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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 2001, Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission File Number 33-64325
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REUNION INDUSTRIES, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 06-1439715
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(State of Incorporation) (I.R.S. Employer Identification No.)
11 STANWIX STREET, SUITE 1400, PITTSBURGH, PENNSYLVANIA 15236
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(Address of principal executive offices, including zip code)
(412) 281-2111
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: COMMON STOCK, $.01 par value
Name of Each Exchange on Which Registered: AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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At March 27, 2002, 15,590,619 shares of common stock were issued and
outstanding. As of March 27, 2002, the aggregate market value of the voting
stock held by non-affiliates of the registrant (computed by reference to the
average of the high and low sales prices on the American Stock Exchange) was
$2,731,337.
DOCUMENTS INCORPORATED BY REFERENCE: Part III, Items 10 through 13 are
incorporated from the Registrant's definitive proxy statements to be filed
within 120 days after the close of Reunion Industries's fiscal year.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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REUNION INDUSTRIES, INC.
TABLE OF CONTENTS
Page No.
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PART I
Item 1. Business 4
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 16
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 48
Item 8. Consolidated Financial Statements and Supplementary Data 49
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosures 49
PART III
Item 10. Directors and Executive Officers of the Registrant 49
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial
Owners and Management 49
Item 13. Certain Relationships and Related Transactions 49
PART IV
Item 14. Exhibits, Financial Statements Schedules,
and Reports on Form 8-K 50
SIGNATURES 51
- 2 -
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act which are intended to be covered by the safe harbors created thereby. The
forward-looking statements contained in this report are enclosed in brackets
[] for ease of identification. Note that all forward-looking statements
involve risks and uncertainties. Factors which could cause the future results
and shareholder values to differ materially from those expressed in the
forward-looking statements include, but are not limited to, the strengths of
the markets which the Company serves, the Company's ability to execute its
restructuring plan and sell assets at acceptable prices and the Company's
ability to refinance certain of its debts. Although the Company believes that
the assumptions underlying the forward-looking statements contained in this
report are reasonable, any of the assumptions could be inaccurate and,
therefore, there can be no assurances that the forward-looking statements
included or incorporated by reference in this report will prove to be
accurate. In light of the significant uncertainties inherent in the forward-
looking statements included or incorporated by reference herein, the inclusion
of such information should not be regarded as a representation by the Company
or any other person that the Company's objectives and plans will be achieved.
In addition, the Company does not intend to, and is not obligated to, update
these forward-looking statements after filing and distribution of this report,
even if new information, future events or other circumstances have made them
incorrect or misleading as of any future date.
- 3 -
PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
The following is a list of recent developments related to Reunion
Industries, Inc. that occurred during 2001. For a discussion of these
developments, see Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
* Restructuring and Other Actions
* 2001 Covenant Compliance
* Repayment of $120,000 of 13% Senior Notes
* Solicitation of Consent of Senior Noteholders
* Acquisition of NPS Acquisition Corp.
* Additional Shares of Reunion Common Stock
* Payment of $680,000 Industrial Revenue Development Bonds
GENERAL
Reunion Industries, Inc., a Delaware corporation ("Reunion Industries" or
"Reunion"), is the successor by merger, effective March 16, 2000, of Chatwins
Group, Inc. ("Chatwins Group") with and into Reunion Industries, Inc. The
term "Company" is used throughout this report and refers to Reunion after the
merger and Chatwins Group prior to the merger, as the acquirer for purposes of
applying purchase accounting. Reunion Industries' executive offices are
located at 11 Stanwix Street, Suite 1400, Pittsburgh, Pennsylvania 15222 and
its telephone number is (412) 281-2111.
The Company owns and operates a diverse group of industrial manufacturing
operations that design and manufacture engineered, high-quality products for
specific customer requirements, such as large-diameter seamless pressure
vessels, hydraulic and pneumatic cylinders, leaf springs and precision plastic
components. Until December 2001, the Company's products also included heavy-
duty cranes, bridge structures and materials handling systems. In December
2001, the Company classified its heavy-duty cranes, bridge structures and
materials handling systems businesses as discontinued operations.
The Company's customers include original equipment manufacturers and end-
users in a variety of industries, such as transportation, power generation,
chemicals, metals, home electronics, office equipment and consumer goods. The
Company's business units are organized into two major product categories:
* Metals manufactures and markets a broad range of fabricated and machined
industrial metal parts and products including large-diameter seamless pressure
vessels, hydraulic and pneumatic cylinders and leaf springs. Metals serves
original equipment manufacturers and end-users and has nearly 1,000 customers.
* Plastics manufactures precision molded plastic parts and provides
engineered plastics services to more than 500 original equipment
manufacturers.
- 4 -
Prior to the third quarter of 2001, the Company considered these product
categories to be its reportable segments for financial reporting purposes.
Due to the third quarter 2001 downturns in the markets for several of the
Company's Metals product lines and the resulting significant variation in
product line gross margins, the Company realigned Metals' reportable segments
into its five separate Metals' product segments. The Company then classified
two Metals' segments as discontinued operations in the fourth quarter of 2001
and combined two similar product segments, resulting in two reportable
segments: pressure vessels and springs; cylinders. Plastics continues to be
reported as a single segment.
General information about each of Reunion Industries' principal
businesses is set forth below under the captions "Metals" and "Plastics."
Reunion Industries' Certificate of Incorporation includes certain capital
stock transfer restrictions which are designed to prevent any person or group
of persons from becoming a 5% shareholder of Reunion Industries and to prevent
an increase in the percentage stock ownership of any existing person or group
of persons that constitutes a 5% shareholder by prohibiting and voiding any
transfer or agreement to transfer stock to the extent that it would cause the
transferee to hold such a prohibited ownership percentage. [The transfer
restrictions are intended to help assure that Reunion Industries' net
operating loss carryforwards will continue to be available to offset future
taxable income by decreasing the likelihood of an "ownership change" (measured
over a three year testing period) for federal income tax purposes.] The
transfer restrictions do not apply to transfers approved by Reunion
Industries' Board of Directors if such approval is based on a determination
that the proposed transfer will not jeopardize the full utilization of Reunion
Industries' net operating loss carryforwards.
METALS
Metals designs, manufactures and markets a broad range of fabricated and
machined industrial metal parts and products to original equipment
manufacturers and end-users through its manufacturing divisions. Metals
includes:
CPI - CPI, founded in 1897 and located in McKeesport, Pennsylvania,
specializes in manufacturing large, seamless pressure vessels for the above
ground storage and transportation of highly pressurized gases such as natural
gas, hydrogen, nitrogen, oxygen and helium. These pressure vessels are
provided to customers such as industrial gas producers and suppliers, the
alternative fueled vehicle compressed natural gas fuel industry, chemical and
petrochemical processing facilities, shipbuilders, NASA, public utilities and
gas transportation companies.
Hanna - Hanna, founded in 1901 with locations in Chicago, Illinois and
Milwaukee, Wisconsin, designs and manufactures a broad line of hydraulic and
pneumatic cylinders, actuators, accumulators and manifolds. These products
are used in a wide variety of industrial and mobile machinery and equipment
requiring the application of force in a controlled and repetitive process.
Hanna's specialty is custom cylinders in both small quantities packaged by its
distributors with valves, pumps and controls as complete fluid power systems
and large quantities sold directly to equipment manufacturers. As part of the
Company's plan to restructure its continuing operations, Hanna's Chicago and
Milwaukee operations are being combined in a leased facility in Libertyville,
Illinois.
- 5 -
Steelcraft - Steelcraft, founded in 1972 and located in Miami, Oklahoma,
manufactures and sells cold-rolled steel leaf springs. Its principal
customers are manufacturers of trailers for boats, small utility vehicles and
golf carts and makers of recreational vehicles and agricultural trailers. In
anticipation of entering the pressure vessel trailer market, in the fourth
quarter of 2001 the Company realigned its management and financial reporting
to include leaf springs with pressure vessels.
Alliance - Alliance, founded in 1901 and located in Alliance, Ohio,
designs, engineers and manufactures a variety of equipment including heavy-
duty cranes used in a wide range of steel and aluminum mill applications,
large special purpose cranes used in marine and aerospace applications and
heavy industrial plants and lighter duty cranes for various industrial
applications, coke oven machinery and other large steel-related fabrications.
Early in 2000, Alliance also entered the steel bridge fabrication market.
Alliance also offers maintenance and repair services for all of the equipment
it manufactures. Alliance is classified as a discontinued operation in the
report.
Kingway - Kingway, which represents Chatwins Group's former Auto-Lok
division founded in 1946 and combined with Kingway at the time of the
acquisition, is located in Acworth, Georgia. Kingway manufactures roll formed
and structural steel fabricated storage racks for industrial and commercial
materials handling systems and general storage applications. Kingway also
manufactures gravity flow racking and computer assisted picking systems for
the order selection segment of the materials handling systems industry. In
addition, Kingway participates on larger contracts in the sale of total
materials handling systems through purchasing and reselling related components
such as decking and carton flow devices, and subcontracting of rack erection.
Kingway is classified as a discontinued operation in this report.
Markets and Customers. Metals operates in mature markets. Most of
Metals' products are sold in highly competitive markets both in the U.S. and
internationally and compete with a significant number of companies of varying
sizes, including divisions or subsidiaries of larger companies, on the basis
of price, service, quality and the ability to supply customers in a timely
manner. Many of Metals' competitors have financial and other resources that
are substantially greater than those of the Company. [Competitive pressures
or other factors could cause us to lose market share or erode prices which
could negatively impact the Company's results of operations.]
Although individual customers have accounted for more than 10% of Metals'
sales in prior years, during 2001, no customer accounted for more than 7%.
Sales and Marketing. Metals markets and distributes its products in a
variety of ways including in-house marketing and sales personnel at all of its
divisions, domestic independent and manufacturer representatives, domestic and
international agents and North American networks of independent distributors
that specialize in metal products and the specific products of each division.
Raw Materials. The major raw materials used by Metals include steel
hot- and cold-rolled bands, structural bars, stainless steel coils, welded and
seamless steel tubing and pipe, steel alloy bars, steel plates, brass tubing
and bars and aluminum extrusions, all of which are supplied by various
domestic sources. Prices for most of these raw materials used by the Company
declined slightly during 2001 due to an over-supply of domestic steel and
foreign steel imports into U.S. markets. [There can be no assurance that
prices for these and other raw materials used by the Company will not increase
in the future.]
- 6 -
Research and Development. The majority of Metals' research and
development work is related to improving the quality and performance of its
existing products, meeting design requirements and specifications of its
customers that require customized products and developing greater production
efficiencies. To meet these objectives, there are engineering departments at
all major metals manufacturing divisions. Metals' business is not materially
dependent on any patents, licenses or trademarks.
PLASTICS
ORCplastics manufactures plastic products and provides engineered
plastics services through its two divisions: thermoplastics and thermoset
plastics.
Founded in 1964 as Oneida Molded Plastics, the thermoplastics division
designs and produces injection molded parts and provides secondary services,
such as hot stamping, welding, printing, painting and assembly of such
products, and designs and builds custom molds at its tool shop in order to
produce component parts for specific customers. The thermoplastics division's
principal products consist of specially designed and manufactured components
for office equipment; business machines; computers and peripherals;
telecommunications, packaging and industrial equipment; and recreational and
consumer products.
Founded in 1927 as Rostone, the thermoset plastics division compounds and
molds thermoset polyester resins. The thermoset plastics division's principal
products consist of specially designed and manufactured components for
original equipment manufacturers in the electrical, transportation, appliance
and office equipment industries. The thermoset plastics division is also a
compounder of proprietary fiberglass reinforced materials used in a number of
customer applications.
Thermoplastics Division
Markets and Customers. The markets in which the thermoplastics division
competes have sales in excess of $25 billion per year. These markets are
highly competitive. The principal competitors are international companies
with multi-plant operations based in the United States, Germany, France and
Japan, as well as approximately 3,800 independent companies located in the
United States engaged in the custom molding business. Most of these companies
are privately owned and have sales volumes ranging from $3 million to $7
million per year. In addition, approximately one-half of the total injection
molding market is supplied by in-house molding shops. The thermoplastics
division competes on the basis of customer service, product quality and price.
During 2001, one customer accounted for approximately 12% of the
thermoplastics division's sales (7% of Plastics sales). [The loss of this
customer could have a material adverse effect on the results of operations of
the thermoplastics division]. The thermoplastics division continues to
diversify its customer base and has approximately 500 customers in the various
industries described above. ORCplastics continues to seek additional
customers in the business machines, consumer products and medical products
industries. [We believe that these new customers provide future growth
opportunities for the division.]
Sales and Marketing. Sales of products are made through an internal
sales staff and a network of independent manufacturers' representatives
working from nine separate regional offices throughout the eastern United
States. The division generally pays commissions of between 2% and 5% percent
of sales based upon volume.
- 7 -
Raw Materials. The principal raw materials used by the thermoplastics
division are thermoplastic polymers. These materials are available from a
number of suppliers. [Prices for these materials are affected by changes in
market demand, and there can be no assurances that prices for these and other
raw materials will not increase in the future. The division's contracts with
its customers generally provide that such price increases can be passed
through to the customers.]
Research and Development. The majority of the thermoplastics division's
research and development work is related to meeting design requirements and
specifications of its customers that require customized products and
developing greater production efficiencies. To meet these objectives, the
division has engineering personnel at each of its manufacturing locations.
The division's business is not materially dependent on any patents, licenses
or trademarks.
Thermoset Plastics Division
Markets and Customers. The thermoset plastics division competes in a
market with a limited number of privately owned competitors and in-house
molders on the basis of product specifications, customer service and price.
During 2001, one customer accounted for approximately 22% of the thermoset
plastics division's sales (9% of Plastics sales). [The loss of this customer
could have a material adverse effect on the thermoset plastics division's
results of operations. The thermoset plastics division continues to seek new
customers in the industries described previously and in other industries.]
Sales and Marketing. Sales of thermoset plastics products are made
through an internal sales staff and a network of independent representatives
working from ten separate offices throughout the central United States. The
thermoset plastics division generally pays commissions of between 3% and 5% of
sales based on volume.
Raw Materials. The principal raw materials used by the thermoset
plastics division are styrene, polyester resins, fiberglass and commercial
phenolics. These materials are available from a number of suppliers. [Prices
and availability of these materials are affected by changes in market demand,
and there can be no assurances that prices for these and other raw materials
used by the thermoset plastics division will not increase in the future.]
When possible, if shortages occur, the thermoset plastics division engineers
new products to provide its customers a cost-effective alternative to the
material in short supply.
Research and Development. Research and development at the thermoset
plastics division is focused on the development of proprietary thermoset
materials under the trade name Rosite. The thermoset plastics division
compounds a wide range of Rosite materials to satisfy its customers' various
needs. The thermoset plastics division also provides services in meeting
customers' design requirements and specifications of their customized
products. Other than Rosite, the thermoset plastics division's business is
not materially dependent on any patents, licenses or trademarks.
- 8 -
REPORTABLE SEGMENT DATA
Segment data, including earnings before interest, taxes, depreciation and
amortization (EBITDA), for the years ended December 31, 2001, 2000 and 1999
(in thousands except for related notes):
Capital Total
Net Sales EBITDA(1) Spending Assets(2)
--------- --------- --------- ---------
2001:
-----
Metals:
Pressure vessels and springs $ 41,594 $ 6,085 $ 260 $ 17,936
Cylinders 19,369 (2,182) 26 9,662
-------- -------- -------- --------
Subtotal Metals 60,963 3,903 286 27,598
Plastics 38,532 (1,123) 1,066 18,443
Corporate and other - (3,660) 10 14,572
Discontinued operations - - 1,535 23,803
-------- -------- -------- --------
Totals $ 99,495 (880) $ 2,897 $ 84,416
======== ======== ========
Write-off of impaired goodwill (2,946)
Depreciation and amortization(5) (5,392)
Interest expense (7,057)
--------
Loss from continuing operations
before income taxes $(16,275)
========
2000:
-----
Metals:
Pressure vessels and springs $ 32,250 $ 7,180 $ 520 $ 23,103
Cylinders(3) 30,463 7,130 130 14,152
-------- -------- -------- --------
Subtotal Metals 62,713 14,310 650 37,255
Plastics 42,008 2,563 1,031 23,485
Corporate and other(4) - 865 71 24,126
Discontinued operations - - 2,320 31,573
-------- -------- -------- --------
Totals $104,721 17,738 $ 4,072 $116,439
======== ======== ========
Depreciation and amortization(5) (4,639)
Interest expense (6,972)
Equity in loss of affiliate (296)
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Income from continuing operations
before income taxes $ 5,831
========
- 9 -
1999:
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Metals:
Pressure vessels and springs $ 27,400 $ 4,578 $ 850 $ 19,859
Cylinders 32,291 3,950 320 15,666
-------- -------- -------- --------
Subtotal Metals 59,691 8,528 1,170 35,525
Corporate and other - (1,711) 37 17,072
Discontinued operations - - 1,378 15,084
-------- -------- -------- --------
Totals $ 59,691 6,817 $ 2,585 $ 67,681
======== ======== ========
Depreciation and amortization (1,648)
Interest expense (5,261)
Equity in loss of affiliate (566)
--------
Loss from continuing operations
before income taxes $ (658)
========
(1) EBITDA is presented as it is the primary measurement used by management
in assessing segment performance and not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a
widely accepted financial indicator of a company's ability to incur and
service debt.
(2) Headquarters total assets at December 31, 2001 is primarily comprised
of goodwill. Headquarters total assets at December 31, 2000 is primarily
comprised of goodwill and deferred tax assets. At December 31, 2001,
the goodwill relates to the Company's pressure vessel and springs segment
and the cylinders segment. Because of the historically positive
operating results and cash generation of the pressure vessel
and springs segment, management does not consider its related goodwill
to be impaired as of December 31, 2001. Also, management does not
consider the cylinders segment goodwill to be impaired as the
Company believes this segment is in a temporary cyclical downturn.
(3) Includes the gain of $2.4 million on sale of the land and building of
the Company's Chicago, IL hydraulic cylinder location.
(4) Includes the gain of $4.9 million on sale of the Company's Irish
plastics operation.
(5) Excludes amortization of debt issuance expenses of $1,011,000,
$897,000 and $1,308,000 for the years ended December 31, 2001, 2000
and 1999, respectively, which is included in interest expense.
- 10 -
ENVIRONMENTAL REGULATION
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 materially adverse effect on the Company's
consolidated financial position, results of operations or cash flows.]
Except as described in the following paragraphs, the Company believes it
is currently in material compliance with existing environmental protection
laws and regulations and is not involved in any significant remediation
activities or administrative or judicial proceedings arising under federal,
state or local environmental protection laws and regulations. In addition to
management personnel who are responsible for monitoring environmental
compliance and arranging for remedial actions that may be required, the
Company has also employed outside consultants from time to time to advise and
assist the Company's environmental compliance efforts. Except as described in
the following paragraphs, the Company has not recorded any accruals for
environmental costs.
In February 1996, Reunion was informed by a contracted environmental
services consulting firm that soil and ground water contamination exists at
its Lafayette, Indiana site. Since then, the Company has expended $376,000 of
remediation costs and accrued an additional $20,000.
In connection with the sale of its former oil and gas operations, pre-
merger Reunion retained certain oil and gas properties in Louisiana because of
litigation concerning environmental matters. The Company is in the process of
environmental remediation under a plan approved by the Louisiana Department of
Natural Resources Office of Conservation (LDNROC). The Company has recorded
an accrual for its proportionate share of the remaining estimated costs to
remediate the site based on plans and estimates developed by the environmental
consultants hired by the Company. During 1999, the Company conducted
remediation work on the property. The Company paid $172,000 of the total cost
of $300,000. Regulatory hearings were held in January 2000 and 2001 to
consider the adequacy of the remediation conducted to date. In August 2001,
LDNROC issued its order for the Company to complete the soil remediation under
the plan approved in 1999 and to perform additional testing to determine to
what extent groundwater contamination might exist. The Company's
environmental consultant is in the process of updating the estimate of the
costs to comply with this order, [but the Company does not believe that the
cost of future remediation will exceed the amount accrued]. No remediation
was performed in 2000 or 2001 pending the decision. However, the Company has
paid $232,000 for its share of consulting services in connection with the
hearings. At December 31, 2001, the balance accrued for these remediation
costs is approximately $1,076,000. 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.
- 11 -
On March 15, 2002, the Company received a Request for Information from
the United States Environmental Protection Agency (USEPA) regarding the
Gambonini Mine Site in Marin County, California. The Company is currently
gathering the information requested by the USEPA and is cooperating fully with
this request. At this time, the Company has not been formally named as a
potentially responsible party. As such and because the extent of the
Company's involvement with the Gambonini Mine Site is not known, the Company
has not made any assessment of potential liability, if any.
Employees
At December 31, 2001, Reunion Industries employed 1,045 full time
employees, of whom 683 were employed in Metals and 345 were employed in
Plastics. There were 17 corporate employees. The Company believes its
relations with its employees are good.
A breakdown of the Company's workforce by location and function at
December 31, 2001 is as follows.
General and
Group Location Manufacturing Administrative Total
-------- -------- ----------------- ----------------- -----
Union Non-Union Union Non-Union
----- --------- ----- ---------
Metals:
Alliance, OH 108(1) 36 144
Acworth, GA 188 48 236
Beijing, China 7 7
Exeter, NH 1 17 18
McKeesport, PA 97(2) 4 8(3) 22 131
Chicago, IL 68 20 88
Libertyville, IL 27 7 34
Miami, OK 20 5 25
Plastics:
Charlotte, NC 3 3
Oneida, NY 58 14 72
Phoenix, NY 42 7 49
Siler City, NC 48 8 56
LaFayette, IN 143(4) 2 20 165
Corporate:
Pittsburgh, PA 14 14
Stamford, CT 3 3
--- --- - --- -----
Totals 348 458 8 231 1,045
=== === = === =====
(1) United Steelworkers of America - Contract expires June 14, 2002.
(2) United Steelworkers of America - Contract expires May 31, 2006.
(3) United Steelworkers of America - Contract expires May 31, 2006.
(4) International Brotherhood of Electrical Workers - Contract expires
February 27, 2003.
The employees in Beijing, China are Chinese nationals and relate to
seamless pressure vessel sales efforts in that region. These employees are
not covered by a union nor are they covered by any benefit or insurance plans
sponsored by the Company.
As of December 31, 2001, approximately 34% of the Company's workforce was
covered by collective bargaining agreements including approximately 10%
covered by an agreement that expires within one year of December 31, 2001.
This agreement relates to the workforce of the Company's discontinued bridges
and cranes operations in Alliance, Ohio and will not be renewed or
renegotiated.
- 12 -
ITEM 2. PROPERTIES
The Company has a total of 102.3 acres and approximately 1.9 million
square feet under roof being used for ongoing operations. Except for CPI's
sales office in Beijing, China, Plastics' administrative headquarters in
Charlotte, NC and the Company's corporate sites in Pittsburgh, PA and
Stamford, CT, which are administrative, all locations are both manufacturing
and administrative facilities:
Approx.
Square Land Expiration
Group Location Feet Acres Title Date
-------- -------- ------- ----- ----- ----------
Metals: McKeesport, PA 603,000 37.0 Owned -
Beijing, China 1,000 - Leased 10/31/02
Alliance, OH 384,000 14.8 Owned -
Chicago, IL 85,000 - Leased 06/30/02
Libertyville, IL 56,000 - Leased 12/31/13
Milwaukee, WI 68,000 3.2 Owned -
Miami, OK 39,000 13.5 Owned -
Acworth, GA 223,000 - Leased 3/12/08
Exeter, NH 8,000 - Leased 3/31/02
Plastics: Charlotte, NC 4,500 - Leased 6/30/02
Oneida, NY 84,000 3.5 Owned -
Phoenix, NY 28,000 - Leased 1/31/05
Phoenix, NY 20,000 2.0 Owned -
Siler City, NC 130,000 8.3 Owned -
LaFayette, IN 168,000 20.0 Owned -
Headquarters: Pittsburgh, PA 8,000 - Leased 4/30/05
Stamford, CT 1,500 - Leased monthly
As part of its corporate-wide restructuring plan, [the Company intends to
shut-down and/or dispose of its facilities in Alliance, OH, Milwaukee, WI,
Acworth, GA, Exeter, NH, Charlotte, NC and Siler City, NC.] The operations of
the Company's Milwaukee, WI facility have been relocated to its leased
facility in Libertyville, IL. [The Company intends to relocate the operations
of its Chicago, IL facility to Libertyville, IL by June 2002.] The Company
also owns 92.7 acres of idle farm land adjacent to its former Ipsen facility
in Boone County, IL, which were retained by the Company after the Ipsen sale.
The Company is currently pursuing the disposition of this land.
In connection with the sale of its oil and gas business in Louisiana,
Reunion Industries retained certain oil and gas properties in Louisiana
because of litigation concerning environmental matters. [Reunion Industries
intends to sell these properties when the litigation is resolved.]
Reunion Industries holds title to or recordable interests in federal and
state leases totaling approximately 55,000 acres near Moab, Utah, known as Ten
Mile Potash. Sylvanite, a potash mineral, is the principal mineral of
interest and occurrence in the Ten Mile Potash property. To date, Ten Mile
Potash has not yielded any significant revenues from mining operations or any
other significant revenues, and Reunion Industries is pursuing the sale or
farmout of these interests.
Reunion Industries subleases, from Stanwich Partners, Inc., a related
party, approximately 1,500 square feet of office space in Stamford,
Connecticut for its corporate office there. Management believes the terms of
this sublease are comparable to those available from third parties.
The Company believes that all of its facilities have been in operation
for a sufficient period of time to demonstrate their suitability for their
individual purposes. [The production capacities of the Company's facilities
are believed by the Company to be sufficient for the Company's anticipated
future needs after restructuring activities.]
- 13 -
ITEM 3. LEGAL PROCEEDINGS
Certain litigation in which Reunion Industries is involved is described
below.
In June 1993, the U.S. Customs Service (Customs) made a demand on
Chatwins Group's former industrial rubber distribution division for $612,948
in marking duties pursuant to 19 U.S.C. Sec. 1592. The duties are claimed on
importations of "unmarked" hose products from 1982 to 1986. Following
Chatwins Group's initial response raising various arguments in defense,
including expired statute of limitations, Customs responded in January 1997 by
reducing its demand to $370,968 and reiterating that demand in October 1997.
Chatwins Group restated its position and continues to decline payment of the
claim. Should the claim not be resolved, Customs threatens suit in the
International Courts of Claims. The Company continues to believe, based on
consultation with counsel, that there are facts which raise a number of
procedural and substantive defenses to this claim, which will be vigorously
defended. There is no applicable insurance coverage.
In December 1999, a stockholder of Reunion filed a purported class-action
lawsuit in Delaware Chancery Court alleging, among other things, that
Reunion's public stockholders would be unfairly diluted in the merger with
Chatwins Group. The lawsuit sought to prevent completion of the merger and,
the merger having been completed, seeks rescission of the merger or awarding
of damages. The lawsuit remains in the initial stages of discovery. Reunion
intends to vigorously contest the suit.
The Company has been named as a defendant in fifteen consolidated
lawsuits filed in December 2000 or early 2001 in the Superior Court for Los
Angeles County, California, three of which are purported class actions
asserted on behalf of approximately 200 payees. The plaintiffs in these suits
except one are structured settlement payees to whom Stanwich Financial
Services Corp. (SFSC) is indebted. The Company and SFSC are related parties.
In addition to the Company, there are numerous defendants in these suits,
including SFSC, Mr. Bradley, the sole shareholder of SFSC's parent, several
major financial institutions and certain others. All of these suits arise out
of the inability of SFSC to make structured settlement payments when due.
Pursuant to the court's order, plaintiffs in the purported class actions and
plaintiffs in the individual cases actions filed a model complaint. Except
for the class allegations, the two model complaints are identical. The
plaintiffs seek compensatory and punitive damages, restoration of certain
alleged trust assets, restitution and attorneys' fees and costs.
The plaintiffs in one of the suits are former owners of a predecessor of
SFSC and current operators of a competing structured settlement business.
These plaintiffs claim that their business and reputations have been damaged
by SFSC's structured settlement defaults, seek damages for unfair competition
and purport to sue on behalf of the payees.
The plaintiffs allege that the Company borrowed funds from SFSC and has
not repaid these loans. The plaintiffs' theories of liability against the
Company are that it is the alter ego of SFSC and Mr. Bradley and that the
Company received fraudulent transfers of SFSC's assets. The plaintiffs also
assert direct claims against the Company for inducing breach of contract and
aiding and abetting an alleged breach of fiduciary duty by SFSC.
- 14 -
On June 25, 2001, SFSC filed a Chapter 11 Bankruptcy Petition in the U.S.
Bankruptcy Court for the District of Connecticut. SFSC filed an adversary
proceeding in the bankruptcy case against the plaintiffs seeking a declaration
that the structured settlement trust assets are the property of the bankruptcy
estate. On July 16, 2001, the bankruptcy court granted a temporary
restraining order enjoining the plaintiffs from prosecuting their claims
against the Company, SFSC, Mr. Bradley and others. As a result of this
restraining order of the bankruptcy court, the Company entered a standstill
agreement with the plaintiffs on August 22, 2001. Pursuant to the standstill
agreement, and the stipulation of the parties to the SFSC bankruptcy case, the
plaintiffs agreed to take no further action to prosecute any claim in the
litigation against the Company, Mr. Bradley and others to recover any
structured settlement trust assets or any derivative claims or claims based on
allegations of alter ego, fraudulent transfer or conversion. The plaintiffs
did not agree to waive or release their direct personal claims against the
Company for damages, but the plaintiffs agreed to cease and desist the
prosecution of those claims until no earlier than sixty days following service
of written notice to the Company stating that they have elected to
unilaterally terminate the standstill agreement.
Plaintiffs filed second amended model complaints in the class actions and
individual cases on August 24, 2001. Both model complaints allege causes of
action against the Company for interference with contract and aiding and
abetting breach of fiduciary duty. However, pursuant to the standstill
agreement, the plaintiffs are taking no action to prosecute these claims
against the Company at this time.
Certain of the financial institution defendants have asserted cross-
complaints against the Company for implied and express indemnity and
contribution and negligence. The Company denies the allegations of the
plaintiffs and the cross-complainant financial institutions and intends to
vigorously defend against these actions and cross-actions.
The Company has been named in approximately 250 separate asbestos suits
filed since January 1, 2001 by three plaintiffs' law firms in Wayne County,
Michigan. The claims allege that cranes from the Company's crane
manufacturing location in Alliance, OH were present in various parts of
McLouth and Great Lakes Steel Mills in Wayne County, Michigan and that those
cranes contained asbestos to which plaintiffs were exposed over a 40 year
span. Counsel for the Company has filed an answer to each complaint denying
liability by the Company and asserting all alternative defenses permitted
under the Court's Case Management Order. Counsel for the Company has
negotiated dismissal of 95 cases without any cost to the Company. The Company
denies that it manufactured any products containing asbestos or otherwise knew
or should have known that any component part manufacturers provided products
containing asbestos. The Company intends to vigorously defend against these
lawsuits.
On July 10, 2001, a lawsuit that alleges personal injury from asbestos
exposure was filed in the Superior Court for San Francisco County in
California against greater than fifty defendants, including Oneida Rostone
Corporation (ORC), pre-merger Reunion's Plastics subsidiary and the Company's
Plastics Group. In October 2001, Allen-Bradley Company, a former owner of the
Rostone business of ORC, agreed to defend and indemnify Reunion in this
lawsuit pursuant to a contractual obligation to do so. As of March 15, 2002,
43 separate actions in various states have been brought against the Company
and all actions are being defended by the prior owners.
- 15 -
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None in the fourth quarter of 2001.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Reunion Industries' common stock is traded on the American Stock Exchange
(RUN) since March 23, 2000. Previously, Reunion Industries' common stock was
traded in the over-the-counter market and was listed on the NASDAQ Small-Cap
Market (RUNI). The stock was also listed on the Pacific Exchange (RUN) until
July 5, 2000.
As of March 15, 2002, there were 1,261 holders of record of Reunion
Industries' common stock with an aggregate of 15,590,619 shares outstanding.
The table below reflects the high and low sales prices on the NASDAQ
Small-Cap Market for the pre-merger quarterly period and on the American Stock
Exchange for the post-merger quarterly periods in the two years ended December
31, 2001. The NASDAQ Small-Cap quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
QUARTER ENDED High Low
------------- ------ ------
2001
March 31.......................................$1.850 $1.100
June 30........................................$1.600 $0.870
September 30...................................$1.490 $0.700
December 31....................................$0.740 $0.210
2000
March 31.......................................$3.625 $1.875
June 30........................................$2.500 $0.938
September 30...................................$2.125 $1.625
December 31....................................$2.000 $0.875
No cash dividends have been declared or paid during the past three years
with respect to the common stock. The Board of Directors currently follows a
policy of retaining any earnings for operations and for the expansion of the
business of the company. Cash dividends are also limited by the availability
of funds, including limitations contained in Reunion Industries' lending
agreements. [Therefore, Reunion Industries anticipates that it will not pay
any cash dividends on its common stock in the foreseeable future.]
- 16 -
Equity Compensation Plan Information
Equity Compensation Plans
---------------------------
Approved by Not Approved
Security by Security
Holders Holders
------------ ------------
Number of Securities to be issued upon
exercise of outstanding options,
warrants and rights 1,089,000 -
========= =========
Weighted-average exercise price of
outstanding options, warrants
and rights $2.57 -
========= =========
Number of Securities remaining available
for future issuance under equity
compensation plans (excluding outstanding
options, warrants and rights) 374,000 -
========= =========
- 17 -
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data of the Company. All data are reported in thousands, except for per-share
data. The selected financial data are derived from the consolidated financial
statements presented in Item 14 and should be read in conjunction with such
consolidated financial statements and related notes. Historical data have
been restated for the classifications of the Company's bridges and cranes and
materials handling systems operations as discontinued operations.
Year Ended December 31, 2001 2000 1999(1) 1998(1) 1997(1)
-------- -------- -------- -------- --------
EARNINGS DATA:
Net sales $ 99,495 $104,721 $ 59,691 $ 67,388 $ 66,702
Cost of sales 84,457 81,485 46,353 49,560 50,287
-------- -------- -------- -------- --------
Gross profit 15,038 23,236 13,338 17,828 16,415
Selling, general and
administrative expenses 15,718 16,388 7,864 8,660 8,315
Provision for restructuring 6,811 - - - -
Other (income) expense, net 1,727 (6,251) 305 367 440
-------- -------- -------- -------- --------
Operating profit (loss) (9,218) 13,099 5,169 8,801 7,660
Interest expense, net(2) 7,057 6,972 5,261 5,140 5,227
Equity in loss from continuing
operations of affiliate - 296 566 4,056 373
-------- -------- -------- -------- --------
Income (loss) before income
taxes from continuing
operations (16,275) 5,831 (658) (395) 2,060
Provision for (benefit from)
income taxes(3) 12,678 (616) (922) (122) 391
-------- -------- -------- -------- --------
Income (loss) from
continuing operations $(28,953) $ 6,447 $ 264 $ (273)$ 1,669
======== ======== ======== ======== ========
Income (loss) from continuing
operations applicable to
common stockholders(4) $(28,953) $ 6,352 $ (192) $ (729)$ 1,213
======== ======== ======== ======== ========
Weighted average common shares
outstanding(5) - basic 15,587 13,236 9,500 9,500 9,500
======== ======== ======== ======== ========
Weighted average common shares
outstanding(5) - diluted 15,612 13,306 9,500 9,500 9,500
======== ======== ======== ======== ========
Income (loss) from continuing
operations per common share
- basic and diluted(5) $ (1.86) $ 0.48 $ (0.02) $ (0.08)$ 0.13
======== ======== ======== ======== ========
- 18 -
OPERATING AND OTHER DATA:
Cash flow from (used in)
operating activities(6) $ 5,050 $ 5,507 $ (4,168) $ (3,268)$ 2,312
======== ======== ======== ======== ========
Cash flow from (used in)
investing activities(6) (2,532) 27,997 34,494 (5,195) (5,044)
======== ======== ======== ======== ========
Cash flow from (used in)
financing activities(6) (3,863) (31,385) (30,249) 8,070 3,110
======== ======== ======== ======== ========
Depreciation and
amortization(7) 5,392 4,639 1,648 1,553 1,434
======== ======== ======== ======== ========
Capital expenditures(8) 1,362 1,752 1,207 1,717 1,713
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Total assets 84,416 116,439 67,681 98,329 93,500
======== ======== ======== ======== ========
Debt in default 64,389 - - - -
======== ======== ======== ======== ========
Revolving credit facility - 19,367 5,834 34,005 26,061
======== ======== ======== ======== ========
Total long-term debt(9) 9,512 50,732 49,971 50,019 50,043
======== ======== ======== ======== ========
Redeemable preferred stock - - 8,938 8,482 8,026
======== ======== ======== ======== ========
Stockholders' equity
(deficit)(10) (17,169) 21,559 (7,870) (8,594) (6,863)
======== ======== ======== ======== ========
EBITDA(11): $ (880) $ 17,738 $ 6,817 $ 10,354 $ 9,094
======== ======== ======== ======== ========
(1) Represents historical financial data of Chatwins Group as Chatwins Group
was considered the acquirer in the merger. The Company has restated such
financial data for the classifications of its bridges and cranes and materials
handling systems segments as discontinued operations.
(2) Includes amortization of debt issuance expenses of the following amounts
for the following years: 2001: $1,011; 2000: $897; 1999: $1,308; 1998: $671
and 1997: $550.
(3) See note 12 to the consolidated financial statements. Due primarily to
the use of net operating loss carryforwards, Chatwins Group's actual cash
payments, net of refunds, relating to state and federal income taxes for the
year December 31, 1997 was $205. In 1998, Chatwins Group had a net refund of
$139. In 1999, Chatwins Group paid $279. In 2000, Reunion paid $322. In
2001, Reunion had a net refund of $119.
(4) In determining income (loss) from continuing operations applicable to
common stock, income from continuing operations is reduced by accretions of
dividends on preferred stock of $95 in 2000 and $456 in each of the years 1999
through 1997.
- 19 -
(5) Weighted average shares outstanding for the year ended December 31, 1999
through 1997 have been restated to give retroactive effect to the
recapitalization of Chatwins Group in connection with the merger.
(6) Accounting rules do not require restatement of the statement of cash
flows upon the classification of a segment as a discontinued operation.
(7) Excludes amortization of debt issuance expenses and depreciation and
amortization related to discontinued operations. See note (2) above.
(8) Excludes capital expenditures of discontinued operations.
(9) Excludes borrowings under revolving credit facilities and includes
current maturities of 13% senior notes for 1997 through 2000.
(10) Stockholders' equity has been reduced by accretions for redemption value
of and dividends on redeemable preferred stock of $15.0 million through
December 31, 2000.
(11) EBITDA is calculated as follows:
2001 2000 1999(1) 1998(1) 1997(1)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before taxes $(16,275) $ 5,831 $ (658) $ (395) $ 2,060
Interest expense, net(2) 7,057 6,972 5,261 5,140 5,227
Depreciation and
amortization(7) 5,392 4,639 1,648 1,553 1,434
Write-off of impaired goodwill 2,946 - - - -
Equity loss from continuing
operations of affiliate - 296 566 4,056 373
-------- -------- -------- -------- --------
EBITDA $ (880) $ 17,738 $ 6,817 $ 10,354 $ 9,094
======== ======== ======== ======== ========
EBITDA is presented in the Selected Historical Financial Data, not as an
alternative measure of operating results or cash flow from operations as
determined by accounting principles generally accepted in the United States,
but because it is a widely accepted financial indicator of a company's ability
to incur and service debt and due to the close relationship it bears to
Reunion's financial covenants in its borrowing agreements.
- 20 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is provided to assist readers in
understanding the Company's financial performance during the periods presented
and significant trends which may impact the future performance of the Company.
It should be read in conjunction with the consolidated financial statements
and accompanying notes included elsewhere in this Form 10-K.
The Company has announced a plan to restructure its continuing operations
and dispose of or shut-down other businesses. Such businesses are being
reported as discontinued operations. Therefore, prior year information has
been restated for comparative purposes and the following discussion of results
of operations is separated into continuing and discontinued operations.
GENERAL
The Company owns and operates a diverse group of industrial manufacturing
operations that design and manufacture engineered, high-quality products for
specific customer requirements, such as large-diameter seamless pressure
vessels, hydraulic and pneumatic cylinders, leaf springs and precision plastic
components. Until December 2001, the Company's products also included heavy-
duty cranes, bridge structures and materials handling systems. The Company
classified its heavy-duty cranes, bridge structures and materials handling
systems businesses as discontinued operations.
The Company's customers include original equipment manufacturers and end-
users in a variety of industries, such as transportation, power generation,
chemicals, metals, home electronics, office equipment and consumer goods. The
Company's business units are organized into two major product categories:
Metals manufactures and markets a broad range of fabricated and machined
industrial metal parts and products including large-diameter seamless pressure
vessels, hydraulic and pneumatic cylinders and leaf springs. Metals serves
original equipment manufacturers and end-users and has nearly 1,000 customers.
Plastics manufactures precision molded plastic parts and provides
engineered plastics services to more than 500 original equipment
manufacturers.
Prior to the third quarter of 2001, the Company considered these product
categories to be its reportable segments for financial reporting purposes.
Due to the third quarter 2001 downturns in the markets for several of the
Company's Metals product lines and the resulting significant variation in
product line gross margins, the Company realigned Metals' reportable segments
into its separate Metals' product segments. The Company then classified two
Metals' segments as discontinued operations in the fourth quarter of 2001 and
combined two similar product segments, resulting in two reportable segments:
pressure vessels and springs; cylinders. Plastics continues to be reported as
a single segment.
RECENT DEVELOPMENTS
Restructuring and Other Actions
As the result of downturns in several of the markets served by the
Company during the third and fourth quarters of 2001 and the resulting
decreases in the Company's ability to absorb costs and the quality of its
borrowing base, management of the Company has developed a plan to restructure
its continuing businesses and dispose of or shut-down other businesses. These
actions are designed to improve productivity and operating performance, reduce
debt and provide liquidity. [The benefits of these actions are anticipated to
begin to be realized in 2002 and continue over the next several years.]
- 21 -
Key elements of the plan include:
RESTRUCTURING
* Consolidate the pressure vessel operations of CPI and NPSAC.
* Consolidate the cylinder operations of Hanna and TJ Brooks.
* Shut-down Plastics' thermoplastics operations at Siler City, NC.
* Close Plastics' corporate headquarters in Charlotte, NC.
* Address machinery and equipment impairments.
DISCONTINUED OPERATIONS
* Shut-down and liquidate the assets and business of Alliance Machine.
* Dispose of the Kingway Material Handling division.
In April 2001, the Company entered into a non-binding letter of intent
for the sale of substantially all of the assets of Alliance for $3.3 million
in cash plus the assumption by the buyer of certain liabilities. Consummation
of this sale is subject to certain conditions, including the execution of a
definitive asset purchase agreement, and there can be no assurance that the
transaction will close on the terms set forth in the letter of intent or at
all.
The plan was approved by the Company's board of directors in December
2001. The Company has recorded a fourth quarter 2001 charge for restructuring
costs, including facility shut-down costs, lease termination costs and asset
writedowns, including impaired goodwill related to Plastics, and a charge for
estimated loss on disposal of discontinued operations (related solely to
Alliance Machine) including phase-out period operating losses, lease
termination costs and asset writedowns.
Components of the fourth quarter 2001 charges are as follows:
Classifications of Charges
------------------------------
Provision for Discontinued
Restructuring Operations
------------- -------------
Metals:
Asset impairments $ 613 $ 3,771
Lease termination costs 927 995
Reserve for operating losses during phase-out - 1,633
Employee separations 20 -
-------- --------
Total charges - Metals 1,560 6,399
-------- --------
Plastics:
Asset impairments 2,060 -
Goodwill impairment 2,946 -
Lease termination costs 245 -
-------- --------
Total charges - Plastics 5,251 -
-------- --------
Total charges $ 6,811 $ 6,399
======== ========
The $1.6 million charge for discontinued operations phase-out includes
$1.4 million for operating losses and $0.2 million for employee separations
costs.
- 22 -
[The cash outlay related to the charges is anticipated to occur during
2002. Management also anticipates incurring other charges and cash outlays in
2002 in order to fully execute the plan. Components of the estimated cash
impacts of the plan anticipated to occur in 2002 are as follows:
Classification of Cash Impacts
------------------------------
Discontinued
Restructuring Operations
------------- -------------
Total charges $ 6,811 $ 6,399
Less: Non-cash components (5,619) (3,771)
-------- --------
Estimated cash impacts of charges 1,192 2,628
Other anticipated cash outlays:
Relocation costs 750 -
Phase-out period operating losses 730 -
-------- --------
Total estimated cash impacts $ 2,672 $ 2,628
======== ========]
Execution of the plan began in January 2002 and [is expected to be
completed by June 2002 but by no later than the end of 2002]. Benefits of the
plan include cost reductions from streamlining operations, reducing operating
losses at historically unprofitable businesses and interest savings from
reduced debt. [Management estimates indicate that the present value of these
benefits significantly exceeds the near-term estimated costs to execute the
plan.]
2001 Covenant Compliance
See "LIQUIDITY AND CAPITAL RESOURCES" for a discussion of 2001 covenant
compliance.
Semi-Annual Interest on 13% Senior Notes due November 1, 2001
The Company was unable to fund its November 1, 2001 $1.616 million semi-
annual interest payment on its 13% senior notes as it had insufficient funds
available under its revolving credit facility with BOA. Failure to make the
November 1 interest payment is a default under the indenture which governs the
13% senior notes. Under the terms of the indenture, the Company had thirty
days to cure the default. The Company was unable to cure the default during
the 30-day cure period.
Management of the Company has been in contact with certain of the note
holders and holders representing approximately ninety percent of the principal
amount of senior notes outstanding. As part of its corporate-wide
restructuring plan, management of the Company has determined to dispose of
assets in order to meet its interest payment obligations under the 13% senior
notes.
Repayment of $120,000 of 13% Senior Notes
Chatwins Group was required to make sinking fund payments to redeem $12.5
million principal amount of the senior notes on May 1 in each of 2000 through
2003 at face value plus accrued interest and to offer to purchase $25 million
of the senior notes on June 1, 2000 at face value plus accrued interest. In
February 2000, Chatwins Group solicited the holders of the $49,975,000 of 13%
senior notes outstanding asking them to waive their right to participate in
the June 1, 2000 $25.0 million purchase offer, of which $47,450,000 agreed to
waive such right resulting in a maximum purchase offer obligation on June 1,
2000 of $2,525,000.
- 23 -
On June 1, 2000 Reunion made the required offer to purchase $2,525,000 of
senior notes, of which holders of only $120,000 of senior notes tendered.
However, the $25.0 million of 13% senior notes repaid from the merger proceeds
was applied against Reunion's obligations for sinking fund payments and the
purchase offer as follows (in thousands):
May 1, June 1, May 1,
2000 2000 2001 Total
-------- -------- -------- --------
Sinking fund payment or
purchase offer obligation $ 12,500 $ 120 $ 12,500 $ 25,120
$25.0 million applied to
obligations (12,500) (120) (12,380) (25,000)
-------- -------- -------- --------
Maximum required payment $ - $ - $ 120 $ 120
======== ======== ======== ========
The $120,000 principal amount of 13% senior notes was repaid by the
Company on May 1, 2001 from funds available under its revolving credit
facility.
Of the remaining $24.855 million of senior notes, $12.5 million is
scheduled to be repaid in May 2002 and $12.355 million is scheduled to be
repaid in May 2003. [Management does not expect to have the internally
generated liquidity necessary to fund the May 1, 2002 sinking fund payment and
is in the process of investigating various refinancing and repayment
scenarios. Such scenarios involve not only mezzanine or additional term debt,
which could potentially include warrants, but also involve other
considerations such as a sale of assets.] The Company currently is in default
under the indenture for the senior notes due to its inability to make the
November 1, 2001 semi-annual interest payment of $1.616 million.
Solicitation of Consent of Senior Noteholders
The Company is required to make sinking fund payments on its $24.855
million of senior notes of $12.5 million on May 1, 2002 and $12.355 million on
May 1, 2003. On September 4, 2001, the Company solicited the consent of its
senior noteholders to extend the sinking fund payment dates by two years. The
solicitation expired on November 2, 2001. As part of the solicitation, the
Company reserved the right to terminate it if holders of less than $22.0
million principal amount of senior notes consented. The Company has exercised
its right to terminate the solicitation.
Acquisition of NPS Acquisition Corp.
On January 17, 2001, the Company acquired NPS Acquisition Corp. (NPSAC)
(f/k/a Naptech Pressure Systems) from Charles E. Bradley, Sr. (Mr. Bradley),
the Company's chairman of the board and chief executive officer. Until the
first quarter of 2002, NPSAC was based in Clearfield, Utah and manufactured
seamless steel pressure vessels, an existing Metals product line. As part of
the Company's plan to restructure its continuing operations, in the first
quarter of 2002 this facility was shut-down and its operations were relocated
and combined with the Company's pressure vessel manufacturing operations in
McKeesport, Pennsylvania. The transaction was accounted for as a purchase
under APB Opinion No. 16 "Business Combinations". The purchase price in
excess of net assets acquired of $8.6 million was recorded as goodwill and,
until December 31, 2001, was being amortized over 15 years.
- 24 -
The purchase price included the assumption of a 15% per annum $6.9
million note payable to Shaw Group, the former owner of Naptech Pressure
Systems. Simultaneously with the acquisition, Reunion paid Shaw Group $2.0
million of the note payable in cash from funds available under its revolving
credit facility with Bank of America (BOA). The remainder of the note payable
of $4.9 million was then restructured to include quarterly principal payments
of $0.6 million for eight quarters which began on February 28, 2001. Reunion
made the first two payments from funds available under its revolving credit
facility. The Company has been unable to fund the remaining payments under
this note due to lack of liquidity and insufficient funds available under its
revolving credit facility. The note is unsecured and subordinated to the BOA
term loan and revolving credit facilities.
The estimated fair value of assets acquired included approximately $1.4
million of cash, receivables, inventories and other current assets,
approximately $0.3 million of fixed assets and $1.3 million of deferred tax
assets which are fully reserved by a valuation allowance. The purchase price
in excess of net assets acquired of $8.6 million was recorded as goodwill and,
until December 31, 2001, was being amortized over 15 years. NPSAC's fully-
reserved deferred tax assets are comprised primarily of net operating losses.
Additional Shares of Reunion Common Stock
In the merger, Reunion issued 9,500,000 shares of common stock to holders
of Chatwins Group's common stock. The merger agreement also provided that up
to an additional 500,000 shares of Reunion common stock would be issued to
former Chatwins Group common stockholders if the former Chatwins Group
businesses and the acquired Kingway business achieve specified performance
levels in 2000. A determination of the number of shares to be issued was made
by the board of directors at its meeting held on May 15, 2001. Such
additional shares totaled 348,995 and were issued on May 29, 2001. The
closing price of Reunion's common stock on that date was $1.30 per share. The
issuance of the additional shares was recorded as a merger purchase price
adjustment to goodwill.
Payment of $680,000 Industrial Revenue Development Bonds
Upon the sale of its domestic grating operations in September 1999, the
Company retained an obligation for a $680,000 note payable due May 1, 2001
related to an industrial development revenue bond issue by Orem City, Utah.
This note payable was repaid in May 2001 from funds available under the
Company's revolving credit facility.
- 25 -
RESULTS OF OPERATIONS
Year Ended December 31, 2001 Compared to
Year Ended December 31, 2000
Continuing Operations
Metals
Metals net sales, gross margins and EBITDA percentages for 2001 and 2000
are as follows. Pressure vessels and spring sales and margins for 2000 are
pro forma as though the acquisition of NPSAC occurred at the beginning of
2000. Cylinders EBITDA percentage for 2000 excludes a $2.4 million gain on
sale of its Chicago, IL property.
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2001 2000 2001 2000 2001 2000
--------- --------- ------ ------ ------ ------
Pressure vessels
and springs $ 41,594 $ 35,806 23.3% 29.3% 14.6% 22.1%
Cylinders 19,369 30,463 5.0% 24.4% (11.3%) 15.4%
--------- --------- ------ ------ ------ ------
Metals totals $ 60,963 $ 66,269 17.5% 27.1% 6.4% 17.9%
========= ========= ====== ====== ====== ======
The increase in pressure vessel sales in 2001 compared to 2000 was due to
a strong order levels in that product line towards the end of 2000, the
backlog for which at the end of 2000 was $8.6 million higher than at the end
of 1999, and the recognition of $2.8 million of revenues on a large NASA
contract shipped in the first quarter of 2001. Gross margin has been affected
by a change in product mix towards lower margin domestic products, an increase
in unfavorable variances in the fourth quarter of 2001 due to decrease in
production activity as the result of a lower order levels towards the end of
2001 and provisions for obsolete and slow-moving inventories of $1.3 million
in the fourth quarter of 2001. Also, sales of leaf springs in 2001 continued
to be impacted by the economic downturn as consumers decreased spending on
recreational items, particularly in the marine market. [Management
anticipates that these trends will continue into 2002]. Sales of cylinders
continues to be affected by a downturn in this market, [a trend which the
Company believes will continue into 2002.] Gross margin has been affected
accordingly as the decreased volume has significantly impact this segment's
ability to absorb costs. Gross margin has also been impacted by provisions
for obsolete and slow-moving inventories of $0.9 million in the fourth quarter
of 2001.
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation, and is presented, not as an alternative measure of operating
results or cash flow from operations as determined by accounting principles
generally accepted in the United States, but because it is a widely accepted
financial indicator of a company's ability to incur and service debt and due
to the close relationship it bears to Reunion's financial covenants in its
borrowing agreements. EBITDA and EBITDA as a percentage of sales decreased
significantly during 2001 compared to the pro forma 2000 primarily due to the
same factors affecting gross profit margin discussed above.
- 26 -
Plastics
Plastics sales for 2001 totaled $38.5 million, compared to $42.0 million
in 2000. Year-to-date 2000 Plastics sales included $5.0 million from its
former Irish plastics subsidiary which the Company sold in the 2000 third
quarter but excluded $11.3 million of sales from the pre-March 16, 2000 merger
period. On a proforma basis assuming these events occurred at the beginning
of 2000, Plastics 2000 sales would have been $48.3 million, indicating a $9.8
million decrease year-to-year. This decrease in revenues is the continuation
during 2001 of a downward trend which began in 1999 and resulted from several
factors, including certain customers relocating manufacturing operations to
Mexico and Asia, reduced customer orders for continuing programs, end of
product cycles and delays in new program starts, which affected all Plastics
facilities. [Management is seeking to expand Plastics' product offerings in
the business machines, consumer products and medical products industries to
mitigate this trend. However, if not successful, this trend in Plastics
revenue could continue into 2002.]
Plastics gross profit for 2001 was $4.4 million, or 11.4%, compared to
$6.3 million, or 15.0%, for 2000. On a proforma basis for the events
described above Plastics 2000 gross profit and margin would be $7.4 million,
or 15.3%. The decrease in gross profit and margin is directly related to the
decreasing trend in sales, resulting in inefficiencies and the inability to
absorb fixed overheads. [Depending on future sales volumes, the declining
trend in gross margin could continue.] Plastics EBITDA for 2001 was a
negative $1.1 million, or negative 2.9%, compared to $2.6 million, or 6.1%,
for 2000. On a proforma basis for the events described above, Plastics EBITDA
and percentage would be $2.7 million, or 5.6%. EBITDA was impacted by the
same factors as gross profit and margin.
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation, and is presented, not as an alternative measure of operating
results or cash flow from operations as determined by accounting principles
generally accepted in the United States, but because it is a widely accepted
financial indicator of a company's ability to incur and service debt and due
to the close relationship it bears to Reunion's financial covenants in its
borrowing agreements. EBITDA and EBITDA as a percentage of sales decreased
significantly in 2001 compared to 2000 primarily due to the same factors
affecting gross profit and margin discussed above.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for 2001 were $15.7
million, compared to $16.4 million for 2000. Had the merger, the acquisition
of NPSAC and the sale of the Company's Irish plastics business occurred at the
beginning of 2000, SGA for 2000 would have been $17.7 million, indicating a
pro forma decrease of $2.0 million. This decrease in SGA is directly related
to the decreasing trend in sales, resulting in lower commissions expense, and
cost cutting measures taken during June 2001, which included personnel
reductions in sales and administration. The cost of these reductions was
inconsequential as the Company paid no severance packages and retained no
post-severance obligations related to these reductions. [Management estimates
the savings from these reductions to be approximately $1.0 million annually.]
However, the benefits of these cost cutting measures are being offset by the
continuation of the negative trend in sales and the resulting effect on the
Company's ability to absorb costs. SGA expenses as a percentage of sales
increased to 15.8% for 2001 compared to 15.4% on a proforma basis in 2000.
SGA as a percentage of sales was higher in 2001 compared to 2000 due to the
faster rate at which volume has decreased compared to decreases in relatively
fixed administrative costs.
- 27 -
Provision for Restructuring
The Company has recorded a fourth quarter 2001 charge for restructuring
costs, including facility shut-down costs, lease termination costs and asset
writedowns, including impaired goodwill related to Plastics. Components of
the fourth quarter 2001 charge for restructuring are as follows:
Metals Plastics Totals
-------- -------- --------
Asset impairments $ 613 $ 2,060 $ 2,673
Goodwill impairment - 2,946 2,946
Lease termination costs 927 245 1,172
Employee separations 20 - 20
-------- -------- --------
Total charges $ 1,560 $ 5,251 $ 6,811
======== ======== ========
Other (Income) Expense
Other expense for 2001 was $1.7 million, compared to other income of $6.3
million for 2000. The components are as follows:
2001 2000 Change
-------- -------- --------
Goodwill and other intangibles amortization $ 2,008 $ 1,253 $ 755
Gain on sale of equipment with zero book value (375) - (375)
Gain on sale of Irish plastics business - (4,933) 4,933
Gain on sale of Chicago, IL property - (2,441) 2,441
Other (income) expense, net 94 (130) 224
-------- -------- --------
Total other (income) expense, net $ 1,727 $ (6,251) $ 7,978
======== ======== ========
The increase in goodwill and other intangibles amortization is primarily
due to the fact that 2001 includes a full year of goodwill amortization
related to the merger, Kingway acquisition and NPSAC acquisition compared to
the approximate nine-and-one-half month post-merger and Kingway acquisition
period in 2000 and no goodwill amortization related to the NPSAC goodwill.
Except for goodwill amortization and the gains as described above, there were
no individually significant or offsetting items in either 2001 or 2000.
Interest Expense
Interest expense, net, for 2001 and 2000 was $7.1 million. Although
level from year-to-year, interest expense decreased due to the lower level of
debt of the Company as the result of a decrease in overadvance fees in 2001
compared to overadvance fees paid in the first half of 2000 before the Company
significantly reduced debt levels in the second half of 2000 through asset
sales, the $29.5 million of cash proceeds generated through asset sales and
used to reduce debt during the second half of 2000 and the lower interest
rates on the Company's Bank of America facilities due to the many rate
reductions by the Federal Reserve after June 2000. The decreases were offset
by an increase due to the debt assumed in the NPSAC acquisition, an increase
in amortization of deferred financing fees and an increase in interest rates
in November 2001 on the Company's Bank of America facilities to a default rate
as specified in the BOA Financing and Security Agreement. [Interest expense
for 2002 may decrease compared to 2001 depending on the amount of proceeds and
timing of asset dispositions in 2002 as part of the Company's corporate-wide
restructuring plan.]
For 2001 and 2000, a total of $3.1 million and $4.4 million,
respectively, of interest expense has been allocated to or actually incurred
in discontinued operations. Interest expense is allocated to discontinued
operations on the basis of the percentage of total average assets of
discontinued operations to gross total assets.
- 28 -
Equity Results
Equity in loss of continuing operations of affiliate in 2000 represents
Chatwins Group's pre-merger share of Reunion's loss from continuing operations
in that period.
Income Taxes
There was a tax provision from continuing operations of $12.7 million for
2001 compared to a tax benefit of $0.6 million for 2000. The Company has net
operating loss carryforwards for Federal tax return reporting purposes
totaling $124.1 million at December 31, 2001, $79.2 million of which expire by
2004. [The Company may be able to utilize its loss carryforwards against
possible increased profitability as the result of the Company's corporate-wide
restructuring plan. However, until the amount of proceeds from and timing of
asset dispositions as part of such plan are known], management has determined
to fully reserve for the total amount of net deferred tax assets as of
December 31, 2001. The tax benefit from continuing operations in 2000 was the
result of a decrease in the valuation allowance against the deferred tax
assets related to the Company's net operating loss carryforwards established
at the merger date due a change in the then current estimates of future
taxable income.
Discontinued Operations
There was a loss from discontinued operations for 2001 of $9.2 million.
The Company recorded a fourth quarter 2001 charge for estimated loss on
disposal of discontinued operations ($6.4 million) related to estimated phase-
out period operating losses, lease termination costs and asset writedowns of
the discontinued bridges and cranes business [as management expects that the
materials handling systems business will be sold at a price exceeding its
carrying value.]
There was a loss from discontinued bridges and cranes operations during
2001 ($5.3 million) and income from discontinued materials handling systems
operations ($3.0 million). Management adjusted the reserve for estimated
expenses related to Chatwins Group's former grating business ($0.3 million)
due to an increase in estimated future operating lease commitments. There was
a loss from discontinued agricultural operations ($135,000) during 2001.
There was income from discontinued operations during 2000 of $0.55
million. The income from discontinued operations was comprised of a loss from
discontinued bridges and cranes operations ($7.2 million), income from
discontinued materials handling systems operations ($6.4 million), a loss from
discontinued wine grape agricultural operations ($0.6 million), the gain from
the sale of such operations ($2.3 million with $-0- tax effect as the
valuation allowance against the deferred tax assets related to the Company's
net operating loss carryforwards was reduced for the tax effect of such gain),
a reduction in the gain on disposal of the discontinued grating business of
the former Chatwins Group ($0.8 million) and a reduction in the provision for
estimated expenses of the discontinued grating business ($0.5 million).
The reduction in the gain on disposal is the result of the final outcome
of the arbitration with Alabama Metal Industries Corporation (AMICO), the
purchaser of the Company's discontinued grating business, regarding the final
purchase price adjustment resulting from a disagreement between the Company
and AMICO in the preparation of the closing date balance sheet. In
calculating the gain on disposal in September 1999, the Company provided $0.5
million for future estimated purchase price adjustments. In November 2000,
the arbiter for the dispute returned a final purchase price adjustment,
including interest, of $1.3 million, a difference of $0.8 million. The
- 29 -
Company paid AMICO $1.3 million in November 2000 from proceeds available under
its revolving credit facility.
For 2001 and 2000, discontinued operations includes a total of $3.1
million and $4.4 million, respectively, of interest expense.
Extraordinary Items
The losses from extraordinary items in 2000 of $1.9 million, net of $-0-
taxes, represent the pre-merger write-offs of deferred financing costs at both
Chatwins Group and pre-merger Reunion and fees related to the early repayment
of the Company's term loan B with BOA in August 2000 with the proceeds from
the sale of the Company's Irish plastics business.
Year Ended December 31, 2000 Compared to
Year Ended December 31, 1999
Continuing Operations
Metals
Metals net sales, gross margins and EBITDA percentages for 2000 and 1999
are as follows. Since the acquisition of NPSAC did not occur until January
2001, no pro forma adjustments have been made to pressure vessels and spring
sales and margins for 2000 and 1999 below. Cylinders EBITDA percentage for
2000 excludes a $2.4 million gain on sale of its Chicago, IL property.
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2000 1999 2000 1999 2000 1999
--------- --------- ------ ------ ------ ------
Pressure vessels
and springs $ 32,250 $ 27,400 29.5% 25.1% 22.2% 16.7%
Cylinders 30,463 32,291 24.4% 20.0% 15.4% 12.2%
--------- --------- ------ ------ ------ ------
Metals totals $ 62,713 $ 59,691 27.0% 22.3% 18.9% 14.3%
========= ========= ====== ====== ====== ======
The increase in pressure vessel sales in 2000 was due to strong first and
second quarter 2000 order levels which began to ship in the 2000 second half
and an overall increase in foreign sales in several pressure vessel product
lines. Sales of leaf springs were up slightly compared to 1999. Pressure
vessel and springs margin increased on the higher level of sales and a product
mix which included more higher-margin foreign sales. Sales of cylinders was
down due to softness in the hydraulic cylinder market. However, 2000 sales
included an increase in higher-margin core business cylinder sales away from
lower margin marine and other cylinders.
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation, and is presented, not as an alternative measure of operating
results or cash flow from operations as determined by accounting principles
generally accepted in the United States, but because it is a widely accepted
financial indicator of a company's ability to incur and service debt and due
to the close relationship it bears to Reunion's financial covenants in its
borrowing agreements. EBITDA and EBITDA as a percentage of sales increased
during 2000 compared to the 1999 primarily due to the same factors affecting
gross profit margin discussed above. Note that for financial reporting
- 30 -
purposes, the Company classified the $2.4 million gain on sale of the cylinder
business' Chicago, IL property within cylinder EBITDA. Excluding this gain,
cylinder EBITDA and EBITDA as a percentage of cylinder sales increased in 2000
compared to 1999.
Plastics
Plastics sales for 2000 since the March 16, 2000 merger totaled $42.0
million. Such sales resulted in Plastics gross profit of $6.3 million, or
15.0% of sales.
On a pro forma basis as if Plastics was acquired on January 1, 1999,
Plastics sales in 2000 totaled $56.0 million, compared to $71.6 million for
1999. Excluding the Irish plastics business for reasons of comparability,
such sales would be $48.3 million for 2000 and $57.7 million for 1999, a
decrease of $9.4 million or 16%. The decrease in revenues is the continuation
of a trend which began in 1999 and resulted from several factors, including
certain customers relocating manufacturing operations to Mexico and Asia,
reduced customer orders for continuing programs, end of product cycles and
delays in new program starts, which affected all Plastics facilities.
Plastics gross profit for 2000 was $6.3 million, or 15.0% of sales. On a
pro forma basis, Plastics gross profit for 2000 was $8.2 million, or 14.6% of
sales, compared to $10.8 million, or 14.9% of sales, for 1999. Excluding the
Irish plastics business for reasons of comparability, gross profit would be
$7.1 million, or 14.7% of sales, for 2000 and $8.6 million, or 15.0% of sales,
for 1999, a decrease of $1.5 million or 18%. The decline in gross profit is
directly related to the reduction in sales volume and resulting cost
absorption inefficiencies.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for 2000 were $16.4
million, compared to $7.9 million for 1999, an increase of $8.5 million. SGA
expenses in 2000 include approximately $6.5 million of SGA from Plastics and
corporate administrative expenses of pre-merger Reunion which were not present
in 1999. The remaining increase was due primarily to an increase in pre-
merger related professional fees at Chatwins Group and a charge related to
special healthcare benefits offered in the 2000 fourth quarter. SGA expenses
as a percentage of sales increased to 15.6% for 2000 compared to 13.2% in
1999. SGA as a percentage of sales was higher in 2000 compared to 1999 due to
the addition of Plastics, whose combined SGA as a percentage of related sales
was 14.1%, and increases in pre-merger related professional fees at Chatwins
Group and fourth quarter healthcare costs.
Other (Income) Expense
Other income for 2000 was $6.3 million, compared to other expense of $0.3
million for 1999. The larger components of each are as follows:
2000 1999 Change
-------- -------- --------
Goodwill and other intangibles amortization $ 1,253 $ 364 $ 889
Gain on sale of Irish plastics business (4,933) - (4,933)
Gain on sale of Chicago, IL property (2,441) - (2,441)
Other (income) expense, net (130) (59) (71)
-------- -------- --------
Total other (income) expense, net $ (6,251) $ 305 $ (6,556)
======== ======== ========
- 31 -
The increase in goodwill and other intangibles amortization is primarily
due to the fact that 2000 includes a goodwill amortization related to the
merger and Kingway acquisition and 1999 included no goodwill amortization
related to these events. Except for goodwill amortization and the gains as
described above, there were no individually significant or offsetting items in
either 2000 or 1999.
Interest Expense
Interest expense, net, for 2000 was $7.0 million compared to $5.3 million
for 1999, indicating an increase of $1.7 million. The increase in interest
expense reflects the higher level of debt of the post-merger company when
compared to the 1999 debt levels of pre-merger Chatwins Group and the payment
of $0.7 million in overadvance fees.
For 2000 and 1999, a total of $4.4 million and $4.7 million,
respectively, of interest expense has been allocated to or actually incurred
in discontinued operations.
Equity Results
Equity in loss of continuing operations of affiliate in 2000 and 1999
represents Chatwins Group's pre-merger share of Reunion's loss from continuing
operations in each period.
Income Taxes
There was a non-cash tax benefit from continuing operations of $0.6
million for 2000 compared to a non-cash tax benefit of $0.9 million for 1999.
The tax benefit from continuing operations in 2000 was the result of a
decrease in the valuation allowance against the deferred tax assets related to
the Company's net operating loss carryforwards established at the merger date
due to a change in the then current estimates of future taxable income. The
tax benefit for 1999 is primarily the result of the pre-tax loss from
continuing operations in 1999 and the reversal of the valuation allowance of
$640,000 for deferred tax assets.
Discontinued Operations
There was income from discontinued operations during 2000 of $0.55
million. The income from discontinued operations was comprised of a loss from
discontinued bridges and cranes operations ($7.2 million), income from
discontinued materials handling systems operations ($6.4 million), a loss from
discontinued wine grape agricultural operations ($0.6 million), the gain from
the sale of such operations ($2.3 million with $-0- tax effect as the
valuation allowance against the deferred tax assets related to the Company's
net operating loss carryforwards was reduced for the tax effect of such gain),
a reduction in the gain on disposal of the discontinued grating business of
the former Chatwins Group ($0.8 million) and a reduction in the provision for
estimated expenses of the discontinued grating business ($0.5 million).
The reduction in the gain on disposal is the result of the final outcome
of the arbitration with Alabama Metal Industries Corporation (AMICO), the
purchaser of the Company's discontinued grating business, regarding the final
purchase price adjustment resulting from a disagreement between the Company
and AMICO in the preparation of the closing date balance sheet. In
calculating the gain on disposal in September 1999, the Company provided $0.5
million for future estimated purchase price adjustments. In November 2000,
the arbiter for the dispute returned a final purchase price adjustment,
including interest, of $1.3 million, a difference of $0.8 million. The
Company paid AMICO $1.3 million in November 2000 from proceeds available under
its revolving credit facility.
- 32 -
There was income from discontinued operations during 1999 of $1.1
million, net of taxes of $0.2 million. Income from discontinued operations
was comprised of a loss from discontinued bridges and cranes operations ($1.7
million), income from discontinued materials handling systems operations ($0.7
million), the gain on disposal of the discontinued grating business of the
former Chatwins Group ($8.4 million) and income from discontinued operations
of the grating business ($0.1 million, which included the $1.7 million pre-tax
gain on sale of the Chicago property that comprised the Chicago manufacturing
operations of Chatwins Group's Klemp division), partially offset by provisions
for estimated expenses ($1.9 million) and disposals of the international
grating subsidiaries ($4.1 million) and the oil and gas operations ($0.7
million). There was also equity in income from discontinued operations of
pre-merger Reunion (less than $0.1 million).
For 2000 and 1999, discontinued operations includes a total of $4.4
million and $4.7 million, respectively, of interest expense.
Extraordinary Items
The losses from extraordinary items in 2000 of $1.9 million represents
the pre-merger write-offs of deferred financing costs at both Chatwins Group
and pre-merger Reunion and the write-off of term loan B deferred financing
costs due to the early retirement of this debt.
On August 31, 2000, the Company sold its Irish plastics subsidiary for
net proceeds of $10.0 million. A portion of the proceeds was used to repay in
its entirety the term B loan. Related to the term B loan was $133,000 of
unamortized debt issuance fees which the Company has recorded as an
extraordinary item of $80,000.
Change in Accounting Principle
Effective January 1, 1999, Chatwins Group adopted the AICPA's Statement
of Position 98-5, "Reporting on the Costs of Start-up Activities," which
requires that the costs of start-up activities be expensed as incurred. Such
adoption is reported as the cumulative effect of a change in accounting
principle and resulted in the write-off of $176,000 of start-up costs, net of
taxes of $91,000. These start-up costs primarily related to Chatwins Group's
international subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company manages its liquidity as a consolidated enterprise. The
operating groups of the Company carry minimal cash balances. Cash generated
from group operating activities generally is used to repay borrowings under
revolving credit arrangements, as well as other uses (e.g. corporate
headquarters expenses, debt service, capital expenditures, etc.). Conversely,
cash required for group operating activities generally is provided from funds
available under the same revolving credit arrangements.
Recent Developments
The following discussion describes developments that have affected the
Company during 2001 and during the period in 2000 since the March 16, 2000
merger.
- 33 -
Restructuring and Other Actions
As the result of downturns in several of the markets served by the
Company during the third and fourth quarters of 2001 and the resulting
decreases in the Company's ability to absorb costs and the quality of its
borrowing base, management of the Company has developed a plan to restructure
its continuing businesses and dispose of or shut-down certain other
businesses. These actions are designed to improve productivity and operating
performance, reduce debt and provide liquidity. [The benefits of these
actions are anticipated to begin to be realized in 2002 and continue over the
next several years.] Key elements of the plan include:
RESTRUCTURING
* Consolidate the pressure vessel operations of CPI and NPSAC.
* Consolidate the cylinder operations of Hanna and TJ Brooks.
* Shut-down Plastics' thermoplastics operations at Siler City, NC.
* Close Plastics' corporate headquarters in Charlotte, NC.
* Address machinery and equipment impairments.
DISCONTINUED OPERATIONS
* Shut-down and liquidate the assets and business of Alliance Machine.
* Dispose of the Kingway Material Handling division.
In April 2001, the Company entered into a non-binding letter of intent
for the sale of substantially all of the assets of Alliance for $3.3 million
in cash plus the assumption by the buyer of certain liabilities. Consummation
of this sale is subject to certain conditions, including the execution of a
definitive asset purchase agreement, and there can be no assurance that the
transaction will close on the terms set forth in the letter of intent or at
all.
The plan was approved by the Company's board of directors in December
2001. The Company has recorded a fourth quarter 2001 charge for restructuring
costs, including facility shut-down costs, lease termination costs and asset
writedowns, including impaired goodwill related to Plastics, and a charge for
estimated loss on disposal of discontinued operations (related solely to
Alliance Machine) including phase-out period operating losses, lease
termination costs and asset writedowns.
- 34 -
Components of the fourth quarter 2001 charges are as follows:
Classifications of Charges
------------------------------
Provision for Discontinued
Restructuring Operations
------------- -------------
Metals:
Asset impairments $ 613 $ 3,771
Lease termination costs 927 995
Reserve for operating losses during phase-out - 1,633
Employee separations 20 -
-------- --------
Total charges - Metals 1,560 6,399
-------- --------
Plastics:
Asset impairments 2,060 -
Goodwill impairment 2,946 -
Lease termination costs 245 -
-------- --------
Total charges - Plastics 5,251 -
-------- --------
Total charges $ 6,811 $ 6,399
======== ========
The $1.6 million charge for discontinued operations phase-out includes
$1.4 million for operating losses and $0.2 million for employee separations
costs. [The cash outlay related to the charges is anticipated to occur during
2002. Management also anticipates incurring other charges and cash outlays in
2002 in order to fully execute the plan.
Components of the estimated cash impacts of the plan anticipated to occur
in 2002 are as follows:
Classification of Cash Impacts
------------------------------
Discontinued
Restructuring Operations
------------- -------------
Total charges $ 6,811 $ 6,399
Less: Non-cash components (5,619) (3,771)
-------- --------
Estimated cash impacts of charges 1,192 2,628
Other anticipated cash outlays:
Relocation costs 750 -
Phase-out period operating losses 730 -
-------- --------
Total estimated cash impacts $ 2,672 $ 2,628
======== ========]
Execution of the plan began in January 2002 and [is expected to be
completed by June 2002 but by no later than the end of 2002]. Benefits of the
plan include cost reductions from streamlining operations, reducing operating
losses at historically unprofitable businesses and interest savings from
reduced debt. [Management estimates indicate that the present value of these
benefits significantly exceeds the near-term estimated costs to execute the
plan.]
- 35 -
2001 Covenant Compliance
For the quarter ended March 31, 2001 and for each fiscal quarter
thereafter in 2001, the Bank of America (BOA) Financing and Security Agreement
required the Company to maintain a minimum fixed charge coverage ratio of
1.25:1 and maximum funded debt to EBITDA ratios of 3.75:1, 3.50:1, 3.25:1 and
3.00:1.
In April 2001, the Company entered into a letter agreement with Bank of
America whereby, as long as the Company maintained both a fixed charge
coverage ratio of at least 1.00:1 and had a funded debt to EBITDA ratio of no
more than 4.50:1 as of the September 30, 2001 and December 31, 2001
calculation dates, and as long as the Company was in compliance on all other
covenants, the Bank of America would not accelerate any of its loans.
Due to the rate and level of the downturns in several of the markets
served by the Company and the resulting decrease in the Company's ability to
absorb costs, cost cutting and capital expenditure restriction measures taken
by management during the third and fourth quarters of 2001 were not enough to
achieve ratio compliance. For the quarter ended September 30, 2001, the
Company's fixed charge coverage ratio was 0.79:1 and the funded debt to EBITDA
ratio was 5.61:1. As a result, the Company is in default under its BOA
Financing and Security Agreement.
The Company and Bank of America entered into various amendments to the
BOA Financing and Security Agreement during 2000. The December 12, 2000
amendment required the Company to maintain a minimum availability under the
revolving credit facility of $1.5 million. Through the second quarter of
2001, the Company had complied with this requirement. However, due to the
downturn in several of the markets served by the Company during the third
quarter of 2001 and the resulting decrease in the quality of the Company's
borrowing base, ineligible receivables and inventory increased. Based on the
borrowing base formulas as set forth in the BOA Financing and Security
Agreement, this increase in ineligibles resulted in a decrease in borrowing
availability under the revolving credit facility and the Company's inability
to maintain a minimum availability of $1.5 million. As a result, the Company
is in default under its BOA Financing and Security Agreement.
In November 2001, the Company was informed by BOA that a borrowing base
deficiency existed, as defined in the BOA financing and security agreement.
Since that time, the Company and BOA have entered into six side letter
agreements wherein BOA and the other lenders that participated in the BOA
refinancing of the Company in the merger agreed to provide monthly advances in
excess of the borrowing base of the Company for working capital needs while
the Company addresses its lack of liquidity issue pursuant to its plan to sell
assets and reduce debt. The sixth side letter agreement, dated April 1, 2002,
provides overadvance approval on a day-to-day basis whereby the overadvance
may not exceed $3.5 million. As of April 16, 2002, the Company has not
exceeded the $3.5 million overadvance availability provided for in the side
letter agreement. However, nothing in these six side letter agreements waives
or otherwise alters BOA's already existing remedies under the BOA financing
and security agreement including acceleration of all amounts outstanding under
the BOA financing and security agreement.
In consideration of providing its approval of overadvance availability,
as provided in the side letter agreements, the Company has been and continues
to pay a weekly fee of $25,000 or $50,000, depending on the amount of the
overadvance. Since entering into the side letter agreements beginning in
November 2001, the Company has paid BOA a total of $750,000 in such fees.
During 2001, the Company spent $2.9 million on capital expenditures. The
Company's covenant limitation on capital expenditures is $4.5 million for the
year 2001 and thereafter.
- 36 -
Semi-Annual Interest on 13% Senior Notes due November 1, 2001
The Company was unable to fund its November 1, 2001 $1.616 million semi-
annual interest payment on its 13% senior notes as it had insufficient funds
available under its revolving credit facility with BOA. Failure to make the
November 1 interest payment is a default under the indenture which governs the
13% senior notes. Under the terms of the indenture, the Company had thirty
days to cure the default. The Company was unable to cure the default during
the 30-day cure period.
Management of the Company has been in contact with certain of the Note
Holders and holders representing approximately ninety percent of the principal
amount of senior notes outstanding. As part of its corporate-wide
restructuring plan, management of the Company has determined to dispose of
assets in order to meet its interest payment obligations under the 13% senior
notes. [Management of the Company currently believes that it will be able to
obtain the necessary funds. However, there can be no assurance that
management will be successful in its efforts.]
Repayment of $120,000 of 13% Senior Notes
Chatwins Group was required to make sinking fund payments to redeem $12.5
million principal amount of the senior notes on May 1 in each of 2000 through
2003 at face value plus accrued interest and to offer to purchase $25 million
of the senior notes on June 1, 2000 at face value plus accrued interest. In
February 2000, Chatwins Group solicited the holders of the $49,975,000 of 13%
senior notes outstanding asking them to waive their right to participate in
the June 1, 2000 $25.0 million purchase offer, of which $47,450,000 agreed to
waive such right resulting in a maximum purchase offer obligation on June 1,
2000 of $2,525,000.
On June 1, 2000 Reunion made the required offer to purchase $2,525,000 of
senior notes, of which holders of only $120,000 of senior notes tendered.
However, the $25.0 million of 13% senior notes repaid from the merger proceeds
was applied against Reunion's obligations for sinking fund payments and the
purchase offer as follows (in thousands):
May 1, June 1, May 1,
2000 2000 2001 Total
-------- -------- -------- --------
Sinking fund payment or
purchase offer obligation $ 12,500 $ 120 $ 12,500 $ 25,120
$25.0 million applied to
obligations (12,500) (120) (12,380) (25,000)
-------- -------- -------- --------
Maximum required payment $ - $ - $ 120 $ 120
======== ======== ======== ========
The $120,000 principal amount of 13% senior notes was repaid by the
Company on May 1, 2001 from funds available under its revolving credit
facility.
Of the remaining $24.855 million of senior notes, $12.5 million is
scheduled to be repaid in May 2002 and $12.355 million is scheduled to be
repaid in May 2003. [Management does not expect to have the internally
generated liquidity necessary to fund the May 1, 2002 sinking fund payment and
is in the process of investigating various refinancing and repayment
scenarios. Such scenarios involve not only mezzanine or additional term debt,
which could potentially include warrants, but also involve other
considerations such as a sale of assets.] The Company currently is in default
under the indenture for the senior notes due to its inability to make the
November 1, 2001 semi-annual interest payment of $1.616 million.
- 37 -
Solicitation of Consent of Senior Noteholders
The Company is required to make sinking fund payments on its $24.855
million of senior notes of $12.5 million on May 1, 2002 and $12.355 million on
May 1, 2003. On September 4, 2001, the Company solicited the consent of its
senior noteholders to extend the sinking fund payment dates by two years. The
solicitation expired on November 2, 2001. As part of the solicitation, the
Company reserved the right to terminate it if holders of less than $22.0
million principal amount of senior notes consented. The Company has exercised
its right to terminate the solicitation.
Acquisition of NPS Acquisition Corp.
On January 17, 2001, the Company acquired NPS Acquisition Corp. (NPSAC)
(f/k/a Naptech Pressure Systems) from Charles E. Bradley, Sr. (Mr. Bradley),
the Company's chairman of the board and chief executive officer. Until the
first quarter of 2002, NPSAC was based in Clearfield, Utah and manufactured
seamless steel pressure vessels, an existing Metals product line. As part of
the Company's plan to restructure its continuing operations, in the first
quarter of 2002 this facility was shut-down and its operations were relocated
and combined with the Company's pressure vessel manufacturing operations in
McKeesport, Pennsylvania. The transaction was accounted for as a purchase
under APB Opinion No. 16 "Business Combinations". The purchase price in
excess of net assets acquired of $8.6 million was recorded as goodwill and,
until December 31, 2001, was being amortized over 15 years.
The purchase price included the assumption of a 15% per annum $6.9
million note payable to Shaw Group, the former owner of Naptech Pressure
Systems. Simultaneously with the acquisition, Reunion paid Shaw Group $2.0
million of the note payable in cash from funds available under its revolving
credit facility with Bank of America (BOA). The remainder of the note payable
of $4.9 million was then restructured to include quarterly principal payments
of $0.6 million for eight quarters which began on February 28, 2001. Reunion
made the first two payments from funds available under its revolving credit
facility. The Company has been unable to fund the remaining payments under
this note due to lack of liquidity and insufficient funds available under its
revolving credit facility. The note is unsecured and subordinated to the BOA
term loan and revolving credit facilities.
The estimated fair value of assets acquired included approximately $1.4
million of cash, receivables, inventories and other current assets,
approximately $0.3 million of fixed assets and $1.3 million of deferred tax
assets which are fully reserved by a valuation allowance. The purchase price
in excess of net assets acquired of $8.6 million was recorded as goodwill and,
until December 31, 2001, was being amortized over 15 years. NPSAC's fully-
reserved deferred tax assets are comprised primarily of net operating losses.
Additional Shares of Reunion Common Stock
In the merger, Reunion issued 9,500,000 shares of common stock to holders
of Chatwins Group's common stock. The merger agreement also provided that up
to an additional 500,000 shares of Reunion common stock would be issued to
former Chatwins Group common stockholders if the former Chatwins Group
businesses and the acquired Kingway business achieve specified performance
levels in 2000. A determination of the number of shares to be issued was made
by the board of directors at its meeting held on May 15, 2001. Such
additional shares totaled 348,995 and were issued on May 29, 2001. The
closing price of Reunion's common stock on that date was $1.30 per share. The
issuance of the additional shares was recorded as a merger purchase price
adjustment to goodwill.
- 38 -
Payment of $680,000 Industrial Revenue Development Bonds
Upon the sale of its domestic grating operations in September 1999, the
Company retained an obligation for a $680,000 note payable due May 1, 2001
related to an industrial development revenue bond issue by Orem City, Utah.
This note payable was repaid in May 2001 from funds available under the
Company's revolving credit facility.
Dispositions and Discontinued Operations
In December 2001, pursuant to the plan developed by management to
restructure the Company's continuing businesses and dispose of or shut-down
certain other businesses, the Company classified and began accounting for its
bridges and cranes and materials handing systems businesses as discontinued
operations in accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" (APB 30). Prior period information contained in the
consolidated financial statements and notes have been restated to reflect
accounting for these businesses as discontinued operations.
On August 31, 2000, the Company sold its Irish plastics subsidiary, Data
Packaging, Ltd. The net proceeds of $10.0 million from the sale were used to
repay debt including a portion of the Company's senior secured and revolving
credit borrowings with Bank of America.
On October 27, 2000, the Company sold substantially all of its wine grape
agricultural operations and real estate holdings in Napa County, California.
The $16.5 million net proceeds from the sale after transaction-related costs
were used to reduce debt. During the third quarter of 2000, the Company
classified and began accounting for the agricultural operations as
discontinued operations.
On December 28, 2000, the Company sold and leased-back the land and
building of its Chicago, IL hydraulic cylinder manufacturing location. The
net proceeds of $3.0 million from the sale were used to repay debt including a
portion of the Company's senior secured and revolving credit borrowings with
Bank of America.
The Merger
On March 16, 2000, Chatwins Group and Reunion merged, with Reunion as the
surviving entity. Prior to the merger, Chatwins Group owned approximately 37%
of Reunion's issued and outstanding common stock.
The merger was accounted for as a purchase under APB Opinion No. 16
"Business Combinations" with Chatwins Group as the acquirer for purposes of
applying purchase accounting. Accordingly, Chatwins Group's assets and
liabilities are accounted for at historical book values and the unowned
portion of the assets and liabilities of Reunion have been revalued at their
estimated fair value.
The purchase price in the merger was $8.1 million, consisting of
2,490,000 shares of Reunion common stock not owned by Chatwins Group at March
16, 2000 valued at $3.25 per share, based on the market price of Reunion
common stock between July 28 and August 2, 1999, immediately prior to the
announcement of the July 28, 1999 approval by Reunion's board of directors of
the amended and restated merger agreement. Assets acquired included
approximately $13.3 million of current assets and approximately $23.5 million
of fixed and other assets. Liabilities and minority interests assumed
included approximately $9.9 million of current liabilities, $21.6 million of
noncurrent liabilities and $2.1 million of minority interests.
- 39 -
Holders of Chatwins Group Class D, Series A, B and C preferred stock
received 9,033 shares of Reunion Series A preferred stock in the merger. The
Reunion Series A preferred stock had an initial redemption price of
$9,033,000. See "Preferred Stock Exchange" below for a discussion of the
exchange of the Company's preferred stock for common stock.
The Refinancing
Simultaneously with the merger, Reunion entered into $72.5 million of
senior secured credit facilities with Bank of America. These credit
facilities consisted of a $39.0 million revolving credit facility, a $25.8
million term loan A facility, a $5.0 million term loan B facility and a $2.7
million capital expenditures facility.
Proceeds from initial borrowings under the Bank of America credit
facilities were used for various purposes, including repayment of Chatwins
Group's existing credit facilities with Bank of America, repayment of
Reunion's existing credit facilities with the CIT Group/Business Credit, Inc.
and retirement of $25.0 million of Chatwins Group's 13% senior notes plus
accrued and unpaid interest. Reunion assumed the obligations of Chatwins
Group under the indenture governing the remaining $24.975 million 13% senior
notes.
The Company is currently in default under its BOA credit facilities and
13% senior notes. Therefore, BOA and the Company's senior noteholders have
available to them all remedies as provided under the contractual terms of the
BOA Financing and Security Agreement and the indenture governing the 13%
senior notes including, but not limited to, acceleration of all amounts
outstanding under each.
Acquisition of Kingway
Simultaneously with the merger, Reunion acquired Stanwich Acquisition
Corp. (SAC), an affiliated company, doing business as Kingway Material
Handling (Kingway). Similar to Chatwins Group's material handling product
line, Kingway produces industrial and commercial storage racks and materials
handling systems. Subsequent to the merger and acquisition, Reunion
integrated Kingway into the existing material handling product line and
operates from a single location. The transaction was accounted for as a
purchase under APB 16.
The purchase price included $100,000 in cash paid to the then existing
common stockholders of Kingway, the assumption of approximately $10.3 million
of Kingway's debt and the issuance of $6.8 million of preferred stock in
exchange for Kingway's existing preferred stock as described below. Assets
acquired included approximately $3.0 million of current assets and
approximately $2.1 million of fixed and other assets. Liabilities assumed,
including the assumed debt, included approximately $11.7 million of current
liabilities and $6.8 million of preferred stock. The purchase price in excess
of net assets acquired, less $0.3 million, the value assigned to SAC's net
operating losses at the time of the acquisition, amounting to approximately
$13.2 million, was recorded as goodwill and, until December 31, 2001, was
being amortized over 15 years.
In the acquisition, the holder of SAC's preferred stock received in
exchange for its shares 5,000 shares of Reunion Series B preferred stock. The
Reunion Series B preferred stock has a redemption price of $5,000,000 plus
cumulative dividends as of the date of the acquisition of $1,781,000. See
"Preferred Stock Exchange" below for a discussion of the exchange of the
Company's preferred stock for common stock.
- 40 -
In December 2001, pursuant to a plan developed by management to
restructure the Company's continuing businesses and dispose of or shut-down
certain other businesses (see note 2), the Company classified and began
accounting for the materials handling systems business as a discontinued
operation.
Preferred Stock Exchange
On June 14, 2000, the Company's Board of Directors approved the exchange
of its Series A and Series B preferred stocks for 3,245,515 shares of the
Company's common stock at an exchange price of $5.00 per share. The Series A
and Series B preferred stock were issued in connection with the March 16, 2000
merger with Chatwins Group and acquisition of Kingway, and had an aggregate
liquidation value of $16.2 million. The closing market price of the common
stock was $1.00 on that date. Except for the par value of the issued common
stock and the expense connected with the exchange, the aggregate carrying
value of the Series A and B preferred stocks was recorded as additional paid-
in capital upon their exchange for common stock.
Summary of 2001 Activities
Cash and cash equivalents totaled $1.2 million (including $0.5 million
classified within discontinued operations) at December 31, 2001, compared to
$2.5 million (including $0.7 million classified within discontinued
operations) at December 31, 2000, a decrease of $1.3 million. This decrease
resulted from $5.1 million of cash provided by operations more than offset by
$2.5 million of cash being used in investing activities and $3.9 million used
in financing activities.
Operating Activities
Cash provided by operating activities of $5.1 million in 2001 was the
result of a decrease in net working capital as lower volume levels led to a
reduction in receivables and inventories and as tighter liquidity resulted in
a slowdown in payments to vendors.
Investing Activities
The Company disposed of machinery and equipment with no book value during
2001, generating $0.4 million in cash proceeds. Capital expenditures were
$2.9 million. The Company also acquired the common stock of NPSAC for
$10,000.
Financing Activities
Proceeds from new borrowings totaled $0.5 million, all under the capital
expenditures facility. The Company made scheduled repayments of debt totaling
$5.3 million, which included $3.7 million on its term loan A, $0.2 million on
its capital expenditures facility, $1.2 million on the note payable assumed in
the NPSAC acquisition, $120,000 of 13% senior notes and an additional $48,000
on a Metals related note payable. Other debt repayments totaling $58,000
represent payments on capital lease obligations and other debt. Revolving
credit facility borrowings increased $3.8 million during the year, including
the $2.0 million paid in the NPSAC acquisition.
- 41 -
CONTRACTUAL OBLIGATIONS
The following represents a tabular summarization of the Company's
contractual obligations at December 31, 2001 (in thousands):
Less
Than 1 to 3 4 to 5 After
Description Total 1 Year Years Years 5 Years
-------------------------- -------- -------- -------- -------- --------
Debt in default $ 41,914 $ 16,434 $ 20,217 $ 5,263 $ -
Other debt - related parties 4,615 4,615 - - -
Other long-term debt 4,661 4,661 - - -
Capital lease obligations
and SBA loans 236 87 149 - -
Noncancellable operating
lease commitments 22,756 4,724 6,465 4,167 7,400
-------- -------- -------- -------- --------
Total contractual
obligations $ 74,182 $ 30,521 $ 26,831 $ 9,430 $ 7,400
======== ======== ======== ======== ========
The above table shows the contractual aggregate maturities of debt in
default excluding the Company's revolving credit facility. Due to its default
status, all such debt and the revolving credit facility is classified as
current in the accompanying consolidated balance sheet at December 31, 2001.
Other debt - related parties and other long-term debt, although contractually
due, are classified as long-term in the accompanying consolidated balance
sheet at December 31, 2001 as such amounts may not be paid due to restrictions
imposed by the BOA financing and security agreement.
FACTORS AFFECTING CURRENT AND FUTURE LIQUIDITY
During the third and fourth quarters of 2001, the Company experienced
downturns in several of the markets it serves resulting in a decrease in the
Company's ability to absorb costs and a decrease in the quality of its
borrowing base due to an increase in ineligible receivables and inventory.
Based on the borrowing base formulas as set forth in the BOA Financing and
Security Agreement, this increase in ineligibles resulted in a decrease in
borrowing availability under the revolving credit facility. These events have
had a significant adverse effect on the Company's ability to meet its
obligations, including the Company extending its vendors and its inability to
make the November 1, 2001 $1.616 million semi-annual interest payment on the
$24.855 million of outstanding senior notes.
Management of the Company has developed a restructuring plan which
includes the disposition of other businesses and which is designed to improve
productivity and operating performance. [The improvements in productivity and
operating performance as the result of its implementation, although expected
to begin in 2002, may not materialize for several quarters] and the Company
has not executed a significant sale of assets. At the same time, the Company
has past due, immediate and near-term obligations.
[Management of the Company is currently pursuing certain asset
dispositions included in the Company's restructuring plan and believes that by
the end of June 2002, based on recent discussions with several qualified
buyers, the Company will generate adequate proceeds from asset sales to
alleviate the current and future strain on liquidity and meet its past due,
immediate and near-term obligations. However, no assurances can be given that
such pursuits will be successful.]
- 42 -
GOING CONCERN
As of December 31, 2001, the Company was unable to extend its May 2002
sinking fund payment date and was unable to fund its November 1, 2001 $1.616
million semi-annual interest payment on its 13% senior notes as it had
insufficient funds under its revolving credit facility. Additionally, the
Company's Bank of America (BOA or Bank of America) Financing and Security
Agreement and the indenture governing the 13% senior notes contain various
covenants which, among other things, require the Company to maintain minimum
availability and specify that the Company meet certain financial requirements,
including minimum EBITDA, a minimum fixed charge coverage ratio and a maximum
funded debt to EBITDA ratio. As of December 31, 2001, the Company was not in
compliance with the minimum EBITDA requirement, fixed charge coverage ratio
and maximum funded debt to EBITDA ratio. The Company has not been in
compliance with certain of these financial covenants since the third quarter
of fiscal 2001. As a result, $64.4 million of the Company's long-term debt
was classified as current on the consolidated balance sheet as of December 31,
2001 and is currently subject to various remedies including, but not limited
to, acceleration of all amounts outstanding under the BOA Financing and
Security Agreement and the 13% senior notes. [The Company is projecting that
it will not be in compliance with the covenants of its BOA Financing and
Security Agreement or its 13% senior notes over the next twelve months.]
The Company has generated a net loss of $38,128,000 during the year ended
December 31, 2001.
The financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The negative working capital
position of $60,179,000, the defaults of the BOA Financing and Security
Agreement and the 13% senior notes, and the lack of borrowing capacity under
its revolving credit facility indicate that [the Company may not be able to
continue as a going concern for a reasonable period of time.] The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
Since September 2001, the Company has been negotiating with its lenders
to defer principal payments and modify the financial covenants under its
existing debt facilities. Additionally, the Company has engaged a firm to
serve as its investment banker with respect to the sale of its materials
handling systems business and has had discussions with several prospective
buyers. The Company plans to continue to pursue this sale to provide the
liquidity necessary to maintain its ongoing operations. [Although management
expects to be able to accomplish its plans, there is no assurance that it will
be able to do so. Failure to accomplish these plans could have an adverse
impact on the Company's liquidity, financial position and future operations.]
CRITICAL ACCOUNTING POLICIES
Use of Estimates
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States.
When more than one accounting principle, or method of its application, is
generally accepted, management selects the principle or method that is
appropriate in the Company's specific circumstances. Application of the
accounting principles requires the Company's management to make estimates
about the future resolution of existing uncertainties and that affect the
reported amounts of assets, liabilities, revenues, expenses which in the
normal course of business are subsequently adjusted to actual results. Actual
results could differ from such estimates. In preparing these financial
statements, management has made its best estimates and judgments of the
amounts and disclosures included in the consolidated financial statements
giving due regard to materiality.
- 43 -
Revenue Recognition, Accounts Receivable and Allowance for Doubtful Accounts
Sales are recorded when title and risks of ownership transfer to the
buyer. Shipping and handling fees charged to customers are recorded as
revenues and the related costs are recorded as cost of sales.
The Company markets its products to a diverse customer base in the United
States and in other countries. Credit is extended after a credit review by
management which is based on a customer's ability to perform its obligations.
Such reviews are regularly updated. The allowance for doubtful accounts is
based upon agings of customer balances and specific account reviews by
management. Reunion Industries has no concentration of credit risks and
generally does not require collateral or other security from its customers.
Accounts receivable are presented net of a reserve for doubtful accounts
of $212,000 at December 31, 2001 and $328,000 at December 31, 2000, which
represented 1.7% and 2.6%, respectively, of gross trade receivables (excluding
other non-trade receivables).
Inventories and Inventory Reserves
Inventories are stated at the lower of cost or market, at costs which
approximate the last-in, first-out method of inventory valuation. The
remainder are at costs which approximate the first-in, first-out method.
Work-in-process and finished goods include material costs, labor costs and
manufacturing overhead. Reserves for excess, slow-moving and obsolete
inventories are based on reviews of inventory usage reports for items more
than one year old. The Company evaluates its inventories on a quarterly basis
to identify excess, slow-moving and obsolete inventories and assess reserve
adequacy. When this evaluation indicates such inventories exist, the reserve
is increased by a charge to operations or such inventories are written off.
With downturns in certain of the markets served by the Company during the
second half of 2001, the Company experienced an increase in inventories
classified as slow-moving according to its policy. Based on a review by
management, the Company wrote-off $2.5 million of inventories in the fourth
quarter of 2001.
Goodwill and Impairment
The excess of the purchase consideration over the fair value of the net
assets of acquired businesses is considered to be goodwill and, until December
31, 2001, was being amortized over 15 years using the straight-line method.
The Company periodically evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life of goodwill may
warrant revision or the carrying value of goodwill may not be recoverable. In
evaluating goodwill for possible impairment, an estimate of undiscounted
future cash flows over the goodwill's remaining estimated useful life is used.
If this analysis indicates that goodwill is impaired, a loss is recognized to
reduce its carrying value to fair market value.
At December 31, 2001, the Company had $11.4 million of goodwill on its
consolidated balance sheet and another $11.6 million was classified within net
assets of discontinued operations. Of the $11.4 million of goodwill, $9.5
million relates to the Company's pressure vessel and springs segment, $1.5
million relates to the cylinders segment and the remainder relates to
additional shares of the Company's common stock issued pursuant to the merger
agreement. See "Additional Shares of Reunion Common Stock." Because of the
historically positive operating results and cash generation of the pressure
vessel and springs segment, management does not consider its related goodwill
to be impaired as of December 31, 2001. Also, management does not consider
the cylinders segment goodwill to be impaired as the Company believes this
segment is in a temporary cyclical downturn.
- 44 -
During the fourth quarter of 2001, as part of the provision for
restructuring, the Company wrote-off all goodwill related to Plastics of $2.9
million due to the equipment write-offs and the historical operating results
of that segment.
Management does not consider the $11.6 million of goodwill classified
within net assets of discontinued operations to be impaired as it relates to
the discontinued materials handling systems operations, which has historically
produced positive operating results and cash generation and which management
expects to dispose of at an amount which exceeds its carrying value.
See "Recent Accounting Pronouncements."
Property, Plant and Equipment
The Company evaluates its property, plant and equipment for impairment
whenever indicators of impairment exist. With downturns in certain of the
markets served by the Company during the second half of 2001, indications were
that impairment existed in its Plastics segment and that the carrying value of
a portion of its property, plant and equipment was no longer recoverable. As
a result, as part of the provision for restructuring, the Company recorded
$2.1 million related to impaired property, plant and equipment at Plastics.
Such equipment has a carrying value at December 31, 2001 of approximately $0.4
million representing the appraised estimated liquidation value of such
equipment.
Pensions
The Company accounts for its defined benefit pension plans in accordance
with SFAS No. 87, "Employers' Accounting for Pensions" which requires that
amounts recognized in the consolidated financial statements be determined on
an actuarial basis. The Company makes contributions to the defined benefit
plans based on the minimum funding requirements of the Employee Retirement
Income Security Act of 1974.
The Company uses the fair value of plan assets to determine the expected
and actual returns on plan assets. The difference between the expected return
and actual return is deferred. During the second half of 2001, the fair value
of assets in both of the Company's defined benefit pension plans decreased for
various reasons, including a downturn in the overall economy and unusual world
events. This decrease in asset values resulted in the Company recording
additional minimum pension liabilities in excess of amounts previously
accruedtotalling $1.1 million which is classified as accumulated comprehensive
loss within stockholders' equity at December 31, 2001. Although management
believes the long-term rates of return used to calculate the expected returns
on plan assets are reasonable, should a trend of actual returns being less
than expected returns develop, future pension costs would likely increase.
In determining the discount rates to be used at the end of each year to
determine plan liabilities, the Company looks at rates of return on high-
quality, fixed-income investments that receive one of the two highest ratings
given by a recognized ratings agency. Changes in discount rates over the last
three years have not materially affected pension costs and the net effect of
changes in the discount rate, as well as the net effect of other changes in
actuarial assumptions and experience, have been deferred as allowed by SFAS
87.
[The Company currently expects that consolidated pension costs for 2002
will not be significantly different from 2001.]
- 45 -
Other Postretirement Benefits
The Company provides health benefits for certain retired employees at the
Company's pressure vessel operations and Plastics and of its Corporate
Executive Payroll. These plans are not funded. Other postretirement benefit
costs and the benefit obligation are actuarially determined based on discount
rates and expected trends in healthcare costs.
Environmental Contingencies
When it is probable that a liability has been incurred or an asset has
been impaired, a loss is recognized assuming the amount of the loss can be
reasonably estimated. Except as described in the following paragraphs, the
Company believes it is currently in material compliance with existing
environmental protection laws and regulations and is not involved in any
significant remediation activities or administrative or judicial proceedings
arising under federal, state or local environmental protection laws and
regulations. In addition to management personnel who are responsible for
monitoring environmental compliance and arranging for remedial actions that
may be required, the Company has also employed outside consultants from time
to time to advise and assist the Company's environmental compliance efforts.
Except as described in the following paragraphs, the Company has not recorded
any accruals for environmental costs.
In February 1996, Reunion was informed by a contracted environmental
services consulting firm that soil and ground water contamination exists at
its Lafayette, Indiana site. Since then, the Company has expended $376,000 of
remediation costs and accrued an additional $20,000.
In connection with the sale of its former oil and gas operations, pre-
merger Reunion retained certain oil and gas properties in Louisiana because of
litigation concerning environmental matters. The Company is in the process of
environmental remediation under a plan approved by the Louisiana Department of
Natural Resources Office of Conservation (LDNROC). The Company has recorded
an accrual for its proportionate share of the remaining estimated costs to
remediate the site based on plans and estimates developed by the environmental
consultants hired by the Company. During 1999, the Company conducted
remediation work on the property. The Company paid $172,000 of the total cost
of $300,000. Regulatory hearings were held in January 2000 and 2001 to
consider the adequacy of the remediation conducted to date. In August 2001,
LDNROC issued its order for the Company to complete the soil remediation under
the plan approved in 1999 and to perform additional testing to determine to
what extent groundwater contamination might exist. The Company's
environmental consultant is in the process of updating the estimate of the
costs to comply with this order, [but the Company does not believe that the
cost of future remediation will exceed the amount accrued]. No remediation
was performed in 2000 or 2001 pending the decision. However, the Company has
paid $232,000 for its share of consulting services in connection with the
hearings. At December 31, 2001, the balance accrued for these remediation
costs is approximately $1,076,000. 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.
- 46 -
On March 15, 2002, the Company received a Request for Information from
the United States Environmental Protection Agency (USEPA) regarding the
Gambonini Mine Site in Marin County, California. The Company is currently
gathering the information requested by the USEPA and is cooperating fully with
this request. At this time, the Company has not been formally named as a
potentially responsible party. As such and because the extent of the
Company's involvement with the Gambonini Mine Site is not known, the Company
has not made any assessment of potential liability, if any.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations." This statement
eliminates the pooling-of-interest method for business combinations and
changes the criteria for recognizing intangible assets apart from goodwill.
This statement is effective for purchases completed after June 30, 2001.
The Company has not engaged in any acquisitions since June 30, 2001.
Acquisitions prior to June 30, 2001 were recorded as purchases in accordance
with Accounting Principles Board Opinion No. 16.
The Financial Accounting Standards Board issued SFAS No. 142, "Goodwill
and Other Intangible Assets." This statement eliminates the amortization of
goodwill and indefinite lived intangible assets and requires such assets be
reviewed for impairment at least annually. This statement is effective for
goodwill and intangible assets acquired prior to July 1, 2001 upon adoption,
which is required for fiscal years beginning after December 15, 2001.
The Financial Accounting Standards Board issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." This statement
supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" but retains many of its fundamental
provisions. SFAS 144 also supersedes certain provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" but retains its provision to separately report
discontinued operations and extends that reporting to a component of an
entity, as defined therein, that either has been disposed of or is classified
as held for sale, thus broadening the presentation of discontinued operations
to include more disposal transactions. Effective January 1, 2002, the Company
adopted this statement.
The Company is evaluating the adoption and effects of these statements on
the Company.
- 47 -
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the operation of its business, Reunion Industries has market risk
exposure to foreign currency exchange rates, raw material prices and interest
rates. Each of these risks and Reunion Industries' strategies to manage the
exposure is discussed below.
Reunion Industries manufactures its products in the United States and
sells its products in the United States and in foreign countries. The
countries to which the Company exports its products vary from year to year.
International sales in 2001 were in four major areas of the globe: the Far
East; Mexico; Western Europe; and Canada. International sales in 2000 were in
four major areas of the globe: the Far East; Canada; Western Europe; and
Central and South Americas. The majority of international sales in 2001 and
2000 relate to pressure vessel sales to customers in Taiwan and the People's
Republic of China. Of Reunion's $99.5 million of consolidated net sales for
2001, $16.7 million were export sales, of which $12.6 million related to
pressure vessel sales and $3.7 million related to Plastics. The remainder
related to cylinder sales in Canada. Of the $12.6 million of foreign pressure
vessel sales, approximately $9.0 million was in the Far East (principally
China and Taiwan) and $2.6 million was in Western Europe. The remainder were
in the Middle East and Canada. Plastics export sales included $2.6 million in
Mexico with the remainder in Europe and Canada.
Export sales to foreign countries are denominated in U.S. dollars, the
Company's reporting currency. Accordingly, transaction loss exposures due to
fluctuations in the currencies of the countries to which the Company's
domestic locations export are minimal.
The major raw materials used by Metals include steel hot- and cold-rolled
bands, structural bars, stainless steel coils, welded and seamless steel
tubing and pipe, steel alloy bars, steel plates, brass tubing and bars and
aluminum extrusions. The major raw material used by Plastics is thermoplastic
polymers. These materials are available from a number of suppliers. [Prices
for these materials are affected by changes in market demand, and there can be
no assurances that prices for these and other raw materials will not increase
in the future.] [Reunion Industries' contracts with its Plastics customers
generally provide that such price increases can be passed through to its
customers.] A 1.00% change in raw material prices would affect results of
operations by approximately $500,000.
Reunion Industries' operating results are subject to risk from interest
rate fluctuations on debt that carries variable interest rates. The variable
rate debt was approximately $39.5 million at December 31, 2001, which is
representative of balances outstanding during the year. A 1.00% change in
interest rates would affect results of operations by approximately $400,000.
- 48 -
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reunion Industries' consolidated financial statements are set forth
beginning at Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the captions "Proposal, Election of Directors" and
"Management Information; Executive Officers" is incorporated herein by
reference from the Company's Definitive Proxy Statement relating to its 2002
annual meeting of stockholders to be filed with the commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934 within 120 days after
the close of the Registrant's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Management Information" and
"Proposal; Election of Directors; Director Compensation" is incorporated
herein by reference from the Company's Definitive Proxy Statement relating to
its 2002 annual meeting of stockholders to be filed with the commission
pursuant to Regulation 14A under the Securities Exchange Act of 1934 within
120 days after the close of the Registrant's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Ownership Information" is incorporated
herein by reference from the Company's Definitive Proxy Statement relating to
its 2002 annual meeting of stockholders to be filed with the commission
pursuant to Regulation 14A under the Securities Exchange Act of 1934 within
120 days after the close of the Registrant's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Ownership Information; Certain
Relationships and Related Transactions" is incorporated herein by reference
from the Company's Definitive Proxy Statement relating to its 2002 annual
meeting of stockholders to be filed with the commission pursuant to Regulation
14A under the Securities Exchange Act of 1934 within 120 days after the close
of the Registrant's fiscal year.
- 49 -
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FROM 8-K
(a) Documents included in this report:
The following consolidated financial statements and financial statement
schedules of Reunion Industries, Inc. and its subsidiaries are included in
Part II, Item 8:
1. Financial Statements (Pages F-1 through F-51)
Report of Independent Public Accountants - Ernst & Young LLP
Report of Independent Public Accountants - PricewaterhouseCoopers LLP
Consolidated Balance Sheets - December 31, 2001 and 2000
Consolidated Statements of Income (Loss) and Comprehensive
Income (Loss) - Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows - Years Ended December 31, 2001,
2000 and 1999
Notes to Consolidated Financial Statements
2. Financial Statement Schedules (Page S-1)
Schedule II - Valuation and Qualifying Accounts and Reserves
Other schedules have been omitted because they are either not required,
not applicable, or the information required to be presented is included in
Reunion Industries' financial statements and related notes.
3. Exhibits
See pages E-1 to E-5 for a listing of exhibits filed with this report or
incorporated by reference herein.
(b) Current Reports on Form 8-K
On December 12, 2001, the Company filed a Current Report on Form 8-K
dated December 1, 2001 to file as an exhibit a public announcement via press
release indicating that it would be further delayed in making its November 1,
2001 semi-annual interest payment of $1.616 million on its 13% Senior Notes
due 2003, to attribute such further delay to the inability to obtain the
necessary financing and to announced that failure to make the November 1
interest payment within the thirty-day cure period resulted in an Event of
Default as defined in the Indenture which governs the 13% Senior Notes.
On February 14, 2002, the Company filed a Current Report on Form 8-K
dated February 12, 2002 to publicly announce the date, time and place of its
annual meeting of stockholders and the date of record for stockholders that
will be permitted to vote at the annual meeting.
- 50 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: April 16, 2002 REUNION INDUSTRIES, INC.
--------------
By: /s/ Kimball J. Bradley
---------------------------
Kimball J. Bradley
President, Chief Operating
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons in the
capacities and on this 16th day of April, 2002.
Signature Title
--------- -----
/s/ Charles E. Bradley, Sr. Chairman of the Board, Chief Executive
--------------------------- Office and Director
Charles E. Bradley, Sr.
/s/ Joseph C. Lawyer Vice Chairman and Director
---------------------------
Joseph C. Lawyer
/s/ John M. Froehlich Executive Vice President, Chief
--------------------------- Financial Officer, Treasurer and
John M. Froehlich Assistant Secretary (chief financial
and accounting officer)
/s/ Thomas N. Amonett Director
---------------------------
Thomas N. Amonett
/s/ Thomas L. Cassidy Director
---------------------------
Thomas L. Cassidy
/s/ W. R. Clerihue Director
---------------------------
W. R. Clerihue
/s/ Franklin Myers Director
---------------------------
Franklin Myers
/s/ John G. Poole Director
---------------------------
John G. Poole
- 51 -
REUNION INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
------------------------------------------ ----
Report of Independent Accountants - Ernst & Young LLP...................F-2
Report of Independent Accountants - PricewaterhouseCoopers LLP..........F-3
Consolidated Balance Sheet..............................................F-4
Consolidated Statement of Income (Loss) and
Comprehensive Income (Loss)...........................................F-5
Consolidated Statement of Cash Flows....................................F-6
Notes to Consolidated Financial Statements..............................F-9
- F-1-
Report of Independent Auditors
Board of Directors and Stockholders
Reunion Industries, Inc.
We have audited the accompanying consolidated balance sheet of Reunion
Industries, Inc. as of December 31, 2001, and the related consolidated
statements of income (loss) and comprehensive income (loss) and cash flows for
the year then ended. Our audit also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Reunion Industries, Inc. at December 31, 2001, and the consolidated results of
its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that
Reunion Industries, Inc. will continue as a going concern. As more fully
described in Note 1, at December 31, 2001, the Company is in default on $64.4
million of debt, has a deficiency in working capital of $60.2 million, a loss
from continuing operations of $29.0 million and has a deficiency in assets of
$17.2 million. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of liabilities
that may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Pittsburgh Pennsylvania
March 15, 2002
- F-2 -
Report of Independent Accountants
To the Board of Directors
and Stockholders of
Reunion Industries, Inc.
In our opinion, the consolidated balance sheet as of December 31, 2000
and the related consolidated statements of income (loss) and comprehensive
income (loss) and of cash flows for each of the two years in the period ended
December 31, 2000 present fairly, in all material respects, the financial
position, results of operations and cash flows of Reunion Industries, Inc. and
its subsidiaries at December 31, 2000 and for each of the two years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. We have not audited the consolidated financial statements of
Reunion Industries, Inc. for any period subsequent to December 31, 2000.
As discussed in Note 3 to the accompanying consolidated financial
statements, Reunion merged with Chatwins Group, Inc. (Chatwins), an affiliate
company on March 16, 2000. Chatwins was considered the acquiring company for
financial reporting purpose. Effective with the merger, the combined company
retained the name Reunion Industries, Inc.
PRICEWATERHOUSECOOPERS LLP
Pittsburgh, Pennsylvania
April 18, 2001
- F-3 -
REUNION INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
At December 31, At December 31,
(in thousands) 2001 2000
-------------- --------------
ASSETS:
Cash and cash equivalents $ 686 $ 1,814
Receivables, net 12,347 12,618
Advances to employees 213 233
Inventories, net 10,814 17,979
Other current assets 1,219 2,105
Net assets of discontinued operations, current 5,162 10,416
-------- --------
Total current assets 30,441 45,165
Property, plant and equipment, net 19,134 23,530
Due from related parties 1,488 3,950
Goodwill, net 11,443 6,321
Other assets, net 3,269 16,316
Net assets of discontinued operations,
non-current 18,641 21,157
-------- --------
Total assets $ 84,416 $116,439
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Debt in default $ 64,389 $ -
Revolving credit facility - 19,367
Current maturities of debt 87 4,061
Trade payables 11,211 11,387
Accrued salaries and benefits 3,643 3,594
Accrued interest 2,942 1,075
Accrued environmental reserves 1,076 1,287
Reserve for restructuring 1,192 -
Due to related party 1,107 224
Other current liabilities 4,973 6,210
-------- --------
Total current liabilities 90,620 47,205
Long-term debt 4,810 42,656
Long-term debt - related party 4,615 4,015
Other liabilities 1,616 1,004
-------- --------
Total liabilities 101,661 94,880
-------- --------
Commitments and contingent liabilities - -
Stockholders' equity:
Common stock ($.01 par value, 20,000,000 shares
authorized, 15,590,619 and 15,235,624 shares
issued and outstanding, respectively) 156 152
Capital in excess of par value 25,064 24,608
Accumulated other comprehensive loss (1,136) -
Accumulated deficit (41,329) (3,201)
-------- --------
Stockholders' equity (deficit) (17,245) 21,559
-------- --------
Total liabilities and stockholders' equity $ 84,416 $116,439
======== ========
See accompanying notes to consolidated financial statements.
- F-4 -
REUNION INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share information)
Year Ended December 31,
2001 2000 1999
Sales: -------- -------- --------
Metals $ 60,963 $ 62,713 $ 59,691
Plastics 38,532 42,008 -
-------- -------- --------
Total sales 99,495 104,721 59,691
-------- -------- --------
Cost of Sales:
Metals 50,300 45,772 46,353
Plastics 34,157 35,713 -
-------- -------- --------
Total cost of sales 84,457 81,485 46,353
-------- -------- --------
Gross profit 15,038 23,236 13,338
Selling, general & administrative 15,718 16,388 7,864
Provision for restructuring 6,811 - -
Other (income) expense, net 1,727 (6,251) 305
-------- -------- --------
Operating profit (loss) (9,218) 13,099 5,169
Interest expense, net 7,057 6,972 5,261
Equity in loss from continuing operations
of affiliate - 296 566
-------- -------- --------
Income (loss) from continuing operations
before income taxes (16,275) 5,831 (658)
Provision for (benefit from) income taxes 12,678 (616) (922)
-------- -------- --------
Income (loss) from continuing operations (28,953) 6,447 264
-------- -------- --------
Discontinued operations, net of tax:
Estimated loss on disposal of discontinued
bridges and cranes operations including
provision of $1,633 for operating losses
during phase-out period, less applicable
income taxes of $-0- (6,399) - -
Loss from discontinued bridges and cranes
operations, net of applicable income tax
benefits $-0-, $-0- and $1,245,
respectively (5,294) (7,229) (1,665)
Income from discontinued materials handling
operations, less applicable income taxes
of $-0-, $-0- and $539, respectively 2,973 6,427 721
Gain on disposal of discontinued agricultural
operations, less applicable income
taxes of $-0- - 2,286 -
Loss from discontinued agricultural
operations, less applicable income
taxes of $-0- and $-0-, respectively (135) (639) -
Income (loss) from Discontinued Klemp to
May 28, 1999, less applicable income
taxes of $58 - - 136
Gain (loss) on disposal of Discontinued
Klemp (domestic), less applicable income
taxes of $-0- and $3,905, respectively - (830) 8,422
Provision for estimated (expenses) credit
Discontinued Klemp (domestic), less
applicable income taxes (benefit) of $-0-,
$-0- and ($864), respectively (320) 530 (1,859)
Estimated loss on disposal of Discontinued
Klemp (foreign) including provision
of $545 for operating losses during
the phase-out period, less applicable
income tax benefit of $1,900 - - (4,087)
- F-5 -
REUNION INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(continued)(in thousands, except per share information)
Year Ended December 31,
2001 2000 1999
-------- -------- --------
Estimated loss on disposal of discontinued
oil and gas operations, less applicable
income tax benefit of $311 - - (669)
Equity in income from discontinued
operations of affiliate, less applicable
income taxes of $50 - - 79
-------- -------- --------
Income (loss) from discontinued operations (9,175) 545 1,078
-------- -------- --------
Income (loss) before cumulative effect of
change in accounting principle and
extraordinary items (38,128) 6,992 1,342
Cumulative effect of change in accounting
principle, net of income tax benefit of $91 - - (176)
-------- -------- --------
Income (loss) before extraordinary items (38,128) 6,992 1,166
-------- -------- --------
Extraordinary items, net of tax:
Write-off of deferred financing costs (merger) - (1,501) -
Write-off of deferred financing costs
(extinguishment of debt) - (80) -
Equity in loss of extraordinary item
of affiliate - (271) -
-------- -------- --------
Loss from extraordinary items - (1,852) -
-------- -------- --------
Net income (loss) (38,128) 5,140 1,166
Other comprehensive loss, net of $-0- tax:
Additional pension liability in excess of
unrecognized prior service cost (1,136) - -
-------- -------- --------
Comprehensive income (loss) $(39,264) $ 5,140 $ 1,166
======== ======== ========
Earnings (loss) applicable to common
stockholders $(38,128) $ 5,045 $ 710
======== ======== ========
Earnings (loss) per common share
- basic and diluted:
Continuing operations $ (1.86) $ 0.48 $ (0.02)
Discontinued operations (0.59) 0.04 0.11
Cumulative effect of change
in accounting principle - - (0.02)
Extraordinary items - (0.14) -
-------- -------- --------
Income (loss) per common share
- basic and diluted $ (2.45) $ 0.38 $ 0.07
======== ======== ========
Weighted average shares outstanding - basic 15,587 13,236 9,500
======== ======== ========
Weighted average shares outstanding - diluted 15,612 13,306 9,500
======== ======== ========
See accompanying notes to consolidated financial statements.
- F-6 -
REUNION INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2001 2000 1999
-------- -------- --------
Cash flow from operating activities:
Net income (loss) $(38,128) $ 5,140 $ 1,166
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation 4,865 5,276 3,637
Amortization of intangibles 2,354 1,403 634
Amortization of deferred financing fees 1,011 897 1,308
Write-off of deferred financing fees - 1,635 -
Deferred tax provision (benefit) 12,678 (898) (758)
Equity in net loss of affiliate - 567 437
Gain on sale of Irish plastics subsidiary - (4,933) -
Gain on sale of discontinued agricultural
operations - (2,286) -
Gain on sale of property (375) (2,441) (1,681)
Gain (loss) on sale of Discontinued Klemp - 830 (12,327)
Provision for restructuring 6,811 - -
Provision for estimated loss on disposal of
discontinued bridges and cranes operations 6,399 - -
Provision for inventories 2,485 - -
Provision (credit) for estimated expenses of
Discontinued Klemp (domestic) 320 (530) 2,723
Provision for estimated loss on disposal of
Discontinued Klemp (foreign) - - 5,987
Provision for estimated loss on disposal of
discontinued oil and gas operations - - 980
Payments of expenses of discontinued
operations (445) (2,219) (1,586)
Changes in assets and liabilities:
Decrease in receivables 2,357 4,509 5,184
Decrease (increase) in inventories 6,443 (1,299) 689
Decrease in other current assets 656 803 472
Increase (decrease) in trade payables
and other current liabilities (2,784) 462 (2,954)
Increase (decrease) in due from
related parties 2,462 784 (1,741)
Net change in other assets and liabilities (2,059) (2,193) (6,338)
-------- -------- --------
Cash provided (used) by operating activities 5,050 5,507 (4,168)
-------- -------- --------
Cash flow from investing activities:
Proceeds from sale of property 375 3,013 4,563
Proceeds from sale of Irish plastics subsidiary - 9,990 -
Proceeds from sale of discontinued
agricultural operations - 16,500 -
Cash acquired in merger - 2,666 -
Proceeds from sale of Discontinued Klemp - - 32,052
Proceeds from sale of discontinued
oil and gas operations - - 189
Proceeds from sale of investment in
joint venture - - 275
Acquisition of NPSAC common stock (10) - -
Acquisition of Kingway common stock - (100) -
Capital expenditures (2,897) (4,072) (2,585)
-------- -------- --------
Cash provided (used) by investing activities (2,532) 27,997 34,494
-------- -------- --------
- F-7 -
REUNION INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(in thousands)
Year Ended December 31,
2001 2000 1999
-------- -------- --------
Cash flow from financing activities:
Proceeds from issuance of debt 534 31,498 -
Repayments of debt (5,312) (72,323) (72)
Repayments of debt of discontinued operations (680) - -
Repayments to related parties - (1,076) -
Revolving credit facilities borrowings 170,795 184,443 170,396
Revolving credit facilities repayments (167,687) (170,910) (198,567)
Payments of deferred financing costs (162) (1,404) (1,213)
Net decrease in outstanding checks (1,351) (1,613) (793)
-------- -------- --------
Cash used by financing activities (3,863) (31,385) (30,249)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents (1,345) 2,119 77
Less:Change in cash of discontinued operations 217 (447) (120)
Cash and cash equivalents, beginning of year 1,814 142 185
-------- -------- --------
Cash and cash equivalents, end of year $ 686 $ 1,814 $ 142
======== ======== ========
Supplemental cash flow information:
Interest paid $ 6,208 $ 9,716 $ 8,819
======== ======== ========
Income taxes paid (refunded) $ (119) $ 322 $ 279
======== ======== ========
See accompanying notes to consolidated financial statements.
- F-8 -
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ACCOUNTING POLICIES
Nature of Business
Reunion Industries Inc. ("Reunion Industries", "Reunion" or "the
Company") operations are composed of two major product categories: metals and
plastics. Metals designs, manufactures and markets a broad range of metal
fabricated and machined industrial parts and products, including seamless
steel pressure vessels, fluid power cylinders and leaf springs. Until being
classified as discontinued operations in the fourth quarter of 2001, products
of Metals included bridge structures and cranes and materials handling systems
and storage racks. Plastics manufactures high volume, precision plastics
products and thermoset compounds and provides engineered plastics services.
Going Concern
As of December 31, 2001, the Company was unable to extend its May 2002
sinking fund payment date and was unable to fund its November 1, 2001 $1.616
million semi-annual interest payment on its 13% senior notes as it had
insufficient funds under its revolving credit facility. Additionally, the
Company's Bank of America (BOA or Bank of America) Financing and Security
Agreement and the indenture governing the 13% senior notes contain various
covenants which, among other things, require the Company to maintain minimum
availability and specify that the Company meet certain financial requirements,
including minimum EBITDA, a minimum fixed charge coverage ratio and a maximum
funded debt to EBITDA ratio. As of December 31, 2001, the Company was not in
compliance with the minimum EBITDA requirement, fixed charge coverage ratio
and maximum funded debt to EBITDA ratio. The Company has not been in
compliance with certain of these financial covenants since the third quarter
of fiscal 2001. As a result, $64.4 million of the Company's long-term debt
was classified as current on the consolidated balance sheet as of December 31,
2001 and is currently subject to various remedies including, but not limited
to, acceleration of all amounts outstanding under the BOA Financing and
Security Agreement and the 13% senior notes. The Company is projecting that
it will not be in compliance with the covenants of its BOA Financing and
Security Agreement or its 13% senior notes over the next twelve months.
The Company has generated a net loss of $38,128,000 during the year ended
December 31, 2001.
The financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The negative working capital
position of $60,179,000, the defaults of the BOA Financing and Security
Agreement and the 13% senior notes, and the lack of borrowing capacity under
its revolving credit facility indicate that the Company may not be able to
continue as a going concern for a reasonable period of time. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
Since September 2001, the Company has been negotiating with its lenders
to defer principal payments and modify the financial covenants under its
existing debt facilities. Additionally, the Company has engaged a firm to
serve as its investment banker with respect to the sale of its materials
handling systems business and has had discussions with several prospective
buyers. The Company plans to continue to pursue this sale to provide the
liquidity necessary to maintain its ongoing operations. Although management
expects to be able to accomplish its plans, there is no assurance that it will
be able to do so. Failure to accomplish these plans could have an adverse
impact on the Company's liquidity, financial position and future operations.
- F-9 -
Discontinued Operations
In December 2001, pursuant to a plan developed by management to
restructure the Company's continuing businesses and dispose of or shut-down
certain other businesses (see note 2), the Company classified and began
accounting for its bridges and cranes and material handling systems businesses
as discontinued operations in accordance with Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" (APB 30), which requires
discontinued operations to be reported separately from continuing operations.
Prior period information contained in these consolidated financial statements
and accompanying notes have been restated to reflect accounting for these
discontinued businesses in accordance with APB 30. See note 16.
On October 27, 2000, the Company sold substantially all of its wine grape
agricultural operations and real estate holdings in Napa County, California.
The Company classified and began accounting for the agricultural operations as
discontinued operations in accordance with APB 30. See note 16.
During 1999, the former Chatwins Group disposed of its grating
manufacturing business and liquidated its oil and gas business through the
disposition of all of its grating and oil and gas related assets. See note
16.
Principles of Consolidation
The consolidated financial statements include the accounts of Reunion
Industries and its subsidiaries. All significant intercompany transactions
and balances have been eliminated.
Investments in other companies over which Reunion Industries does not
have control, less than a 50% equity interest, and in which Reunion Industries
has the ability to exercise significant influence over operating or financial
policies, if any, are accounted for by the equity method.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates that affect the reported amounts of assets, liabilities, revenues,
expenses, and disclosures of contingencies during the reporting period, which
in the normal course of business are subsequently adjusted to actual results.
Actual results could differ from such estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposit accounts and other
cash equivalents with original maturities of 3 months or less.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are net of $212,000 and $328,000 in allowance for
doubtful accounts at December 31, 2001 and 2000, respectively. Credit is
extended after a credit review by management which is based on a customer's
ability to perform its obligations. Such reviews are regularly updated. The
allowance for doubtful accounts is based upon agings of customer balances and
specific account reviews by management. The Company has no concentration of
credit risks and generally does not require collateral or other security from
its customers.
- F-10 -
Inventories and Reserves for Obsolescence
Inventories are stated at the lower of cost or market, at costs which
approximate the "last-in, first-out" (LIFO) method of inventory valuation for
approximately 64% and 71% of total inventories at December 31, 2001 and 2000,
respectively. The remainder are at costs which approximate the "first-in,
first-out" (FIFO) method. Work-in-process and finished goods include material
costs, labor costs and manufacturing overhead. Reserves for excess, slow-
moving and obsolete inventories are based on reviews of inventory usage
reports for items more than one year old. See note 4.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, including costs as
determined by the allocation of the purchase price in business acquisitions
accounted for using the purchase method, and depreciated over their estimated
useful lives using the straight-line method for financial statement purposes.
Estimated useful lives in years for depreciation are as follows: 25 to 40 for
buildings and improvements; 7 to 12 for machinery and equipment; 5 to 8 for
computer systems; 7 to 10 for furniture and fixtures. Additions, betterments
and replacements are capitalized, while expenditures for repairs and
maintenance are charged to operations when incurred. As units of property are
sold or retired, the related cost and accumulated depreciation are removed
from the accounts, and any resulting gain or loss is recognized in income.
Computer Software Costs
The internal and external costs incurred to develop internal-use computer
software are capitalized if they relate to designing, coding, installing and
testing the software during the application development stage. All other
costs incurred are expensed.
Goodwill
Goodwill, which represents the excess of the purchase consideration over
the fair value of the net assets of acquired businesses, is being amortized
over 15 years using the straight-line method. Accumulated amortization of
goodwill at December 31, 2001 and 2000, is $935,000 and $324,000,
respectively.
The Company periodically evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life of goodwill may
warrant revision or the carrying value of goodwill may not be recoverable. In
evaluating goodwill for possible impairment, an estimate of undiscounted
future cash flows over the goodwill's remaining estimated useful life is used.
If this analysis indicates that goodwill is impaired, a loss is recognized to
reduce its carrying value to fair value.
Long-Lived Assets and Impairment
The Company reviews long-lived assets for impairment whenever
circumstances indicate that the carrying amount of the asset may not be
recoverable, and recognizes an impairment loss when the undiscounted future
cash flows expected to be generated by the asset are less than the carrying
amount of the asset. Long-lived assets held for sale, other than assets to be
disposed of in connection with disposal of a discontinued business segment,
are reported at the lower of carrying amount or fair value less cost to sell.
- F-11 -
Other Assets
Other assets primarily include capitalized debt issuance costs on
presently outstanding debt, which are being amortized to interest expense
using the effective interest rate method over the term of the related debt
agreements, and the cash surrender value of life insurance policies. See
notes 6 and 13.
Revenue Recognition
Sales are recorded when shipped and title and risks of ownership transfer
to the buyer. Shipping and handling fees charged to customers are recorded as
revenues and the related costs are recorded as cost of sales.
The percentage-of-completion method of accounting is used for orders with
long cycle times. Under this method, income is recognized as work on
contracts progresses. The percentage of work completed is determined
principally by comparing the accumulated costs to date with management's
current estimate of costs at contract completion. Contract costs include all
direct material and labor costs and those indirect costs related to contract
performance. At the time when current estimates indicate a loss, a provision
is made. Long-term contract amounts are related to and included in net assets
of discontinued operations at December 31, 2001 and 2000.
Environmental Policies
Environmental expenditures that relate to current operations are either
expensed or capitalized depending on the nature of the expenditure.
Expenditures relating to conditions caused by past operations that do not
contribute to current or future revenue generation are expensed. Liabilities
are recorded when environmental assessments and/or remediation actions are
probable, and the costs can be reasonably estimated (See note 14).
Income Taxes
The Company provides deferred income taxes for all temporary differences
between financial and income tax reporting using the liability method.
Deferred taxes are determined based on the estimated future tax effect of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of enacted tax laws. A valuation allowance
is recorded for net deferred tax assets if it is more likely than not that
such assets will not be realized. The Company has significant net operating
loss and investment tax credit carryforwards for tax purposes, a portion of
which may expire unutilized (see note 12).
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 (see note 9).
Potential common shares relating to options to purchase common stock
aggregating 25,809 and 69,682 are included in the weighted average number of
shares for the years ended December 31, 2001 and 2000, respectively.
- F-12 -
Recent Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations." This statement
eliminates the pooling-of-interest method for business combinations and
changes the criteria for recognizing intangible assets apart from goodwill.
This statement is effective for purchases completed after June 30, 2001.
The Company has not engaged in any acquisitions since June 30, 2001.
Acquisitions prior to June 30, 2001 were recorded as purchases in accordance
with Accounting Principles Board Opinion No. 16.
The Financial Accounting Standards Board issued SFAS No. 142, "Goodwill
and Other Intangible Assets." This statement eliminates the amortization of
goodwill and indefinite lived intangible assets and requires such assets be
reviewed for impairment at least annually. This statement is effective for
goodwill and intangible assets acquired prior to July 1, 2001 upon adoption,
which is required for fiscal years beginning after December 15, 2001. The
Company is evaluating the adoption and effects of this statement on the
Company. During the year ended December 31, 2001, the Company recorded
goodwill amortization of $1,903,000. The effect on basic earnings per share
had the Company adopted the non-amortization of goodwill provisions of SFAS
142 at the beginning of 2001 would have been a decrease in net loss per share
of $0.12 for the year ended December 31, 2001.
The Financial Accounting Standards Board issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." This statement
supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" but retains many of its fundamental
provisions. SFAS 144 also supersedes Accounting Principles Board Opinion No.
30, "Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" but
retains its provision to separately report discontinued operations and extends
that reporting to a component of an entity, as defined therein, that either
has been disposed of or is classified as held for sale, thus broadening the
presentation of discontinued operations to include more disposal transactions.
This statement is effective for fiscal years beginning after December 15,
2001.
Non-cash Financing and Investing Activities
The Company acquired all of the outstanding common stocks of NPS
Acquisition Corp. in 2001 and Kingway in 2000. These transactions included
the assumptions of liabilities as part of the purchase price. The Company and
Chatwins Group merged in 2000 in a non-cash issuance of the Company's stock
and the assumption of certain liabilities. See note 3 for a discussion of
these events.
The Company exchanged its Series A and B preferred stock in a non-cash
issuance of the Company's common stock in 2000. See note 8 for a discussion
of this event.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform
to 2001 classifications.
- F-13 -
NOTE 2: RESTRUCTURING AND OTHER ACTIONS
As the result of downturns in several of the markets served by the
Company during the third and fourth quarters of 2001 and the resulting
decreases in the Company's ability to absorb costs and the quality of its
borrowing base, management of the Company has developed a plan to restructure
its continuing businesses and dispose of or shut-down certain other
businesses. Key elements of the plan include:
RESTRUCTURING
* Consolidate the pressure vessel operations of CPI and NPSAC.
* Consolidate the cylinder operations of Hanna and TJ Brooks.
* Shut-down Plastics' thermoplastics operations at Siler City, NC.
* Close Plastics' corporate headquarters in Charlotte, NC.
* Address machinery and equipment impairments.
DISCONTINUED OPERATIONS
* Shut-down and liquidate the assets and business of Alliance Machine.
* Dispose of the Kingway Material Handling division.
The plan was approved by the Company's board of directors in December
2001. The Company has recorded a fourth quarter 2001 charge for restructuring
costs, including facility shut-down costs, lease termination costs and asset
writedowns, including impaired goodwill related to Plastics, and a charge for
estimated loss on disposal of discontinued operations (related solely to
Alliance Machine) including phase-out period operating losses, lease
termination costs and asset writedowns. Components of the fourth quarter 2001
charges are as follows:
Classifications of Charges
------------------------------
Provision for Discontinued
Restructuring Operations
------------- -------------
Metals:
Asset impairments $ 613 $ 3,771
Lease termination costs 927 995
Reserve for operating losses during phase-out - 1,633
Employee separations 20 -
-------- --------
Total charges - Metals 1,560 6,399
-------- --------
Plastics:
Asset impairments 2,060 -
Goodwill impairment 2,946 -
Lease termination costs 245 -
-------- --------
Total charges - Plastics 5,251 -
-------- --------
Total charges $ 6,811 $ 6,399
======== ========
The $1.6 million charge for discontinued operations phase-out includes
$1.4 million for operating losses and $0.2 million for employee separations
costs.
- F-14 -
Execution of the plan began in January 2002 and is expected to be
completed by June 2002 but by no later than the end of 2002. Benefits of the
plan include cost reductions from streamlining operations, reducing operating
losses at historically unprofitable businesses and interest savings from
reduced debt. Management estimates indicate that the present value of these
benefits significantly exceeds the near-term estimated costs to execute the
plan.
NOTE 3: THE MERGER, REFINANCING AND ACQUISITIONS
The Merger
On March 16, 2000, Chatwins Group, Inc. (Chatwins Group) and Reunion
merged, with Reunion as the surviving entity. Prior to the merger, Chatwins
Group owned approximately 37% of Reunion's issued and outstanding common
stock.
The merger was accounted for as a purchase under APB Opinion No. 16
"Business Combinations" with Chatwins Group as the acquirer for purposes of
applying purchase accounting. Accordingly, Chatwins Group's assets and
liabilities were accounted for at historical book values and the assets and
liabilities of the 63% of Reunion not previously owned were revalued at their
estimated fair value. As Chatwins Group was considered to be the acquirer in
the merger, the pre-merger financial information presented herein represents
the historical financial information of Chatwins Group restated for the
classifications of the Company's bridges and cranes and materials handling
systems businesses as discontinued operations. See note 2.
The purchase price in the merger was $8.1 million, consisting of
2,490,000 shares of Reunion common stock not owned by Chatwins Group at March
16, 2000 valued at $3.25 per share, based on the market price of Reunion
common stock between July 28 and August 2, 1999, immediately prior to the
announcement of the July 28, 1999 approval by Reunion's board of directors of
the amended and restated merger agreement. Assets acquired included
approximately $13.3 million of current assets and approximately $23.5 million
of fixed and other assets. Liabilities and minority interests assumed
included approximately $9.9 million of current liabilities, $21.6 million of
noncurrent liabilities and $2.1 million of minority interests.
In the merger, Reunion issued 9,500,000 shares of common stock to holders
of Chatwins Group's common stock. The 1,450,000 shares of Reunion common
stock previously owned by Chatwins Group were retired in the merger, as were
the previously issued shares of Chatwins Group common stock. The merger
agreement also provided that up to an additional 500,000 shares of Reunion
common stock would be issued to former Chatwins Group common stockholders if
the former Chatwins Group businesses and the acquired Kingway business
achieved specified performance levels in 2000. A determination of the number
of shares to be issued was made by the board of directors at its meeting held
on May 15, 2001. Such additional shares totaled 348,995 and were issued on
May 29, 2001. The closing price of Reunion's common stock on that date was
$1.30 per share. The issuance of the additional shares was recorded as a
merger purchase price adjustment to goodwill.
Holders of Chatwins Group Class D, Series A, B and C preferred stock
received 9,033 shares of Reunion Series A preferred stock in the merger. The
Reunion Series A preferred stock had an initial redemption price of
$9,033,000. Cumulative dividends at 10% of the initial redemption price were
payable as and when declared by Reunion's Board of Directors. See note 8 for
a discussion of the exchange of the Company's preferred stock for common
stock.
- F-15 -
The Refinancing
Simultaneously with the merger, Reunion entered into $72.5 million of
senior secured credit facilities with Bank of America ("Bank of America" or
"BOA"). These credit facilities consist of a $39.0 million revolving credit
facility, a $25.8 million term loan A facility, a $5.0 million term loan B
facility and a $2.7 million capital expenditures facility.
Proceeds from initial borrowings under the Bank of America credit
facilities were used for various purposes, including repayment of Chatwins
Group's then existing credit facilities with Bank of America, repayment of
Reunion's existing credit facilities with the CIT Group/Business Credit, Inc.
and retirement of $25.0 million of Chatwins Group's 13% senior notes plus
accrued and unpaid interest. Reunion assumed the obligations of Chatwins
Group under the indenture governing the remaining 13% senior notes. See note
7.
Acquisition of Kingway
Simultaneously with the merger, Reunion acquired Stanwich Acquisition
Corp. (SAC), an affiliated company, doing business as Kingway Material
Handling (Kingway). Similar to Chatwins Group's material handling product
line, Kingway produces industrial and commercial storage racks and materials
handling systems. Subsequent to the merger and acquisition, Reunion
integrated Kingway into the existing material handling product line and
operates from a single location.
The purchase price included $100,000 in cash paid to the then existing
common stockholders of Kingway, the assumption of approximately $10.3 million
of Kingway's debt and the issuance of $6.8 million of preferred stock in
exchange for Kingway's existing preferred stock as described below. Assets
acquired included approximately $3.0 million of current assets and
approximately $2.1 million of fixed and other assets. Liabilities assumed,
including the assumed debt, included approximately $11.7 million of current
liabilities and $6.8 million of preferred stock. The purchase price in excess
of net assets acquired, less $0.3 million, the value assigned to SAC's net
operating losses at the time of the acquisition, amounting to approximately
$13.2 million, was recorded as goodwill and, until December 31, 2001, was
being amortized over 15 years.
In the acquisition, the holder of SAC's preferred stock received in
exchange for its shares 5,000 shares of Reunion Series B preferred stock. The
Reunion Series B preferred stock has a redemption price of $5,000,000 plus
cumulative dividends as of the date of the acquisition of $1,781,000. See
note 8 for a discussion of the exchange of preferred stock for common stock.
In December 2001, pursuant to a plan developed by management to
restructure the Company's continuing businesses and dispose of or shut-down
certain other businesses (see note 2), the Company classified and began
accounting for the materials handling systems business as a discontinued
operation.
Acquisition of NPS Acquisition Corp.
On January 17, 2001, the Company acquired NPS Acquisition Corp. (NPSAC)
(f/k/a Naptech Pressure Systems) from Charles E. Bradley, Sr. (Mr. Bradley),
the Company's chairman of the board and chief executive officer. Until the
first quarter of 2002, NPSAC was based in Clearfield, Utah and manufactured
seamless steel pressure vessels, an existing Metals product line. As part of
the Company's plan to restructure its continuing operations, in the first
quarter of 2002 this facility was shut-down and its operations were relocated
and combined with the Company's pressure vessel manufacturing operations in
McKeesport, Pennsylvania.
- F-16 -
The purchase price was $10,000 plus the non-cash assumption of $10.3
million of NPSAC's liabilities, including a 15% per annum $6.9 million note
payable to Shaw Group, the former owner of Naptech Pressure Systems and $0.6
million of notes payable to Stanwich Financial Services Corp., a related
party. Simultaneously with the acquisition, Reunion paid Shaw Group $2.0
million of the note payable in cash from funds available under its revolving
credit facility with Bank of America (BOA). The remainder of the note payable
of $4.9 million was then restructured to include quarterly principal payments
of $0.6 million for eight quarters which began on February 28, 2001. Reunion
made the first two payments from funds available under its revolving credit
facility. The Company was has been unable to fund the remaining payments
under this note due to lack of liquidity and insufficient funds available
under its revolving credit facility. The note is unsecured and subordinated
to the BOA term loan and revolving credit facilities.
The estimated fair value of assets acquired included approximately $1.4
million of cash, receivables, inventories and other current assets,
approximately $0.3 million of fixed assets and $1.3 million of deferred tax
assets which are fully reserved by a valuation allowance. The purchase price
in excess of net assets acquired of $8.6 million was recorded as goodwill and,
until December 31, 2001, was being amortized over 15 years. NPSAC's fully-
reserved deferred tax assets are comprised primarily of net operating losses.
NOTE 4: INVENTORIES
Inventories are comprised of the following (in thousands):
At December 31,
2001 2000
-------- --------
Metals:
Raw material $ 3,297 $ 4,268
Work-in-process 1,908 3,499
Finished goods 2,431 5,873
-------- --------
Gross inventories 7,636 13,640
Less: LIFO adjustment 131 80
-------- --------
Metals inventories 7,767 13,720
-------- --------
Plastics:
Raw material 1,715 2,584
Work-in-process 421 323
Finished goods 911 1,352
-------- --------
Plastics inventories 3,047 4,259
-------- --------
Inventories $ 10,814 $ 17,979
======== ========
- F-17 -
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (PP&E) is comprised of the following (in
thousands):
At December 31,
2001 2000
-------- --------
Metals:
Land $ 541 $ 541
Buildings and improvements 4,853 4,870
Machinery and equipment 13,219 13,205
Computer systems 1,882 1,879
Furniture and fixtures 452 438
Construction-in-progress 11 527
-------- --------
Property, plant and equipment 20,958 21,460
Less: Accumulated depreciation (12,766) (11,905)
-------- --------
Metals PP&E, net 8,192 9,555
-------- --------
Plastics:
Land 861 861
Buildings and improvements 4,138 4,038
Machinery and equipment 8,202 9,583
Computer systems 629 536
Furniture and fixtures 193 180
Construction-in-progress 105 -
-------- --------
Property, plant and equipment 14,128 15,198
Less: Accumulated depreciation (3,536) (1,634)
-------- --------
Plastics PP&E, net 10,592 13,564
-------- --------
Corporate:
Land 167 167
Buildings and improvements 23 23
Computer systems 398 390
Furniture and fixtures 123 123
-------- --------
Property, plant and equipment 711 703
Less: Accumulated depreciation (361) (292)
-------- --------
Corporate PP&E, net 350 411
-------- --------
Property, plant and equipment, net $ 19,134 $ 23,530
======== ========
NOTE 6: OTHER ASSETS
Other assets consist of the following (in thousands):
At December 31,
2001 2000
-------- --------
Noncurrent deferred taxes (note 12) $ - $ 11,527
Deferred financing costs (net of accumulated
amortization of $2,546 and $1,557) 823 1,882
Cash surrender value of life insurance policies 2,299 2,156
Other 147 751
-------- --------
Total other assets $ 3,269 $ 16,316
======== ========
- F-18 -
NOTE 7: DEBT IN DEFAULT AND LONG-TERM DEBT
The Company is in default on its 13% senior notes and its Bank of America
(BOA) revolving and term loan credit facilities. See note 3 for a discussion
of the refinancing of the Company related to the merger with Chatwins Group
and the acquisitions of Kingway and NPSAC.
Debt in default consists of the following (in thousands):
At December 31,
2001
--------------
13% senior notes (net of discount of $2) $ 24,853
BOA revolving credit facility 22,475
BOA term loan A due March 16, 2007 16,071
BOA capital expenditure facility 990
--------
Total debt in default $ 64,389
========
Aggregate maturities of debt in default excluding the BOA revolving
credit facility are as follows (in thousands):
Year ended December 31,
Total 2002 2003 2004 2005 2006 2006+
------- ------- ------- ------- ------- ------- -------
$41,914 $16,434 $16,285 $ 3,932 $ 3,932 $ 1,331 $ -
======= ======= ======= ======= ======= ======= =======
Long-term debt consists of the following (in thousands):
At December 31,
2001 2000
-------- --------
13% senior notes (net of unamortized
discount of $14) $ - $ 24,961
BOA term loan A due March 16, 2007 - 19,757
BOA capital expenditure facility - 640
Note payable due February 28, 2003 3,644 -
Other 1,253 1,359
Other - related parties 4,615 4,015
-------- --------
Total long-term debt 9,512 50,732
Current maturities (87) (4,061)
-------- --------
Total long-term debt, less current maturities $ 9,425 $ 46,671
======== ========
13% Senior Notes
Chatwins Group was required to make sinking fund payments to redeem $12.5
million principal amount of the senior notes on May 1 in each of 2000 through
2003 at face value plus accrued interest and to offer to purchase $25 million
of the senior notes on June 1, 2000 at face value plus accrued interest. In
February 2000, Chatwins Group solicited the holders of the $49,975,000 of 13%
senior notes outstanding asking them to waive their right to participate in
the June 1, 2000 $25.0 million purchase offer, of which $47,450,000 agreed to
waive such right resulting in a maximum purchase offer obligation on June 1,
2000 of $2,525,000.
- F-19 -
On June 1, 2000 Reunion made the required offer to purchase $2,525,000 of
senior notes, of which holders of only $120,000 of senior notes tendered.
However, the $25.0 million of 13% senior notes repaid from the merger proceeds
was applied against Reunion's obligations for sinking fund payments and the
purchase offer as follows (in thousands):
May 1, June 1, May 1,
2000 2000 2001 Total
-------- -------- -------- --------
Sinking fund payment or
purchase offer obligation $ 12,500 $ 120 $ 12,500 $ 25,120
$25.0 million applied to
obligations (12,500) (120) (12,380) (25,000)
-------- -------- -------- --------
Maximum required payment $ - $ - $ 120 $ 120
======== ======== ======== ========
The $120,000 principal amount of 13% senior notes was repaid by the
Company on May 1, 2001 with funds available under its revolving credit
facility.
On September 4, 2001, the Company solicited the consent of its senior
noteholders to extend the May 2002 and 2003 sinking fund payment dates by two
years. The solicitation expired on November 2, 2001. As part of the
solicitation, the Company reserved the right to terminate it if holders of
less than $22.0 million principal amount of senior notes consented. The
Company has exercised its right to terminate the solicitation.
The Indenture governing the 13% senior notes includes covenants which
restrict or prohibit: incurrence of indebtedness outside its revolving credit
facility unless interest coverage tests are met; dividends, stock repurchases,
loans, investments and retirements of junior debt; liens and encumbrances on
assets; transactions with affiliates; sales of assets at less than fair value
and for less than 75% cash consideration; and mergers, consolidations and the
sale of substantially all assets.
The indenture also requires that the company maintain EBITDA (as defined
in the indenture) of at least $7.2 million on a last twelve months basis at
the end of each fiscal quarter and that the company offer to repurchase some
or all of the 13% senior notes upon a change of control or the sale of a
significant amount of assets where the proceeds are not reinvested in other
manufacturing assets within 180 days of the sale. In 2001, the Company did
not generate the required EBITDA.
The Company was unable to fund its November 1, 2001 $1.616 million semi-
annual interest payment on its 13% senior notes as it had insufficient funds
available under its revolving credit facility with BOA. Failure to make the
November 1 interest payment is a default under the indenture which governs the
13% senior notes. Under the terms of the indenture, the Company had thirty
days to cure the default. The Company was unable to cure the default during
the 30-day cure period.
As part of its corporate-wide restructuring plan (see note 2), management
of the Company has determined to dispose of assets in order to meet its
interest payment obligations under the 13% senior notes. The senior notes are
subordinated to the Bank of America revolving and term loan credit facilities.
Bank of America Revolving and Term Loan Credit Facilities
Simultaneously with the Chatwins Group merger, Reunion entered into
senior secured credit facilities with Bank of America and other lenders.
These credit facilities consist of a $39.0 million revolving credit facility,
a $25.8 million term loan A facility amortizing in 84 monthly principal
payments, a $5.0 million term loan B facility amortizing in 36 monthly
- F-20 -
principal payments, and a $2.7 million capital expenditures facility which
amortizes in 60 monthly principal payments when borrowed. These facilities
have a three-year initial term and automatically renew for additional one-year
increments unless either party gives the other notice of termination at least
60 days prior to the beginning of the next one-year term. Since the merger,
the Company has borrowed $1.2 million under the capital expenditures facility.
All of the term loan B and portions of the term loan A and revolving credit
facility were repaid with the proceeds from the sale of the Company's Irish
plastics business and agricultural and Chicago, Illinois real estate in 2000.
Interest on loans outstanding under the Bank of America facilities is
tied to Bank of America's prime rate, as that term is defined in the financing
agreements. Interest rates the prime rate plus 0.50% for the revolving credit
facility and the prime rate plus 0.75% for the term loan A and capital
expenditures facilities. Because the Company is in default on its BOA
revolving credit and term loan A facilities, the interest rate on each has
been adjusted to the BOA prime rate plus 4%.
The Bank of America credit facilities are collateralized by a first
priority lien on substantially all of the current and after-acquired assets of
Reunion including, without limitation, all accounts receivable, inventory,
property, plant and equipment, chattel paper, documents, instruments, deposit
accounts, contract rights and general intangibles.
The facilities require Reunion to comply with financial covenants,
including fixed charge coverage and leverage tests, and other covenants. The
fixed charge coverage covenant requires the Company to maintain a minimum
fixed charge coverage ratio to be tested as of the last day of each fiscal
quarter. The components of the calculation are on a rolling twelve-month
basis. The ratio is defined as EBITDA (adjusted to exclude non-financed
capital expenditures and income taxes paid) divided by fixed charges (defined
as scheduled or required principal and interest payments on debt). The
leverage test is defined as the ratio of funded debt to EBITDA. Funded debt
is defined as all secured and unsecured long-term debt, including current
maturities. See "2001 Covenant Compliance" below.
In addition, the facilities contain various affirmative and negative
covenants, including limitations on stockholder and related party
distributions. The Company was in compliance with all other covenants. The
facilities require Reunion to pay the reasonable expenses incurred by the
lenders in connection with the facilities. Available borrowings under the
Bank of America revolving credit facility are based upon a percentage of
eligible receivables and inventories.
Since the refinancing, the Company and BOA have entered into several
amendments of the Financing and Security Agreement and various letter
agreements to provide the Company with temporary overadvance and special
availability loans in order to assist the Company with short-term tightenings
of liquidity.
On December 12, 2000, the agreement was amended to include a requirement
that the Company maintain a minimum availability under the revolving credit
facility of $1.5 million. See "2001 Covenant Compliance" below. On January
19, 2001, the agreement was amended to allow for the acquisition of NPSAC by
the Company.
2001 Covenant Compliance
For the quarter ended March 31, 2001 and for each fiscal quarter
thereafter in 2001, the Bank of America (BOA) Financing and Security Agreement
required the Company to maintain a minimum fixed charge coverage ratio of
1.25:1 and maximum funded debt to EBITDA ratios of 3.75:1, 3.50:1, 3.25:1 and
3.00:1.
- F-21 -
In April 2001, the Company entered into a letter agreement with Bank of
America whereby, as long as the Company maintained both a fixed charge
coverage ratio of at least 1.00:1 and had a funded debt to EBITDA ratio of no
more than 4.50:1 as of the September 30, 2001 and December 31, 2001
calculation dates, and as long as the Company was in compliance on all other
covenants, the Bank of America would not accelerate any of its loans.
Due to the rate and level of the downturns in several of the markets
served by the Company and the resulting decrease in the Company's ability to
absorb costs, cost cutting and capital expenditure restriction measures taken
by management during the third and fourth quarters of 2001 were not enough to
achieve ratio compliance. For the quarter ended September 30, 2001, the
Company's fixed charge coverage ratio was 0.79:1 and the funded debt to EBITDA
ratio was 5.61:1. As a result, the Company is in default under its BOA
Financing and Security Agreement.
The Company and Bank of America entered into various amendments to the
BOA Financing and Security Agreement during 2000. The December 12, 2000
amendment required the Company to maintain a minimum availability under the
revolving credit facility of $1.5 million. Through the second quarter of
2001, the Company had complied with this requirement. However, due to the
downturn in several of the markets served by the Company during the third
quarter of 2001 and the resulting decrease in the quality of the Company's
borrowing base, ineligible receivables and inventory increased. Based on the
borrowing base formulas as set forth in the BOA Financing and Security
Agreement, this increase in ineligibles resulted in a decrease in borrowing
availability under the revolving credit facility and the Company's inability
to maintain a minimum availability of $1.5 million. As a result, the Company
is in default under its BOA Financing and Security Agreement.
In November 2001, the Company was informed by BOA that a borrowing base
deficiency existed, as defined in the BOA financing and security agreement.
Since that time, the Company and BOA have entered into six side letter
agreements wherein BOA and the other lenders that participated in the BOA
refinancing of the Company in the merger agreed to provide monthly advances in
excess of the borrowing base of the Company for working capital needs while
the Company addresses its lack of liquidity issue pursuant to its plan to sell
assets and reduce debt. The sixth side letter agreement, dated April 1, 2002,
provides overadvance approval on a day-to-day basis whereby the overadvance
may not exceed $3.5 million. As of April 16, 2002, the Company has not
exceeded the $3.5 million overadvance availability provided for in the side
letter agreement. However, nothing in these six side letter agreements waives
or otherwise alters BOA's already existing remedies under the BOA financing
and security agreement including acceleration of all amounts outstanding under
the BOA financing and security agreement.
In consideration of providing its approval of overadvance availability,
as provided in the side letter agreements, the Company has been and continues
to pay a weekly fee of $25,000 or $50,000, depending on the amount of the
overadvance. Since entering into the side letter agreements beginning in
November 2001, the Company has paid BOA a total of $750,000 in such fees.
During 2001, the Company spent $2.9 million on capital expenditures. The
Company's covenant limitation on capital expenditures is $4.5 million for the
year 2001 and thereafter.
- F-22 -
Note Payable due February 28, 2003
With the acquisition of NPSAC, Reunion assumed a note payable of $4.9
million. Terms of this note payable include quarterly principal payments of
$0.6 million for eight quarters which began on February 28, 2001 and quarterly
interest payments at 15% per annum on the unpaid principal. Reunion made the
first two payments from funds available under its revolving credit facility.
The Company has been unable to fund the remaining payments under this note due
to lack of liquidity and insufficient funds available under its revolving
credit facility. The Company has classified this note payable as long-term as
it is unsecured and subordinated to the BOA term loan and revolving credit
facilities.
Other Long-Term Debt
Other long-term debt includes a $1,017,000 11% note payable, $134,000 of
capital leases and a $102,000 small business loan related to Plastics.
Payment of the note payable is restricted by the terms of the Bank of America
revolving and term loan facilities agreement and, as such, is classified as
long-term. The capital leases are collateralized by the financed equipment.
Maturities of capital leases and the small business loan are: 2002 - $87;
2003 - $86 and 2004 - $63.
Other Debt - Related Parties
Related party debt includes notes payable to SFSC totaling $4,615,000
with interest at 10% per annum on $100,000, at 11% per annum on $1,017,000, at
15% per annum on $500,000 and at 18% per annum on $2,998,000. Related party
debt is classified as long-term as it is subordinated to the Bank of America
revolving and term loan facilities except that regularly scheduled payments of
interest may be made when due as long as no default exists under the BOA
facilities (see note 13).
NOTE 8: STOCKHOLDERS' EQUITY
The Company's Certificate of Incorporation authorizes the issuance of
20,000,000 shares of common stock, par value $.01 per share, and 10,000,000
shares of "blank check" preferred stock, par value $.01 per share, and
includes certain capital stock transfer restrictions which are designed to
prevent any person or group of persons from becoming a 5% shareholder of the
Company and to prevent an increase in the percentage stock ownership of any
existing person or group of persons that constitutes a 5% shareholder by
prohibiting and voiding any transfer or agreement to transfer stock to the
extent that it would cause the transferee to hold such a prohibited ownership
percentage. The Transfer Restrictions are intended to help assure that the
Company's substantial net operating loss carryforwards will continue to be
available to offset future taxable income by decreasing the likelihood of an
"ownership change" for federal income tax purposes.
No dividends have been declared or paid during the year with respect to
the common stock of the Company. Cash dividends are limited by the
availability of funds and by restrictions in the Company's debt agreements.
- F-23 -
The following represents stockholders' equity activity for the 3-year
period ended December 31, 2001 (in thousands):
Year Ended December 31,
2001 2000 1999
-------- -------- --------
Par value of common stock, January 1 $ 152 $ 3 $ 3
Contingent share issuance 4 - -
Options exercise (note 9) - - -
Merger and acquisition activity (note 3) - 117 -
Preferred stock exchange - 32 -
-------- -------- --------
Par value of common stock, December 31 $ 156 $ 152 $ 3
======== ======== ========
Treasury stock (41,109 shares carried
at cost), January 1 $ - $ (500) $ (500)
Merger and acquisition activity (note 3) - 500 -
-------- -------- --------
Treasury stock, December 31 $ - $ - $ (500)
======== ======== ========
Capital in excess of par value, January 1 $ 24,608 $ 873 $ 859
Contingent share issuance 450 - -
Options exercise (note 9) 6 - -
Merger and acquisition activity (note 3) - 8,015 -
Preferred stock exchange - 15,720 -
Warrant exercises - - 14
-------- -------- --------
Capital in excess of par value, December 31 $ 25,064 $ 24,608 $ 873
======== ======== ========
Accumulated other comprehensive
loss, January 1 $ - $ - $ -
Additional pension liability in excess of
unrecognized prior service cost (note 10) (1,136) - -
-------- -------- --------
Accumulated other comprehensive
loss, December 31 $ (1,136) $ - $ -
======== ======== ========
Accumulated deficit, January 1 $ (3,201) $ (8,246) $ (8,956)
Net income (loss) (38,128) 5,140 1,166
Preferred stock accretions - (95) (456)
-------- -------- --------
Accumulated deficit, December 31 $(41,329) $ (3,201) $ (8,246)
======== ======== ========
Total stockholders' equity, January 1 $ 21,559 $ (7,870) $ (8,594)
Contingent share issuance 454 - -
Options exercise 6 - -
Merger and acquisition activity (note 3) - 8,632 -
Preferred stock exchange - 15,752 -
Other comprehensive loss (1,136) - -
Net income (loss) (note 1) (38,128) 5,140 1,166
Preferred stock accretions - (95) (456)
Warrant exercises - - 14
-------- -------- --------
Total stockholders' equity, December 31 $(17,245) $ 21,559 $ (7,870)
======== ======== ========
- F-24 -
The following represents common stock activity for the 2-year period
ended December 31, 2001 (in thousands of shares):
Outstanding common stock, January 1 15,236 3,940(1)
Contingent share issuance 349 -
Options exercise 6 -
Cancellation of Chatwins Group shares in merger - (1,450)
Reunion shares issued in merger to former
Chatwins Group shareholders - 9,500
Preferred stock exchange - 3,246
-------- --------
Outstanding common stock, December 31 15,591 15,236
======== ========
(1) - Not restated to give effect to the merger.
In the merger, Reunion issued 9,500,000 shares of common stock to holders
of Chatwins Group's common stock. The merger agreement also provided that up
to an additional 500,000 shares of Reunion common stock would be issued to
former Chatwins Group common stockholders if the former Chatwins Group
businesses and the acquired Kingway business achieved specified performance
levels in 2000. A determination of the number of shares to be issued was made
by the board of directors at its meeting held on May 15, 2001. Such
additional shares totaled 348,995 and were issued on May 29, 2001. The
closing price of Reunion's common stock on that date was $1.30 per share. The
issuance of the additional shares was recorded as a merger purchase price
adjustment to goodwill.
On June 14, 2000, the Company's Board of Directors approved the exchange
of its Series A and Series B preferred stocks for 3,245,515 shares of the
Company's common stock at an exchange price of $5.00 per share. The Series A
and Series B preferred stocks were issued in connection with the March 16,
2000 merger with Chatwins Group and acquisition of Kingway, and had an
aggregate liquidation value of $16.2 million. The closing market price of
Reunion's common stock was $1.00 on that date.
NOTE 9: STOCK OPTIONS
At December 31, 2001, the Company has three stock option plans which are
described below. In implementing FASB Statement 123 "Accounting for Stock-
Based Compensation" in 1996, the Company elected to continue to apply the
provisions of APB Opinion 25 and related interpretations in accounting for its
plans. Stock option grants during the periods presented were all at exercise
prices equal to or above the current market price of the underlying security
and, accordingly, no compensation cost has been recognized for the Company's
stock option plans. At December 31, 2001, 1,463,000 shares of common stock
were reserved for issuance pursuant to these plans.
- F-25 -
Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement 123, the Company's loss per
share for 2001 and earnings per share for 2000 would have changed to the pro
forma amounts as indicated below:
As Reported Pro forma
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
Earnings (loss) applicable to
common stockholders $(38,128) $ 5,045 $(38,374) $ 4,655
======== ======== ======== ========
Basic earnings (loss) per
common share $ (2.45) $ 0.38 $ (2.46) $ 0.35
======== ======== ======== ========
Diluted earnings (loss) per
common share $ (2.45) $ 0.38 $ (2.46) $ 0.35
======== ======== ======== ========
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions: dividend yield of 0 percent for all years; expected
volatility of 86% for 2001 and 82% for 2000; risk-free interest rates of 3.4%
to 5.8% for 2001 and 5.3% to 6.5% for 2000 and expected life of ten years in
2001 and 2000. Expected volatility was estimated based on historical
performance of the Company's stock prices and is not necessarily an indication
of future stock movements.
1992 Option Plan
Effective July 1, 1992, the Board of Directors and stockholders of the
Company approved the adoption of the 1992 Nonqualified Stock Option Plan (the
"1992 Option Plan"). The 1992 Option Plan, as amended, authorized the grant
of options and sale of 250,000 shares of common stock of the Company to key
employees, directors and consultants. In March 2000, the Company granted
25,000 options at an exercise price of $3.00 per share and in June 2000
granted 14,000 options at an exercise price of $1.00 per share to Mr. Bradley.
The options vest in one-third installments over a two year period beginning
with the date of grant. No option granted under the 1992 Option Plan may be
exercised prior to six months from its date of grant or remain exercisable
after ten years from the grant date.
1993 Option Plan
Effective September 28, 1993, the Board of Directors and stockholders of
the Company approved the adoption of the 1993 Incentive Stock Option Plan (the
"1993 Option Plan") for the granting of options or awards covering up to
250,000 shares of the Company's common stock to officers and other key
employees. Under the terms of the 1993 Option Plan, the Compensation
Committee of the Board of Directors is authorized to grant (i) stock options
(nonqualified or incentive), (ii) restricted stock awards, (iii) phantom stock
options, (iv) stock bonuses and (v) cash bonuses in connection with grants of
restricted stock or stock bonuses. In July 1996, the Company granted 50,000
incentive stock options (10,000 exercised) to Richard L. Evans, the Company's
Secretary and Executive Vice President of Administration, and 5,000 incentive
stock options (all forfeited) to another officer, all at an exercise price of
$4.4375 per share. The options were fully vested in July 1998 and were
exercisable until July 2001. During 2001, the exercise period for these
options was extended until July 2006. In February 1998, the Company granted
20,000 options at an exercise price of $5.0625 to Mr. Evans, and in May 1998,
the Company granted 75,000 options at an exercise price of $7.21875 to Mr.
Bradley. The options vest in installments through February 2000 and are
exercisable until February 2003 for Mr. Evans and vest in installments through
January 2003 and are exercisable until May 2003 for Mr. Bradley.
- F-26 -
In June 2000, the Company granted 95,000 options, 82,500 at an exercise
price of $1.00 per share (including 6,000 to Mr. Bradley, 12,500 to Mr.
Lawyer, 9,500 to Mr. Froehlich and 7,000 to Mr. Evans) and 12,500 at an
exercise price of $1.10 per share to Kimball Bradley. The options vest in
one-third installments over a two year period beginning six months after the
date of grant. The options are exercisable until June 2005 for Kimball
Bradley and June 2010 for all other options granted. During 2001, Mr. Evans
exercised 4,667 of these options.
1998 Option Plan
On August 4, 1998, the Company's stockholders ratified the adoption by
the Board of Directors, on June 1, 1998, of the 1998 Stock Option Plan (the
1998 Option Plan). The Compensation Committee of the Board of Directors is
authorized to grant incentive options and nonqualified options covering up to
600,000 shares of the Company's common stock to officers and other key
employees. On February 13, 1998, the Board of Directors, on recommendation
by the Compensation Committee, had conditionally granted options to purchase
15,000 shares of the Company's common stock to each of the five non-employee
Directors (excluding Mr. Bradley), subject to adoption of the plan by the
Board and ratification by the stockholders. The options have an exercise
price of $5.0625, vested immediately and are exercisable until February 2008.
In March 2000, the Company granted 304,000 options, 279,000 at an
exercise price of $3.00 per share (including 25,000 to Mr. Lawyer, 20,000 to
Mr. Froehlich, 10,000 to Mr. Evans and 50,000 to non-employee directors) and
25,000 at an exercise price of $3.30 per share to Kimball Bradley. The
options vest in one-third installments over a two year period beginning with
the date of grant. The options are exercisable until March 2005 for Kimball
Bradley and March 2010 for all other options granted. As of December 31,
2000, 2,000 options had been forfeited.
In June 2000, the Company granted 212,000 options, 204,500 at an exercise
price of $1.00 per share (including 7,500 to Mr. Lawyer, 9,500 to Mr.
Froehlich, 2,000 to Mr. Evans and 45,000 to non-employee directors) and 7,500
at an exercise price of $1.10 per share to Kimball Bradley. The options vest
in one-third installments over a two year period beginning with the date of
grant. The options are exercisable until June 2005 for Kimball Bradley and
June 2010 for all other options granted. During 2001, Mr. Evans exercised
1,333 of these options.
In December 2000, the Company granted 10,000 options at an exercise price
of $1.25 per share to an employee. The options vest in one-third installments
over a two year period beginning with the date of grant. The options are
exercisable until December 2010.
At the Company's annual meeting of stockholders in May 2001, the
Company's stockholders approved a proposal to reserve an additional 600,000
shares of the Company's common stock for issuance under the 1998 Stock Option
Plan.
In May 2001, the Company granted 313,500 options, 263,500 at an exercise
price of $1.45 per share (including 10,000 to Mr. Lawyer, 25,000 to Mr.
Froehlich, 10,000 to Mr. Evans and 55,000 to non-employee directors) and
50,000 at an exercise price of $1.595 per share to Kimball Bradley. The
options vest in one-third installments over a two year period beginning with
the first anniversary of the date of grant. The options are exercisable until
June 2006 for Kimball Bradley and June 2011 for all other options granted.
In August 2001, the Company granted 10,000 options at an exercise price
of $1.40 per share to an employee. The options vest in one-third installments
over a two year period beginning with the first anniversary of the date of
grant. The options are exercisable until June 2011.
- F-27 -
A summary of the status of the Company's stock options and warrants as of
December 31, 2001 and 2000 and changes during the year is presented below:
2001 2000
------------------ ------------------
Weighted Weighted
Average Average
Exercise Exercise
Fixed Options Shares Price Shares Price
------------- --------- -------- --------- --------
Outstanding at beginning of year 868,000 $2.91 210,000 $5.71
Granted 323,500 1.47 660,000 2.01
Exercised (6,000) 1.00 - -
Forfeited/expired (96,500) 2.01 (2,000) 3.00
--------- ---------
Outstanding at end of year 1,089,000 2.57 868,000 2.91
========= =========
Options exercisable at end of year 572,867 3.20 395,733 3.53
========= =========
Weighted-average fair value of options granted:
Exercise price equal to market
price on grant date $ 1.27 $ 1.62
========= =========
Exercise price greater than
market price on grant date $ 1.04 $ 1.70
========= =========
The following table summarizes information about stock options and
warrants outstanding at December 31, 2001:
Remaining Number Number
Exercise Contractual Outstanding Exercisable
Price Life at 12/31/01 at 12/31/01
--------- ----------- ----------- -----------
$1.0000 8.50 years 248,750 168,500
$1.1000 3.50 years 20,000 13,333
$1.2500 9.00 years 10,000 6,667
$1.4000 9.50 years 10,000 -
$1.4500 9.50 years 261,500 -
$1.5950 4.50 years 50,000 -
$3.0000 8.25 years 253,750 177,500
$3.3000 3.25 years 25,000 16,667
$4.4375 4.50 years 40,000 40,000
$5.0625 1.00 years 20,000 20,000
$5.0625 6.00 years 75,000 75,000
$7.2188 1.50 years 75,000 55,200
--------- ---------
1,089,000 572,867
========= =========
- F-28 -
NOTE 10: EMPLOYEE BENEFIT PLANS
The Company sponsors defined benefit plans and other postretirement
benefit plans for certain employees in Metals and Plastics and employees of
its Corporate Executive Payroll (as defined in the plan document).
Metals
Metals Pension Plan: Reunion sponsors a defined benefit pension plan
which covers substantially all of its employees at its McKeesport, PA pressure
vessel manufacturing location. This plan is the defined benefit plan from
former Chatwins Group. Benefits under this plan are based solely on
continuous years of service and are not affected by changes in compensation
rates.
The Company's funding policy with respect to this plan provides that
payments to the pension trusts be at least equal to the minimum funding
requirements of the Employee Retirement Income Security Act of 1974. Assets
of the plan are invested principally in fixed income and equity securities.
Metals and Corporate Executive Payroll Other Postretirement Plan:
Reunion maintains various postretirement healthcare and life insurance benefit
plans for certain active and retired employees. Covered active and retired
employees include those of the Company's McKeesport, PA pressure vessel
manufacturing location, pursuant to a November 1997 plan amendment which
became effective January 1, 1998 and employees of Reunion's Corporate
Executive Payroll. In a September 2000 amendment, certain employees of the
Company's crane and bridge manufacturing location in Alliance, OH who had
attained age 60 and had at least 10 years of service were offered a voluntary
early retirement incentive program whereby the Company will provide healthcare
coverage at no cost to the employee for the employee and eligible dependents
until the employee reaches age 65. In the fourth quarter of 2000, the Company
recorded a charge of $169,000 representing the estimated cost of providing
coverage to those employees accepting the offer before December 31, 2000.
Eligible active and retired employees of the one Metals operating
division for which postretirement benefits are provided include both union and
nonunion employees. Healthcare benefits for both union and nonunion retirees
are provided for the most part through comprehensive major medical and other
health benefit provisions subject to various retiree cost-sharing features.
The majority of employees eligible for healthcare benefits upon retirement are
former employees of USX Corporation (USX). A significant portion of
postretirement healthcare earned by such employees prior to 1987 is the
responsibility of USX. Life insurance benefits provided to eligible union
retirees are based on fixed amounts negotiated in labor agreements. Life
insurance benefits provided to eligible nonunion retirees are based on the
employee's annual base salary at retirement subject to a maximum benefit.
Postretirement healthcare benefits for eligible active and retired
employees of Reunion's Corporate Executive Payroll are paid for by Reunion and
subject to various retiree cost-sharing features. Postretirement healthcare
benefits for Corporate Executive Payroll employees terminate when the retiree
becomes Medicare eligible. Postretirement life insurance benefits for
eligible active and retired employees of Reunion's Corporate Payroll are paid
for by Reunion and are based on the employee's annual base salary at
retirement. Except for certain life insurance benefits paid from reserves
held by insurance carriers, benefits have not been funded. Contributions to
the plans by Reunion equal benefits paid.
- F-29 -
The following table sets forth the changes in the benefit obligations and
plan assets for the years ended December 31, 2001 and 2000 and the funded
status at December 31, 2001 and 2000 of the Metals pension plan and the Metals
and Corporate Executive Payroll other postretirement benefits plans (in
thousands):
Pension Other Postretirement
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Change in benefit obligation:
Benefit obligation, beginning $ 2,365 $ 2,174 $ 1,085 $ 1,005
Service cost 123 106 44 36
Interest cost 161 148 87 75
Plan amendment 56 46 71 20
Actuarial loss (gain) 76 27 525 (7)
Benefits paid (124) (136) (249) (44)
-------- -------- -------- --------
Benefit obligation, ending $ 2,657 $ 2,365 $ 1,563 $ 1,085
======== ======== ======== ========
Change in plan assets:
Fair value, beginning $ 2,367 $ 1,870 $ - $ -
Actual return (368) 415 - -
Company contribution 222 218 249 44
Benefits paid (124) (136) (249) (44)
-------- -------- -------- --------
Fair value, ending $ 2,097 $ 2,367 $ - $ -
======== ======== ======== ========
Funded status:
Net obligation (asset), ending $ 560 $ (2) $ 1,563 $ 1,085
Unrecognized costs:
Additional minimum pension
liability 519 - - -
Prior service costs (145) (100) 6 (13)
Net (loss) gain (405) 241 205 583
Transition obligation (12) (25) (489) (496)
-------- -------- -------- --------
Accrued benefit cost $ 517 $ 114 $ 1,285 $ 1,159
======== ======== ======== ========
Net periodic pension and other postretirement benefits costs for the
following years for Metals pension and Metals and Corporate Executive Payroll
other postretirement benefits plans ended December 31 are as follows (in
thousands):
Pension Other Postretirement
---------------------- ----------------------
2001 2000 1999 2001 2000 1999
------ ------ ------ ------ ------ ------
Benefits earned during year $ 123 $ 106 $ 110 $ 44 $ 36 $ 39
Interest cost 161 148 137 87 75 65
Early retirement incentive - - - - 169 -
Amortization of:
Prior service cost 11 8 8 - - -
Unrecognized net loss (gain) - - 1 (44) (48) (43)
Unrecognized net obligation 12 12 12 48 48 50
Expected return on plan assets (202) (161) (132) - - -
------ ------ ------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ 105 $ 113 $ 136 $ 135 $ 280 $ 111
====== ====== ====== ====== ====== ======
- F-30 -
Assumptions used to develop Metals pension cost and projected benefit
obligation for the defined benefit pension plan for the following years ended
December 31 are as follows:
2001 2000 1999
-------- -------- --------
Discount rate 7.00% 7.25% 7.25%
======== ======== ========
Expected rate of return on plan assets 8.25% 8.25% 8.25%
======== ======== ========
For the calculation of Metals and Corporate Executive Payroll net
periodic pension costs to be recorded in 2002, the expected rate of return on
plan assets was held at 8.25%.
Assumptions used to develop the net periodic postretirement benefit costs
and accumulated postretirement benefit obligations for the following years
ended December 31 are as follows:
2001 2000 1999
-------- -------- --------
Discount rate 7.00% 7.75% 6.75%
======== ======== ========
Healthcare cost trend rate 3.0% 3.0% 3.0%
======== ======== ========
Rate of compensation increase 2.0% 2.0% 2.0%
======== ======== ========
USX administers the postretirement healthcare plans for the eligible
employees of the McKeesport, PA location previously owned by USX and bills
Reunion for its share of the postretirement costs related to Reunion's
retirees covered by the plans. During 1997, Chatwins Group's actuary reviewed
several years of rates charged to Chatwins Group by USX for retiree medical
coverage and, as a result, elected to reduce the applicable healthcare cost
trend rate for all years subsequent to 1997 to 3%. A one percentage point
increase in the assumed healthcare cost trend rate would increase the benefit
obligation at December 31, 2001 by approximately $153,000, increase net
periodic cost by approximately $34,000 and increase the total of the service
and interest cost components by approximately $17,000. Conversely, a one
percentage point decrease in the assumed healthcare cost trend rate would
result in approximate decreases in each by $125,000, $21,000 and $16,000,
respectively.
Plastics
Plastics Pension Plan: Reunion sponsors a defined benefit pension plan
which covered substantially all of its employees at its New York facilities.
Effective June 15, 1999, all benefits under this plan were frozen and the
remaining employees became eligible to participate in the 401(k) defined
contribution plan.
Plastics Other Postretirement Plan: Reunion maintains a postretirement
healthcare plan for certain salaried and union retirees and their dependents.
Covered employees are eligible to participate in the medical benefit plan if,
at the time they retire, they have at least 10 years of service and have
attained 62 years of age. This plan is contributory via employee
contributions, deductibles and co-payments and are subject to certain annual,
lifetime and benefit-specific maximum amounts.
- F-31 -
The following table sets forth the changes in the benefit obligations and
plan assets for the years ended December 31, 2001 and 2000 and the funded
status at December 31, 2001 and 2000 for Plastics pension and other
postretirement benefits plans (in thousands):
Pension Other Postretirement
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Change in benefit obligation:
Benefit obligation, beginning $ 2,731 $ 2,576 $ 1,499 $ 1,368
Service cost - - 53 50
Interest cost 204 194 107 101
Plan amendment - - (68) -
Actuarial loss (gain) 300 33 (44) 50
Benefits paid (100) (72) (94) (70)
-------- -------- -------- --------
Benefit obligation, ending $ 3,135 $ 2,731 $ 1,453 $ 1,499
======== ======== ======== ========
Change in plan assets:
Fair value, beginning $ 2,423 $ 2,366 $ - $ -
Actual return (608) 7 - -
Company contribution 186 122 94 70
Benefits paid (100) (72) (94) (70)
-------- -------- -------- --------
Fair value, ending $ 1,901 $ 2,423 $ - $ -
======== ======== ======== ========
Funded status:
Net obligation, ending $ 1,234 $ 308 $ 1,453 $ 1,499
Unrecognized costs:
Additional minimum liability 1,126 - - -
Net (loss) gain (1,126) (3) 97 53
-------- -------- -------- --------
Accrued benefit cost $ 1,234 $ 305 $ 1,550 $ 1,552
======== ======== ======== ========
Net periodic pension and other postretirement benefits costs for the
following years for Plastics pension and other postretirement benefits plan
ended December 31 are as follows (in thousands):
Pension Other Postretirement
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Benefits earned during year $ - $ - $ 53 $ 50
Interest cost 204 194 107 101
Expected return on plan assets (222) (206) - -
-------- -------- -------- --------
Defined benefit pension and
total other postretirement
benefits costs (income) $ (18) $ (12) $ 160 $ 151
======== ======== ======== ========
Assumptions used to develop the pension cost and projected benefit
obligation for the defined benefit pension plan for the following years ended
December 31, 2001 and 2000 are as follows:
2001 2000
-------- --------
Discount rate 7.00% 7.75%
======== ========
Expected rate of return on plan assets 9.00% 9.00%
======== ========
- F-32 -
For the calculation of the net periodic pension costs to be recorded in
2002, the expected rate of return on plan assets was reduced to 8.25%.
Assumptions used to develop the net periodic postretirement benefit costs
and accumulated postretirement benefit obligations for the following years
ended December 31 are as follows:
2001 2000
-------- --------
Discount rate 7.00% 7.75%
======== ========
Healthcare cost trend rate 7.00% 8.45%
======== ========
A one percentage point increase in the assumed healthcare cost trend rate
would increase the benefit obligation at December 31, 2001 by approximately
$128,000, increase net periodic cost by approximately $16,000 and increase the
total of the service and interest cost components by approximately $16,000.
Conversely, a one percentage point decrease in the assumed healthcare cost
trend rate would result in approximate decreases in each by $114,000, $15,000
and $15,000, respectively.
Other Employee Benefit Plans
The Company also sponsors qualified contributory 401(k) plans covering
substantially all employees and a money purchase defined contribution plan for
Corporate Executive Payroll and certain other salaried employees. For those
employees electing to participate in the 401(k) plans, employees can
contribute up to an annually determined maximum amount permitted by law and
the Company makes matching contributions up to specified limits. For those
eligible for the money purchase defined contribution plan, until December 31,
2001, the Company contributes 5% of the employee's base salary to savings
funds designated by the employee. Effective December 31, 2001, the Company
terminated the money purchase defined contribution plan and the majority of
its assets were distributed to participating employees during the first
quarter of 2002. During 2001 and 2000, the Company's expense to these
deferred compensation plans totaled $1,016,000 and $1,215,000, respectively.
In 1999, Chatwins Group's expense related to such plans totaled $901,000.
Excluding discontinued operations, such amount for 2001 would be $772,000.
The Company does not provide any other postemployment benefits to former
or inactive employees except for unemployment compensation benefits required
by law.
- F-33 -
NOTE 11: EARNINGS PER COMMON SHARE
The computations of basic and diluted earnings per common share (EPS) for
the years ended December 31, 2001, 2000 and 1999 are as follows (in thousands,
except share and per share amounts):
Income Shares EPS
-------- -------- -------
Year ended December 31, 2001:
Loss applicable to common stockholders,
weighted average shares outstanding
and basic EPS $(38,128) 15,587 $ (2.45)
=======
Dilutive effect of stock options 25
-------- --------
Loss applicable to common stockholders,
shares outstanding and diluted EPS $(38,128) 15,612 $ (2.45)
======== ======== =======
Year ended December 31, 2000:
Net income $ 5,140
Less: Preferred stock dividend accretions (95)
--------
Income available to common stockholders,
weighted average shares outstanding
and basic EPS 5,045 13,236 $ 0.38
=======
Dilutive effect of stock options 70
-------- --------
Income available to common stockholders,
shares outstanding and diluted EPS $ 5,045 13,306 $ 0.38
======== ======== =======
Year ended December 31, 1999:
Net income $ 1,166
Less: Preferred stock dividend accretions (456)
--------
Income available to common stockholders,
shares outstanding and basic and diluted EPS $ 710 9,500 $ 0.07
======== ======== =======
The assumed conversion of potentially dilutive instruments is anti-
dilutive in the year ended December 31, 1999, therefore, basic and dilutive
EPS are the same in each period. At December 31, 2001, the Company's stock
options outstanding totaled 1,089,000. Such options included a dilutive
component of 25,809 shares. At December 31, 2000, the Company's stock options
outstanding totaled 868,000. Such options included a dilutive component of
69,682 shares. Weighted average shares outstanding for 1999 has been restated
to give effect to the recapitalization of Chatwins Group in connection with
the merger.
- F-34 -
NOTE 12: INCOME TAXES
The tax provision for continuing operations is comprised of the following
amounts (in thousands):
Year Ended December 31,
2001 2000 1999
-------- -------- --------
Current:
Federal $ - $ 176 $ 88
State and local - 106 (252)
-------- -------- --------
Total - 282 (164)
-------- -------- --------
Deferred:
Federal 12,678 (898) (758)
State and local - - -
-------- -------- --------
Total 12,678 (898) (758)
-------- -------- --------
Total tax provision (benefit) $ 12,678 $ (616) $ (922)
======== ======== ========
The Company's effective income tax rate from continuing operations,
reflected in the accompanying consolidated statement of income, differs from
the statutory rate due to the following (in thousands):
Year Ended December 31,
2001 2000 1999
-------- -------- --------
Computed amount at statutory rate (34%) $ (5,533) $ 1,983 $ (224)
Net change in valuation allowance 11,653 (2,857) (640)
State and local income taxes (1,072) 106 (252)
Goodwill amortization 116 69 49
Foreign sales exclusions (71) (13) -
Expiration of loss carryforwards 9,488 83 -
Tax attributes of acquired company (1,140) 60 -
Federal return to prior year's
provision adjustments (773) - -
Other - net 10 (47) 145
-------- -------- --------
Total tax provision (benefit) from
continuing operations $ 12,678 $ (616) $ (922)
======== ======== ========
Components of consolidated income taxes consist of the following (in
thousands):
Year Ended December 31,
2001 2000 1999
-------- -------- --------
Income (loss) from continuing operations $ 12,678 $ (616) $ (922)
Equity income (loss) from discontinued
operations of affiliate - - 50
Income (loss) from discontinued operations - - 182
Change in accounting principle - - (91)
Extraordinary items - - -
-------- -------- --------
Total consolidated tax provision (benefit) $ 12,678 $ (616) $ (781)
======== ======== ========
- F-35 -
Temporary differences and carryforwards that gave rise to significant
portions of deferred tax assets and liabilities are as follows (in thousands):
At December 31,
2001 2000
-------- --------
Depreciation $ (621) $ (3,055)
Historical goodwill (94) (1,247)
Inventory basis differences (664) (664)
Other (352) (292)
-------- --------
Deferred tax liabilities (1,731) (5,258)
-------- --------
Loss carryforwards (NOLs) 42,202 47,295
Book reserves 6,537 3,808
Deferred compensation 431 381
Tax credit carryforwards 997 1,025
Unicap adjustments 286 188
Other 1,753 973
-------- --------
Deferred tax assets 52,206 53,670
Less: Valuation allowance (50,475) (35,734)
-------- --------
Deferred tax assets, net 1,731 17,936
-------- --------
Deferred taxes, net asset $ - $ 12,678
======== ========
At December 31, 2001, Reunion had net operating loss carryforwards for
Federal tax return reporting purposes of approximately $124.1 million, of
which $79.2 million will expire by the end of 2004. The Company may be able
to utilize its loss carryforwards against possible increased profitability as
the result of the Company's corporate-wide restructuring plan. However, until
the amount of proceeds from and timing of asset dispositions as part of such
plan are known, management concluded that it is more likely than not that the
Company's loss carryforwards will expire unutilized and has determined to
fully reserve for the total amount of net deferred tax assets as of December
31, 2001.
The current and noncurrent classifications of the deferred tax balances
are as follows (in thousands):
At December 31,
2001 2000
-------- --------
Current:
Deferred tax assets $ 10,798 $ 5,254
Deferred tax liabilities (862) (696)
Less: Valuation allowance (10,350) (3,407)
-------- --------
Current deferred taxes, net asset (liability) (414) 1,151
-------- --------
Noncurrent:
Deferred tax assets 41,409 48,416
Deferred tax liabilities (870) (4,562)
Less: Valuation allowance (40,125) (32,327)
-------- --------
Noncurrent deferred taxes, net asset 414 11,527
-------- --------
Deferred taxes, net asset $ - $ 12,678
======== ========
- F-36 -
No U.S. federal or state corporate income tax return examinations are
currently in process. The Company believes adequate provisions for income
taxes have been recorded for all years.
NOTE 13: RELATED PARTIES, RELATIONSHIPS, TRANSACTIONS AND BALANCES
The Parties and Relationships
Reunion Industries, Inc. - Reunion is a publicly traded Delaware
corporation which is headquartered in Pittsburgh, Pennsylvania. Charles E.
Bradley, Sr. (Mr. Bradley) is chairman of the board and Chief Executive
Officer of Reunion. Kimball Bradley is President, Chief Operating Officer, a
director of Reunion and son of Mr. Bradley. Mr. Richard L. Evans (Mr. Evans)
is Executive Vice President of Administration and Secretary of Reunion. Mr.
John G. Poole (Mr. Poole) is a director of Reunion.
Chatwins Group, Inc. - Until the merger, Chatwins was a privately held
corporation headquartered in Pittsburgh, Pennsylvania. Chatwins owned
approximately 37% of Reunion's outstanding common stock. Mr. Bradley was
Chairman of the Board and majority beneficial shareholder of Chatwins.
Kimball Bradley was Senior Vice President and a shareholder of Chatwins. Mr.
Poole was a director and shareholder of Chatwins.
Stanwich Partners, Inc. - Stanwich Partners, Inc. (SPI) is engaged in
consulting services in the field of financial planning and reporting. Mr.
Bradley is the President of SPI. Mr. Poole was Vice President of SPI until
December 31, 2001.
Stanwich Financial Services Corp. - SFSC is a privately held corporation
in the structured settlement business. SFSC is owned 100% by Mr. Bradley.
Mr. Evans was an officer of SFSC until June 2001. The Company has been named
as a defendant in several lawsuits filed against SFSC. See note 14.
Stanwich Acquisition Corp. - Stanwich Acquisition Corp. (SAC) was a
privately-held company whose common stock was owned 42.5% by Mr. Bradley,
42.5% by Kimball Bradley and 15% by Mr. Evans. SAC acquired Kingway Material
Handling (Kingway) in 1997 and was subsequently acquired by the Company
simultaneously with the Chatwins merger.
NPS Acquisition Corp. - NPS Acquisition Corp. (NPSAC) was formed by Mr.
Bradley to acquire and hold NAPTech Pressure Systems (NAPTech). NAPTech was
based in Clearfield, Utah and manufactures seamless steel pressure vessels, an
existing Metals product line. In January 2001, NPSAC was purchased by the
Company. See note 3.
CPS Leasing, Inc. - CPS Leasing, Inc. (CPSL) is a subsidiary of Consumer
Portfolio Services, Inc. (CPS). Mr. Bradley and Mr. Poole are stockholders of
CPS. Mr. Poole is a director of CPS and Mr. Bradley was a director until July
2001. Charles E. Bradley Jr., Mr. Bradley's son, is President of CPS. CPSL
is primarily engaged in machinery and equipment lease financing.
Butler Air, Inc. - Butler Air, Inc. (Butler) is a wholly owned subsidiary
of Stanwich Aviation Company, Inc. (SAVI). Butler provides charter flight
services. Mr. Bradley is a director of Butler and the owner of 65% of SAVI.
- F-37 -
The Transactions and Balances
SPI Consulting Agreement
Reunion, and Chatwins Group prior to the merger, have maintained various
consulting agreements with SPI under which $300,000 was recorded as expense
during each of the years ended December 31, 2001, 2000 and 1999, respectively.
The consulting agreement expires on March 31, 2003 unless terminated by SPI
with 30 days' notice. Annual payments are permitted on this agreement as long
as the Company meets an interest coverage ratio of at least 1.5 to 1 for the
prior 4 full fiscal quarters. All amounts owed to SPI from the Company have
been paid as of December 31, 2001. At December 31, 2000, $20,000 was prepaid
and is included in other current assets in the accompanying consolidated
balance sheet.
SPI Sublease
The Company subleases from SPI approximately 1,500 square feet of office
space in Stamford, Connecticut for administrative purposes. During 2001, the
Company paid SPI approximately $36,000 under this sublease. During 2000, the
Company paid SPI approximately $30,000 under this sublease.
SFSC Revolving Credit Facility
In November 1997, SFSC provided SAC with a revolving credit facility. At
the time of the merger and acquisition of Kingway, SFSC was paid $1,116,000
including interest under this loan from refinancing proceeds. The Company
assumed the remaining balance. See notes 3 and 8. During 2001, $148,000 of
interest was paid to SFSC. During 2000, $434,000 of interest was paid to
SFSC, including $75,000 prepaid at December 31, 2000 which is included in
other current assets in the accompanying consolidated balance sheet. At
December 31, 2001 and 2000, the balance of $2,998,000 is included in long-term
debt - related parties in the accompanying consolidated balance sheet. At
December 31, 2001, accrued and unpaid interest due to SFSC of $227,000 is
included in due to related parties in the accompanying consolidated balance
sheet.
Other SFSC Notes Payable
At the time of the acquisition of NPSAC by the Company, the Company
assumed two notes payable by NPSAC to SFSC. At December 31, 2001, their
balances of $500,000 and $100,000 are included in long-term debt - related
parties in the accompanying consolidated balance sheet. During 2001, no
interest was paid to SFSC related to these notes payable. At December 31,
2001, accrued and unpaid interest due to SFSC related to these notes payable
of $173,000 is included in due to related parties in the accompanying
consolidated balance sheet.
SFSC Note Receivable
In August 1999, pre-merger Reunion loaned $310,000 to SFSC. The loan was
scheduled to be repaid in December 1999 with interest at 15%. In December
1999, the Company agreed to extend the maturity to March 2000 and loaned an
additional $40,000 to SFSC also with interest at 15% which was repaid in March
2000. The remaining balance including accrued and unpaid interest due from
SFSC at December 31, 2001 and 2000 is $419,000 and $372,000, respectively, and
is included in due from related parties in the accompanying consolidated
balance sheet.
- F-38 -
Kingway Service Agreement
Similar to Auto-Lok, Chatwins Group's storage rack and materials handling
systems business prior to the merger, Kingway produced industrial and
commercial storage racks and materials handling systems. In 1997, Kingway and
Auto-Lok entered into a service agreement pursuant to which Kingway would
utilize Auto-Lok's surplus capacity in exchange for fees approximately equal
to Auto-Lok's costs of providing the surplus capacity. The integration of
Kingway's business into Auto-Lok's facility took place primarily during the
second quarter of 1998. During 2000, in the period prior to the merger, and
1999, costs totaling $1,256,000 and $1,550,000, respectively, were charged to
Kingway under this agreement. At the acquisition date, receivables totaling
$3,407,000 were due from Kingway.
NAPTech Services Agreement
In August 1998, the pressure vessel division of pre-merger Chatwins Group
and NPSAC entered into a services agreement pursuant to which CPI would
provide certain administrative services to NAPTech for cash fees at
approximately equal to the cost of providing such services. During 2000 and
1999 costs, net of non-cash services provided by NPSAC, totaling $1,363,000
and $899,000, respectively, were charged to NPSAC under this agreement. At
December 31, 2000, receivables totaling $2,356,000 were due from NPSAC and
included in due from related parties in the accompanying consolidated balance
sheets. On January 17, 2001, the Company acquired the common stock of NPSAC
from Mr. Bradley. See note 3.
CPS Leasing, Inc.
Reunion, and Chatwins Group prior to the merger, entered into various
operating lease agreements with CPSL. During 2001, 2000 and 1999, lease
payments totaling $803,000, $866,000 and $613,000, respectively, were paid to
CPSL. At December 31, 2001, the Company has future minimum rental commitments
under noncancellable operating leases with CPSL totaling $3,221,000.
Butler Air
Reunion, and Chatwins Group prior to the merger, entered into
arrangements for flying services with Butler. Butler provides charter flight
services for certain business travel by Reunion's officers and employees at
rates which the Company believes are comparable to those available from third
parties. The Company paid a monthly fee of $5,000 through May 2001 which was
credited against services used. Such arrangement was then terminated.
SFSC Collateral Fees
At the time of the merger and essential to the closing of the Bank of
America refinancing, SFSC provided side collateral in the form of CPS debt and
common stock to support the borrowings. Under this arrangement, SFSC is to
receive a 5% collateral fee for as long as the collateral is in place. Such
collateral was in place from the time of the merger and remains in place.
During 2001 and 2000, the Company recorded interest expense of $283,000 and
$224,000, respectively, related to this arrangement. During 2001, the Company
made a $100,000 payment related to this arrangement. At December 31, 2001,
$407,000 is included in due to related party in the accompanying consolidated
balance sheet.
- F-39 -
In March 2000, SFSC pledged a $5.0 million note from CPS to secure the
obligations of NPSAC to the former owners of the business. NPSAC agreed to
pay SFSC a 2% credit support fee for this pledge. The Company assumed this
credit support obligation in the acquisition of NPSAC. During 2001, no
amounts under this credit support obligation were paid to SFSC by the Company.
At December 31, 2001, accrued and unpaid fees totalling $154,000 were due to
SFSC under this credit support obligation and included in due to related party
in the accompanying consolidated balance sheet.
Cash Surrender Value of Life Insurance Policies
The Company pays the premiums on life insurance policies covering Mr.
Bradley, Mr. Joseph C. Lawyer (Mr. Lawyer), the Company's vice chairman and a
director, and Mr. Poole. Pursuant to these arrangements, the Company will be
reimbursed for the premiums it pays for such policies from either the death
benefit of the policy or their cash surrender value. The covered individuals
have agreed with the Company that if the policy proceeds are insufficient to
reimburse the Company for the full amount of the premiums paid, they will
cover the shortfall. As of December 31, 2001 and 2000, premiums paid by the
Company in excess of the cash surrender values of the policies totaled
$1,069,000 and $1,222,000, respectively, and are included in due from related
parties in the accompanying consolidated balance sheets.
Mr. Bradley Note Payable
At the time of the merger, the Company assumed a note payable to Mr.
Bradley related to pre-merger Reunion's plastics business. At December 31,
2001 and 2000, the balance of $1,017,000 is included in long-term debt -
related parties in the accompanying consolidated balance sheet. During 2001,
$55,000 was paid to SFSC related to this note payable. No interest was paid
in 2000. At December 31, 2001, accrued and unpaid interest due related to
this notes payable of $56,000 is included in due to related parties in the
accompanying consolidated balance sheet. The note payable and any accrued and
unpaid interest have been assigned to SFSC.
Mr. Bradley Guarantee
At the time of the NPSAC acquisition by the Company, NPSAC was indebted
to Mr. Bradley in connection with an agreement whereby Mr. Bradley guaranteed
certain obligations of NPSAC to its former owners. At December 31, 2001, a
total of $90,000 is included in due to related parties in the accompanying
consolidated balance sheet related to this agreement.
Employee Advances
At December 31, 2001 and 2000, the Company had non-interest bearing
advances due from five employees totaling $213,000 and $233,000, respectively.
The highest balance during each of 2001 and 2000 was $233,000.
NOTE 14: COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company and its subsidiaries are 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.
- F-40 -
In June 1993, the U.S. Customs Service (Customs) made a demand on
Chatwins Group's former industrial rubber distribution division for $612,948
in marking duties pursuant to 19 U.S.C. Sec. 1592. The duties are claimed on
importations of "unmarked" hose products from 1982 to 1986. Following
Chatwins Group's initial response raising various arguments in defense,
including expired statute of limitations, Customs responded in January 1997 by
reducing its demand to $370,968 and reiterating that demand in October 1997.
Chatwins Group restated its position and continues to decline payment of the
claim. Should the claim not be resolved, Customs threatens suit in the
International Courts of Claims. The Company continues to believe, based on
consultation with counsel, that there are facts which raise a number of
procedural and substantive defenses to this claim, which will be vigorously
defended. There is no applicable insurance coverage.
In December 1999, a stockholder of Reunion filed a purported class-action
lawsuit in Delaware Chancery Court alleging, among other things, that
Reunion's public stockholders would be unfairly diluted in the merger with
Chatwins Group. The lawsuit sought to prevent completion of the merger and,
the merger having been completed, seeks rescission of the merger or awarding
of damages. The lawsuit remains in the initial stages of discovery. Reunion
intends to vigorously contest the suit.
The Company has been named as a defendant in fifteen consolidated
lawsuits filed in December 2000 or early 2001 in the Superior Court for Los
Angeles County, California, three of which are purported class actions
asserted on behalf of approximately 200 payees. The plaintiffs in these
suits, except one, are structured settlement payees to whom Stanwich Financial
Services Corp. (SFSC) is indebted. The Company and SFSC are related parties
(see note 13).
In addition to the Company, there are numerous defendants in these suits,
including SFSC, Mr. Bradley, the sole shareholder of SFSC's parent, several
major financial institutions and certain others. All of these suits arise out
of the inability of SFSC to make structured settlement payments when due.
Pursuant to the court's order, plaintiffs in the purported class actions and
plaintiffs in the individual cases actions filed a model complaint. Except
for the class allegations, the two model complaints are identical. The
plaintiffs seek compensatory and punitive damages, restoration of certain
alleged trust assets, restitution and attorneys' fees and costs.
The plaintiffs in one of the suits are former owners of a predecessor of
SFSC and current operators of a competing structured settlement business.
These plaintiffs claim that their business and reputations have been damaged
by SFSC's structured settlement defaults, seek damages for unfair competition
and purport to sue on behalf of the payees.
The plaintiffs allege that the Company borrowed funds from SFSC and has
not repaid these loans. The plaintiffs' theories of liability against the
Company are that it is the alter ego of SFSC and Mr. Bradley and that the
Company received fraudulent transfers of SFSC's assets. The plaintiffs also
assert direct claims against the Company for inducing breach of contract and
aiding and abetting an alleged breach of fiduciary duty by SFSC.
On June 25, 2001, SFSC filed a Chapter 11 Bankruptcy Petition in the U.S.
Bankruptcy Court for the District of Connecticut. SFSC filed an adversary
proceeding in the bankruptcy case against the plaintiffs seeking a declaration
that the structured settlement trust assets are the property of the bankruptcy
estate. On July 16, 2001, the bankruptcy court granted a temporary
restraining order enjoining the plaintiffs from prosecuting their claims
against the Company, SFSC, Mr. Bradley and others. As a result of this
- F-41 -
restraining order of the bankruptcy court, the Company entered a standstill
agreement with the plaintiffs on August 22, 2001. Pursuant to the standstill
agreement, and the stipulation of the parties to the SFSC bankruptcy case, the
plaintiffs agreed to take no further action to prosecute any claim in the
litigation against the Company, Mr. Bradley and others to recover any
structured settlement trust assets or any derivative claims or claims based on
allegations of alter ego, fraudulent transfer or conversion. The plaintiffs
did not agree to waive or release their direct personal claims against the
Company for damages, but the plaintiffs agreed to cease and desist the
prosecution of those claims until no earlier than sixty days following service
of written notice to the Company stating that they have elected to
unilaterally terminate the standstill.
Plaintiffs filed second amended model complaints in the class actions and
individual cases on August 24, 2001. Both model complaints allege causes of
action against the Company for interference with contract and aiding and
abetting breach of fiduciary duty. However, pursuant to the standstill
agreement, the plaintiffs are taking no action to prosecute these claims
against the Company at this time.
Certain of the financial institution defendants have asserted cross-
complaints against the Company for implied and express indemnity and
contribution and negligence. The Company denies the allegations of the
plaintiffs and the cross-complainant financial institutions and intends to
vigorously defend against these actions and cross-actions.
The Company has been named in approximately 250 separate asbestos suits
filed since January 1, 2001 by three plaintiffs' law firms in Wayne County,
Michigan. The claims allege that cranes from the Company's crane
manufacturing location in Alliance, OH were present in various parts of
McLouth and Great Lakes Steel Mills in Wayne County, Michigan and that those
cranes contained asbestos to which plaintiffs were exposed over a 40 year
span. Counsel for the Company has filed an answer to each complaint denying
liability by the Company and asserting all alternative defenses permitted
under the Court's Case Management Order. Counsel for the Company has
negotiated dismissal of 95 cases without any cost to the Company. The Company
denies that it manufactured any products containing asbestos or otherwise knew
or should have known that any component part manufacturers provided products
containing asbestos. The Company intends to vigorously defend against these
lawsuits.
On July 10, 2001, a lawsuit that alleges personal injury from asbestos
exposure was filed in the Superior Court for San Francisco County in
California against greater than fifty defendants, including Oneida Rostone
Corporation (ORC), pre-merger Reunion's Plastics subsidiary and the Company's
Plastics Group. In October 2001, Allen-Bradley Company, a former owner of the
Rostone business of ORC, agreed to defend and indemnify Reunion in this
lawsuit pursuant to a contractual obligation to do so. As of March 15, 2002,
43 separate actions in various states have been brought against the Company
and all actions are being defended by the prior owner.
- F-42 -
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 materially adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
Except as described in the following paragraphs, the Company believes it
is currently in material compliance with existing environmental protection
laws and regulations and is not involved in any significant remediation
activities or administrative or judicial proceedings arising under federal,
state or local environmental protection laws and regulations. In addition to
management personnel who are responsible for monitoring environmental
compliance and arranging for remedial actions that may be required, the
Company has also employed outside consultants from time to time to advise and
assist the Company's environmental compliance efforts. Except as described in
the following paragraphs, the Company has not recorded any accruals for
environmental costs.
In February 1996, Reunion was informed by a contracted environmental
services consulting firm that soil and ground water contamination exists at
its Lafayette, Indiana site. Since then, the Company has expended $376,000 of
remediation costs and accrued an additional $20,000.
In connection with the sale of its former oil and gas operations, pre-
merger Reunion retained certain oil and gas properties in Louisiana because of
litigation concerning environmental matters. The Company is in the process of
environmental remediation under a plan approved by the Louisiana Department of
Natural Resources Office of Conservation (LDNROC). The Company has recorded
an accrual for its proportionate share of the remaining estimated costs to
remediate the site based on plans and estimates developed by the environmental
consultants hired by the Company. During 1999, the Company conducted
remediation work on the property. The Company paid $172,000 of the total cost
of $300,000. Regulatory hearings were held in January 2000 and 2001 to
consider the adequacy of the remediation conducted to date. In August 2001,
LDNROC issued its order for the Company to complete the soil remediation under
the plan approved in 1999 and to perform additional testing to determine to
what extent groundwater contamination might exist. The Company's
environmental consultant is in the process of updating the estimate of the
costs to comply with this order, but the Company does not believe that the
cost of future remediation will exceed the amount accrued. No remediation was
performed in 2000 or 2001 pending the decision. However, the Company has paid
$232,000 for its share of consulting services in connection with the hearings.
At December 31, 2001, the balance accrued for these remediation costs is
approximately $1,076,000. 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.
- F-43 -
On March 15, 2002, the Company received a Request for Information from
the United States Environmental Protection Agency (USEPA) regarding the
Gambonini Mine Site in Marin County, California. The Company is currently
gathering the information requested by the USEPA and is cooperating fully with
this request. At this time, the Company has not been formally named as a
potentially responsible party. As such and because the extent of the
Company's involvement with the Gambonini Mine Site is not known, the Company
has not made any assessment of potential liability, if any.
Operating leases
Minimum rental commitments under all noncancellable operating leases in
effect at December 31, 2001, were as follows (in thousands):
Year ended December 31,
Total 2002 2003 2004 2005 2006 After 2006
------- ------ ------ ------ ------ ------ ----------
$22,756 $4,724 $3,565 $2,900 $2,422 $1,745 $7,400
======= ====== ====== ====== ====== ====== ======
Of the total future lease rental commitments of $22.8 million, $7,061,000
relates to discontinued operations, of which $5,782,000 relates to the
discontinued materials handling systems business and $1,279,000 relates to the
discontinued bridges and cranes business. As part of the Company's plan to
restructure its continuing operations and the related provision for
restructuring recorded in 2001, the Company has provided $2,167,000 of
operating lease termination reserves, of which $995,000 relates to the
discontinued bridges and cranes operations. Operating lease commitments
related to the discontinued materials handling systems business are
anticipated to be assigned to the purchaser of the business when sold.
Operating lease rental expense related to continuing operations for the
years ended December 31, 2001, 2000 and 1999, amounted to $3,181,000,
$2,482,000 and $851,000, respectively.
NOTE 15: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash and cash equivalents, accounts receivable and accounts payable -
The carrying amounts approximate fair value because of the short maturities of
these instruments.
Debt - Approximately 53% of the Company's debt has variable rates of
interest and 47% bears interest at fixed rates approximating current market
rates. Accordingly, management estimates that the carrying amounts
approximate the fair value, approximately $72.9 million at December 31, 2001.
Approximately 1% ($1,017,000) of the debt is related party debt for which
comparable instruments do not exist. Accordingly, it is not practicable to
estimate the fair value of this debt. This debt bears interest at 11% and is
subject to subordination to the Bank of America senior secured credit
facilities.
- F-44 -
NOTE 16: DISCONTINUED OPERATIONS
In December 2001, pursuant to the plan developed by management to
restructure the Company's continuing businesses and dispose of or shut-down
certain other businesses (see note 2), the Company classified and began
accounting for its bridges and cranes and materials handling systems
businesses as discontinued operations in accordance with Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" (APB 30).
On October 27, 2000, the Company sold substantially all of its wine grape
agricultural operations and real estate holdings in Napa County, California.
The Company classified and began accounting for the agricultural operations as
discontinued operations in accordance with APB 30.
During 1999, Chatwins Group's management adopted plans to exit the
grating manufacturing business and oil and gas business through the
disposition of all of its grating and oil and gas related assets. Upon
adoption of the plans, Chatwins Group classified and began accounting for such
businesses as discontinued operations in accordance with APB 30.
On September 30, 1999, Chatwins Group completed the sale of its domestic
grating business and assets to Alabama Metal Industries Corporation (AMICO)
for $32.1 million in cash and the assumption by AMICO of certain operating
liabilities, subject to post-closing adjustments. The sale of the domestic
business and assets of Discontinued Klemp resulted in a pre-tax gain of
approximately $12.3 million, classified within discontinued operations for the
year ended December 31, 1999, net of tax, at $8.4 million. Chatwins Group
retained certain obligations of Discontinued Klemp and is obligated to pay
various expenses of the sale, all of which have been estimated to total
approximately $2.7 million and are classified within discontinued operations
for the year ended December 31, 1999, net of tax, at $1.9 million, and within
net assets (liabilities) of discontinued operations as reserve for estimated
expenses. Through December 31, 1999, Chatwins Group paid in cash almost $1.6
million of such expenses. In December 1999, this reserve was increased by
$0.7 million for additional identified future items. Obligations retained and
expenses required to be paid by Chatwins Group primarily include non-
cancelable lease commitments and legal and professional fees.
At that time management provided a reserve for estimated losses on
disposals of its international grating businesses and its oil and gas
operations of $6.0 million and $1.0 million, respectively. Such estimated
losses on disposal are classified within discontinued operations for the year
ended December 31, 1999, net of tax, at $4.1 million (including $0.5 million
for estimated operating losses during the phase-out period) and $0.7 million,
respectively, and within net assets (liabilities) of discontinued operations
as reserve for estimated loss on disposal. During the fourth quarter of 1999,
$3.4 million of such reserve was utilized to write-off receivables due to
Chatwins Group from Klemp de Mexico ($2.6 million) and to recognize losses on
disposal from sales of oil and gas assets ($0.8 million). Cash proceeds from
the sales of oil and gas related assets during the fourth quarter of 1999
totaled approximately $0.2 million. Such cash proceeds were used to paydown
borrowings under the BOA Facility.
- F-45 -
In the period subsequent to the sale of its domestic grating business to
AMICO, Chatwins Group (and then Reunion after the merger) and AMICO
unsuccessfully attempted to negotiate the final post-closing adjustment. The
purchase and sale agreement between Chatwins Group and AMICO included a
provision for disagreements over the final post-closing adjustments to enter
binding arbitration. Reunion and AMICO entered binding arbitration in the
second quarter of 2000 which resulted in a final post-closing adjustment
payment of $1.3 million by Reunion to AMICO in November 2000. Reunion made
the payment from funds available under its revolving credit facility with Bank
of America. In calculating the gain on disposal in September 1999, the
Company provided $0.5 million for future estimated purchase price adjustments,
a $0.8 million difference. During 2000, including the payment to AMICO,
Reunion made payments of expenses of discontinued operations of $2.2 million.
During 2001, Reunion made payments of expenses of discontinued operations of
more than $0.4 million.
At December 31, 2001, the assets and liabilities of discontinued
operations are comprised of the assets and liabilities of the discontinued
bridges and cranes and material handling systems businesses and the remaining
reserve for expenses of the discontinued grating business. At December 31,
2000, the assets and liabilities of discontinued operations are comprised of
the assets and liabilities of the discontinued bridges and cranes and material
handling systems businesses, the assets and liabilities of the discontinued
wine grape agricultural business, the remaining reserve for expenses of the
discontinued grating business and a $680,000 note payable due May 1, 2001
related to an industrial development revenue bond issue by Orem City, Utah.
This note payable was retained by the Company upon the sale of its domestic
grating operations and paid with funds available under it revolving credit
facility on May 1, 2001. The assets and liabilities have been separately
classified on the balance sheet as net assets of discontinued operations. A
summary follows (in thousands):
At December 31,
2001 2000
-------- --------
NET ASSETS, CURRENT:
Cash and cash equivalents $ 506 $ 723
Receivables, net 14,463 19,849
Inventories, net 2,093 3,802
Other current assets 249 1,202
-------- --------
Total current assets 17,311 25,576
-------- --------
Current maturities of debt - 680
Trade payables 7,182 10,753
Other current liabilities 2,014 3,277
Reserve for operating losses during phase-out 2,628 -
Reserve for estimated expenses 325 450
-------- --------
Total liabilities 12,149 15,160
-------- --------
Net assets of discontinued operations, current $ 5,162 $ 10,416
======== ========
NET ASSETS, NON-CURRENT:
Property, plant and equipment, net $ 6,985 $ 7,888
Goodwill, net 11,628 12,516
Other assets, net 28 753
-------- --------
Net assets of discontinued operations,
non-current $ 18,641 $ 21,157
======== ========
- F-46 -
Pursuant to APB 30, the consolidated financial statements reflect the
operating results of discontinued operations separately from continuing
operations. For 2001, results of discontinued operations relate to the
Company's discontinued bridges and cranes and material handling systems
businesses. For 2000, results of discontinued operations relate to the
Company's discontinued bridges and cranes and material handling systems
businesses and discontinued wine grape agricultural operations. Summarized
results of discontinued operations for the years ended December 31, 2001 and
2000 follow (in thousands):
2001 2000
-------- --------
Net sales $ 64,979 $ 79,748
Income (loss) before taxes (8,720) 845
Interest expense is allocated to discontinued operations on the basis of
the percentage of total average assets of discontinued operations to gross
total assets for the period presented. The above results of discontinued
operations include actual and allocated interest expense totaling $3.1 million
and $4.4 million for the years ended December 31, 2001 and 2000, respectively.
The above results of discontinued operations for 2000 includes a $2,286,000
gain on sale of the discontinued agricultural operations.
In the merger, Chatwins Group was considered the acquirer for purposes of
applying purchase accounting. Accordingly, all pre-merger historical
financial statements are those of the former Chatwins Group. Because Chatwins
Group used the equity method to account for its approximately 37% investment
in Reunion prior to the merger, the agricultural operations were not
reclassified to discontinued operations. Had the agricultural operations been
reclassified from equity in loss of affiliate, the effect on Chatwins Group's
results from continuing operations for the year ended December 31, 1999 is as
follows (in thousands, except for per share amounts)(unaudited):
1999
--------
Income from continuing operations $ 264
Effect of reclassification 501
-------
Adjusted income from continuing operations 765
Preferred stock dividend accretions (456)
-------
Adjusted income applicable to common stockholders $ 309
=======
Income (loss) from continuing operations per common
share - basic and diluted $ 0.03
=======
Weighted average number of common shares - basic and diluted 9,500
=======
NOTE 17: SEGMENT DISCLOSURES AND RELATED INFORMATION
The Company owns and operates a diverse group of industrial manufacturing
operations that design and manufacture engineered, high-quality products for
specific customer requirements, such as large-diameter seamless pressure
vessels, hydraulic and pneumatic cylinders, leaf springs and precision plastic
components. Until December 2001, the Company's products also included heavy-
duty cranes, bridge structures and materials handling systems. In December
2001, the Company classified its heavy-duty cranes, bridge structures and
materials handling systems businesses as discontinued operations.
- F-47 -
The Company's customers include original equipment manufacturers and end-
users in a variety of industries, such as transportation, power generation,
chemicals, metals, home electronics, office equipment and consumer goods. The
Company's business units are organized into two major product categories:
* Metals manufactures and markets a broad range of fabricated and machined
industrial metal parts and products including large-diameter seamless pressure
vessels, hydraulic and pneumatic cylinders and leaf springs. Metals serves
original equipment manufacturers and end-users and has nearly 1,000 customers.
* Plastics manufactures precision molded plastic parts and provides
engineered plastics services to more than 500 original equipment
manufacturers.
Prior to the third quarter of 2001, the Company considered these product
categories to be its reportable segments for financial reporting purposes.
Due to the third quarter 2001 downturns in the markets for several of the
Company's Metals product lines and the resulting significant variation in
product line gross margins, the Company realigned Metals' reportable segments
into its separate Metals' products. The Company then classified two Metals'
businesses as discontinued operations in the fourth quarter of 2001 and
combined two others, resulting in two reportable segments: pressure vessels
and springs; cylinders. Plastics continues to be reported as a single
segment.
Reunion's continuing operations manufacture their products in the United
States. Of Reunion's $99.5 million of consolidated net sales for 2001, $16.7
million were export sales, of which $12.6 million related to pressure vessel
sales and $3.7 million related to Plastics. The remainder related to cylinder
sales in Canada. Of the $12.6 million of foreign pressure vessel sales,
approximately $9.0 million was in the Far East (principally China and Taiwan)
and $2.6 million was in Western Europe. The remainder were in the Middle East
and Canada. Plastics export sales included $2.6 million in Mexico with the
remainder in Europe and Canada. During 2001, no one customer accounted for
more than 10.0% of the net sales of Reunion.
- F-48 -
Segment data, including earnings before interest, taxes, depreciation and
amortization (EBITDA), for the years ended December 31, 2001, 2000 and 1999
(in thousands except for related notes):
Capital Total
Net Sales EBITDA(1) Spending Assets(2)
--------- --------- --------- ---------
2001:
-----
Metals:
Pressure vessels and springs $ 41,594 $ 6,085 $ 260 $ 17,936
Cylinders 19,369 (2,182) 26 9,662
-------- -------- -------- --------
Subtotal Metals 60,963 3,903 286 27,598
Plastics 38,532 (1,123) 1,066 18,443
Corporate and other - (3,660) 10 14,572
Discontinued operations - - 1,535 23,803
-------- -------- -------- --------
Totals $ 99,495 (880) $ 2,897 $ 84,416
======== ======== ========
Write-off of impaired goodwill (2,946)
Depreciation and amortization(5) (5,392)
Interest expense (7,057)
--------
Loss from continuing operations
before income taxes $(16,275)
========
2000:
-----
Metals:
Pressure vessels and springs $ 32,250 $ 7,180 $ 520 $ 23,103
Cylinders(3) 30,463 7,130 130 14,152
-------- -------- -------- --------
Subtotal Metals 62,713 14,310 650 37,255
Plastics 42,008 2,563 1,031 23,485
Corporate and other(4) - 865 71 24,126
Discontinued operations - - 2,320 31,573
-------- -------- -------- --------
Totals $104,721 17,738 $ 4,072 $116,439
======== ======== ========
Depreciation and amortization(5) (4,639)
Interest expense (6,972)
Equity in loss of affiliate (296)
--------
Income from continuing operations
before income taxes $ 5,831
========
- F-49 -
Capital
Net Sales EBITDA(1) Spending
--------- --------- ---------
1999:
-----
Metals:
Pressure vessels and springs $ 27,400 $ 4,578 $ 850
Cylinders 32,291 3,950 320
-------- -------- --------
Subtotal Metals 59,691 8,528 1,170
Corporate and other - (1,711) 37
Discontinued operations - - 1,378
-------- -------- --------
Totals $ 59,691 6,817 $ 2,585
======== ========
Depreciation and amortization(5) (1,648)
Interest expense (5,261)
Equity in loss of affiliate (566)
--------
Loss from continuing operations
before income taxes $ (658)
========
(1) EBITDA is presented as it is the primary measurement used by management
in assessing segment performance and not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a
widely accepted financial indicator of a company's ability to incur and
service debt.
(2) Headquarters total assets at December 31, 2001 is primarily comprised
of goodwill. Headquarters total assets at December 31, 2000 is primarily
comprised of goodwill and deferred tax assets. At December 31, 2001,
the goodwill relates to the Company's pressure vessel and springs segment
and the cylinders segment. Because of the historically positive
operating results and cash generation of the pressure vessel
and springs segment, management does not consider its related goodwill
to be impaired as of December 31, 2001. Also, management does not
consider the cylinders segment goodwill to be impaired as the
Company believes this segment is in a temporary cyclical downturn.
(3) Includes the gain of $2.4 million on sale of the land and building of
the Company's Chicago, IL hydraulic cylinder location.
(4) Includes the gain of $4.9 million on sale of the Company's Irish
plastics operation.
(5) Excludes amortization of debt issuance expenses of $1,011,000,
$897,000 and $1,308,000 for the years ended December 31, 2001, 2000
and 1999, respectively, which is included in interest expense.
- F-50 -
NOTE 18: QUARTERLY DATA (unaudited)
In the fourth quarter of 2001, the Company classified its bridges and
cranes and materials handling systems operations as discontinued operations.
Amounts for interim periods during 2001 and 2000 have been restated. Results
by quarter for 2001 and 2000 follow:
2001 Quarter Ended
--------------------------------------
March 31 June 30 Sept 30 Dec 31
-------- -------- -------- --------
Operating revenue $ 32,472 $ 26,318 $ 21,658 $ 19,047
Operating costs and expenses 29,968 26,030 22,545 30,170
-------- -------- -------- --------
Operating income (loss) $ 2,504 $ 288 $ (887) $(11,123)
======== ======== ======== ========
Income (loss) from continuing
operations $ 511 $ (1,037) $ (1,069) $(27,358)
Income (loss) from discontinued
operations 250 537 (1,651) (8,311)
-------- -------- -------- --------
Net income (loss) $ 761 $ (500) $ (2,720) $(35,669)
======== ======== ======== ========
Income (loss) from continuing
operations per common share:
Basic $ 0.03 $ (0.07) $ (0.07) $ (1.76)
======== ======== ======== ========
Diluted $ 0.03 $ (0.07) $ (0.07) $ (1.76)
======== ======== ======== ========
Significant items included in results
of continuing operations which might
affect comparability are as follows:
Provision for restructuring $ - $ - $ - $ 6,811
Provision for inventories - - - 2,485
Provision for valuation allowance on
deferred tax assets - - - 12,678
======== ======== ======== ========
2000 Quarter Ended
--------------------------------------
March 31 June 30 Sept 30 Dec 31
-------- -------- -------- --------
Operating revenue $ 19,871 $ 32,685 $ 28,762 $ 23,403
Operating costs and expenses 17,835 30,365 22,250 21,172
-------- -------- -------- --------
Operating income $ 2,036 $ 2,320 $ 6,512 $ 2,231
======== ======== ======== ========
Income (loss) from continuing
operations $ 1,113 $ (214) $ 4,572 $ 976
Income (loss) from discontinued
operations (318) 562 (198) 499
Loss from extraordinary items (1,772) - (80) -
-------- -------- -------- --------
Net income (loss) $ (977) $ 348 $ 4,294 $ 1,475
======== ======== ======== ========
Income (loss) from continuing
operations per common share:
Basic $ 0.10 $ (0.02) $ 0.30 $ 0.06
======== ======== ======== ========
Diluted $ 0.10 $ (0.02) $ 0.30 $ 0.06
======== ======== ======== ========
Significant items included in results
of continuing operations which might
affect comparability are as follows:
Gains on sales of businesses
and assets $ - $ - $ 4,933 $ 2,441
======== ======== ======== ========
- F-51 -
Report of Independent Accountants
To the Board of Directors of
Reunion Industries, Inc.
Our audits of the consolidated financial statements referred to in our
report dated April 18, 2001, appearing in this Annual Report on Form 10-K of
Reunion Industries, Inc. also included an audit of the financial statement
schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in connection with the related
consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
Pittsburgh, Pennsylvania
April 18, 2001
REUNION INDUSTRIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
(dollars in thousands)
Charged to
Beginning Costs and Ending
Balance Expenses Other Deductions Balance
--------- ---------- ------- ---------- -------
Year ended
December 31, 2001:
Allowance for doubtful
accounts $ 554 $ 168 $ (226)(6) $ 284(3) $ 212
Inventory obsolescence
reserve 887 1,113 (275)(6) 221(4) 1,504
Deferred tax valuation
allowance 35,734 14,741 - - 50,475
Reserve for
restructuring - 1,192 - - 1,192
Year ended
December 31, 2000:
Allowance for doubtful
accounts $ 196 $ 251 $ 396(1) $ 289(3) $ 554
Inventory obsolescence
reserve 395 362 375(1) 245(4) 887
Deferred tax valuation
allowance - - 38,933(2) 3,199(5) 35,734
_________________________
(1) Acquired in the merger (Reunion with Chatwins Group) and
acquisition (Kingway).
(2) Represents valuation allowance acquired in the merger of $65,413
less post-merger expirations of NOL's of $26,480.
(3) Uncollectible accounts written off, net of recoveries.
(4) Inventory written off.
(5) NOL's utilized post-merger net of benefit.
(6) Reduction to beginning balance due to businesses classified as
discontinued operations during 2001.
S-1
EXHIBIT INDEX
2.1 Merger Agreement by and between Reunion Resources Company and
Reunion Industries, Inc. Incorporated by reference to Exhibit 2.1 to
Registration Statement on Form S-4 filed on March 4, 1996
(File No. 33-64325).
2.2 Amended and Restated Merger Agreement, dated as of July 28, 1999,
between Reunion Industries, Inc. and Chatwins Group, Inc.
Incorporated by reference to Exhibit 2.2 to Registration Statement
on Form S-4 filed on September 28, 1999 (File No. 333-84321).
3.1 Certificate of Incorporation of Reunion Industries, Inc. Incorporated
by reference to Exhibit 3.1 to Registration Statement on Form S-4
filed on March 4, 1996 (File No. 33-64325).
3.2 Bylaws of Reunion Industries, Inc. Incorporated by reference to
Exhibit 3.2 to Registration Statement on Form S-4 filed on
March 4, 1996 (File No. 33-64325).
3.3 Not used.
3.4 Not used.
4.1 Specimen Stock Certificate evidencing the Common Stock, par value $.01
per share, of Reunion Industries, Inc. Incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-4 filed on
March 4, 1996 (File No. 33-64325).
4.2 Not used.
4.3 Not used.
10.1* Buttes Gas & Oil Co. 1992 Nonqualified Stock Option Plan.
Incorporated by reference to Exhibit 10.35 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992 (File
No. 001-07726).
10.2* Form of Stock Option Agreement for options issued pursuant to the 1992
Nonqualified Stock Option Plan. Incorporated by reference to Exhibit
10.36 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1992 (File No. 001-07726).
10.3* Reunion Resources Company 1993 Incentive Stock Plan. Incorporated by
reference to Exhibit 10.34 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993 (File No. 001-07726).
- E-1 -
10.4* Form of Stock Option Agreement for options issued pursuant to the 1993
Incentive Stock Plan. Incorporated by reference to Exhibit 10.35 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1993 (File No. 001-07726).
10.5* The 1998 Stock Option Plan of Reunion Industries, Inc. Incorporated
by reference to Exhibit 2.2 to Registration Statement on Form S-4
filed on June 26, 1998 (File No. 333-56153).
10.6* Form of Stock Option Agreement for options issued pursuant to the 1998
Stock Option Plan of Reunion Industries, Inc. Incorporated by
reference to Exhibit 10.7 to Reunion Industries' Annual Report on
Form 10-K for the year ended December 31, 1998 (File No. 33-64325).
10.7 -
10.12 Not used.
10.13 Asset Purchase Agreement between Oneida Rostone Corp., Quality Molded
Products, Inc. and Don A. Owen, dated November 18, 1996. Incorporated
by reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K dated November 18, 1996 (File No. 33-64325).
10.14 Asset Purchase Agreement, dated September 30, 1999, by and between
Chatwins Group, Inc. and Alabama Metal Industries Corporation
Incorporated by reference to exhibit 10.5 to Registration Statement
on Form S-4 filed on November 12, 1999 (File No. 333-84321).
10.15 Amended and Restated Financing and Security Agreement by and among
Reunion Industries, Inc. as Borrower and Bank of America, National
Association, as Agent and Bank of America, National Association and
others as Formula Lenders and Bank of America, National Association
and others as Term Loan B Lenders dated as of March 16, 2000.
Incorporated by reference to exhibit 10.15 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999
(File No. 33-64325).
10.16 Indenture, dated as of May 1, 1993, by and between Chatwins Group,
Inc. and The First National Bank of Boston, as trustee. Incorporated
by reference to Exhibit 4.4 to Chatwins Group, Inc.'s Registration
Statement on Form S-1 filed on July 30, 1993 (File No. 33-63274).
10.17 First Supplemental Indenture and Wavier of Covenants of Indenture
between The First National Bank of Boston, as trustee, and Chatwins
Group, Inc. Incorporated by reference to Exhibit 4.32 to Chatwins
Group, Inc.'s Current Report on Form 8-K dated June 30, 1995 and filed
with the Commission on July 3, 1995 (File No. 33-63274).
10.18 Second Supplemental Indenture between The First National Bank
of Boston, as trustee, and Chatwins Group, Inc. Incorporated
by reference to Exhibit 4.33 to Chatwins Group, Inc.'s Current
Report on Form 8-K dated June 30, 1995 and filed with the Commission
July 3, 1995 (File No. 33-63274).
10.19 Third Supplemental Indenture, dated as of May 28, 1999, between
Chatwins Group, Inc. and State Street Bank and Trust company,
as successor Trustee to The First National Bank of Boston.
Incorporated by reference to exhibit 10.19 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999
(File No. 33-64325).
- E-2 -
10.20 Fourth Supplemental Indenture, dated as of March 8, 2000, between
Chatwins Group, Inc. and State Street Bank and Trust Company, as
successor Trustee to The First National Bank of Boston.
Incorporated by reference to exhibit 10.20 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999
(File No. 33-64325).
10.21 Fifth Supplemental Indenture, dated as of March 16, 2000, between
Chatwins Group, Inc., Reunion Industries, Inc. and State Street
Bank and Trust Company, as successor Trustee to The First National
Bank of Boston. Incorporated by reference to exhibit 10.21 in
the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 (File No. 33-64325).
10.22 Share Purchase Agreement dated August 4, 2000 among the Registrant,
RII Investment Corp., Enterprise Ireland, Paul Walsh, Donal Lawlor,
Brendan Murtagh and Tintarent Limited. Incorporated by reference
to exhibit 10.22 in the Company's Current Report on Form 8-K dated
August 31, 2000 (File No. 33-64325).
10.23 Deed of Indemnity dated August 4, 2000 between RII Investment Corp.
and Tintarent Limited. Incorporated by reference to exhibit 10.23
in the Company's Current Report on Form 8-K dated August 31, 2000
(File No. 33-64325).
10.24 Deed of Guarantee dated August 4, 2000 between the Registrant and
Tintarent Limited. Incorporated by reference to exhibit 10.24
in the Company's Current Report on Form 8-K dated August 31, 2000
(File No. 33-64325).
10.25 Disclosure Letter dated August 4, 2000 between the RII Investment
Corp. and Tintarent Limited. Incorporated by reference to exhibit
10.25 in the Company's Current Report on Form 8-K dated August
31, 2000 (File No. 33-64325).
10.26 Real Estate Purchase Agreement dated May 5, 2000 between Juliana
Vineyards and Triad Napa LLC. Incorporated by reference to exhibit
10.26 in the Company's Current Report on Form 8-K dated October 27,
2000 (File No. 33-64325).
10.27 First Amendment to Real Estate Purchase Agreement dated August 12,
2000 between Juliana Vineyards and Triad Napa LLC. Incorporated by
reference to exhibit 10.27 in the Company's Current Report on
Form 8-K dated October 27, 2000 (File No. 33-64325).
10.28 Agent Side Letter Agreement dated May 1, 2000 between Reunion
Industries, Inc. and Bank of America, National Association.
Incorporated by reference to exhibit 10.28 in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000
(File No. 33-64325).
10.29 Agent Side Letter Agreement dated June 6, 2000 between Reunion
Industries, Inc. and Bank of America, National Association.
Incorporated by reference to exhibit 10.29 in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000
(File No. 33-64325).
10.30 Amendment No. 1 to Amended and Restated Financing and Security
Agreement dated June 26, 2000 between Reunion Industries, Inc.,
Bank of America, National Association, Congress Financial Corporation
and Contrarian Funds, LLC. Incorporated by reference to exhibit
10.30 in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 (File No. 33-64325).
- E-3 -
10.31 Amendment No. 2 to Amended and Restated Financing and Security
Agreement dated July 31, 2000 between Reunion Industries, Inc.,
Bank of America, National Association, Congress Financial Corporation
and Contrarian Funds, LLC. Incorporated by reference to exhibit
10.31 in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 (File No. 33-64325).
10.32 Amendment No. 3 to Amended and Restated Financing and Security
Agreement dated December 12, 2000 between Reunion Industries, Inc.,
Bank of America, National Association, Congress Financial Corporation
and Citizens Business Credit Company. Incorporated by reference to
exhibit 10.32 in the Company's Annual Report on Form 10-K for the
year ended December 31, 2000 (File No. 33-64325).
10.33 Amendment No. 4 to Amended and Restated Financing and Security
Agreement dated January 19, 2001 between Reunion Industries, Inc.,
Bank of America, National Association, Congress Financial Corporation
and Citizens Business Credit Company. Incorporated by reference to
exhibit 10.33 in the Company's Annual Report on Form 10-K for the
year ended December 31, 2000 (File No. 33-64325).
10.34 Merger Agreement dated as of March 30, 1999 among Reunion
Industries, Inc., Stanwich Acquisition Corp., Kimball J. Bradley,
Richard L. Evans, Charles E. Bradley, Sr. and Stanwich Financial
Services Corp. Incorporated by reference to exhibit 10.34 in
the Company's Annual Report on Form 10-K for the year ended
December 31, 2000 (File No. 33-64325).
10.35 Merger Agreement dated as of March 30, 1999 among Reunion
Industries, Inc., NPS Acquisition Corp. and Charles E.
Bradley, Sr. Incorporated by reference to exhibit 10.35 in
the Company's Annual Report on Form 10-K for the year ended
December 31, 2000 (File No. 33-64325).
10.36 Forebearance Agreement dated as of January 16, 2001 among NAPTech,
Inc.; NAPTech PS Corporation, Reunion Industries, Inc., Stanwich
Financial Services Corp. and Charles E. Bradley. Incorporated by
reference to exhibit 10.36 in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 (File No. 33-64325).
10.37 Reaffirmation of Merger Agreement dated as of December 5, 2000
among Reunion Industries, Inc., NPS Acquisition Corp. and
Charles E. Bradley. Incorporated by reference to exhibit
10.37 in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 (File No. 33-64325).
10.38 Subordinated Promissory Note payable by Reunion Industries, Inc.
pay to the order of NAPTECH, Inc. and NAPTECH PS Corporation in
the amount of $4,860,535. Incorporated by reference to exhibit
10.38 in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 (File No. 33-64325).
10.39 Side Letter Agreement dated April 17, 2001 between Reunion
Industries, Inc., Bank of America, National Association,
Congress Financial Corporation and Citizens Business Credit
Company. Incorporated by reference to exhibit 10.39 in
the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 (File No. 33-64325).
10.40 Side Letter Agreement dated November 28, 2001 between Reunion
Industries, Inc. and Bank of America, National Association.(1)
10.41 Side Letter Agreement dated December 7, 2001 between Reunion
Industries, Inc. and Bank of America, National Association.(1)
- E-4 -
10.42 Side Letter Agreement dated January 22, 2002 between Reunion
Industries, Inc. and Bank of America, National Association.(1)
10.43 Side Letter Agreement dated February 1, 2002 between Reunion
Industries, Inc. and Bank of America, National Association.(1)
10.44 Side Letter Agreement dated March 1, 2002 between Reunion
Industries, Inc. and Bank of America, National Association.(1)
10.45 Side Letter Agreement dated April 1, 2002 between Reunion
Industries, Inc. and Bank of America, National Association.(1)
21.1 List of subsidiaries and jurisdictions of organization.(1)
23.1 Consent of Independent Public Accountants - Ernst & Young LLP(1)
23.2 Consent of Independent Public Accountants - PricewaterhouseCoopers
LLP(1)
(1) - Filed herewith.
* - Compensatory plan or arrangement.
- E-5 -
Exhibit 21.1
REUNION INDUSTRIES, INC.
SUBSIDIARIES AS OF DECEMBER 31, 2001
Company Incorporated Parent
------- ------------ ------
1 Reunion Industries, Inc. Delaware
2 Juliana Vineyards California 1
3 Buttes Drilling-C Company Texas 1
4 Reunion Titan, Inc. Texas 3
5 Reunion Potash Company Delaware 1
6 Shanghai Klemp Metals Products Company* Peoples Republic
of China 1 (65.0%)
Inactive Companies
------------------
11 Buttes Resources Canada, Ltd. Delaware 1
12 Ocean Phoenix Transport, Inc. District of Columbia 1
13 Reunion Sub I, Inc. Delaware 1
14 Reunion Sub II, Inc. Delaware 1
15 Reunion Sub III, Inc. Delaware 1
16 Asie-Dolphin Drilling SDN BHD Malaysia 3 (49%)
17 Buttes Gas & Oil do Brasil, Ltda. Brazil 1 (49%)
18 Dolphin Titan do Brazil Servicos
de Perfuracoes, Ltd. Brazil 3
19 Monaco Corporation British Virgin Is. 3
20 Ocean Phoenix Holdings, N. V. Netherlands Antilles 1
21 Progress Drilling International, Inc. Panama 3
22 Progress Perfuracoes do Brasil, Ltd. Brazil 21
* The Company has no control over the operations of this subsidiary.
- E-6 -
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-37702) pertaining to the 1998 Stock Option Plan,
the Registration Statement (Form S-8 No. 333-62074) pertaining to the 1998
Stock Option Plan, the Registration Statement (Form S-8 No. 33-77232)
pertaining to the 1993 Stock Option Plan, the Registration Statement (Form S-3
No. 33-77566) pertaining to the registration of 248,500 shares of common
stock, the Registration Statement (Form S-3 No. 333-37368) pertaining to the
registration of 8,269,479 shares of common stock and the Registration
Statement (Form S-3 No. 333-41842) pertaining to the registration of 3,245,515
shares of common stock of Reunion Industries, Inc. of our report dated March
15, 2002, with respect to the consolidated financial statements and schedule
of Reunion Industries, Inc. included in the Annual Report (Form 10-K) for the
year ended December 31, 2001.
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
April 16, 2002
- E-7 -
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-37702, 33-77232 and 333-62074) and
Registration Statements on Form S-3 (Nos. 33-77566, 333-37368 and 333-41842)
of Reunion Industries, Inc. of our reports, dated April 18, 2001, relating to
the financial statements and financial statement schedule which appear in this
Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Pittsburgh, Pennsylvania
April 16, 2002
- E-8 -
Exhibit 10.40
[BANK OF AMERICA LETTERHEAD]
November 28, 2001
Mr. Kimball J. Bradley
Reunion Industries, Inc.
300 Weyman Plaza
Suite 340
Pittsburgh, Pennsylvania 15236
Re: Amended and Restated Financing Agreement, dated as of March 16, 2000,
by and between REUNION INDUSTRIES, INC., a Delaware corporation ("Borrower"),
BANK OF AMERICA, NATIONAL ASSOCIATION, a national banking association
("BANA"), and each other financial institution that is a party thereto
(collectively, the "Lenders" and individually, a "Lender"), and BANK OF
AMERICA, NATIONAL ASSOCIATION a national banking association, in its capacity
as both collateral and administrative agent (the "Agent") for each of the
Lenders, as such agreement has been amended by that certain Amendment No. 1 to
Amended and Restated Financing and Security Agreement, dated as of June 26,
2000, by that certain Amendment No. 2 to Amended and Restated Financing and
Security Agreement, dated as of July 31, 2000, by that certain Amendment No. 3
to Amended and Restated Financing and Security Agreement, dated as of December
12, 2000 and by that certain Amendment No. 4 to Amended and Restated Financing
and Security Agreement, dated as of January 19, 2001 (as amended, modified,
restated, substituted, extended and renewed at any time and from time to time,
the "Financing Agreement")
Dear Mr. Bradley:
Reference is hereby made to the Financing Agreement. Capitalized terms
used in this letter have the meanings ascribed thereto in the Financing
Agreement.
It has come to our attention that, based on recently discovered
ineligibles which have posted today, a Borrowing Base Deficiency in the amount
of approximately $2,000,000 has occurred. While neither the Agent nor any of
the Formula Lenders has any obligation to fund a Borrowing Base Deficiency,
the Agent may in its sole discretion, pursuant to Section 8.13 of the
Financing Agreement, make, for the account of the Formula Lenders on a pro
rata basis, advances under the Revolving Loan of up to $2,500,000 in excess of
the Borrowing Base (but not in excess of the limitation set forth in the
aggregate Revolving Credit Commitments) for an aggregate period of not more
than 30 days in any twelve month period without the prior written consent of
the Requisite Lenders ("Agent Discretionary Loans"). The Agent has already
used a portion of these days funding Borrowing Base Deficiencies during
October 2001.
Based on information currently available, please be advised that the
Agent is not willing to make any further Agent Discretionary Loans except
under the following conditions:
(a) At all times during which a Borrowing Base Deficiency exists,
commencing with the date of this letter agreement, the interest rate
applicable to all Loans and other Obligations under the Financing Agreement
will be the Prime Rate plus four percent (4%) per annum;
(b) Additionally, commencing with the week beginning November 25,
2001, the Agent will charge to the Borrower a weekly fee in the amount of
$25,000, payable (if at all) on the last day of each week for each week during
which a Borrowing Base Deficiency exists as of the end of any Business Day
during such week; and
(c) The Agent does not intend to make any Agent Discretionary Loans
after December 7, 2001.
- E-9 -
Nothing in this letter agreement shall be read as a commitment by the
Agent to make any Agent Discretionary Loans in any amount for any period of
time. Agent Discretionary Loans will evaluated on a case-by-case basis, in
each case, and will be made only in the Agent's sole discretion. Nothing in
this letter agreement shall be construed as a waiver of any Event of Default,
or of the Agent's or any Lenders' rights and remedies with respect to any
Event of Default, all of which are specifically hereby reserved.
Please indicate your agreement to the foregoing terms and conditions by
signing a copy of this letter and returning it to the undersigned.
Very truly yours,
Bank of America, National Association, as Agent
________________________________
Brett Mook, Vice President
Acknowledged and agreed, this 28th day
of November, 2001.
REUNION INDUSTRIES, INC.
_________________________
Name: Kimball J. Bradley
Title: President
cc: Ken Chin, Esq.
Mr. Thomas A. Martin
Mr. Robert D. Beer
- E-10 -
Exhibit 10.41
[BANK OF AMERICA LETTERHEAD]
December 7, 2001
Mr. Kimball J. Bradley
Reunion Industries, Inc.
300 Weyman Plaza
Suite 340
Pittsburgh, Pennsylvania 15236
Re: Amended and Restated Financing Agreement, dated as of March 16, 2000,
by and between REUNION INDUSTRIES, INC., a Delaware corporation ("Borrower"),
BANK OF AMERICA, NATIONAL ASSOCIATION, a national banking association
("BANA"), and each other financial institution that is a party thereto
(collectively, the "Lenders" and individually, a "Lender"), and BANK OF
AMERICA, NATIONAL ASSOCIATION a national banking association, in its capacity
as both collateral and administrative agent (the "Agent") for each of the
Lenders, as such agreement has been amended by that certain Amendment No. 1 to
Amended and Restated Financing and Security Agreement, dated as of June 26,
2000, by that certain Amendment No. 2 to Amended and Restated Financing and
Security Agreement, dated as of July 31, 2000, by that certain Amendment No. 3
to Amended and Restated Financing and Security Agreement, dated as of December
12, 2000 and by that certain Amendment No. 4 to Amended and Restated Financing
and Security Agreement, dated as of January 19, 2001 (as amended, modified,
restated, substituted, extended and renewed at any time and from time to time,
the "Financing Agreement")
Dear Mr. Bradley:
Reference is hereby made to the Financing Agreement. Capitalized terms
used in this letter have the meanings ascribed thereto in the Financing
Agreement.
Recently the Agent delivered to the Lenders for their approval a proposal
for a $3.5 million overadvance facility that was intended to address the
Borrower's working capital needs through February 28, 2002. Unfortunately,
the Lenders are unable to approve this proposal, if at all, by December 7,
2001, as the proposal requested. It is the Agent's view that the Agent and
the Lenders will be unable to fund Loans under the Financing Documents as
currently in effect beyond December 7, 2001. Accordingly, as an interim
measure while the Agent, the Lenders and the Borrower work toward a longer-
term solution to the Borrower's liquidity issues, the Agent has proposed to
the Lenders that notwithstanding the 30-day limitation set forth in
Section 8.13 of the Financing Agreement, (i) the Agent shall have the
authority to grant discretionary advances of up to $2,500,000 otherwise
permitted under, and subject to the other limitations set forth in, Section
8.13 of the Financing Agreement through January 11, 2002, without regard to
the number of days that such discretionary advances remain outstanding,
(ii) all discretionary advances made by the Agent through December 9, 2001,
and, to the extent made within the parameters set forth in clause (i) above,
all discretionary advances made thereafter, have been and are for the account
of the Formula Lenders on a pro rata basis. The foregoing agreement, if
accepted by the Lenders, is subject to the following terms and conditions:
(a) during the period that a discretionary advance is outstanding,
and at all times that a Borrowing Base Deficiency exists, the interest rate
applicable to the Obligations will be the Prime Rate plus 4% per annum;
- E-11 -
(b) the Agent will charge to the Borrower a weekly fee in the amount
of $25,000, payable to the Agent, for the ratable benefit of the Lenders, on
the last day of each week for each week, from the week beginning December 10,
2001 through and including the week beginning January 7, 2002, during which a
discretionary advance under Section 8.13 of the Financing Agreement is
outstanding;
(c) Borrowers will be charged a $50,000 amendment fee in connection
with the amendment to Section 8.13 of the Financing Agreement, payable upon
the effectiveness of the amendment to the Agent for the ratable benefit of the
Lenders;
(d) Borrower agrees to report inventory values on a weekly basis,
with methodologies satisfactory to the Agent and the Lenders;
(e) Borrower agrees not to use any proceeds of any discretionary
advances under Section 8.13 of the Financing Agreement (as modified by clause
(i) above) to make any payments on any Indebtedness for Borrowed Money (other
than the Obligations); and
(f) Borrower agrees to retain a crisis manager reasonably acceptable
to the Agent and the Lenders, whose activities shall include, among others,
providing the Lenders with a 13-week cash flow forecast for the Borrower, and
conducting an independent review of the Borrower's collateral reporting
methodologies and reporting on the results thereof to the Lenders.
Please indicate your approval of and agreement to the foregoing terms and
conditions by signing a copy of this letter and returning it to me. Please
understand, however, that your signature alone will not be enough to create
discretionary advance authority in the Agent--the approval of the Lenders is
also required. Accordingly, even though you are, by signing below, agreeing
to the terms set forth above, neither the Agent nor any Lender will be bound
by such terms until the Agent and the Lenders have approved the same terms and
executed a document to that effect. Please also bear in mind that, as we have
discussed, absent an acceptable agreement signed by the Agent, the Lenders and
the Borrower, the Agent and the Lenders will not be able to fund any Loans
after the date hereof.
Additionally, nothing in this letter agreement shall be read as a
commitment by the Agent to make any discretionary loans in any amount for any
period of time, even if the terms and conditions hereof are approved and
accepted by the Agent and the Lenders in writing. Discretionary loans will
evaluated on a case-by-case basis, in each case, and will be made only in the
Agent's sole discretion and then only to the extent such discretionary
advances comply with the Financing Agreement, as the same may be modified
hereby (to the extent the Agent and the Lenders agree hereto). Nothing in
this letter agreement shall be construed as a waiver of any Event of Default,
or of the Agent's or any Lenders' rights and remedies with respect to any
Event of Default, all of which are specifically hereby reserved.
Very truly yours,
Bank of America, National Association, as Agent
________________________________
Brett Mook, Vice President
- E-12 -
Acknowledged and agreed, this 7th day
of December, 2001.
REUNION INDUSTRIES, INC.
_________________________
Name: Kimball J. Bradley
Title: President
cc: Ann Chamberlain, Esq.
Thomas A. Martin
Robert D. Beer
- E-13 -
Exhibit 10.42
[BANK OF AMERICA LETTERHEAD]
January 22, 2002
Mr. Kimball J. Bradley
Reunion Industries, Inc.
300 Weyman Plaza
Suite 340
Pittsburgh, Pennsylvania 15236
Re: Amended and Restated Financing Agreement, dated as of March 16, 2000,
by and between REUNION INDUSTRIES, INC., a Delaware corporation ("Borrower"),
BANK OF AMERICA, NATIONAL ASSOCIATION, a national banking association
("BANA"), and each other financial institution that is a party thereto
(collectively, the "Lenders" and individually, a "Lender"), and BANK OF
AMERICA, NATIONAL ASSOCIATION a national banking association, in its capacity
as both collateral and administrative agent (the "Agent") for each of the
Lenders, as such agreement has been amended by that certain Amendment No. 1 to
Amended and Restated Financing and Security Agreement, dated as of June 26,
2000, by that certain Amendment No. 2 to Amended and Restated Financing and
Security Agreement, dated as of July 31, 2000, by that certain Amendment No. 3
to Amended and Restated Financing and Security Agreement, dated as of December
12, 2000 and by that certain Amendment No. 4 to Amended and Restated Financing
and Security Agreement, dated as of January 19, 2001 (as amended, modified,
restated, substituted, extended and renewed at any time and from time to time,
the "Financing Agreement")
Dear Mr. Bradley:
Reference is hereby made to the Financing Agreement. Capitalized terms
used in this letter have the meanings ascribed thereto in the Financing
Agreement.
Reference is also made to a letter agreement, dated December 7, 2001,
between the Agent and the Borrower (the "December 7 Letter"), pursuant to
which the Borrower agreed that the Agent's authority to grant discretionary
advances in excess of the Borrowing Base under Section 8.13 of the Financing
Agreement, in an amount not to exceed $2,500,000, would be extended through
January 11 2002, notwithstanding the 30-day limitation set forth in Section
8.13 of the Financing Agreement.
As we have discussed, the Agent and the Lenders have now approved, and
the Borrower by executing the acknowledgment attached to this letter hereby
acknowledges and agrees, that notwithstanding the 30-day limitation set forth
in Section 8.13 of the Financing Agreement, and notwithstanding the $2,500,000
cap on discretionary advances set forth in Section 8.13 of the Financing
Agreement, (i) the Agent shall have the authority to make, in its sole
discretion, advances under the Revolving Loan for the account of the Formula
Lenders on a pro rata basis, of up to $4,400,000 in excess of the Borrowing
Base (but not in excess of the limitation set forth in aggregate Revolving
Credit Commitments) for the period commencing on January 11, 2002 and
continuing through January 31, 2002, without the prior written consent of the
Requisite Lenders, (ii) the Agent shall have the authority to make , in its
sole discretion, advances under the Revolving Loan for the account of the
Formula Lenders on a pro rata basis, of up to $2,500,000 in excess of the
Borrowing Base( but not in excess of the limitation set forth in aggregate
Revolving Credit Commitments) for the period commencing on February 1, 2002
and continuing through February 11, 2002, without the prior written consent of
- E-14 -
the Requisite Lenders, and (iii) all discretionary advances made by the agent
through January 22, 2001, and, to the extent made within the parameters set
forth in clauses (i) and (ii) above (as applicable), all discretionary
advances made thereafter, have been and are for the account of the Formula
Lenders on a pro rata basis. The foregoing agreement remains subject to the
terms and conditions set forth in paragraphs (a) - (f) of the December 7
Letter.
Nothing in this letter agreement shall be read as a commitment by the
Agent to make any discretionary loans in any amount for any period of time.
Discretionary loans will evaluated on a case-by-case basis, in each case, and
will be made only in the Agent's sole discretion and then only to the extent
such discretionary advances comply with the Financing Agreement, as the same
may be modified hereby. Additionally, nothing in this letter agreement shall
be construed as a waiver of any Event of Default (including without limitation
those Events of Default arising out of the existence of the Borrowing Base
deficiency and the Borrower's failure to maintain minimum Revolving Credit
Availability of at least $1,500,000, as required by the Financing Agreement,
the existence of each of which Borrower acknowledges by signing below), or of
the Agent's or any Lenders' rights and remedies with respect to any Event of
Default, all of which are specifically hereby reserved. By signing below,
Borrower also represents, warrants and acknowledges that as of the date
hereof, it has no defenses, claims, counterclaims or setoffs with respect to
the Financing Agreement or its Obligations thereunder or with respect to any
actions of the Agent, any Lender, or any of their respective officers,
directors, shareholders, employees, agents or attorneys, and Borrower
irrevocably and absolutely waives any such defenses, claims, counterclaims and
setoffs and releases the Agent, each Lender, and each of their respective
officers, directors, shareholders, employees, agents and attorneys from the
same.
Very truly yours,
Bank of America, National Association, as Agent
________________________________
Brett Mook, Vice President
Acknowledged and agreed, effective as of
the 22nd day of January, 2002.
REUNION INDUSTRIES, INC.
_________________________
Name: John M. Froehlich
Title: Executive Vice President and
Chief Financial Officer
cc: Ann Chamberlain, Esq.
Thomas A. Martin
Christopher Daniel
- E-15 -
Exhibit 10.43
[BANK OF AMERICA LETTERHEAD]
February 1, 2002
Mr. Kimball J. Bradley
Reunion Industries, Inc.
300 Weyman Plaza
Suite 340
Pittsburgh, Pennsylvania 15236
Re: Amended and Restated Financing Agreement, dated as of March 16, 2000,
by and between REUNION INDUSTRIES, INC., a Delaware corporation ("Borrower"),
BANK OF AMERICA, NATIONAL ASSOCIATION, a national banking association
("BANA"), and each other financial institution that is a party thereto
(collectively, the "Lenders" and individually, a "Lender"), and BANK OF
AMERICA, NATIONAL ASSOCIATION a national banking association, in its capacity
as both collateral and administrative agent (the "Agent") for each of the
Lenders, as such agreement has been amended by that certain Amendment No. 1 to
Amended and Restated Financing and Security Agreement, dated as of June 26,
2000, by that certain Amendment No. 2 to Amended and Restated Financing and
Security Agreement, dated as of July 31, 2000, by that certain Amendment No. 3
to Amended and Restated Financing and Security Agreement, dated as of December
12, 2000 and by that certain Amendment No. 4 to Amended and Restated Financing
and Security Agreement, dated as of January 19, 2001 (as amended, modified,
restated, substituted, extended and renewed at any time and from time to time,
the "Financing Agreement")
Dear Mr. Bradley:
Reference is hereby made to the Financing Agreement. Capitalized terms
used in this letter have the meanings ascribed thereto in the Financing
Agreement.
Reference is also made to a letter agreement, dated January 22, 2001,
between the Agent and the Borrower, pursuant to which the Borrower agreed that
the Agent's authority to grant discretionary advances in excess of the
Borrowing Base under Section 8.13 of the Financing Agreement, in an amount not
to exceed $4,400,000, would be extended through January 31, 2002,
notwithstanding limitations set forth in Section 8.13 of the Financing
Agreement.
As we have discussed, the Agent and the Lenders have now approved, and
the Borrower by executing the acknowledgment attached to this letter hereby
acknowledges and agrees, that notwithstanding the 30-day limitation set forth
in Section 8.13 of the Financing Agreement, and notwithstanding the $2,500,000
cap on discretionary advances set forth in Section 8.13 of the Financing
Agreement, (i) the Agent shall have the authority to make, in its sole
discretion, advances under the Revolving Loan for the account of the Formula
Lenders on a pro rata basis, of up to $4,400,000 in excess of the Borrowing
Base (but not in excess of the limitation set forth in aggregate Revolving
Credit Commitments) for the period commencing on January 11, 2002 and
continuing through February 10, 2002, without the prior written consent of the
Requisite Lenders, (ii) the Agent shall have the authority to make, in its
sole discretion, advances under the Revolving Loan for the account of the
Formula Lenders on a pro rata basis, of up to $3,500,000 in excess of the
Borrowing Base (but not in excess of the limitation set forth in aggregate
Revolving Credit Commitments) for the period commencing on February 11, 2002
and continuing through March 1, 2002, without the prior written consent of the
Requisite Lenders, and (iii) all discretionary advances made by the Agent
through January 31, 2002, and, to the extent made within the parameters set
forth in clauses (i) and (ii) above (as applicable), all discretionary
advances made thereafter, have been and are for the account of the Formula
Lenders on a pro rata basis. The foregoing agreement is subject to the
following terms and conditions:
- E-16 -
(a) during the period that a discretionary advance is outstanding, and at
all times that a Borrowing Base Deficiency exists, the interest rate
applicable to the Obligations will be the Prime Rate plus 4% per annum;
(b) the Agent will charge to the Borrower a weekly fee in the amount of
$25,000, payable to the Agent, for the ratable benefit of the Formula Lenders,
on the last day of each week for each week, from the week beginning December
10, 2001 through and including the week beginning February 25, 2002, during
which a discretionary advance under Section 8.13 of the Financing Agreement is
outstanding;
(c) the Agent will charge to the Borrower an additional weekly fee in the
amount of $25,000, payable to the Agent, for the ratable benefit of the
Formula Lenders, on the last day of each week for each week, from the week
beginning February 11, 2002, through and including the week beginning
February 25, 2002, during which, at any time, the amount of discretionary
advances outstanding under Section 8.13 of the Financing Agreement exceeds
$2,500,000;
(d) Borrower agrees to report inventory values on a weekly basis, with
methodologies satisfactory to the Agent and the Lenders;
(e) Borrower agrees not to use any proceeds of any discretionary advances
under Section 8.13 of the Financing Agreement (as modified by clauses (i) and
(ii) above) to make any payments on any Indebtedness for Borrowed Money (other
than the Obligations); and
(f) Borrower agrees to retain a crisis manager reasonably acceptable to
the Agent and the Lenders, whose activities shall include, among others,
providing the Lenders with a 13-week cash flow forecast for the Borrower, and
conducting an independent review of the Borrower's collateral reporting
methodologies and reporting on the results thereof to the Lenders.
Nothing in this letter agreement shall be read as a commitment by the
Agent to make any discretionary loans in any amount for any period of time.
Discretionary loans will evaluated on a case-by-case basis, in each case, and
will be made only in the Agent's sole discretion and then only to the extent
such discretionary advances comply with the Financing Agreement, as the same
may be modified hereby. Additionally, nothing in this letter agreement shall
be construed as a waiver of any Event of Default (including without limitation
those Events of Default arising out of the existence of the Borrowing Base
Deficiency and the Borrower's failure to maintain minimum Revolving Credit
Availability of at least $1,500,000, as required by the Financing Agreement,
the existence of each of which Borrower acknowledges by signing below), or of
the Agent's or any Lenders' rights and remedies with respect to any Event of
Default, all of which are specifically hereby reserved. By signing below,
Borrower also represents, warrants and acknowledges that as of the date
hereof, it has no defenses, claims, counterclaims or setoffs with respect to
the Financing Agreement or its Obligations thereunder or with respect to any
actions of the Agent, any Lender, or any of their respective officers,
directors, shareholders, employees, agents or attorneys, and Borrower
irrevocably and absolutely waives any such defenses, claims, counterclaims and
setoffs and releases the Agent, each Lender, and each of their respective
officers, directors, shareholders, employees, agents and attorneys from the
same.
- E-17 -
Very truly yours,
Bank of America, National Association, as Agent
________________________________
Brett Mook, Vice President
Acknowledged and agreed, effective as of
the 1st day of February, 2002.
REUNION INDUSTRIES, INC.
_________________________
Name: Kimball J. Bradley
Title: President
cc: Ann Chamberlain, Esq.
Thomas A. Martin
Christopher Daniel
- E-18 -
Exhibit 10.44
[BANK OF AMERICA LETTERHEAD]
March 1, 2002
Mr. Kimball J. Bradley
Reunion Industries, Inc.
300 Weyman Plaza
Suite 340
Pittsburgh, Pennsylvania 15236
Re: Amended and Restated Financing Agreement, dated as of March 16, 2000,
by and between REUNION INDUSTRIES, INC., a Delaware corporation ("Borrower"),
BANK OF AMERICA, NATIONAL ASSOCIATION, a national banking association
("BANA"), and each other financial institution that is a party thereto
(collectively, the "Lenders" and individually, a "Lender"), and BANK OF
AMERICA, NATIONAL ASSOCIATION a national banking association, in its capacity
as both collateral and administrative agent (the "Agent") for each of the
Lenders, as such agreement has been amended by that certain Amendment No. 1 to
Amended and Restated Financing and Security Agreement, dated as of June 26,
2000, by that certain Amendment No. 2 to Amended and Restated Financing and
Security Agreement, dated as of July 31, 2000, by that certain Amendment No. 3
to Amended and Restated Financing and Security Agreement, dated as of December
12, 2000 and by that certain Amendment No. 4 to Amended and Restated Financing
and Security Agreement, dated as of January 19, 2001 (as amended, modified,
restated, substituted, extended and renewed at any time and from time to time,
the "Financing Agreement")
Dear Mr. Bradley:
Reference is hereby made to the Financing Agreement. Capitalized terms
used in this letter have the meanings ascribed thereto in the Financing
Agreement.
Reference is also made to a letter agreement, dated February 1, 2002,
between the Agent and the Borrower, pursuant to which, among other things, the
Borrower agreed that the Agent's authority to grant discretionary advances in
excess of the Borrowing Base under Section 8.13 of the Financing Agreement, in
an amount not to exceed $4,400,000 (as reduced pursuant to such letter
agreement) would be extended through March 1, 2002, notwithstanding the
limitations set forth in Section 8.13 of the Financing Agreement.
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As we have discussed, the Agent and the Lenders have now approved, and
the Borrower by executing the acknowledgment attached to this letter hereby
acknowledges and agrees, that notwithstanding the 30-day limitation set forth
in Section 8.13 of the Financing Agreement, and notwithstanding the $2,500,000
cap on discretionary advances set forth in Section 8.13 of the Financing
Agreement, (i) the Agent shall have the authority to make, in its sole
discretion, advances under the Revolving Loan for the account of the Formula
Lenders on a pro rata basis, of up to $3,500,000 in excess of the Borrowing
Base (but not in excess of the limitation set forth in aggregate Revolving
Credit Commitments) for the period commencing on March 2, 2002, and continuing
through March 15, 2002, without the prior written consent of the Requisite
Lenders, (ii) if the Borrower has provided the Agent with a Letter of Intent,
as defined herein, together with evidence satisfactory to the Agent that the
transactions contemplated by such Letter of Intent are being diligently
pursued, the Agent shall have the authority to make, in its sole discretion,
advances under the Revolving Loan for the account of the Formula Lenders on a
pro rata basis, of up to $3,500,000 in excess of the Borrowing Base (but not
in excess of the limitation set forth in aggregate Revolving Credit
Commitments) for the period commencing on March 16, 2002, and continuing
through April 1, 2002, without the prior written consent of the Requisite
Lenders, and (iii) all discretionary advances made by the Agent through
March 1, 2002, and, to the extent made within the parameters set forth in
clauses (i) and (ii) above (as applicable), all discretionary advances made
thereafter, have been and are for the account of the Formula Lenders on a pro
rata basis. As used in the foregoing sentence, "Letter of Intent" means a
fully executed letter of intent relating to the sale of the Borrower's Auto-
Lok/ King-Way division, in form and substance acceptable to the Agent in its
sole reasonable discretion.
The foregoing agreement is subject to the following terms and conditions:
(a) during the period that a discretionary advance is outstanding,
and at all times that a Borrowing Base Deficiency exists, the interest rate
applicable to the Obligations will be the Prime Rate plus 4% per annum;
(b) the Agent will charge to the Borrower a weekly fee in the amount
of $25,000, payable to the Agent, for the ratable benefit of the Formula
Lenders, on the last day of each week for each week, from the week beginning
December 10, 2001 through and including the week beginning April 1, 2002,
during which a discretionary advance under Section 8.13 of the Financing
Agreement is outstanding;
(c) the Agent will charge to the Borrower an additional weekly fee in
the amount of $25,000, payable to the Agent, for the ratable benefit of the
Formula Lenders, on the last day of each week for each week, from the week
beginning March 4, 2002, through and including the week beginning April 1,
2002, during which, at any time, the amount of discretionary advances
outstanding under Section 8.13 of the Financing Agreement exceeds $2,500,000;
(d) Borrower agrees to report inventory values on a weekly basis,
with methodologies satisfactory to the Agent and the Lenders;
(e) Borrower agrees not to use any proceeds of any discretionary
advances under Section 8.13 of the Financing Agreement (as modified by clauses
(i) and (ii) above) to make any payments on any Indebtedness for Borrowed
Money (other than the Obligations); and
(f) Borrower agrees to retain a crisis manager reasonably acceptable
to the Agent and the Lenders, whose activities shall include, among others,
providing the Lenders with a 13-week cash flow forecast for the Borrower, and
conducting an independent review of the Borrower's collateral reporting
methodologies and reporting on the results thereof to the Lenders.
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Nothing in this letter agreement shall be read as a commitment by the
Agent to make any discretionary loans in any amount for any period of time.
Discretionary loans will evaluated on a case-by-case basis, in each case, and
will be made only in the Agent's sole discretion and then only to the extent
such discretionary advances comply with the Financing Agreement, as the same
may be modified hereby. Additionally, nothing in this letter agreement shall
be construed as a waiver of any Event of Default (including without limitation
those Events of Default arising out of the existence of the Borrowing Base
Deficiency and the Borrower's failure to maintain minimum Revolving Credit
Availability of at least $1,500,000, as required by the Financing Agreement,
the existence of each of which Borrower acknowledges by signing below), or of
the Agent's or any Lenders' rights and remedies with respect to any Event of
Default, all of which are specifically hereby reserved. By signing below,
Borrower also represents, warrants and acknowledges that as of the date
hereof, it has no defenses, claims, counterclaims or setoffs with respect to
the Financing Agreement or its Obligations thereunder or with respect to any
actions of the Agent, any Lender, or any of their respective officers,
directors, shareholders, employees, agents or attorneys, and Borrower
irrevocably and absolutely waives any such defenses, claims, counterclaims and
setoffs and releases the Agent, each Lender, and each of their respective
officers, directors, shareholders, employees, agents and attorneys from the
same.
Very truly yours,
Bank of America, National Association, as Agent
________________________________
Brett Mook, Vice President
Acknowledged and agreed, effective as of
the 1st day of March, 2002.
REUNION INDUSTRIES, INC.
_________________________
Name: Kimball J. Bradley
Title: President
cc: Ann Chamberlain, Esq.
Thomas A. Martin
Christopher Daniel
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Exhibit 10.45
[BANK OF AMERICA LETTERHEAD]
April 1, 2002
Mr. Kimball J. Bradley
Reunion Industries, Inc.
300 Weyman Plaza
Suite 340
Pittsburgh, Pennsylvania 15236
Attention: Mr. Kimball J. Bradley
Re: Amended and Restated Financing Agreement, dated as of March 16, 2000,
by and between REUNION INDUSTRIES, INC., a Delaware corporation ("Borrower"),
BANK OF AMERICA, NATIONAL ASSOCIATION, a national banking association
("BANA"), and each other financial institution that is a party thereto
(collectively, the "Lenders" and individually, a "Lender"), and BANK OF
AMERICA, NATIONAL ASSOCIATION a national banking association, in its capacity
as both collateral and administrative agent (the "Agent") for each of the
Lenders, as such agreement has been amended by that certain Amendment No. 1 to
Amended and Restated Financing and Security Agreement, dated as of June 26,
2000, by that certain Amendment No. 2 to Amended and Restated Financing and
Security Agreement, dated as of July 31, 2000, by that certain Amendment No. 3
to Amended and Restated Financing and Security Agreement, dated as of December
12, 2000 and by that certain Amendment No. 4 to Amended and Restated Financing
and Security Agreement, dated as of January 19, 2001, by that certain letter
agreement dated February 1, 2002 between the Borrower and the Agent, and by
that certain letter agreement dated March 1, 2002 between the Borrower and the
Agent (as amended, modified, restated, substituted, extended and renewed at
any time and from time to time, the "Financing Agreement")
Gentlemen:
Reference is hereby made to the Financing Agreement. Capitalized terms
used in this letter have the meanings ascribed thereto in the Financing
Agreement.
The period for discretionary advances of the Revolving Loan
notwithstanding the existence of a Borrowing Base Deficiency set forth in the
letter agreement dated March 1, 2002 between the Borrower and the Agent
expires on April 1, 2002. A Borrowing Base Deficiency is still in existence.
The Agent hereby informs the Borrower that any further advances, loans
and extensions of credit during the existence of a Borrowing Base Deficiency
or that would result in a Borrowing Base Deficiency shall be in the Agent's
sole discretion and the Agent's decision on whether to make any such advances,
loans or extension of credit shall be made on a case-by-case basis. No
extension of credit on any day or days shall (a) imply that an extension of
credit will be made on any succeeding day or (b) establish any course of
dealing.
In accordance with the provisions of he Financing Agreement the Revolving
Loan is payable on demand in the amount of the Borrowing Base Deficiency at
the time of demand.
In consideration of any such discretionary loans that the Lenders may
make, please indicate your agreement to the following:
(a) during the period that a discretionary advance is outstanding,
and at all times that a Borrowing Base Deficiency exists, the interest rate
applicable to the Obligations will be the Prime Rate plus 4% per annum;
- E-22 -
(b) the Agent will charge to the Borrower a weekly fee in the amount
of $25,000, payable to the Agent, for the ratable benefit of the Formula
Lenders, on the last day of each week for each week, from the week beginning
December 10, 2001 through and including the week during which, at any time, a
discretionary advance under Section 8.13 of the Financing Agreement is
outstanding;
(c) the Agent will charge to the Borrower an additional weekly fee in
the amount of $25,000, payable to the Agent, for the ratable benefit of the
Formula Lenders, on the last day of each week for each week, from the week
beginning March 4, 2002, through and including each week during which, at any
time, the amount of discretionary advances outstanding under Section 8.13 of
the Financing Agreement exceeds $2,500,000;
(d) Borrower agrees to report inventory values on a weekly basis,
with methodologies satisfactory to the Agent and the Lenders;
(e) Borrower will not use any proceeds of any discretionary advances
under Section 8.13 of the Financing Agreement (as modified by clauses (i) and
(ii) above) to make any payments on any Indebtedness for Borrowed Money (other
than the Obligations); and
(f) Borrower will retain a crisis manager reasonably acceptable to
the Agent and the Lenders, whose activities shall include, among others,
providing the Lenders with a 13-week cash flow forecast for the Borrower, and
conducting an independent review of the Borrower's collateral reporting
methodologies and reporting on the results thereof to the Lenders.
Nothing in this letter agreement shall be read as a commitment by the
Agent to make any discretionary loans in any amount for any period of time.
Discretionary loans will evaluated on a case-by-case basis, in each case, and
will be made only in the Agent's sole discretion. Additionally, nothing in
this letter agreement shall be construed as a waiver of any Event of Default
(including without limitation those Events of Default arising out of the
existence of the Borrowing Base Deficiency and the Borrower's failure to
maintain minimum Revolving Credit Availability of at least $1,500,000, as
required by the Financing Agreement, the existence of each of which Borrower
acknowledges by signing below), or of the Agent's or any Lenders' rights and
remedies with respect to any Event of Default, all of which are specifically
hereby reserved. By signing below, Borrower also represents, warrants and
acknowledges that as of the date hereof, it has no defenses, claims,
counterclaims or setoffs with respect to the Financing Agreement or its
Obligations thereunder or with respect to any actions of the Agent, any
Lender, or any of their respective officers, directors, shareholders,
employees, agents or attorneys, and Borrower irrevocably and absolutely waives
any such defenses, claims, counterclaims and setoffs and releases the Agent,
each Lender, and each of their respective officers, directors, shareholders,
employees, agents and attorneys from the same.
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Very truly yours,
Bank of America, National Association, as Agent
________________________________
Brett Mook, Vice President
Acknowledged and agreed, effective as of the date
first written above:
REUNION INDUSTRIES, INC.
_________________________
Name: Kimball J. Bradley
Title: President
cc: Ann Chamberlain, Esq.
Thomas A. Martin
Christopher Daniel
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