<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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 1-7726
REUNION INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1439715
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
62 SOUTHFIELD AVENUE
ONE STAMFORD LANDING SUITE 208
STAMFORD, CT 06902
(Address of principal executive offices)
(203) 324-8858
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of October 31, 1998 the Registrant had 3,900,065 shares of common
stock, par value $.0l, outstanding.
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<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998
(Unaudited) and December 31, 1997 2
Consolidated Statements of Operations (Unaudited)
Three Months and Nine Months Ended
September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE
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. The Company's future operations
could be affected by the failure of the Company or outside parties to achieve
Year 2000 computer compliance.
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
REUNION INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 1,949 $ 2,085
Accounts Receivable, Less Allowance for
Doubtful Accounts of $ 437 and $ 375,
respectively 13,808 12,284
Inventories 8,760 7,570
Customer Tooling-in-Process 872 1,773
Deferred crop costs 1,664 --
Other Current Assets 678 495
------- -------
Total Current Assets 27,731 24,207
------- -------
Property, Plant and Equipment--Net 39,863 35,293
------- -------
Other Assets
Goodwill 8,537 9,060
Investment in Joint Venture -- 1,622
Other 1,205 1,877
------- -------
9,742 12,559
------- -------
$77,336 $72,059
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
REUNION INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Current Portion of Long-Term Debt $ 17,190 $ 11,568
Short Term Term Debt - Related Parties 740 -
Accounts Payable 10,823 9,328
Advances From Customers 1,399 2,484
Accrued Bargo Judgment 8,825 -
Other Current Liabilities 6,238 4,654
--------- ---------
Total Current Liabilities 45,215 28,034
LONG-TERM DEBT 8,576 11,112
LONG-TERM DEBT-RELATED PARTIES 1,385 1,542
OTHER LIABILITIES 3,740 2,914
--------- ---------
Total Liabilities 58,916 43,602
--------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK OF CONSOLIDATED SUBSIDIARY 626 -
MINORITY INTEREST 215 140
SHAREHOLDERS' EQUITY
Common Stock ($.01 par value; 20,000 authorized;
3,900 and 3,855 issued and outstanding, respectively) 39 38
Additional Paid-in Capital 29,333 29,242
Accumulated Deficit (Since January 1, 1989) (11,796) (578)
Foreign Currency Translation Adjustments 3 (385)
--------- ---------
Total Shareholders' Equity 17,579 28,317
--------- ---------
$ 77,336 $ 72,059
========= =========
</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,
---------- ---------- ---------- -----------
1998 1997 1998 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 22,957 $ 21,734 $ 74,029 $ 69,877
Cost of Sales 19,436 18,224 63,071 59,314
--------- --------- -------- --------
Gross Profit 3,521 3,510 10,958 10,563
Selling, General and Administrative Expenses 2,790 2,597 8,824 8,359
Provision for merger and refinancing costs 1,362 - 1,362 -
--------- --------- -------- --------
Operating Income (Loss) (631) 913 772 2,204
Other Income and (Expense)
Interest Expense (872) (779) (2,366) (2,319)
Provision for Bargo Judgment - - (8,825) -
Other, Including Interest Income (111) 63 (176) 325
--------- --------- -------- --------
(983) (716) (11,367) (1,994)
--------- --------- -------- --------
Income (Loss) from Continuing Operations Before
Income Taxes (1,614) 197 (10,595) 210
Income Tax Benefit (Expense) 652 (50) 577 (186)
--------- --------- -------- --------
Income (Loss) from Continuing Operations (962) 147 (10,018) 24
Loss from Discontinued Operations - - (1,200) -
--------- --------- -------- --------
Net Income (Loss) (962) 147 (11,218) 24
Foreign currency translation adjustment 477 (60) 388 (278)
--------- --------- -------- --------
Comprehensive Income (Loss) $ (485) $ 87 $(10,830) $ (254)
========= ========= ======== ========
Income (Loss) Per Share - Basic and Diluted
Income ( Loss) from Continuing Operations $ (0.25) $ 0.04 $ (2.59) $ 0.01
Loss from Discontinued Operations - - (0.31) -
--------- --------- -------- --------
Net Income (Loss) $ (0.25) $ 0.04 $ (2.90) $ 0.01
========= ========= ======== ========
Weighted Average Number of Common Shares
Outstanding
Basic 3,900 3,855 3,874 3,855
========= ========= ======== ========
Diluted 3,900 3,939 3,874 3,936
========= ========= ======== ========
</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,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) $(11,218) $ 24
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation 2,713 1,959
Goodwill Amortization 523 516
Debt Issue Cost Amortization 206 180
Provision for Bargo Judgment 8,825 -
Provision for environmental liability 1,200 -
-------- -------
2,249 2,679
Changes in Assets and Liabilities:
Increase in Accounts Receivable (1,518) (952)
Increase in Inventory (1,155) (672)
(Increase) Decrease in Other Current Assets 748 (116)
Increase in Accounts Payable 1,485 1,201
Increase (Decrease) in Other Current Liabilities (970) 623
Other 995 (356)
-------- -------
Net Cash Provided by Operating Activities 1,834 2,407
Cash Flows From Investing Activities:
Acquisition of Joint Venture Interest, Net of Cash Acquired (1,720) -
Sale of Agricultural Land 2,695 -
Capital Expenditures (3,107) (2,741)
Collection of Note Receivable from Sale of Oil and Gas Business - 2,200
Other 451 -
-------- -------
Net Cash Used In Investing Activities (1,681) (541)
Cash Flows From Financing Activities:
Increase in Revolver Borrowings 646 140
Proceeds from Issuance of Debt Obligations 960 1,162
Payments of Debt Obligations (2,613) (2,529)
Proceeds from Issuance of Redeemable Preferred Stock of Subsidiary 583 -
Proceeds from Exercise of Stock Options and Warrants 92 -
Other 43 -
-------- -------
Net Cash Used in Financing Activities (289) (1,227)
Increase (Decrease) in Cash and Cash Equivalents (136) 639
Cash and Cash Equivalents at Beginning of Period 2,085 1,407
-------- -------
Cash and Cash Equivalents at End of Period $ 1,949 $ 2,046
======== =======
</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" or "Reunion") 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, 1998
The Consolidated Balance Sheet at September 30, 1998, and the
Consolidated Statements of Operations and Cash Flows for the periods ended
September 30, 1998 and 1997 included herein are unaudited; however, in the
opinion of management of the Company, they reflect all adjustments necessary
to present fairly the results for the interim periods. Such results are not
necessarily indicative of results to be expected for the year. The
Consolidated Balance Sheet at December 31, 1997 has been derived from the
audited financial statements at that date. The accompanying financial
statements have been prepared on a basis consistent with that used in the
preparation of the consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. For further
information, refer to the consolidated financial statements and footnotes
thereto included in such Annual Report.
EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average number
of common shares outstanding during the period. Diluted earnings per share
gives effect to all dilutive potential common shares outstanding during this
period. Potential common shares include shares issuable upon exercise of the
Company's stock options and warrants.
ACCOUNTING PRONOUNCEMENTS
The Company has adopted FASB Statement No. 130, "Reporting Comprehensive
Income" which establishes standards for reporting and displaying comprehensive
income and its components.
The Financial Accounting Standards Board (FASB) has issued several
accounting pronouncements which the Company will be required to adopt in future
periods.
FASB Statement No. 131 "Disclosures about Segments of an Enterprise and
Related Information" requires that a publicly-held company report financial and
descriptive information about its operating segments in financial statements
issued to shareholders for interim and annual periods. Although the Company
operates in only one segment, the Statement also requires additional disclosures
with respect to products and services, geographic areas of operation, and major
customers which have not previously been presented in the consolidated
financial statements and related notes. The Company will adopt Statement No.
131 for 1998 year end reporting purposes.
FASB Statement No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits" revises employers' disclosures about pension and other
postretirement benefit plans. The Statement does not change the measurement or
recognition of those plans. It standardizes the disclosure requirements for
pensions and other postretirement benefits and eliminates certain disclosures
that are no longer as useful as they previously were. The Company will adopt
Statement No. 132 for 1998 year end reporting purposes.
6
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging
Activities" requires that derivative instruments such as options, forward
contracts and swaps be recorded as assets and liabilities at fair value and
provides guidance for recognition of changes in fair value depending on the
reason for holding the derivative. The Company does not presently have
significant transactions involving derivative instruments, but may do so in the
future. The Company is required to adopt Statement No. 133 for the first
quarter of 2000 and may adopt it earlier.
NOTE 2. INVENTORIES
Inventories consisted of the following:
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
Raw Materials $ 4,060 $ 3,461
Work-in process 1,545 1,440
Finished Goods 3,155 2,669
-------- ---------
Total $ 8,760 $ 7,570
======== =========
NOTE 3. CHATWINS MERGER
The May 31, 1998 Merger Agreement with Chatwins Group, Inc. has been
terminated by mutual agreement. This decision was made as a result of the
inability to arrange sufficient financing to refinance all of the debt of the
combined companies under current market conditions.
As a result, the Company has recorded a charge of $1,362 in the third
quarter of 1998 to write off the accumulated legal, investment banking and
other costs related to the proposed merger and refinancing.
NOTE 4. INVESTMENT IN THE JULIANA PRESERVE
On September 29, 1998, the Company completed the purchase of its joint
venture partner's interest in the Juliana Preserve joint venture for a total
cost of $5,878 including closing expenses. The Company also paid the joint
venture partner $140 in interest for the delay in closing from June 1, 1998.
The purchase price included a $3,700 four-month note with interest at prime rate
plus 2% per annum, secured by liens on the Juliana Preserve property.
Simultaneously with the purchase, the Company sold three parcels to a third
party for $2,700 cash. These proceeds were used to fund the cash portion of
the joint venture interest purchase. The Company also conveyed ownership of one
parcel, together with easements, equipment and water rights, to the Juliana
Mutual Water Company, which will provide water to all owners of parcels within
the Juliana Preserve, including the Company.
As a result of these transactions, the Company owns 100% of the remaining
36 parcels. The property totals approximately 3,800 acres, of which
approximately 1,200 acres are suitable for wine grape production and of which
350 acres are currently in production.
Because of voting rights held by the joint venture partner, the Company
accounted for its investment on the equity method through the date of purchase.
7
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
NOTE 5. INCOME TAX REFUND AND NET OPERATING LOSS CARRYFORWARDS
In August 1998, the Company reached a settlement with the IRS on its appeal
of the denial of the Company's request for refund of Alternative Minimum Tax
paid in 1990 and 1991. As a result of the settlement, the Company received
refunds totaling $676 including interest. Because of the uncertainty over
realization of the refund, the Company had recorded an allowance of $750 in 1996
for the possible denial of the refund claim with a corresponding charge to
income tax expense. As a result of the settlement, the company has recorded an
income tax benefit of $676 in the quarter ended September 30, 1998.
As part of the settlement, the IRS also confirmed the amounts of the
Company's net operating loss carryforwards ("NOLs") as of December 1993.
Based on the amounts confirmed, the revised amounts of the Company's NOLs as of
December 31, 1997 expire as follows:
AS PREVIOUSLY
REPORTED AS REVISED
------------- ----------
1998 $ 8,100 $ 16,300
1999 43,200 44,100
2000 87,300 87,300
2001 27,900 27,900
2002 21,900 22,000
2003-2007 22,100 63,300
2008-2012 5,400 5,600
-------- --------
$215,900 $266,500
NOTE 6. CONTINGENCIES
On April 24, 1998, a jury in state district court in Harris County, Texas
returned jury verdict findings that Bargo Energy Company ("Bargo") had a right
to terminate a November 1995 stock purchase agreement with the Company and that
the Company fraudulently induced Bargo into entering into the agreement. The
November 1995 stock purchase agreement concerned the sale of the Company's
subsidiary, Reunion Energy Company ("REC"), which operated the Company's
discontinued oil and gas business. The jury recommended that an award of $5,000
in punitive damages be assessed against the Company. In July 1998, the court
entered judgment affirming the $5,000 jury verdict and awarding approximately
$3,000 in attorneys' fees and costs. The Company maintained at trial and
continues to maintain that all requirements to closing under the contract were
met, and that Bargo was required to close the transaction. The Company also
maintains that no evidence sufficient to support a jury finding of fraud or
the related punitive damages finding was presented at trial. The Company has
filed a bond which suspends execution on the judgment while the Company appeals.
A formal notice of appeal has been filed and the Company intends to file its
appeal as soon as possible. Although management believes, based on
consultation with counsel, that it is more likely than not that the judgment
will be overturned on appeal, the Company has recorded an accrual of $8,825 for
the amount of the judgment, with a charge to continuing operations in the 1998
second quarter in accordance with generally accepted accounting principles.
In early 1996, the State of California Franchise Tax Board initiated an
audit of the Company's franchise tax returns for the years 1991, 1992 and 1993.
In October 1996, the Company received a formal notice of assessment from the
taxing authority in the aggregate amount of $716 plus interest. Of this amount,
$645 results from the auditor's conclusion that income from gains on sales of
certain Canadian assets in 1991 should be reclassified from nonbusiness to
business income. The Company believes its classification of such income was
correct, and has appealed the assessment of tax. If the Company's positions
prevail on this issue, management believes that the amounts due would not exceed
amounts previously paid or provided for. No additional accruals have been
made for any amounts that may be due if the Company
8
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
does not prevail because the outcome cannot be determined. The Company recorded
a provision for $85 for certain other proposed adjustments.
In connection with the sale of REC, the Company retained certain oil and
gas properties in Louisiana because of litigation concerning environmental
matters. The Company is in the process of environmental remediation under a plan
approved by the Louisiana Office of Conservation. The Company has recorded an
accrual for its proportionate share of the remaining estimated costs to
remediate the site based on plans and estimates developed by the environmental
consultants hired by the Company. During the quarter ended June 30, 1998 the
Company increased this accrual by a charge of $1,200 to discontinued
operations, based on revised estimates of the remaining remediation costs. At
September 30, 1998, the balance accrued for these remediation costs is
approximately $1,537 which is recorded in other current liabilities on the
accompanying balance sheet. Owners of a portion of the property have objected
to the Company's proposed cleanup methodology and have filed suit to require
additional procedures. The Company is contesting this litigation, and believes
its proposed methodology is well within accepted industry practice for
remediation efforts of a similar nature. No accrual has been made for any costs
of any alternative cleanup methodology which might be imposed as a result of
the litigation.
NOTE 7. SUBSEQUENT EVENTS
REFINANCING OF SENIOR SECURED DEBT
On October 19, 1998 Reunion's wholly owned subsidiary, Oneida Rostone Corp.
("ORC"), closed a financing under a Loan and Security Agreement with The CIT
Group/Business Credit, Inc. ("CITBC"). The agreement provides a six-year senior
secured credit facility including revolving credit loans of up to $10,200 and a
term loan in the initial amount of $6,000 for ORC (the "New Facilities"). The
proceeds were used to refinance ORC's debt with Congress Financial Corporation
and to provide working capital for ORC. The New Facilities also provide a letter
of credit used to collateralize the bond for the Company's appeal of the
judgement in favor of Bargo.
The initial borrowing under the New Facilities totaled $15,196, of which
$13,941 was used to repay the debt with Congress Financial Corporation and
$1,255 was paid for fees and other loan costs. CITBC received fees totaling
$1,100.
Future borrowings under the revolving credit loans are subject to a
collateral availability formula based on 85% of eligible accounts receivable
and 60% of eligible raw materials and finished goods inventories, as such terms
are defined in the Agreement. The term loan is repayable in quarterly
installments of $250 beginning December 31, 1998. Interest is payable monthly
at 0.25% above the Chase Manhattan Bank Rate for revolving loans and at 0.50%
above the Chase Manhattan Bank Rate for the term loan.
The New Facilities are secured by liens on substantially all of ORC's
assets and by guarantees of (i) ORC's subsidiary, DPL Acquisition Corp., which
indirectly owns 80.47% of Data Packaging Limited (the Company's plastic
products operation in Ireland), (ii) Reunion, and (iii) Charles E. Bradley,
President and a director of Reunion. Reunion's guarantee is secured by a pledge
of (i) the stock of ORC, (ii) 10% of the stock of Reunion's subsidiary, Juliana
Vineyards, and (iii) a cash deposit of $438. Mr. Bradley's guarantee is secured
by a pledge by an affiliated company, Stanwich Financial Services Corp, of
$6,000 of Partially Convertible Subordinated 9% Notes of Consumer Portfolio
Services, Inc.
STOCKHOLDER LITIGATION
The stockholder litigation against the Company and its directors seeking
to prevent or rescind the merger with Chatwins Group, Inc. was dismissed without
prejudice on October 27, 1998 on motion by the plaintiffs.
9
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's principal operations are in the plastic products industry.
The Company, through its wholly owned subsidiary ORC, manufactures high
volume, precision plastic products and provides engineered plastic services. As
part of its ongoing growth strategy, the Company regularly considers additional
acquisitions in the plastics industry to increase its customer base and expand
its product offerings and service capabilities. In addition, the Company may
consider acquisitions in other industries. The Company also has wine grape
agriculture operations in Napa County, California.
RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998
- --------------------------------------
ORC: Revenues and operating income of ORC were $22.9 million and $1.2
million, respectively, for the three months ended September 30, 1998. This
compares to revenues and operating income of $21.7 million and $1.3 million,
respectively, for the three months ended September 30, 1997.
The 6% increase in revenues is attributable to increased sales from new
customer programs at ORC's subsidiary in Ireland, partially offset by lower
sales at certain U.S. operations. Tooling sales for the three months ended
September 30, 1998 were $1.2 million, versus tooling sales of $1.0 million
for the prior year period. ORC backlog totaled $20.7 million at September 30,
1998, compared to backlog of $21.9 million at December 31, 1997 and backlog
of $22.0 million at September 30, 1997.
Cost of sales totaled $19.4 million, or 84.7% of net sales, for the three
months ended September 30, 1998 compared to $18.2 million, or 83.8% of net
sales for the three months ended September 30, 1997. Gross profit was $3.5
million for the three months ended September 30, 1998 compared to $3.5
million in the prior year period.
Selling, general and administrative expenses were $2.3 million for the
three months ended September 30, 1998, compared to $2.2 million for the three
months ended September 30, 1997. Operating income was $1.2 million for the
three months ended September 30, 1998 compared to $1.3 million in the
comparable 1997 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
$0.5 million for the three months ended September 30, 1998 compared to $0.4
million for the three months ended September 30, 1997.
As a result of termination of the Merger Agreement with Chatwins Group,
Inc. because of the inability to raise sufficient financing under current market
conditions, the Company recorded a charge of $ 1.4 million in the third quarter
of 1998 to write off accumulated legal, investment banking and other costs
related to the merger.
OTHER INCOME AND (EXPENSE): Interest expense was $0.9 million for the
three months ended September 30, 1998 compared to $0.8 million for the prior
year period. The Juliana Preserve results are seasonal with the majority of
revenues and expenses realized after harvest in the fourth quarter. The Company
recognized break-even results during the three months ended September 30, 1998
from its equity interest in the Preserve.
The Company recognized a loss from continuing operations of $1.0 million
during the three months ended September 30, 1998 compared to income of $0.1
million for the comparable prior year period.
10
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 1998
- ------------------------------------
ORC: Revenues and operating income of ORC were $74.0 million and $3.7
million, respectively, for the nine months ended September 30, 1998. This
compares to revenues and operating profit of $69.9 million and $3.5 million,
respectively, for the nine months ended September 30, 1997.
The 6% increase in revenues is attributable to increased sales from new
customer programs at ORC's subsidiary in Ireland, partially offset by lower
sales at certain U.S. operations. Tooling sales for the nine months ended
September 30, 1998 were $4.9 million, versus tooling sales of $3.5 million
for the prior year period. During the second quarter of 1997 ORC experienced a
one month strike at its Rostone division. Although the Company used replacement
and temporary workers during the strike, resultant effects of the strike were
such that sales and operating income were approximately $2.0 million and $1.0
million less than expected for the second quarter of 1997. ORC backlog totaled
$20.7 million at September 30, 1998, compared to backlog of $21.9 million at
December 31, 1997 and backlog of $22.0 million at September 30, 1997.
Cost of sales totaled $63.1 million, or 85.2% of net sales, for the nine
months ended September 30, 1998 compared to $ 59.3 million, or 84.8% of net
sales for the nine months ended September 30, 1997. As a result of the increase
in sales, gross profit increased to $10.9 million for the nine months ended
September 30, 1998 from $10.6 million in the prior year period.
Selling, general and administrative expenses were $7.2 million for the
nine months ended September 30, 1998, compared to $7.0 million for the nine
months ended September 30, 1997. Operating income was $3.7 million for the
nine months ended September 30, 1998 compared to $3.5 million in the
comparable 1997 period. Operating income for the 1997 period was adversely
affected by approximately $1.0 million by the effects of the one month strike as
discussed above.
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
$1.6 million for the nine months ended September 30, 1998 compared to $1.3
million for the nine months ended September 30, 1997.
As a result of termination of the Merger Agreement with Chatwins Group,
Inc. because of the inability to raise sufficient financing under current market
conditions, the Company recorded a charge of $ 1.4 million in the third quarter
of 1998 to write off accumulated legal, investment banking and other costs
related to the merger.
OTHER INCOME AND (EXPENSE): Interest expense was $2.4 million for the nine
months ended September 30, 1998 compared to $2.3 million for the prior year
period. The Company recorded a charge of $8.8 million during the quarter
ended June 30, 1998 to record entry of a judgment in the Company's litigation
with Bargo Energy Company. The Juliana Preserve results are seasonal with the
majority of revenues and expenses realized after harvest in the fourth quarter.
The Company recognized break-even results during the nine months ended September
30, 1998 from its equity interest in the Preserve.
The Company recognized a loss from continuing operations of $10.0
million during the nine months ended September 30, 1998 compared to break even
results for the comparable prior year period.
DISCONTINUED OPERATIONS
After the sale of its oil and gas operations in May 1996, the Company
retained certain oil and gas properties in Louisiana because of litigation
concerning environmental matters. The Company is in the process of
environmental remediation of these properties. Based on further testing
requested by the Louisiana Office of Conservation in connection with
consideration of the Company's remediation plan for approval, the Company's
environmental consultants have estimated that the total costs to remediate the
site are approximately $2.0 million. The Company has increased its existing
accrual for its portion of the estimated remaining remediation costs through a
$1.2 million charge to discontinued operations in the 1998 second quarter.
11
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY OF 1998 ACTIVITIES
Cash and cash equivalents totaled $1.9 million at September 30, 1998.
During the nine months ended September 30, 1998, cash decreased $0.2 million,
with $1.8 million provided by operations, $1.7 million used in investing
activities and $0.3 million used in financing activities.
INVESTING ACTIVITIES: Capital expenditures were $3.1 million in the nine
months ended September 30, 1998. Cash used to acquire the joint venture
interest in the Juliana Preserve was $1.7 million net of cash acquired. Cash
proceeds from the sale of agricultural parcels were $2.7 million.
FINANCING ACTIVITIES: Principal payments reduced long-term obligations by
$1.0 million in nine months ended September 30, 1998. Net revolving loan
borrowings in the period totaled $0.6 million. Proceeds from issuance of
redeemable preferred stock of DPL were $0.6 million and from exercise of stock
options and warrants were $0.1 million.
FACTORS AFFECTING FUTURE LIQUIDITY
Because of various restrictions included in the Company's loan
arrangements, management must separately consider liquidity and financing for
corporate requirements, ORC and agricultural operations.
CORPORATE: Corporate expenses, including salaries and benefits,
professional fees and other public company costs, are expected to approximate
$1.5 million annually. Legal costs to appeal the Bargo litigation and cash
required to collateralize the Bargo appeal bond will add to corporate
requirements. In addition, a significant portion of the $1.6 million accrued
for environmental remediation of the Louisiana properties, described herein, is
expected to be expended during the next twelve months. The Company's source of
funds for these expenses and for future acquisitions, other than from additional
borrowings, are from cash balances and permitted payments by ORC. The
Corporate cash balance at September 30, 1998 was $0.5 million.
As described in Note 7 to the Consolidated Financial Statements, ORC closed
a new credit facility with CITBC in October 1998. This new credit facility
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
monthly payments of up to $0.1 million for management fees and dividends on
preferred stock and tax sharing payments of up to 50% of the tax savings
realized by ORC because of Reunion's NOLs. There can be no assurances that ORC
will be able to maintain the required levels of availability and be permitted to
make the management fee and tax sharing fee payments to Reunion. In any event,
the maximum amount of such payments is not expected to be sufficient for
Reunion's corporate operating and debt service requirements.
Without additional financing, management believes that the Company will
not have sufficient resources to meet its corporate expenses and legal and
environmental costs as they become due over the next twelve months. During
August and September 1998, the Company borrowed a total of $0.7 million from
Stanwich Financial Services Corp., ("SFSC"). Charles E. Bradley, the Company's
President, is a shareholder, director and president of SFSC and Richard L.
Evans, the Company's Executive Vice President, is a Vice President of SFSC.
These borrowings bear interest at 15%, and were due to mature September 30,
1998. SFSC has agreed to extend the maturity date to November 30, 1998 while
the Company seeks additional financing. There can be no assurances that such
financing will be arranged, or that SFSC will extend the maturity or lend
additional funds.
ORC: On October 19, 1998, ORC closed a new loan facility with CITBC. The
new facility is a six-year senior secured credit facility including revolving
credit loans of up to $10.2 million and a term loan in the initial amount of
$6.0 million for ORC. The proceeds were used to refinance ORC's debt with
Congress Financial Corporation and to provide working capital for ORC.
Management believes that ORC's cash flow from operations, together with this
credit facility and permitted levels of capital and operating leases, will be
sufficient for ORC's operating requirements, including capital expenditures and
debt service, over the next twelve months. At October 19, 1998 ORC had $1.6
million in revolving credit availability.
12
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
AGRICULTURAL OPERATIONS: In September 1998, the Company completed the
purchase of its joint venture partner's 28.3% interest in the Juliana Preserve
joint venture for $5.9 million. The purchase was funded from the proceeds of
the sale of three parcels for $2.7 million, and by a $3.7 million 4-month note
to the joint venture partner. The Company is working with its present lender to
refinance the existing $2.0 million debt and the $3.7 million note and to
provide working capital for the farming operations, but there can be no
assurances that such financing will be arranged. Collateral for any new
borrowings is expected to be provided by the underlying agricultural assets and
vineyard acreage. The Company also plans to undertake a limited wine grape
development effort, which management believes will enhance the value of the
property. Management believes the combination of farming revenues plus
prospective borrowings will be sufficient to fund the agricultural operations
over the next twelve months.
YEAR 2000 COMPUTER COMPLIANCE
The Company, like most companies, utilizes electronic technology which
includes computer hardware and software systems that process information and
perform calculations that are date-and time-dependent. The Company is aware
that the coming of the Year 2000 ("Y2K") poses pervasive and complex problems in
that virtually every computer operation (including manufacturing equipment and
other non-information systems equipment), unless it is Y2K compliant, will be
affected in some way by the rollover of the two-digit year value from "99" to
"00" and the inadvertent recognition by electronic technology of "00" as the
year 1900 rather than Y2K. The Company is also aware that it may not only be
negatively affected by the failure of its own systems to be Y2K compliant, but
may also be negatively affected by the Y2K non-compliance of its vendors,
customers, lenders and any other party with which the Company transacts
business.
The Company has completed its initial assessment of the systems and
software in place at all locations. Since the Company uses integrated
accounting and manufacturing software provided by third party vendors, it has
avoided internal programming costs associated with modifying code and data to
handle dates past the year 2000. The latest software releases provided by the
respective third party vendors have achieved Y2K certification from independent
testing organizations. The Company is in the process of upgrading all of its
software to Y2K compliant releases. Upgrading and testing is substantially
complete at two of the Company's four principal manufacturing locations and at
the headquarters locations. The Company expects to complete the remaining
upgrades by the second quarter of 1999. Outside vendors such as suppliers,
banks and payroll services have been contacted and have provided assurances that
they either are compliant or will be by the end of 1998. Testing of the
Company's software and systems is expected to be completed during the second
quarter of 1999.
Because management expects to complete the upgrading of all of its software
early in 1999, the Company has not developed a Y2K contingency plan. Management
regularly monitors the status of the Y2K compliance process, and will develop
contingency plans if it appears that the Company will not achieve full Y2K
compliance by June 1999.
The Company has incurred and expects to continue to incur internal staff
and other costs as a result of modifying existing systems to be Y2K compliant.
Such costs will continue to be expensed as incurred and funded through
internally generated cash while costs to acquire new equipment and software will
be capitalized and depreciated over their useful lives. The software upgrades
were principally planned to improve operating controls and implementation was
not significantly accelerated. Management does not expect the incremental cost
to the Company of enterprise-wide Y2K compliance to be material to its
operations.
Management recognizes that the failure of the Company or any party with
which the Company conducts business to be Y2K compliant in a timely manner could
have a material adverse impact on the operations of the Company. If the
Company's systems were to fail because they were not Y2K compliant, the Company
would incur significant costs and inefficiencies. Manual systems for
manufacturing and financial control would have to be implemented and staffed.
Significant customers might decide to cease doing business with the Company.
13
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONTINGENCIES AND UNCERTAINTIES
On April 24, 1998, a jury in state district court in Harris County, Texas
returned jury verdict findings that Bargo had a right to terminate a November
1995 stock purchase agreement with the Company and that the Company
fraudulently induced Bargo into entering into the agreement. The November 1995
stock purchase agreement concerned the sale of the Company's subsidiary, REC,
which operated the Company's discontinued oil and gas business. The jury
recommended that an award of $5.0 million in punitive damages be assessed
against the Company. In July 1998, the court entered judgment affirming the
$5.0 million jury verdict and awarding approximately $3.0 million in attorneys'
fees and costs. The Company maintained at trial and continues to maintain that
all requirements to closing under the contract were met, and that Bargo was
required to close the transaction. The Company also maintains that no evidence
sufficient to support a jury finding of fraud or the related punitive damages
finding was presented at trial. The Company has filed a bond which suspends
execution on the judgement while the Company appeals. A formal notice of appeal
has been filed and the Company intends to file its appeal as soon as possible.
Although management believes, based on consultation with counsel, that it is
more likely than not that the judgment will be overturned on appeal, the
Company has recorded an accrual for the amount of the bond with a charge to
continuing operations in the 1998 second quarter in accordance with generally
accepted accounting principles.
In early 1996, the State of California Franchise Tax Board initiated an
audit of the Company's franchise tax returns for the years 1991, 1992 and 1993.
In October 1996, the Company received a formal notice of assessment from the
taxing authority in the aggregate amount of $0.7 million plus interest. Of this
amount, $0.6 million results from the auditor's conclusion that income from
gains on sales of certain Canadian assets in 1991 should be reclassified from
nonbusiness to business income. The Company believes its classification of
such income was correct, and has appealed the assessment of tax. If the
Company's positions prevail on this issue, management believes that the amounts
due would not exceed amounts previously paid or provided for. No additional
accruals have been made for any amounts that may be due if the Company does not
prevail because the outcome cannot be determined. The Company recorded a
provision for approximately $0.1 million for certain other proposed
adjustments.
In connection with the sale of REC, the Company retained certain oil and
gas properties in Louisiana because of litigation concerning environmental
matters. The Company is in the process of environmental remediation under a plan
approved by the Louisiana Office of Conservation. The Company has recorded an
accrual for its proportionate share of the remaining estimated costs to
remediate the site based on plans and estimates developed by the environmental
consultants hired by the Company. During the quarter ended June 30, 1998 the
Company increased this accrual by a charge of $1.2 million to discontinued
operations, based on revised estimates of the remaining remediation costs. At
September 30, 1998, the balance accrued for these remediation costs is
approximately $1.5 million which is recorded in other current liabilities on the
accompanying balance sheet. Owners of a portion of the property have objected
to the Company's proposed cleanup methodology and have filed suit to require
additional procedures. The Company is contesting this litigation, and believes
its proposed methodology is well within accepted industry practice for
remediation efforts of a similar nature. No accrual has been made for any costs
of any alternative cleanup methodology which might be imposed as a result of
the litigation.
14
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company filed suit in the 125th Judicial District Court of Harris
County, Texas against Bargo and its general partners, Chisos Corporation, Austin
Resources Corporation, Shearwave, Inc., Brazos Oil & Gas Corporation, and
Schroder Oil Financing & Investment Company, on January 16, 1996 for damages and
relief arising out of Bargo's repudiation of its agreement to purchase all
outstanding shares of the capital stock of the Company's subsidiary, REC. Bargo
had agreed to pay the Company $15.1 million for REC's capital stock, subject to
certain potential adjustments in the purchase price as set forth in the stock
purchase agreement between the Company and Bargo and had deposited $0.5 million
with a contractual escrow agent in accordance with the terms of the stock
purchase agreement. The Company alleged in its complaint that Bargo tortiously
interfered with a prospective stock purchase agreement with another purchaser of
REC's stock, and then wrongfully repudiated its agreement to purchase REC's
stock. The Company also asserted claims against Bargo for breach of contract and
breach of duty of good faith and fair dealing, and sought damages under these
theories of liability. Bargo also filed suit against the Company claiming that
the Company, its investment bankers, and certain individuals fraudulently
misrepresented information and fraudulently induced Bargo into signing the Stock
Purchase Agreement. Bargo also asserted claims for breach of contract and
warranty, return of its escrow, and for unspecified damages under these
theories of liability. The cases were consolidated in the 334th Judicial
District Court of Harris County, Texas, and the consolidated case was realigned
with the Company as plaintiff.
On April 24, 1998, after a three week trial, a jury returned jury verdict
findings that Bargo had a right to terminate the stock purchase agreement with
the Company and that the Company fraudulently induced Bargo into entering into
the agreement. In July 1998, the court entered judgment affirming the $5.0
million jury verdict and awarding approximately $3.0 million in attorneys' fees
and costs. The Company maintained at trial and continues to maintain that all
requirements to closing under the contract were met, and that Bargo was required
to close the transaction. The Company also maintains that no evidence
sufficient to support a jury finding of fraud or the related punitive damages
finding was presented at trial. The Company has filed a bond which suspends
execution on the judgement while the Company appeals. A formal notice of appeal
has been filed and the Company intends to file its appeal as soon as possible.
Management believes, based on consultation with counsel, that it is more likely
than not that any judgment based on a finding of fraud, the award of attorneys'
fees based on a finding of fraud and punitive damages would be overturned on
appeal. If the judgment is not overturned on appeal, the Company would be
obligated to seek alternative funding sources, including a sale of assets.
In July 1998, the Company and its directors were named as defendants in
two class action lawsuits filed in the Delaware Court of Chancery by
certain of the Company's stockholders, purportedly on behalf of all public
stockholders of the Company, seeking to prevent or rescind the merger with
Chatwins Group, Inc. and/or obtain damages from the Company , Chatwins and the
directors of the Company on account of the merger. The lawsuits alleged
breaches of fiduciary duty by the defendants in setting the exchange ratio of
the merger. The Company maintained that the exchange ratio fixed for the
merger fairly reflected the relative values of Chatwins and Reunion when the
merger terms were agreed. In October 1998, the Company announced that the
Merger Agreement had been terminated by mutual agreement because of the
inability to arrange sufficient financing to refinance all of the debt of the
combined companies under current market conditions. On October 27, 1998, the
lawsuits were dismissed without prejudice on motion by the plaintiffs.
15
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the Company's shareholders held August 4, 1998,
shareholders holding a majority of the shares of Common Stock outstanding as of
the close of business on June 26, 1998 voted to approve the following proposals
included in the company's proxy statement as follows:
Proposal 1: Election of Directors For Withhold
--- --------
Thomas N. Amonett 3,359,586 222,471
Charles E. Bradley, Sr. 3,359,287 222,770
Thomas L. Cassidy 3,358,587 223,470
W. R. Clerihue 3,358,502 223,555
Franklin Myers 3,359,572 222,485
John G. Poole 3,359,427 222,630
<TABLE>
<CAPTION>
Broker
For Against Abstentions Non-Votes
--- ------- ----------- ---------
<S> <C> <C> <C> <C>
Proposal 2: The approval of the
adoption of the 1998
Stock Option Plan
of Reunion Industries, Inc. 2,261,171 263,827 7,037 1,050,022
Proposal 3: Consideration and approval
of the Merger Agreement
with Chatwins Group, Inc. The vote on this proposal was deferred to subsequent adjournments of the
meeting. The proposal was withdrawn and the meeting finally adjourned on
October 22, 1998.
Broker
For Against Abstentions Non-Votes
--- ------- ----------- ---------
Proposal 4: To consider and act upon
such other business as may
properly come before the
meeting 3,319,183 237,016 25,858 ----
</TABLE>
16
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10.1 Loan and Security Agreement dated as of October 16, 1998 among
Oneida Rostone Corp. as Borrower, Reunion Industries, Inc. and
DPL Acquisition Corp. as Guarantors, and The CIT Group/Business
Credit, Inc. as Agent and lender (incorporated by reference to
the Company's Current Report on Form 8-K dated October 19, 1998).
11.1 Computation of Earnings Per Share
27 Financial Data Schedule
(B) CURRENT REPORTS ON FORM 8-K
During the quarter ended September 30, 1998, the Company filed no reports
on Form 8-K.
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 12, 1998
17
<PAGE>
Exhibit 11.1
REUNION INDUSTRIES, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER DATA)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1998 1997 1998 1997
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Net (loss) $ (962) $ 147 $(11,218) $ 24
======== ====== ======== ======
Weighted average common shares
outstanding--Basic 3,900 3,855 3,874 3,855
Net additional shares outstanding
assuming all stock options exercised
using the Treasury Stock Method -- 84 -- 81
-------- ------ -------- ------
Average common shares and
common share equivalents
outstanding--Diluted 3,900 3,939 3,874 3,936
======== ====== ======== ======
Net (loss) per share:
Basic $ (0.25) $ 0.04 $ (2.90) $ 0.01
======== ====== ======== ======
Diluted $ (0.25) $ 0.04 $ (2.90) $ 0.01
======== ====== ======== ======
</TABLE>
Notes:
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED 9/30/98 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,949
<SECURITIES> 0
<RECEIVABLES> 14,245
<ALLOWANCES> 437
<INVENTORY> 8,760
<CURRENT-ASSETS> 27,731
<PP&E> 47,673
<DEPRECIATION> 7,810
<TOTAL-ASSETS> 77,336
<CURRENT-LIABILITIES> 45,215
<BONDS> 9,961
626
0
<COMMON> 39
<OTHER-SE> 17,540
<TOTAL-LIABILITY-AND-EQUITY> 77,336
<SALES> 74,029
<TOTAL-REVENUES> 74,029
<CGS> 63,071
<TOTAL-COSTS> 63,071
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,366
<INCOME-PRETAX> (10,595)
<INCOME-TAX> 577
<INCOME-CONTINUING> (10,018)
<DISCONTINUED> (1,200)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,218)
<EPS-PRIMARY> (2.90)
<EPS-DILUTED> (2.90)
</TABLE>
