related Parties - 1,015 Accounts Payable 8,365 8,684 Advances From Customers 1,222 1,249 Accrued Bargo Judgment - 8,425 Accrued Environmental Costs 1,538 1,723 Other Current Liabilities 3,729 3,868 ------------- ------------- Total Current Liabilities 26,869 36,119 LONG-TERM DEBT 20,763 15,245 LONG-TERM DEBT - RELATED PARTIES 1,385 1,385 OTHER LIABILITIES 3,288 3,279 ------------- ------------- Total Liabilities 52,305 56,028 ------------- ------------- COMMITMENTS AND CONTINGENCIES - NOTE 5 REDEEMABLE PREFERRED STOCK OF CONSOLIDATED SUBSIDIARY 557 607 MINORITY INTERESTS 2,602 2,000 STOCKHOLDERS' EQUITY Common Stock ($.01 par value; 20,000 authorized; 3,940 and 3,900 issued and outstanding, respectively) 39 39 Additional Paid-in Capital 29,403 29,332 Accumulated Deficit (Since January 1, 1989) (13,131) (12,961) Foreign Currency Translation Adjustments (599) (171) ------------- ------------- Total Stockholders' Equity 15,712 16,239 ------------- ------------- $ 71,176 $ 74,874 ============= =============
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 Nine Months Ended September 30, September 30, -------------------- ------------------- 1999 1998 1999 1998 -------- ------- ------ --------- NET SALES Plastics $ 17,553 $ 22,957 $ 55,057 $ 74,029 Agriculture 1,887 - 2,710 - -------- ------- ------ --------- 19,440 22,957 57,767 74,029 Cost of Sales Plastics 14,743 19,436 46,994 63,071 Agriculture 1,546 - 2,398 - -------- ------- ------ --------- 16,289 19,436 49,392 63,071 GROSS PROFIT 3,151 3,521 8,375 10,958 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,490 2,790 8,835 8,824 PROVISION FOR MERGER AND REFINANCING COSTS - 1,362 - 1,362 -------- ------- ------ --------- OPERATING INCOME 661 (631) (460) 772 OTHER INCOME AND (EXPENSE) Interest Expense (964) (872) (2,282) (2,366) Provision for Bargo Judgment - - (1,646) (8,825) Bargo Settlement Gain - - 3,617 - Other, Including Interest Income 174 (111) 476 (176) -------- ------- ------ --------- (790) (983) 165 (11,367) -------- ------- ------ --------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (129) (1,614) (295) (10,595) Income Tax Benefit (Expense) 45 652 36 577 -------- ------- ------ --------- INCOME (LOSS) FROM CONTINUING OPERATIONS (84) (962) (259) (10,018) INCOME (LOSS) FROM DISCONTINUED OPERATIONS 459 - 89 (1,200) -------- ------- ------ --------- NET INCOME (LOSS) 375 (962) (170) (11,218) FOREIGN CURRENCY TRANSLATION ADJUSTMENT 233 477 (428) 388 -------- ------- ------ --------- COMPREHENSIVE INCOME (LOSS) $ 608 $ (485) $ (598) $ (10,830) ======== ======= ======= ========= INCOME (LOSS) PER SHARE - BASIC AND DILUTED Income (Loss) from Continuing Operations $ (0.02) $ (0.25) $ (0.07) $ (2.59) Income (Loss) from Discontinued Operations 0.12 - 0.03 (0.31) ======== ======= ======= ========= Net Income (Loss) $ 0.10 $ (0.25) $ (0.04) $ (2.90) ======== ======= ======= ========= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Basic and diluted 3,940 3,900 3,919 3,874 ======== ======= ======= =========
See Accompanying Notes to Consolidated Financial Statements 4 REUNION INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)
Nine Months Ended September 30, ----------------------- 1999 1998 -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $ (170) $ (11,218) Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities Depreciation 2,911 2,713 Goodwill amortization 535 523 Debt issuance costs amortization 809 206 Provision for Bargo judgment 400 8,825 Bargo settlement gain (3,617) - Provision for environmental liability - 1,200 -------- --------- 868 2,249 Changes in Assets and Liabilities: (Increase) Decrease in Accounts Receivable 112 (1,518) (Increase) Decrease in Inventory 372 (1,155) Increase (Decrease) in Accounts Payable (319) 1,485 Payment of Bargo settlement (5,000) - Other - net (865) 773 -------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (4,832) 1,834 -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Joint Venture Interest, Net of Cash Acquired - (1,720) Sale of Agricultural Land 1,440 2,695 Capital Expenditures (1,933) (3,107) Loan to Related Party (310) - Other (401) 451 -------- --------- NET CASH USED IN INVESTING ACTIVITIES (1,204) (1,681) -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Issuance of Debt Obligations 13,750 960 Debt Issuance Costs (325) - Payments of Debt Obligations (7,638) (2,613) Increase (Decrease) in Short Term Borrowings (746) 646 Proceeds from Issuance of Redeemable Preferred Stock of Subsidiary - 583 Proceeds from exercise of stock options and warrants 69 92 Other (3) 43 -------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 5,107 (289) -------- --------- EFFECT OF EXCHANGE RATE ON CASH 131 - -------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (798) (136) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,009 2,085 -------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,211 $ 1,949 ======== =========
See Accompanying Notes to Consolidated Financial Statements 5 REUNION INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) NOTE 1. CONSOLIDATED FINANCIAL STATEMENTS GOING CONCERN CONSIDERATIONS The accompanying consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company has incurred losses in each of the last five years, and incurred a loss of $170 in the nine months ended September 30, 1999. Corporate expenses, including salaries and benefits, professional fees and other public company costs, are expected to approximate $1,500 annually. The Company settled its litigation with Bargo Energy Company ("Bargo") in June 1999, and paid $5,000 to Bargo on July 15, 1999. On September 2, 1999, the Company paid $973 for settlement of a California tax audit. In addition, a significant portion of the $1,378 accrued for environmental remediation of the Louisiana properties (see Note 5) is expected to be expended during the next twelve months. The Company's subsidiary, Oneida Rostone Corp. ("ORC") closed a new credit facility with The CIT Group/Business Credit, Inc. ("CITBC") in October 1998. This new credit facility limits payments to Reunion by ORC and Juliana Vineyards (the Company's wine grape subsidiary). The new credit facility also provided a letter of credit guarantee to provide credit support for a supersedeas bond in the Bargo litigation. Since October 1998, substantially all the amounts otherwise permitted to be paid by ORC to Reunion have been used to fund letter of credit and guarantee fees relating to the supersedeas bond. The $5,000 settlement payment to Bargo in July 1999 was funded by a temporary overadvance on the revolver portion of the CITBC credit facility and the letter of credit was released. In August 1999, the credit facility was amended to increase term loan A to $8,250 and provide for a $3,000 term loan B. This amended facility replaces the temporary overadvance and provides additional working capital for ORC. In previous quarters, ORC was not in compliance with a financial covenant to maintain EBITDA (as defined in the financing agreements with CITBC) of not less than specified amounts each fiscal quarter and CITBC waived compliance with this covenant. In connection with the amended credit facility described above, the financial covenants in the loan agreement were also amended to levels that management believes are reasonably attainable in future quarters. ORC was in compliance with the amended covenants at September 30, 1999. Without additional financing, management believes that the Company will not have sufficient resources to meet its corporate expenses and legal and environmental costs as they become due over the next twelve months. During 1998 and January 1999, the Company borrowed a total of $1,040 from Stanwich Financial Service Corp., ("SFSC"), a related party. These borrowings bear interest at 15% and were originally due to mature September 30, 1998. The Company repaid $800 of this borrowing, including interest, in February 1999 and $303, including interest, in August 1999. There can be no assurances that additional financing will be arranged, or that SFSC will lend additional funds. If the Company is unable to arrange additional financing or complete the merger described below, it will be necessary to reduce or defer corporate headquarters salaries and other corporate expenses and it may be necessary to sell one or more of the Company's businesses. 6 REUNION INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) As described in Note 3, the Company has announced that it has entered into an amended and restated merger agreement with Chatwins Group, Inc. and has held financing discussions with prospective lenders. If such transactions are completed, management believes that there will be sufficient resources for the Company's cash flow requirements. There can be no assurances that any of these transactions will be consummated. 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 SEPTEMBER 30, 1999 The Consolidated Balance Sheet at September 30, 1999 and the Consolidated Statements of Operations and Cash Flows for the three months and nine months ended September 30, 1999 and 1998 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, 1998 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, 1998. 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 the period. Potential common shares include shares issuable upon exercise of the Company's stock options and warrants. Potential common shares were not included in the weighted average number of shares for 1999 because their effect would have been anti-dilutive. ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) has issued the following accounting pronouncement which the company will be required to adopt in future periods: FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" requires that derivative instruments such as options, forward contracts and swaps be recorded as assets and liabilities at fair value and provides guidance for recognition of changes in fair value depending on the reason for holding the derivative. The Company does not presently have significant transactions involving derivative instruments, but may do so in the future. The Company is required to adopt Statement No. 133 for the first quarter of 2001 and may adopt it earlier. 7 REUNION INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) NOTE 2. INVENTORIES Inventories consisted of the following: September 30, 1999 December 31, 1998 ------------------ ----------------- Raw Materials $ 3,327 $ 3,308 Work-in process 997 962 Finished Goods 2,408 2,834 --------- --------- Total $ 6,732 $ 7,104 --------- --------- NOTE 3. PROPOSED MERGER WITH CHATWINS GROUP, INC. The Company and Chatwins Group, Inc., a Delaware corporation that owns approximately 37% of the issued and outstanding shares of common stock of the Company ("CGI"), have entered into an agreement for a stock-for-stock merger of CGI with and into the Company. Upon completion of the merger, the CGI stock outstanding will be converted into 9,500,000 shares of Company common stock, plus up to an additional 500,000 shares if CGI achieves certain post-merger performance targets. The shares of the Company's common stock currently held by CGI will be canceled in the merger. The merger is subject to approval by the Company's stockholders, the securing of adequate financing to refinance certain debt of the Company and CGI and to operate the combined company, and the condition that holders of no more than 5% of CGI stock exercise their appraisal rights under Delaware law. In connection with the merger, Reunion and CGI are jointly pursuing long- term financing options in an effort to consummate the merger within the next several months. There can be no assurances that the long-term financing can be completed or that the merger will be approved or consummated. NOTE 4. LITIGATION AND TAX AUDIT SETTLEMENTS Bargo Energy Company Litigation In June 1999, the Company and Bargo Energy Company reached agreement on the terms of a settlement of their litigation concerning a November 1995 stock purchase agreement for the sale of the Company's subsidiary, Reunion Energy Company ("REC") to Bargo. In July 1998, the trial court had entered judgment affirming a jury finding awarding Bargo $5,000 in punitive damages and awarding approximately $3,000 in attorneys' fees and costs. The Company's appeal was pending. On July 15, 1999, the Company and Bargo signed the Settlement Agreement, the Company paid Bargo $5,000 and the parties released all claims against each other. As described in Note 1, the settlement payment was funded by a temporary overadvance on ORC's revolving credit facility. 8 REUNION INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) Through June 1999, the Company had recorded provisions totaling $8,825 for the trial court judgment plus interest at 10% and $2,060 for credit support and guarantee fees related to the bond filed by the Company to suspend execution on the judgement while the Company appealed. As a result of the settlement, the Company recognized a gain in June 1999 of $3,617, the amount by which the recorded provisions exceeded the settlement amount plus remaining credit support costs. California Tax Audit In June 1999, the Company reached agreement with the California Franchise Tax Board to settle the assessment of additional taxes for 1991, 1992 and 1993. The settlement agreement is subject to final approval by the State of California, which management expects will be received. Under the settlement agreement, Reunion paid $973, including interest, from the proceeds of a sale of a portion of the Company's vineyard property in California. The Company accrued $595 in prior years for this obligation based on settlement discussions. As a result of the settlement, the Company accrued an additional $370 in June 1999, with a corresponding charge to discontinued operations. NOTE 5. CONTINGENCIES Environmental Compliance Various U.S. federal, state and local laws and regulations including, without limitation, laws and regulations concerning the containment and disposal of hazardous waste, oil field waste and other waste materials, the use of storage tanks, the use of insecticides and fungicides and the use of underground injection wells directly or indirectly affect the Company's operations. In addition, environmental laws and regulations typically impose "strict liability" upon the Company for certain environmental damages. Accordingly, in some situations, the Company could be liable for clean up costs even if the situation resulted from previous conduct of the Company that was lawful at the time or from improper conduct of, or conditions caused by, previous property owners, lessees or other persons not associated with the Company or events outside the control of the Company. Such clean up costs or costs associated with changes in environmental laws and regulations could be substantial and could have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. The Company's plastic products and service business routinely uses chemicals and solvents, some of which are classified as hazardous substances. The Company's oil and gas business and related activities routinely involved the handling of significant amounts of waste materials, some of which are classified as hazardous substances. The Company's vineyard operations routinely use fungicides and insecticides, the handling, storage and use of which is regulated under the Federal Insecticide, Fungicide and Rodenticide Act, as well as California laws and regulations. Except as described in the following paragraphs, the Company believes it is currently in material compliance with existing environmental protection laws and regulations and is not involved in any significant remediation activities or administrative or judicial proceedings arising under federal, state or local environmental protection laws and regulations. In addition to management personnel who are responsible for monitoring environmental compliance 9 REUNION INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) and arranging for remedial actions that may be required, the Company has also employed outside consultants from time to time to advise and assist in the Company's environmental compliance efforts. Except as described in the following paragraphs, the Company has not recorded any accruals for environmental costs. In February 1996, the Rostone division of ORC was informed by a contracted environmental services consulting firm that soil and ground water contamination exists at its Lafayette, Indiana site. The Company has expended $235 to date and has accrued an additional $160 based on current estimates of remediation costs. Certain of these costs are recoverable from the seller of Rostone (a related party) by offset to obligations due the seller. In connection with the sale of REC, the Company retained certain oil and gas properties in Louisiana because of litigation concerning environmental matters. The Company is in the process of environmental remediation under a plan approved by the Louisiana Office of Conservation. The Company has recorded an accrual for its proportionate share of the remaining estimated costs to remediate the site based on plans and estimates developed by the environmental consultants hired by the Company. During 1998 the Company increased this accrual by a charge of $1,200 to discontinued operations, based on revised estimates of the remaining remediation costs. During the second quarter of 1999, the Company conducted remediation work on the property. The Company has paid $112 and is required to pay an additional $63 of the total cost of approximately $300. A regulatory hearing has been scheduled for November 1999 to consider the adequacy of the remediation conducted to date. At September 30, 1999, the remaining balance accrued by the Company for remediation costs was $1,378 Owners of a portion of the property have objected to the Company's cleanup methodology and have filed suit to require additional procedures. The Company is contesting this litigation, and believes its proposed methodology is well within accepted industry practice for remediation efforts of a similar nature. No accrual has been made for costs of any alternative cleanup methodology which might be imposed as a result of the litigation. The Company and its subsidiaries are the defendants in a number of lawsuits and administrative proceedings, which have arisen in the ordinary course of business of the Company and its subsidiaries. The Company believes that any material liability which can result from any of such lawsuits or proceedings has been properly reserved for in the Company's consolidated financial statements or is covered by indemnification in favor of the Company or its subsidiaries, and therefore the outcome of these lawsuits or proceedings will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. 10 REUNION INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) NOTE 6. SEGMENT INFORMATION The following table presents information about the results of operations of the Company's business segments:
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ---------------------- 1999 1998 1999 1998 -------- -------- -------- -------- REVENUES Plastic products and services $ 17,553 $ 22,957 $ 55,057 $ 74,029 Agriculture 1,887 0 2,710 0 -------- -------- -------- -------- $ 19,440 $ 22,957 $ 57,767 $ 74,029 ======== ======== ======== ======== INCOME (LOSS) BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (EBITDA) Plastic products and services $ 1,694 $ 2,302 $ 4,188 $ 6,877 Agriculture 777 (55) 618 (40) Corporate and other (288) (1,895) 627 (11,830) -------- -------- -------- -------- $ 2,183 $ 352 $ 5,433 $ (4,993) ======== ======== ======== ======== DEPRECIATION AND AMORTIZATION Plastic products and services $ 905 $ 976 $ 2,935 $ 2,884 Agriculture 445 117 510 349 Corporate and other (2) 1 1 3 -------- -------- -------- -------- $ 1,348 $ 1,094 $ 3,446 $ 3,236 ======== ======== ======== ======== INCOME (LOSS) BEFORE INTEREST AND TAXES (EBIT) Plastic products and services $ 789 $ 1,326 $ 1,253 $ 3,993 Agriculture 332 (172) 108 (389) Corporate and other (286) (1,896) 626 (11,833) -------- -------- -------- -------- 835 (742) 1,987 (8,229) Interest expense (964) (872) (2,282) (2,366) -------- -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES $ (129) $ (1,614) $ (295) $(10,595) ======== ======== ======== ========
11 REUNION INDUSTRIES, INC. AND SUBSIDIARIES 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 and services industry through its wholly owned subsidiary ORC. The Company is also engaged in wine grape agricultural operations in Napa County, California through its wholly owned subsidiary Juliana Vineyards ("Juliana"). The Company and Chatwins Group, Inc., a Delaware corporation that owns approximately 37% of the issued and outstanding shares of common stock of the Company ("CGI"), have entered into an amended agreement for a stock-for-stock merger of CGI with and into the Company. Upon completion of the merger, the CGI stock outstanding will be converted into 9,500,000 shares of Company common stock, plus up to an additional 500,000 shares if CGI achieves certain post- merger performance targets. The shares of the Company's common stock currently held by CGI will be canceled in the merger. The merger is subject to approval by the Company's stockholders, the securing of adequate financing to refinance certain debt of the Company and CGI and to operate the combined company, and the condition that holders of no more than 5% of CGI stock exercise their appraisal rights under Delaware law. In connection with the merger, Reunion and Chatwins are jointly pursuing long-term financing options in an effort to consummate the merger within the next several months. There can be no assurances that the long-term financing can be completed or that the merger will be approved or consummated. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 The Company had net income of $0.4 million during the three months ended September 30, 1999 compared to a net loss of $1.0 million for the three months ended September 30, 1998. ORC: ORC had revenues of $17.6 million and operating income of $0.7 million for the three months ended September 30, 1999 compared to revenues of $22.9 million and operating income of $1.2 million for the three months ended September 30, 1998. The 24% decrease in revenues 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 ORC facilities. ORC backlog totaled $17.3 million at September 30, 1999, compared to backlog of $16.7 million at December 31, 1998 and backlog of $20.7 million at September 30, 1998. Backlog is also affected by customers' continuing movement to just-in-time ordering and shorter delivery cycles. Cost of sales totaled $14.8 million, or 84.0% of net sales, for the three months ended September 30, 1999 compared to $19.4 million, or 84.7% of net sales, for the three months ended September 30, 1998 . Gross profit was $2.8 million for the three months ended September 30, 1999 compared to $3.5 million in the prior year period. The decrease in both cost of sales and gross profit resulted from the decrease in revenues. 12 REUNION INDUSTRIES, INC. AND SUBSIDIARIES Selling, general and administrative expenses were $2.1 million for the three months ended September 30, 1999, compared to $2.3 million for the three months ended September 30, 1998. Operating income was $0.7 million for the three months ended September 30, 1999 compared to $1.2 million in the comparable 1998 period, primarily because of the decrease in revenues. JULIANA: Juliana had operating income of $0.3 million on grape sales of $1.2 million and miscellaneous revenues of $0.7 million for the three months ended September 30, 1999. Juliana's agricultural operations were accounted for on the equity method in the prior year period, and the results for the period were included in Other Income and (Expense). 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 $0.3 million for the three months ended September 30, 1999 compared to $0.5 million for the three months ended September 30, 1998. As a result of the termination of a previous merger agreement with CGI because of the inability to raise sufficient financing under then-current market conditions, the Company recorded a charge of $1.4 million in the third quarter of 1998 to write off accumulated legal, investment banking and other costs related to the merger. OTHER INCOME AND (EXPENSE): Interest expense was $1.0 million for the three months ended September 30, 1999 compared to $0.9 million for the prior year period. The Company recognized breakeven results from its equity investment in the agricultural operations for the three months ended September 30, 1998. NINE MONTHS ENDED SEPTEMBER 30, 1999 The Company had a net loss of $0.2 million for the nine months ended September 30, 1999 compared to a net loss of $11.2 million for the nine months ended September 30, 1998. ORC: Revenues and operating income of ORC were $55.1 million and $1.0 million, respectively, for the nine months ended September 30, 1999 compared to revenues and operating income of $74.0 million and $3.7 million, respectively, for the nine months ended September 30, 1998. The 26% decrease in revenues 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 ORC facilities. ORC backlog totaled $17.3 million at September 30, 1999, compared to backlog of $16.7 million at December 31, 1998 and backlog of $20.7 million at September 30, 1998. Backlog is also affected by customers' continuing movement to just-in-time ordering and shorter delivery cycles. Cost of sales totaled $47.0 million, or 85.4% of net sales, for the nine months ended September 30, 1999 compared to $63.1 million, or 85.2% of net sales for the nine months ended September 30, 1998. Gross profit was $8.1 million for the nine months ended June 30, 1999 compared to $10.9 million in the prior year period. The decrease in both cost of sales and gross profit resulted from the decrease in revenues. 13 REUNION INDUSTRIES, INC. AND SUBSIDIARIES Selling, general and administrative expenses were $7.1 million for the nine months ended September 30, 1999, compared to $7.2 million for the nine months ended September 30, 1998. The 1999 period included a $0.5 million provision for supplemental retirement compensation. Operating income was $1.0 million for the nine months ended September 30, 1999 compared to $3.7 million in the comparable 1998 period, primarily because of the decrease in revenues. JULIANA: Juliana had an operating loss of $0.1 million on grape sales of $1.2 million and miscellaneous revenues of $1.5 million for the nine months ended September 30, 1999. Juliana's agricultural operations were accounted for on the equity method in the prior year period, and the results for the period were included in Other Income and (Expense). 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 $1.4 million for the nine months ended September 30, 1999 and $1.6 million for the nine months ended September 30, 1998. The 1999 amount includes $0.2 million of expenses incurred in connection with the proposed sale of ORC, which was subsequently terminated. The 1999 and 1998 amounts include $0.2 million and $0.4 million, respectively, of legal costs for the Company's litigation with Bargo. As a result of termination of a previous merger agreement with CGI because of the inability to raise sufficient financing under then-current market conditions, the Company recorded a charge of $1.4 million in the third quarter of 1998 to write off accumulated legal, investment banking and other costs related to the merger. OTHER INCOME AND (EXPENSE): Interest expense was $2.3 million for the nine months ended September 30, 1999 compared to $2.4 million for the prior year period as a result of lower interest rates on ORC's new credit facility with CITBC. The Company recorded a charge of $8.8 million in the 1998 period to record entry of judgment in the Company's litigation with Bargo. The Company also recorded a $1.6 million charge in the 1999 period for interest and credit support fees relating to the bond posted in the appeal of the Bargo litigation judgment, and recognized a gain of $3.6 million in the 1999 period as a result of the settlement of this litigation. See Note 4 of the Notes to Consolidated Financial Statements. The Company recognized break-even results from its equity investment in the agricultural operations for the nine months ended September 30, 1998. DISCONTINUED OPERATIONS The Company recognized income from discontinued operations of $0.5 million and $0.1 million, respectively in the three month and nine month periods ended September 30, 1999. The third quarter income was from receipt of a payment from an insurance company on claims relating to the offshore drilling business discontinued in 1993. The Company recorded a $0.4 million charge in the second quarter of 1999 as a result of the settlement of a California tax audit. The Company recorded a $1.2 million discontinued operations charge in the second quarter of 1998 to increase its accrual for estimated environmental remediation costs relating to oil and gas properties in Louisiana. LIQUIDITY AND CAPITAL RESOURCES SUMMARY OF 1999 ACTIVITIES Cash and cash equivalents totaled $1.2 million at September 30, 1999. During the nine months ended September 30, 1999, cash decreased $0.8 million, with $4.8 million used in operations, $1.2 million used in investing activities and $5.1 million provided by financing activities. 14 REUNION INDUSTRIES, INC. AND SUBSIDIARIES Investing Activities: Capital expenditures were $1.9 million and proceeds from the sale of agricultural land were $1.4 million. Financing Activities: Proceeds from new term loan borrowings totaled $13.8 million, principally due to Juliana's $7.5 million refinancing and the $6.0 million borrowing under ORC's credit facility to fund the Bargo settlement payment as described below. Principal payments reduced long-term obligations by $7.6 million, including $5.7 million repaid from the proceeds of the Juliana refinancing. Net short term borrowings were reduced $0.7 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 Juliana. CORPORATE: Corporate expenses, including salaries and benefits, professional fees and other public company costs, are expected to be approximately $1.5 million annually. A payment of $5.0 million to settle the Bargo litigation was made on July 15, 1999 and a settlement payment of approximately $1.0 million to conclude a California tax audit was made on September 2, 1999. In addition, a significant portion of the $1.4 million accrued for environmental remediation of the Louisiana properties, described below under "Contingencies and Uncertainties," is expected to be expended during the next twelve months. The Company's source of funds for these expenses, other than from additional borrowings, are from cash balances and permitted payments by ORC and Juliana. The corporate cash balance at September 30, 1999 was $0.1 million. ORC closed a new credit facility with The CIT Group/Business Credit, Inc. ("CITBC") in October 1998. This new credit facility limits payments to Reunion by ORC and Juliana. If certain levels of availability (as defined in the loan agreements) are maintained, ORC is permitted to pay Reunion monthly payments of interest, plus up to $0.1 million for management fees and dividends on preferred stock, plus tax sharing payments of up to 50% of the tax savings realized by ORC because of Reunion's NOLs. There can be no assurances that ORC will be able to maintain the required levels of availability and be permitted to make the management fee and tax sharing fee payments to Reunion. In any event, the maximum amount of such payments is not expected to be sufficient for Reunion's corporate operating and debt service requirements. The new credit facility also provided a letter of credit guarantee to provide credit support for a supersedeas bond in the Bargo litigation. In addition to the ORC assets, the facility is secured by a guarantee by Mr. Charles E. Bradley, Sr., the Company's President and Chief Executive Officer, a pledge of assets by Stanwich Financial Services Corp., ("SFSC"), a related party, and a pledge of the stock of ORC and Juliana. Since October 1998, substantially all the amounts otherwise permitted to be paid by ORC have been used to fund letter of credit and guarantee fees relating to the bond in the Bargo litigation. The $5.0 million settlement payment to Bargo in July 1999 was funded by a temporary overadvance on the revolver portion of ORC's credit facility and the letter of credit was released. In August 1999, the credit facility was amended to increase term loan A to $8.25 million and provide for a $3.0 million term loan B. This amended facility replaces the temporary overadvance and provides additional working capital for ORC. The guarantee by Mr. Bradley and the pledges of collateral by Reunion and SFSC were continued under this amendment. Substantially all the amounts permitted to be paid by ORC to Reunion are expected to be used to fund continuing guarantee fees on this loan facility. 15 REUNION INDUSTRIES, INC. AND SUBSIDIARIES Without additional financing, management believes that the Company will not have sufficient resources to meet its corporate expenses and legal and environmental costs as they become due over the next twelve months. During 1998 and the first quarter of 1999, the Company borrowed a total of $1.0 million from SFSC. These borrowings bear interest at 15%, and were due to mature September 30, 1998. Reunion Industries repaid $0.8 million, including interest, in February 1999 and $0.3 million, including interest, in August 1999. There can be no assurances that additional financing will be arranged, or that SFSC will lend additional funds. If Reunion is unable to complete the merger with CGI and the related refinancing transaction, or arrange alternative financing, during the fourth quarter of 1999, it will be necessary to reduce or defer corporate headquarters salaries and other corporate expenses and it may be necessary to sell one or more of the company's businesses. As described above under "General," the Company has announced that it has entered into an amended and restated merger agreement with Chatwins and is pursuing long term financing in connection with the proposed merger. If the merger and refinancing are completed, management believes that there will be sufficient resources for the Company's operating and debt service requirements. There can be no assurances that any of these transactions will be consummated. ORC: In October 1998, ORC closed the new credit facility with CITBC. This is a six-year senior secured credit facility including revolving credit loans of up to $10.2 million and a term loan in the initial amount of $6.0 million for ORC. The proceeds were used to refinance ORC's debt with Congress Financial Corporation and to provide working capital for ORC. Management believes that ORC's cash flow from operations, together with this credit facility and permitted levels of capital and operating leases, will be sufficient for ORC's operating requirements, including capital expenditures and debt service, over the next twelve months. At September 30, 1999 ORC had $0.8 million in revolving credit availability. JULIANA: In January 1999, Juliana closed a $7.5 million loan with Equitable Life Assurance Society of the United States ("Equitable"). The proceeds were used to refinance Juliana's existing $2.0 million loan with Equitable, to repay a $3.7 million 4-month note and for working capital. In March 1999, Juliana entered into a $1.5 million one-year credit facility with Napa National Bank secured by grape sale contracts for the 1999 harvest. The proceeds were used for 1999 farming operations and will be repaid from proceeds of grape sales. In August 1999, Juliana sold a portion of the vineyard property to a third party for net proceeds of $1.4 million. The proceeds were used to pay the California tax settlement and to repay debt to SFSC. The Company is continuing its efforts to sell the remaining vineyard property, but there is no assurance that it will be able to do so at a reasonable price or at all. If the Company is unable to sell additional parcels, it may not be possible for Juliana to fund its operating requirements over the next twelve months without funding from Corporate. CONTINGENCIES AND UNCERTAINTIES In connection with the sale of REC, the Company retained certain oil and gas properties in Louisiana because of litigation concerning environmental matters. The Company is in the process of environmental remediation under a plan approved by the Louisiana Office of Conservation. The Company has recorded an accrual for its proportionate share of the remaining estimated costs to remediate the site based on plans and estimates developed by the environmental consultants hired by the Company. During 1998 the Company increased this accrual by a charge of $1.2 million to discontinued operations, based on revised estimates of the remaining remediation costs. During the second quarter of 1999, the Company conducted remediation work on the property. The Company is required to pay $0.2 million of the total cost of $0.3 million. A regulatory hearing has been scheduled for November 1999 to consider the adequacy of the remediation conducted to date. At September 30, 1999, the remaining balance accrued by the 16 REUNION INDUSTRIES, INC. AND SUBSIDIARIES Company for these remediation costs is approximately $1.4 million. Owners of a portion of the property have objected to the Company's proposed cleanup methodology and have filed suit to require additional procedures. The Company is contesting this litigation, and believes its proposed methodology is well within accepted industry practice for remediation efforts of a similar nature. No accrual has been made for any costs of any alternative cleanup methodology which might be imposed as a result of the litigation. YEAR 2000 COMPUTER COMPLIANCE The Company, like most companies, utilizes electronic technology which includes computer hardware and software systems that process information and perform calculations that are date-and time-dependent. The Company is aware that the coming of the Year 2000 poses pervasive and complex problems in that virtually every computer operation (including manufacturing equipment and other non-information systems equipment), unless it is Year 2000 compliant, will be affected in some way by the rollover of the two-digit year value from "99" to "00" and the inadvertent recognition by electronic technology of "00" as the year 1900 rather than Year 2000. The Company is also aware that it may not only be negatively affected by the failure of its own systems to be Year 2000 compliant, but may also be negatively affected by the Year 2000 non-compliance of its vendors, customers, lenders and any other party with which the Company transacts business. The Company has completed its assessment of all of the systems and software in place at all locations and has implemented hardware replacements and software upgrades where necessary to achieve Year 2000 compliance. Because the Company uses integrated accounting and manufacturing software provided by third party vendors, it has avoided internal programming costs associated with modifying code and data to handle dates past the year 2000. The latest software releases provided by the respective third party vendors have achieved Year 2000 certification from independent testing organizations. The Company has upgraded all of its software to Year 2000 compliant releases. Upgrading and testing is complete at all of the company's seven manufacturing locations and at the headquarters location. Significant customers and outside vendors such as suppliers, banks and payroll services have been contacted and have provided assurances that they are Year 2000 compliant. Because the Company has completed the upgrading of all of its software, management has not developed a Year 2000 contingency plan. Management continues to monitor the Year 2000 compliance process and will develop contingency plans if problems are identified in the future. The Company has incurred internal staff and other costs as a result of modifying existing systems to be Year 2000 compliant. Such costs were expensed as incurred and funded through internally generated cash while costs to acquire new equipment and software will be capitalized and depreciated over their useful lives. The hardware replacements and software upgrades were principally planned to improve operating controls and implementation was not significantly accelerated. Management estimates that the incremental cost to the Company of enterprise-wide Year 2000 compliance will total approximately $0.05 million. Management recognizes that the failure of the Company or any party with which the Company conducts business to be Year 2000 compliant in a timely manner could have a material adverse impact on the operations of the Company. If the Company's systems were to fail because they were not Year 2000 compliant, the Company would incur significant costs and inefficiencies. Manual systems for manufacturing and financial control would have to be implemented and staffed. Significant customers might decide to cease doing business with the Company. Disruptions in electric power or in the delivery of materials could cause significant business interruptions. Similarly, business interruptions at significant customers could result in deferred or canceled orders. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-parties, the company cannot ensure its ability to resolve problems associated with the Year 2000 issue that may affect its operations and business, or expose it to third-party liability in a timely and cost-effective manner. 17 REUNION INDUSTRIES, INC. AND SUBSIDIARIES ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK In the operation of its business, the Company has market risk exposures to foreign currency exchange rates, raw material prices and interest rates. Each of these risks and the Company's strategies to manage the exposure is discussed below. The Company manufactures its products in the United States and Ireland and sells products in those markets as well as in Europe. International sales were 28% of the Company's sales in 1998 and 27% for the nine months ended September 30, 1999. The Company's operating results could be affected by changes in foreign currency exchange rates or weak economic conditions in Europe. The Company does not actively hedge its foreign currency risk because the international operations are self-financed and the translation exposure is not considered material to the Company's financial condition, liquidity or results of operations. The principal raw materials used by the Company are thermoplastic polymers. These materials are available from a number of suppliers. Prices for these materials are affected by changes in market demand, and there can be no assurances that prices for these and other raw materials will not increase in the future. The Company's contracts with its customer generally provide that such price increases can be passed through to the customers. The Company's operating results are subject to risk from interest rate fluctuations on debt which carries variable interest rates. The variable rate debt was approximately $21 million at September 30, 1999, which is representative of balances outstanding during the year following the funding of the settlement payment for the Bargo litigation. A 0.25% change in interest rates would affect results of operations by approximately $0.05 million. 18 REUNION INDUSTRIES, INC. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (b) CURRENT REPORTS ON FORM 8-K During the quarter ended September 30, 1999, the Company filed no reports on Form 8-K. 19 REUNION INDUSTRIES, INC. AND SUBSIDIARIES 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: November 15, 1999 20 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1,211 0 12,423 146 6,732 23,119 48,732 10,191 71,176 26,869 22,148 557 0 39 15,673 71,176 57,767 57,767 49,392 49,392 0 0 2,282 (295) (36) (259) 89 0 0 (170) (0.04) (0.04)
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