<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________
TO _____________
COMMISSION FILE NUMBER 1-7726
REUNION INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1439715
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
62 SOUTHFIELD AVENUE
ONE STAMFORD LANDING SUITE 208
STAMFORD, CT 06902
(Address of principal executive offices)
(203) 324-8858
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of October 1, 1997 the Registrant had 3,855,100 shares of common stock,
par value $.0l, outstanding.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - September 30 , 1997 (Unaudited) 2
and December 31, 1996
Consolidated Statements of Operations (Unaudited) 4
Three Months and Nine months Ended September 30, 1997 and 1996
Consolidated Statements of Cash Flows (Unaudited) 5
Nine Months Ended September 30, 1997 and 1996
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 15
</TABLE>
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REUNION INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 2,046 $ 1,407
Accounts Receivable, Less Allowance for
Doubtful Accounts of $538 and $434, respectively 13,699 12,747
Inventories 8,053 7,381
Customer Tooling-in-Process 1,445 1,107
Note Receivable from Sale of Oil & Gas Operations - 2,200
Other Current Assets 221 443
-------- --------
Total Current Assets 25,464 25,285
-------- --------
PROPERTY, PLANT AND EQUIPMENT--NET 24,932 24,333
-------- --------
OTHER ASSETS
Goodwill 9,250 9,766
Assets of Discontinued Agricultural Operations 13,916 14,139
Other Assets Held for Sale 431 401
Other 1,448 1,252
-------- --------
25,045 25,558
-------- --------
$ 75,441 $ 75,176
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
REUNION INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current Portion of Long-Term Debt $12,165 $10,865
Accounts Payable 10,660 9,459
Advances From Customers 2,107 1,922
Other Current Liabilities 5,613 5,175
------- -------
Total Current Liabilities 30,545 27,421
Long-Term Debt 11,664 14,190
Long-Term Debt - Related Parties 1,385 1,385
Other Liabilities 3,158 3,236
------- -------
Total Liabilities 46,752 46,232
------- -------
Commitments and Contingencies
Shareholders' Equity
Common Stock ($.01 par value; 20,000
authorized; 3,855 issued and outstanding) 38 38
Additional Paid-in Capital 29,242 29,242
Retained Earnings (Since January 1, 1989) (284) (307)
Foreign Currency Translation Adjustments (307) (29)
------- -------
Total Shareholders' Equity 28,689 28,944
------- -------
$75,441 $75,176
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
REUNION INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------
1997 1996 1997 1996
-------- --------- -------- -------
<S> <C> <C> <C> <C>
NET SALES $21,734 $ 14,041 $ 69,877 $42,285
COST OF SALES 18,224 11,744 59,314 35,245
-------- --------- -------- -------
GROSS PROFIT 3,510 2,297 10,563 7,040
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,597 2,025 8,359 5,991
-------- --------- -------- -------
OPERATING INCOME 913 272 2,204 1,049
OTHER INCOME AND (EXPENSE)
Interest Expense (779) (476) (2,319) (1,619)
Other, Including Interest Income 63 176 325 301
-------- --------- -------- -------
(716) (300) (1,994) (1,318)
-------- --------- -------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 197 (28) 210 (269)
Income Tax Expense (50) (15) (186) (65)
-------- --------- -------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS 147 (43) 24 (334)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS - (117) - 895
-------- --------- -------- -------
NET INCOME (LOSS) $ 147 $ (160) $ 24 $ 561
======== ========= ======== =======
NET INCOME (LOSS) PER COMMON SHARE AND
COMMON SHARE EQUIVALENT -- PRIMARY AND FULLY DILUTED
Income (Loss) From Continuing Operations $ 0.04 $ (0.01) $ 0.01 $ (0.09)
Income (Loss) From Discontinued Operations 0.00 - (0.03) - 0.23
-------- --------- -------- -------
Net Income (Loss) $ 0.04 $ (0.04) $ 0.01 $ 0.15
======== ========= ======== =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS OUTSTANDING
Primary and Fully Diluted 3,855 3,855 3,855 3,855
======== ========= ======== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
REUNION INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1997 1996
------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 24 $ 561
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation and Amortization 2,655 1,594
-------- -------
2,679 2,155
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable (952) 569
(Increase) Decrease in Inventory (672) 272
(Increase) Decrease in Other Current Assets (116) 339
Increase (Decrease) in Accounts Payable 1,201 (75)
Increase (Decrease) in Other Current Liabilities 623 (1,047)
Other (356) (64)
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,407 2,149
CASH FLOWS FROM INVESTING ACTIVITIES:
Collection of Note Receivable from Sale of Oil and Gas Business 2,200 -
Sale of Discontinued Operations - 9,042
Sale of Real Estate - 2,073
Acquisition of Rostone Net of Cash Acquired - (118)
Investment In and Advances to The Juliana Preserve - (6)
Capital Expenditures (2,741) (833)
-------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (541) 10,158
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Revolver Borrowings 140 393
Proceeds from Issuance of Debt Obligations 1,162 6,644
Payments of Debt Obligations (2,529) (14,728)
-------- -------
NET CASH USED IN FINANCING ACTIVITIES (1,227) (7,691)
INCREASE IN CASH AND CASH EQUIVALENTS 639 4,616
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,407 529
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,046 $ 5,145
======== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
NOTE 1. CONSOLIDATED FINANCIAL STATEMENTS
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Reunion
Industries, Inc. ("RII") and its majority owned subsidiaries. As used herein,
the term "Company" refers to RII, its predecessors and its subsidiaries, unless
the context indicates otherwise. All intercompany transactions and accounts are
eliminated in consolidation.
FINANCIAL STATEMENTS AT SEPTEMBER 30, 1997
The Consolidated Balance Sheet at September 30, 1997, and the Consolidated
Statements of Operations and Cash Flows for the three months and nine months
ended September 30, 1997 and 1996 included herein are unaudited; however, in the
opinion of management of the Company, they reflect all adjustments necessary
to present fairly the results for the interim periods. Such results are not
necessarily indicative of results to be expected for the year. The
Consolidated Balance Sheet at December 31, 1996 has been derived from the
audited financial statements at that date. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
EARNINGS PER SHARE
Earnings per Common Share and Common Share Equivalent are computed based on
the weighted average number of common and common equivalent shares outstanding
during each period. Common equivalent shares include shares issuable upon
exercise of the Company's stock options and warrants. For the three and nine
months ended September 30, 1997 and 1996, common equivalent shares relating to
options and warrants to purchase common stock were not included in the weighted
average number of shares because their effect would have been immaterial.
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued several
accounting pronouncements which the company will be required to adopt in future
periods.
FASB Statement No. 128 "Earnings per Share" establishes new guidelines for
the calculation of and disclosures regarding earnings per share. The company
will adopt the provisions of Statement 128 during the fourth quarter of 1997 and
at that time will be required to present basic and diluted earnings per share
and to restate all prior periods. There will be no impact on the calculation of
basic earnings per share for the quarters ended September 30, 1997 and September
30, 1996. Diluted earnings per share is not expected to differ materially from
basic earnings per share.
The company will adopt FASB Statement No. 129 "Disclosure of Information
About Capital Structure" during the fourth quarter of 1997. The company does
not expect that adoption of the disclosure requirements of this pronouncement
will have a material impact on its financial statements.
FASB Statement No. 130 "Reporting Comprehensive Income," which the company
will adopt during the first quarter of 1998, establishes standards for reporting
and display of comprehensive income and its components in financial statements.
Comprehensive income generally represents all changes in shareholders' equity
except those resulting from investments by or distributions to shareholders.
With the exception of net earnings, such changes are generally not significant
to the company; and the adoption of Statement No. 130, including the required
comparative presentation for prior periods, is not expected to have a material
impact on its financial statements.
6
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
FASB Statement No. 131 "Disclosures about Segments of an Enterprise and
Related Information" requires that a publicly-held company report financial and
descriptive information about its operating segments in financial statements
issued to shareholders for interim and annual periods. Although the Company
operates in only one segment, the Statement also requires additional disclosures
with respect to products and services, geographic areas of operation, and major
customers which have not previously been presented in the consolidated
financial statements and related notes. The company expects to adopt Statement
No. 131 in the first quarter of 1998.
NOTE 2. BUSINESS ACQUISITIONS
ROSTONE
On February 2, 1996, the Company acquired Rostone Corporation
("Rostone") which was merged with and into the Company's subsidiary, Oneida
Molded Plastics Corp. ("Oneida"). The surviving corporation changed its name to
Oneida Rostone Corp. ("ORC"). The Rostone acquisition was accounted for using
the purchase method, and the results of Rostone's operations are included in the
Company's consolidated financial statements from the date of the acquisition,
February 2, 1996.
DATA PACKAGING LIMITED
On October 21, 1996, DPL Acquisition Corp. ("DPLAC"), a wholly-owned
subsidiary of ORC, acquired a 27.5% interest in Data Packaging Limited ("DPL"),
a Bermuda corporation operating in Ireland. On November 18, 1996, DPLAC acquired
an additional 68% of the outstanding stock of DPL. Together, these transactions
represent the "DPL Acquisition." The remaining 4.5% of the outstanding stock of
DPL is owned by Forbairt, an agency of the Irish government, and is accounted
for as a minority interest in the accompanying financial statements. The DPL
Acquisition was accounted for using the purchase method and the results of DPL's
operations are included in the consolidated financial statements from the date
of acquisition.
QUALITY MOLDED PRODUCTS
On November 18, 1996, ORC acquired (the "QMP Acquisition") substantially
all of the assets and the business and assumed certain liabilities of Quality
Molded Products, Inc. ("QMP"). The QMP Acquisition was accounted for using the
purchase method, and the results of QMP's operations are included in the
consolidated financial statements from the date of acquisition.
7
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
PRO FORMA RESULTS
The following unaudited pro forma results of operations for the three and
nine months ended September 30, 1996 have been prepared assuming the
acquisitions of Rostone, DPL and QMP had occurred as of January 1, 1996. These
pro forma results are not necessarily indicative of the results of future
operations or of results that would have occurred had the acquisitions been
consummated as of that date.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
------------------- ------------------
<S> <C> <C>
Revenues $19,805 $61,205
Income (Loss) From Continuing Operations $ (226) $ (488)
Net Income (Loss) $ (343) $ 407
Earnings per Common Share and
Common Share Equivalent $(0.09) $0.11
</TABLE>
NOTE 3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Raw Materials $ 4,448 $ 3,719
Work-in process 1,465 1,170
Finished Goods 2,140 2,492
------- -------
Total $ 8,053 $ 7,381
======= =======
</TABLE>
NOTE 4. CONTINGENCIES
In early 1996, the State of California Franchise Tax Board initiated an
audit of the Company's franchise tax returns for the years 1991, 1992 and 1993.
In October 1996, the Company received a formal notice of assessment from the
taxing authority in the aggregate amount of $716 plus interest. Of this amount,
$645 results from the auditor's conclusion that income from gains on sales of
certain Canadian assets in 1991 should be reclassified from nonbusiness to
business income. The Company believes its classification of such income was
correct, and has appealed the assessment of tax. If the Company's positions
prevail on this issue, management believes that the amounts due would not exceed
amounts previously paid or provided for. No additional accruals have been made
for any amounts that may be due if the Company does not prevail because the
outcome cannot be determined. The Company recorded a provision for $85 in 1996
for certain other adjustments proposed.
8
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
In connection with the sale of Reunion Energy Company ("REC"), the Company
retained certain oil and gas properties in Louisiana because of litigation
concerning environmental matters. The Company is in the process of environmental
remediation under a plan approved by the Louisiana Office of Conservation. The
Company has recorded an accrual of $533 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. Owners of a
portion of the property have objected to the Company's proposed cleanup
methodology and have filed suit to require additional procedures. The Company is
contesting this litigation, and believes its proposed clean up methodology is
well within accepted industry practice for remediation efforts of a similar
nature. No accrual has been made for any additional costs of possible
alternative clean up methods because the nature and dollar amount of such
alternative cannot presently be determined.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements speak only as of the
date of this Form 10-Q, and the Company expressly disclaims any obligation or
undertaking to publicly release any updates or revisions to any forward-looking
statements contained herein. Although the Company believes that its
expectations are based on reasonable assumptions, it cannot assure that the
expectations contained in such forward-looking statements will be achieved.
Such statements involve risks, uncertainties and assumptions which could cause
actual results to differ materially from those contained in such statements.
The Company's operations are affected by domestic and international economic
conditions which affect the volume and pricing of sales of business and consumer
goods, for which the Company produces components, the cost and availability of
materials, labor and other goods and services used in the Company's operations
and the cost of interest on the Company's debt.
GENERAL
The Company's principal operations are in the plastic products industry.
During 1996 the Company completed the Rostone, DPL and QMP Acquisitions which
added new customers and products to the plastic products segment. The Company is
considering additional acquisitions to increase its customer base and expand its
product offerings and service capabilities in the plastics industry. In
addition, the Company may consider acquisitions in other industries.
The Company and Chatwins Group, Inc. ("Chatwins") are considering the
merger of Chatwins with and into the Company following the third anniversary of
the acquisition by Chatwins, in June 1995, of approximately 38% of the Company's
outstanding common stock. However, this or any other transaction between
Chatwins and the Company in which Chatwins has an interest separate from that of
the Company will be subject to approval by the Boards of Directors of the
Company and of Chatwins and compliance by Chatwins with the covenants in its
financing agreements. There can be no assurance that any transaction will be
proposed or that any proposed transaction will be consummated.
Discontinued operations consist of the Company's former oil and gas
operations, sold in 1996, and wine grape agricultural and real estate
development operations, held for sale since December 1996.
9
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997
The Company recognized income from continuing operations of $0.1 million
during the three months ended September 30, 1997 compared to breakeven results
for the comparable prior year period. The 1997 period includes a full three
months of results of the businesses acquired in November 1996 (QMP and DPL)
described in Note 2 "Business Acquisitions." The 1996 period does not include
the results of QMP and DPL which were acquired later that year.
PLASTICS PRODUCTS SEGMENT: The Company, through its wholly owned
subsidiary ORC, manufactures high volume, precision plastic products and
provides engineered plastic services. Revenues and operating income of the
plastic products segment were $21.7 million and $1.3 million, respectively, for
the three months ended September 30, 1997. This compares to revenues and
operating profit of $14.0 million and $0.8 million, respectively, for the three
months ended September 30, 1996.
Revenues increased $7.7 million to $21.7 million for the three months ended
September 30, 1997 from $14.0 million for the three months ended September 30,
1996. The majority of the 55.0% increase in revenues is attributable to the
business acquisitions completed during 1996. Tooling sales for the three months
ended September 30, 1997 were $1.0 million, versus sales of $1.8 million for
the prior year period. Excluding effects of acquisitions, tooling sales
decreased by $0.9 million for the three months ended September 30, 1997
compared to the prior year period. Plastic products segment backlog totaled
$22.0 million at September 30, 1997, compared to backlog of $25.1 million at
December 31, 1996 and backlog of $15.3 million at September 30, 1996.
Cost of sales totaled $18.2 million, or 83.8% of net sales, for the three
months ended September 30, 1997 compared to $11.7 million, or 83.6% of net
sales for the three months ended September 30, 1996. As a result of the
increase in sales, gross margins increased to $3.5 million, or 16.2% of net
sales for the three months ended September 30, 1997 from $2.3 million, or
16.4% of net sales in the prior year period.
Selling, general and administrative expenses were $2.2 million for the
three months ended September 30, 1997, compared to $1.5 million for the three
months ended September 30, 1996, reflecting the businesses acquired in 1996.
Operating income was $1.3 million for the three months ended September 30,
1997 compared to income of $0.8 million in the comparable 1996 period.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSE: Corporate general and
administrative expenses, consisting primarily of executive and administrative
salaries and benefits, professional fees and other public company costs, totaled
$0.4 million for the three months ended September 30, 1997 compared to $0.5
million for the three months ended September 30, 1996.
OTHER INCOME AND (EXPENSE): Interest expense was $0.8 million for the three
months ended September 30, 1997 compared to $0.5 million for the prior year
period as a result of interest on ORC debt incurred after the QMP and DPL
Acquisitions.
10
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 1997
The Company recognized breakeven results from continuing operations during
the nine months ended September 30, 1997 compared to a loss of $0.3 million for
the comparable prior year period. The 1997 period reflects a full nine months
of results of each of the businesses acquired in February 1996 (Rostone) and
November 1996 (QMP and DPL) described above in Note 2 "Business Acquisitions."
The 1996 period includes eight months of Rostone's results, acquired in
February 1996, and does not include the results of QMP and DPL acquired later
in the year.
PLASTICS PRODUCTS SEGMENT: The Company, through its wholly owned
subsidiary ORC, manufactures high volume, precision plastic products and
provides engineered plastic services. Revenues and operating income of the
plastic products segment were $69.9 million and $3.5 million, respectively, for
the nine months ended September 30, 1997. This compares to revenues and
operating profit of $42.3 million and $2.5 million, respectively, for the nine
months ended September 30, 1996.
During the second calendar quarter of 1997, a strike of the Company's
unionized factory work force took place at ORC's Rostone division. The work
stoppage occurred on April 15, 1997 and continued until May 15, 1997. Rostone
used office personnel, temporary workers and new hires to minimize the impact
of the strike on product shipments and the loss of customer business. Rostone,
however, experienced excess scrap, labor inefficiencies and higher than normal
product returns during the strike period and incurred additional overtime
subsequent to the strike in restoring normal production. As a result of the
strike, sales and operating income were approximately $2.0 million and $1.0
million, respectively, less than expected for the second quarter.
Revenues increased $27.6 million to $69.9 million for the nine months ended
September 30, 1997 from $42.3 million for the nine months ended September 30,
1996. The majority of the 65.2% increase in revenues is attributable to the
business acquisitions completed during 1996. The remaining increase in revenues
contributed from the existing business is attributable to parts sales to new
customers combined with higher levels of sales to existing customers, offset by
the effects of the strike. Tooling sales for the nine months ended September
30, 1997 were $3.3 million, compared to sales of $4.6 million for the prior
year period. Excluding effects of acquisitions, tooling sales decreased by $1.9
million for the nine months ended September 30, 1997 compared to the prior year
period. Plastic products segment backlog totaled $22.0 million at September
30, 1997, compared to backlog of $25.1 million at December 31, 1996 and
backlog of $15.3 million at September 30, 1996.
Cost of sales totaled $59.3 million, or 84.8% of net sales, for the nine
months ended September 30, 1997 compared to $35.2 million, or 83.4% of net
sales for the nine months ended September 30, 1996. As a result of the
increase in sales, offset by the effects of the strike, gross margins increased
to $10.6 million, or 15.2% of net sales for the nine months ended September
30, 1997 from $7.0 million, or 16.6% of net sales in the prior year period.
Selling, general and administrative expenses were $7.0 million for the
nine months ended September 30, 1997, compared to $4.6 million for the nine
months ended September 30, 1996, reflecting the businesses acquired in 1996.
Operating income was $3.5 million, for the nine months ended September 30,
1997 compared to $2.5 million, in the comparable 1996 period.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSE: Corporate general and
administrative expenses, consisting primarily of executive and administrative
salaries and benefits, professional fees and other public company costs, totaled
$1.3 million for the nine months ended September 30, 1997 comparable to $1.4
million for the nine months ended September 30, 1996. The expenses for the nine
months ended September 30, 1996 included occupancy and office costs for both
the Company's previous headquarters in Houston, Texas, closed in May 1996, and
its new headquarters in Stamford, Connecticut, and are net of $0.3 million in
reversals of certain charges for office closing and severance costs accrued in
1995.
OTHER INCOME AND (EXPENSE): Interest expense was $2.3 million for the nine
months ended September 30, 1997 compared to $1.6 million in the prior year
period as a result of interest on ORC debt subsequent to the Rostone, QMP and
DPL Acquisitions.
11
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
DISCONTINUED OPERATIONS
The Company resolved to sell its agricultural operations in December 1996
and recorded a provision in 1996 to record estimated losses on disposal and
estimated losses in 1997 through the date of disposition. In May 1996, the
Company sold its REC subsidiary which substantially completed the disposition of
its oil and gas operations. The Company retained certain Louisiana oil and gas
properties because of litigation concerning environmental contamination.
Results from discontinued operations for the nine months ended September
30, 1996 were income of $0.9 million including a $1.6 million gain from an
insurance reimbursement offset by a $0.4 million adjustment to the loss on
disposition of the oil and gas business and $0.3 million of interest expense and
depreciation from the Company's discontinued agricultural operations.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY OF 1997 ACTIVITIES
Cash and cash equivalents totaled $2.0 million at September 30, 1997.
During the nine months ended September 30, 1997, cash increased $0.6 million,
with $2.4 million provided by operations, $0.5 million used by investing
activities and $1.3 million used by financing activities.
INVESTING ACTIVITIES: Capital expenditures were $2.7 million, and the
Company received $2.2 million, plus interest, in final payment on the sale of
the discontinued oil and gas operations.
FINANCING ACTIVITIES: Principal payments reduced long-term obligations by
$2.5 million in the nine months ended September 30, 1997. Proceeds from new
term loan borrowings totaled $1.1 million. Proceeds from net revolving loan
borrowings totaled $0.1 million.
OPERATING ACTIVITIES: Net cash provided by operating activities was $2.4
million in 1997.
FACTORS AFFECTING FUTURE LIQUIDITY
Because of various restrictions included in the Company's loan
arrangements, management must separately consider liquidity and financing for
corporate requirements, ORC and discontinued operations.
CORPORATE: Corporate expenses, including salaries and benefits,
professional fees and other public company costs, approximate $1.6 million
annually . The Company's source of funds for these expenses and for future
acquisitions, other than from additional borrowings, are from cash balances,
permitted payments by ORC and from cash generated by the operations or sale of
discontinued operations and other assets held for sale. The Corporate cash
balance at September 30, 1997 was $2.0 million.
ORC's credit facility with Congress Financial Corporation ("Congress")
limits payments to Reunion by ORC. If certain levels of availability (as defined
in the loan agreements) are maintained, ORC is permitted to pay Reunion
management fees of up to $0.3 million, dividends on preferred stock of up to
$0.6 million, and tax sharing payments of up to 50% of the tax savings realized
by ORC because of Reunion's net operating loss carryovers. There can be no
assurances that ORC will be able to maintain the required levels of availability
and be permitted to make the management fee and tax sharing fee payments to
Reunion. In any event, the maximum amount of such payments is not expected to be
sufficient for Reunion's corporate operating and debt service requirements.
In February 1997, the Company received repayment on the $2.2 million note,
including interest thereon, from the sale of REC.
Management believes that the Company will have sufficient resources to meet
its corporate obligations as they become due over the next twelve months.
12
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
ORC: On February 2, 1996, in connection with the Rostone Acquisition, ORC
entered into a new credit facility with Congress which was amended in November
1996 in connection with the QMP Acquisition. The credit facility as amended
provides for maximum borrowings of $20.0 million under a term loan in the
original amount of $7.7 million and revolving loans based on the eligible
balances of accounts receivable and inventory. Management believes that ORC's
cash flow from operations, together with this credit facility and permitted
levels of capital and operating leases, will be sufficient for ORC's operating
requirements, including capital expenditures and debt service, over the next
twelve months. At September 30, 1997 ORC had $2.0 million in revolving credit
availability.
DISCONTINUED OPERATIONS: In connection with the decision to discontinue the
agricultural operations, the Company has halted real estate development
activities and, as of April 2, 1997, has canceled its development agreement with
Pacific Union. Based on projections of farming costs and capital requirements
for the 1997 crop year, the Company believes that the only liquidity
requirements for the discontinued agricultural operations prior to their sale
will be approximately $0.3 million for debt service, which the Company expects
to fund from its cash balances.
On August 7, 1997, The Juliana Preserve, a joint venture partnership in
which the Company has a 71.7% economic interest and a 50% voting interest, sold
approximately 500 acres of the approximately 4,700 acres controlled by the joint
venture and held for sale since December 1996. Under the terms of the joint
venture agreement, the net proceeds were used to repay debt owed by the joint
venture. The Company will recognize no gain or loss or cash proceeds as a
result of this transaction. The joint venture continues to seek a buyer or
buyers for the remainder of the property.
CONTINGENCIES AND UNCERTAINTIES
In early 1996, the State of California Franchise Tax Board initiated an
audit of the Company's franchise tax returns for the years 1991, 1992 and 1993.
In October 1996, the Company received a formal notice of assessment from the
taxing authority in the aggregate amount of $0.7 million. Of this amount, $0.6
million results from the auditor's conclusion that income from gain on sales of
certain Canadian assets in 1991 should be reclassified from nonbusiness to
business income. The Company believes its classification of such income was
correct, and has appealed the assessment of tax. If the Company's positions
prevail on this issue, management believes that the amounts due would not exceed
amounts previously paid or provided for. No additional accruals have been made
for any amounts that may be due if the Company does not prevail because the
outcome cannot be determined. The Company recorded a provision of $0.1 million
for certain other adjustments proposed.
In connection with the sale of REC, the Company retained certain properties
in Louisiana because of litigation concerning environmental matters. The Company
is in the process of environmental remediation under a plan approved by the
Louisiana Office of Conservation. The Company has recorded an accrual of $0.5
million 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. Owners of a portion of the property have
objected to the Company's proposed cleanup methodology and have filed suit to
require additional procedures. The Company is contesting this litigation, and
believes its proposed clean up methodology is well within accepted industry
practice for remediation efforts of a similar nature. No accrual has been made
for any additional costs of possible alternative clean up methods because the
nature and dollar amount of such alternative cannot presently be determined.
13
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBIT
27 Financial Data Schedule
(B) CURRENT REPORTS ON FORM 8-K
During the quarter ended September 30, 1997, the Company filed no
reports on Form 8-K.
14
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REUNION INDUSTRIES, INC.
(Registrant)
By /s/ Richard L. Evans
--------------------------------------
Richard L. Evans
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 6, 1997
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,046
<SECURITIES> 0
<RECEIVABLES> 14,237
<ALLOWANCES> 538
<INVENTORY> 8,053
<CURRENT-ASSETS> 25,464
<PP&E> 27,120
<DEPRECIATION> 2,188
<TOTAL-ASSETS> 75,441
<CURRENT-LIABILITIES> 30,545
<BONDS> 13,049
0
0
<COMMON> 38
<OTHER-SE> 28,651
<TOTAL-LIABILITY-AND-EQUITY> 75,441
<SALES> 69,877
<TOTAL-REVENUES> 69,877
<CGS> 59,314
<TOTAL-COSTS> 59,314
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 2,319
<INCOME-PRETAX> 210
<INCOME-TAX> 186
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