REUNION INDUSTRIES INC, 10-K405, 1998-03-27

REUNION INDUSTRIES INC
10-K405, 1998-03-27
CRUDE PETROLEUM & NATURAL GAS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------------

FORM 10-K

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 AVE.
ONE STAMFORD LANDING
STAMFORD, CONNECTICUT 06902
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)

(203) 324-8858
(TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
Common Stock, $.01 par value REGISTERED
The Pacific Stock Exchange
Incorporated
NASDAQ Small-Cap. Market

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 February 28, 1998, the registrant had 3,855,100 shares of Common Stock
issued and outstanding. As of February 28, 1998, 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 NASDAQ Small-
Cap. Market) was approximately $10,126,000.

DOCUMENTS INCORPORATED BY REFERENCE

None

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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to thisForm 10-K. [X]
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REUNION INDUSTRIES, INC.

TABLE OF CONTENTS OF FORM 10-K

PART I

<TABLE>
<CAPTION>
ITEM
NO. PAGE
---- ----
<C> <S> <C>
1. BUSINESS........................................................... 1
General............................................................ 1
Plastic Products and Services...................................... 2
Agricultural Operations............................................ 5
Discontinued Operations............................................ 6
Environmental Regulation........................................... 7
Employees.......................................................... 8
2. PROPERTIES......................................................... 9
3. LEGAL PROCEEDINGS.................................................. 10
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 10

PART II

5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................... 11
6. SELECTED FINANCIAL DATA............................................ 12
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................. 13
8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........... 19
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.............................................. 19

PART III

10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 20
11. EXECUTIVE COMPENSATION............................................. 22
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..... 24
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 25

PART IV

14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K... 27
SIGNATURES......................................................... 28
</TABLE>
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FORWARD LOOKING STATEMENTS

This Form 10-K 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-K, 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.

PART I

ITEM 1. BUSINESS

GENERAL

The Company, through its wholly owned subsidiary Oneida Rostone Corp.
("ORC"), manufactures high volume, precision plastic products and provides
engineered plastics services. ORC's Oneida division, acquired in September
1995, designs and produces injection molded parts and provides secondary
services such as hot stamping, welding, printing, painting and assembly of
such products. In addition, Oneida designs and builds custom molds at its tool
shops in order to produce component parts for specific customers. ORC's
Rostone division, acquired in February 1996, compounds and molds thermoset
polyester resins. The acquisitions in November 1996 of Data Packaging Limited
("DPL"), which operates in Ireland, and of the assets and business of Quality
Molded Products, Inc. ("QMP", now part of the Oneida division), have expanded
the Company's custom injection molding capacity. The Company is also engaged
in wine grape agricultural operations in Napa County, California.

During the five year period ended December 31, 1997, the Company, through
its subsidiaries, was also engaged in exploring for, developing, producing and
selling crude oil and natural gas in the United States. In November 1995, the
Company's Board of Directors resolved to pursue the sale of the Company's oil
and gas assets and discontinue the Company's oil and gas operations. On May
24, 1996, the Company completed the sale of its wholly owned subsidiary,
Reunion Energy Company ("REC"), including substantially all of the Company's
oil and gas assets. Until 1993, the Company had also, through its
subsidiaries, (i) provided contract workover services in the Gulf of Mexico,
(ii) explored for, developed, produced and sold crude oil and natural gas in
Canada and (iii) engaged in the management of oil and gas partnerships. Each
of these three lines of business were either discontinued or sold in 1993.

General information about each of the Company's principal businesses is set
forth below under the captions "Plastic Products and Services", "Agricultural
Operations" and "Discontinued Operations." Certain financial information
concerning the discontinued operations is set forth in Note 3 to the
Consolidated Financial Statements.

The Company's original predecessor was organized in California in 1929. The
Company's predecessor, Buttes Gas and Oil Co. ("BGO"), and certain of its
subsidiaries emerged in December 1988 from a reorganization in bankruptcy (the
"Reorganization") under Chapter 11 of the United States Bankruptcy Code.

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Effective June 29, 1993, the Articles of Incorporation of BGO were amended to
effect a plan of recapitalization (the "Recapitalization") pursuant to which,
among other things, (i) each then outstanding share of common stock, par value
$.01 per share, of BGO ("Old Buttes"), was converted automatically and without
further action by stockholders into 1/300th share of new common stock, par
value $.01 per share (the "Reverse Split"), of Old Buttes (as so
recapitalized, "New Buttes"); (ii) all fractional interests in shares of Old
Buttes resulting from the Recapitalization are to be settled in cash at the
last sale price of Old Buttes shares on the Pacific Stock Exchange on the last
trading day before the effective date of the Recapitalization; (iii) following
the effective date of the Recapitalization, New Buttes distributed 14
additional shares of New Buttes for each one new share issued (or issuable) in
the Recapitalization, in payment of a stock distribution payable to the
holders of record of New Buttes shares on the day after the effective date of
the Recapitalization (thereby effecting a fifteen-for-one forward stock
split). BGO was then merged into RRC, a Delaware corporation. RRC merged into
RII effective April 19, 1996.

RII's Certificate of Incorporation includes certain capital stock transfer
restrictions (the "Transfer Restrictions") which are designed to prevent any
person or group of persons from becoming a 5% shareholder of RII 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" (measured over a three year testing period) for federal income tax
purposes. The Transfer Restrictions do not apply to transfers approved by the
Company's Board of Directors if such approval is based on a determination that
the proposed transfer will not jeopardize the full utilization of the
Company's net operating loss carryforwards.

The Company and Chatwins Group, Inc. ("Chatwins") are considering the
possible merger of Chatwins with and into the Company in a tax-free exchange
of stock. Chatwins currently owns approximately 38% of the Company's
outstanding Common Stock (see Item 13--"Certain Relationships and Related
Transactions"). Such a merger will be subject to, among other conditions,
approval by the Boards of Directors and the Stockholders of the Company and
Chatwins and compliance by Chatwins with the covenants in its financing
agreements. The Company has retained an investment banking firm that conducted
appraisals of the values of each party independent to the possible merger. In
addition, outside legal counsel has been retained and financing discussions
have been held with prospective lenders. If such a merger is proposed,
requisite approvals are obtained and other conditions are satisfied, then
consummation of the merger could occur as early as this year. There can be no
assurances that this transaction will be proposed or consummated.

PLASTIC PRODUCTS AND SERVICES

On September 14, 1995, the Company acquired (the "Oneida Acquisition")
Oneida Molded Plastics Corp. ("Oneida"). On February 2, 1996, Rostone
Corporation ("Rostone") merged with and into Oneida (the "Rostone
Acquisition") and the surviving corporation changed its name to Oneida Rostone
Corp. Oneida and Rostone operate as divisions of ORC. On November 18, 1996,
ORC acquired (the "QMP Acquisition") the assets and business of Quality Molded
Products, Inc. ("QMP") and completed the acquisition (the "DPL Acquisition")
of 95.5% of the outstanding shares of Data Packaging Limited ("DPL"). QMP
became part of the Oneida division of ORC. DPL operates as a subsidiary of
ORC.

ONEIDA

Founded in 1964, ORC's Oneida division is a full service plastic injection
molder which manufactures high volume, precision plastic products and provides
engineered plastics services. Oneida designs and produces injection molded
parts and provides secondary services such as hot stamping, welding, printing,
painting and assembly of such products. Oneida's principal products consist of
specially designed and manufactured

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components for office equipment; business machines; computers and peripherals;
telecommunications, packaging and industrial equipment; and recreational and
consumer products.

Oneida designs and manufactures most of its products by injection molding to
a customer's specifications. In most cases, Oneida obtains a contract to
produce a specified number of custom designed products using custom built
molds owned by the customer. The customer either provides its own molds or has
Oneida design and build or obtain from a supplier the molds necessary to
produce the products. The custom molds produced by Oneida are manufactured at
one of its two tool shops, which are located in Siler City, North Carolina and
Phoenix, New York. Oneida has three injection molding facilities, which are
located in Oneida and Phoenix, New York and Siler City, North Carolina. The
Siler City facility was acquired in November 1996 as part of the QMP
Acquisition. During 1997, Oneida moved tooling and injection molding
production from the Clayton, North Carolina facility to the Siler City, North
Carolina facility.

The markets in which Oneida competes have sales in excess of $6 billion per
year. These markets are highly competitive. Oneida's 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.
Oneida competes on the basis of price, customer service and product quality.

Oneida has a decentralized sales organization that keeps close contact with
customers. Sales of Oneida's products are made through an internal sales staff
and a network of independent manufacturer's representatives working from ten
separate regional offices throughout the eastern United States. Oneida
generally pays commissions of between two and five percent of sales, based
upon volume. During 1997, 1996 and 1995, one customer, Xerox Corporation, was
responsible for more than 10% of Oneida's net sales. Sales to Xerox were
approximately 27% of Oneida's sales during 1997, and receivables from Xerox
were approximately 27% of Oneida's accounts receivable at December 31, 1997.
The loss of this customer could have a material adverse effect on the results
of operations of Oneida. In addition to its core customer, Xerox Corporation,
Oneida has approximately 500 customers in the various industries described
above. Oneida has recently obtained additional customers in the business
machines, consumer products and medical products industries. The Company
believes that these new customers provide future growth opportunities for
Oneida.

The principal raw materials used by Oneida 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 used by Oneida will not increase in
the future. Oneida's contracts with its customers generally provide that such
price increases can be passed through to the customers.

The majority of Oneida's engineering 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, Oneida has engineering personnel at each of its manufacturing
locations. Oneida's business is not materially dependent on any patents,
licenses or trademarks.

ROSTONE

Founded in 1927, ORC's Rostone division specializes in precision thermoset
plastic molded parts for original equipment manufacturers in the electrical,
transportation, appliance and office equipment industries. Rostone is also a
compounder of proprietary fiberglass reinforced polyester materials used in a
number of customer applications.

Rostone manufactures its thermoset products through the use of custom built
molds to produce parts to customer specifications. These customer owned molds
are either provided by the customer or designed by Rostone and built by one of
the Oneida tooling facilities or by another supplier. All operations are
conducted

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from one facility in Lafayette, Indiana. Beginning in mid-1998, the Company
plans to use the Clayton, North Carolina leased facility (formerly used by the
Oneida division) to expand the Company's thermoset molding capabilities and
improve its ability to service customers in the southeastern United States.

Rostone competes in a market with a limited number of privately owned
competitors and in-house molders on the basis of price, product specifications
and customer service. Sales of Rostone's products are made through an internal
sales staff and a network of independent representatives working from ten
separate offices throughout the Central United States. Rostone generally pays
commissions of between three and five percent of sales based on volume. During
1997 and 1996, two customers were each responsible for more than 10% of
Rostone's sales. Cutler Hammer represented approximately 29% of Rostone's
sales during 1997 and receivables from Cutler Hammer were approximately 37% of
Rostone's accounts receivable at December 31, 1997. Allen-Bradley represented
approximately 16% of Rostone's sales during 1997 and receivables from Allen-
Bradley were approximately 8% of Rostone's accounts receivable at December 31,
1997. The loss of either of these customers could have a material adverse
effect on Rostone's results of operations.

The principal raw materials used by Rostone 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 Rostone will not increase in the future.
If shortages occur, as occurred for fiberglass during 1994 and 1995, Rostone
exercises its flexibility to engineer new products to provide its customers a
cost effective alternative to the material in short supply.

Research and development at Rostone is focused on the development of
proprietary thermoset materials under the trade name Rosite(R). Rostone
compounds a wide range of Rosite materials to satisfy its customers' various
needs. Rostone also provides services in meeting customers' design
requirements and specifications of their customized products. Other than
Rosite(R), Rostone's business is not materially dependent on any patents,
licenses or trademarks.

DATA PACKAGING LIMITED

Founded in 1981, DPL originally produced magnetic media cassettes, compact
disk and other proprietary products for the computer and data storage
industries. These businesses were discontinued by 1989. DPL presently is a
full service custom plastics injection molder which manufactures high volume,
precision plastic products and provides engineered plastics services. DPL's
principal products consist of specially designed and manufactured components
for office equipment; business machines; computer and peripherals; and
telecommunications equipment.

DPL designs and manufactures its products to a customer's specifications
using custom built molds owned by the customer. The customer either provides
its own molds or has DPL design and obtain from a supplier the molds necessary
to produce the products. All operations are conducted from one facility in
Mullingar, County Westmeath, Ireland.

DPL's markets are highly competitive. Principal competitors are
international companies with operations in Ireland and Western Europe, and
approximately five independent companies in Ireland. DPL competes on the basis
of price, customer service and product quality.

Sales of DPL's products are made by the company's in-house sales force,
which maintains close contact with its customers. During 1997, two customers
were each responsible for more than 10% of DPL's net sales. Dell Products
represented approximately 43% of DPL's sales during 1997 and receivables from
Dell Products were approximately 25% of DPL's accounts receivables at December
31, 1997. Motorola represented approximately 13% of DPL's sales during 1997
and receivables from Motorola were approximately 1% of DPL's accounts
receivable at December 31, 1997. The loss of either of these customers could
have a material adverse

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effect on DPL's results of operations. DPL has recently obtained new customers
in the office equipment and telecommunications industries which management
believes provide future growth opportunities for DPL.

The principal raw materials used by DPL 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 used by DPL will not increase in the
future. DPL's contracts with its customers generally provide that such price
increases can be passed through to the customers.

The majority of DPL's engineering work is related to meeting design
requirements and specifications of its customers that require customized
products and developing greater production efficiencies. DPL's business is not
materially dependent on any patents, licenses or trademarks.

During 1997, the legal ownership of DPL was reorganized to provide certain
members of DPL's management with conditional ownership of 15% of DPL.
Management's ownership will provisionally vest at the rate of up to 20% each
year based on the achievement of certain earnings targets, and will fully vest
when 100% provisionally vested or at the end of 2001. When fully vested,
management has the right to put, and the Company has the right to call, such
ownership for settlement in cash for an amount determined by a formula based
on a multiple of earnings. Because of the put and call features, the Company
accounts for this arrangement as a deferred compensation plan and not as a
minority interest. At December 31, 1997, management was provisionally vested
in 20% of their 15% ownership and deferred compensation of $74 had been
accrued.

BACKLOG

ORC's backlog of orders believed firm at December 31, 1997 and December 31,
1996 were approximately $21.9 million and $25.1 million, respectively,
substantially all of which are expected to ship within a year.

AGRICULTURAL OPERATIONS

The Company's agricultural operations consist primarily of investments in
The Juliana Preserve (the "Preserve") and in certain real estate controlled by
the Preserve. The Preserve is a California general partnership, formed on
October 1, 1994 by Juliana Vineyards and Crescent Farms Company (wholly owned
subsidiaries of the Company, together referenced herein as "Juliana"), and
Freedom Vineyards, Inc., a California corporation ("Freedom Vineyards"), to
jointly farm, manage, develop and ultimately dispose of the combined interest
of all the parties. At December 31, 1997, the joint venture controls
approximately 4,200 acres, of which approximately 1,400 acres are suitable for
wine grape production and of which approximately 350 acres are currently in
production. This property is located within the official boundaries of the
Napa Valley American Viticultural Area, the premier grape growing region of
North America. Prior to the joint venture's formation, Juliana engaged in wine
grape vineyard development and the growing and harvesting of wine grapes for
the premium table wine market. The joint venture will continue to engage in
wine grape agriculture until the existing vineyard parcels are sold. The joint
venture does not hold a significant position in the wine grape market. Prices
received on the sale of wine grapes may fluctuate widely, depending upon
supply, demand and other factors.

In forming the joint venture, the parties effectively contributed their
ownership interests in the agricultural and real estate operations in exchange
for undivided ownership interests in the joint venture of 71.7% to Juliana and
28.3% to Freedom Vineyards, based on independent appraisals of their
respective interests. Although Juliana has a 71.7% interest in the net income
and net assets of the joint venture, it has a 50% voting interest in matters
concerning the operation, development and ultimate disposition of the
property. Juliana is obligated for indebtedness of $2.1 million, payable to an
insurance company, which is fully collateralized by land and vineyards.

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from the assets of the joint venture, including the sale of such assets, or by
development financing. In October 1995, the joint venture entered into a loan
agreement with Washington Federal Savings ("WFS"), the parent of Freedom
Vineyards, to provide $3.0 million of development financing for this project.

In December 1996, the Company's Board of Directors concurred with the joint
venture's plan to suspend the residential development activities and seek a
buyer or buyers for the entire property. During 1997 the Preserve abandoned
its plans to pursue development of the residential community because of
failure to obtain the necessary permits and approvals. In connection with
these decisions, the Company recorded an impairment charge of $1.3 million in
1996 and a further charge of $0.9 million in 1997 for its equity in the write
off of approximately $2.9 million of development costs by the joint venture.
The development loan to WFS was fully repaid in January 1998.

During 1997, the Preserve was unsuccessful in finding a buyer for the entire
property, but sold approximately 500 acres, including approximately 300
plantable acres, to a Napa Valley winery. The Preserve used the net proceeds
to partially repay the WFS development loan. The property is not currently
listed for sale with a broker, but the Preserve is continuing to discuss the
sale of additional portions of the property with potential buyers. The
Preserve is also discussing leasing portions of the property for wine grape
development by other parties.

The Company has agreed in principle with WFS for the Company to buy the WFS
28.3% interest in the Preserve for $5.95 million. The Company plans to
undertake a limited wine grape development effort, which management believes
will enhance the value of the property, if financing can be arranged. The
Company is presently seeking such financing, but there are no assurances that
it can be arranged.

DISCONTINUED OPERATIONS

U.S. OIL AND GAS OPERATIONS

Through November 1995, the Company was engaged in exploring for, developing,
producing and selling crude oil and natural gas in the United States through
the Company's wholly owned subsidiary, REC. REC operated oil and gas
properties in California, Louisiana and Texas and had interests in properties
operated by others in five additional states. In November 1995, the Company's
Board of Directors resolved to pursue the sale of the Company's oil and gas
assets and to discontinue the Company's oil and gas operations. On April 2,
1996, the Company entered into an agreement to sell REC, including
substantially all of its oil and gas assets, to Tri-Union Development Corp.
("Tri-Union"), a subsidiary of Tribo Petroleum Corporation, for a total price
of approximately $11.4 million. On May 24, 1996 the Company completed the sale
of REC for proceeds of $8.0 million cash and a $2.2 million six month note
bearing interest at 12%. The purchase price received for REC's stock reflected
adjustments for intercompany cash transfers by REC to the Company and certain
expenditures by REC between January 1 and the May 24, 1996 closing date. The
note was fully paid in February 1997. Upon completion of this transaction, the
Company has substantially completed the disposal of its discontinued oil and
gas operations.

Through 1993, the Company's oil and gas partnership management operations
were conducted through its wholly owned subsidiary, Buttes Energy Company
("BEC"). The partnerships managed by BEC had interests in approximately 996
wells in seven states. The Company did not own a significant direct or
indirect interest in any of these properties, but a subsidiary of BEC operated
261 of the wells. The Company received fees from the partnerships which
partially offset the expenses incurred by the Company in managing them. The
Company also received overhead reimbursements for supervising the operations
of the properties which it operated. On December 22, 1993, the Company sold
all of the common stock of BEC to TDP Energy Company for approximately $2.1
million in cash. Upon consummation of the sale, the Company was no longer
engaged in the partnership management business.

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CANADIAN OIL AND GAS OPERATIONS

The Company's Canadian operations were primarily conducted through its
wholly owned subsidiary, Northern Enterprises (Canada) Ltd. ("NECL"), which
was headquartered in Calgary, Alberta. These operations consisted of oil and
gas producing properties in Alberta, Saskatchewan and British Columbia, and
exploratory acreage in Alberta and British Columbia. On May 14, 1993, the
Company sold substantially all of the assets of NECL to Mannville Oil & Gas
Ltd., a Canadian Corporation ("Mannville"). Mannville paid approximately $7.4
million in cash and assumed approximately $3.1 million of indebtedness and
other liabilities of NECL. As a result of this transaction, the Company was no
longer engaged in the oil and gas business in Canada.

OFFSHORE CONTRACT WORKOVER OPERATIONS

The Company discontinued its offshore contract workover operations effective
December 31, 1992. These operations were conducted through a majority owned
subsidiary, Dolphin Titan International, Inc. ("Dolphin"), headquartered in
Houston, Texas. Effective January 27, 1993, Dolphin entered into agreements to
charter its three offshore jack up workover rigs to Sundowner Offshore
Services, Inc., ("Sundowner"). On August 27, 1993, the Company sold the rigs
to Sundowner for $8.0 million in cash. As a result of these transactions, the
Company was no longer engaged in the contract workover business.

ENVIRONMENTAL REGULATION

Various 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 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.

The Company's plastic products and service business routinely uses chemicals
and solvents, some of which are classified as hazardous substances. The
Company's oil and gas business and related activities routinely involved the
handling of significant amounts of waste materials, some of which are
classified as hazardous substances. The Company's vineyard operations
routinely use fungicides and insecticides, the handling, storage and use of
which is regulated under the Federal Insecticide, Fungicide and Rodenticide
Act, as well as California laws and regulations.

Except as described in the following paragraphs, the Company believes it is
currently in material compliance with existing environmental protection laws
and regulations and is not involved in any significant remediation activities
or administrative or judicial proceedings arising under federal, state or
local environmental protection laws and regulations. In addition to management
personnel who are responsible for monitoring environmental compliance 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 with respect to its oil and gas
properties. Except as described in the following paragraphs, the Company is
not aware of any conditions or circumstances relating to environmental matters
that will require significant capital expenditures by the Company or that
would result in material adverse effects on its businesses.

In February 1996, Rostone was informed by a contracted environmental
services consulting firm that soil and ground water contamination exists at
its Lafayette, Indiana site. The Company has initiated a remediation plan
under an agreement with the Indiana Department of Environmental Management and
expects to

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substantially complete the remediation during 2000. The Company has accrued
$0.3 million based on current estimates of remediation costs. Certain of these
costs are recoverable from CGI Investment Corp., the seller of Rostone. (See
Item 13--Certain Relationships and Related Transactions.)

In connection with the sale of REC, the Company retained certain oil and gas
properties in Calcasieu Parish, Louisiana because of litigation concerning
environmental matters. The Company is in process of environmental remediation
under a plan approved by the Louisiana Office of Conservation. Approximately
$0.9 million has been expended as of December 31, 1997, and the remaining cost
of cleanup is estimated at approximately $1.1million. Based on its working
interests in the properties, the Company has recorded $0.6 million for its
share of the cost incurred and has accrued an additional $0.7 million for its
share of the estimated remaining cost. 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.

EMPLOYEES

At December 31, 1997, the Company employed 1,060 full time employees, of
whom 1,049 were employed in the plastic products segment, six were employed in
agricultural operations and five were corporate personnel. The Company also
employs hourly employees in its agricultural operations, the number of whom
varies throughout the year.

In ORC's Rostone division, approximately 291 employees are represented by
the International Brotherhood of Electrical Workers, AFL-CIO, under a
collective bargaining agreement which expires in February 2000.

Substantially all of DPL's 162 hourly employees are represented by the
Services Industrial Profession and Technical Union. DPL participates in the
Irish Business and Employers Confederation, which negotiates binding national
agreements about employment policy, pay increases and taxation with the
government and trade unions. The latest three year agreement was signed in
December 1996.

8
<PAGE>

ITEM 2. PROPERTIES

PLASTICS PRODUCTS SEGMENT

The Company's properties used in the plastic products segment are as
follows:

<TABLE>
<CAPTION>
LEASE
SQUARE LAND EXPIRATION
DIVISION LOCATION FEET ACRES TITLE DATE USE
- -------- -------- ------ ----- ----- ---------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Oneida Oneida, NY 84,000 3.5 Owned* -- Manufacturing and Administrative
Phoenix, NY 28,000 -- Leased 1/01/99 Manufacturing and Administrative
Phoenix, NY 20,000 2.0 Owned* -- Manufacturing
Clayton, NC 35,000 -- Leased 6/30/98 Manufacturing and Administrative
Siler City, NC 130,000 8.3 Owned* -- Manufacturing and Administrative
Rostone Lafayette, IN 168,000 20.0 Owned* -- Manufacturing and Administrative
DPL Mullingar, Ireland 72,000 5.9 Owned -- Manufacturing and Administrative
</TABLE>
- --------
* Subject to mortgages in connection with ORC's credit facility with Congress
Financial Corporation (see Note 8 of the Notes to the Consolidated
Financial Statements).
Oneida has moved production from Clayton to Siler City, N.C. effective
December 31, 1997. Rostone plans to use the Clayton, N.C. facility in the
future to expand thermoset production.
The Company believes that these facilities are suitable and adequate for ORC's
use.

AGRICULTURAL PROPERTIES

For information concerning the Company's agricultural properties see Item 1.
"Business--Agricultural Operations". The Company maintains an office facility
on its vineyard property.

PROPERTIES HELD FOR SALE

The Company 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 the Company is pursuing the sale or farmout of these
interests.

OTHER PROPERTIES

The Company subleases, from Stanwich Partners, Inc. ("SPI"), approximately
1,500 square feet of office space in Stamford, Connecticut for its corporate
offices. Three of the Company's directors and officers are officers, directors
and/or shareholders of SPI. Management believes the terms of this sublease are
at least as favorable to the Company as would be the case in an arm's length
transaction (see Item 13--"Certain Relationships and Related Transactions").

9
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

Certain litigation in which the Company is involved is described below.

The Company filed suit in the 125th Judicial District Court of Harris
County, Texas against Bargo Energy Company ("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 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 has 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 asserts claims against Bargo for
breach of contract and breach of duty of good faith and fair dealing, and
seeks damages under these theories of liability. Bargo has 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 asserts
claims for breach of contract and warranty, return of its escrow, and seeks
unspecified damages under these theories of liability. The cases have now been
consolidated in the 334th Judicial District Court of Harris County, Texas, and
the consolidated case has been realigned with the Company as plaintiff.
Discovery has been completed, and a trial date has been set for March 31,
1998.

As described in Item 1: "Business--Environmental Regulation", the owners of
a portion of the property currently being remediated for environmental
contamination have filed suit to require additional procedures. The Company is
contesting the litigation.

The Company and its subsidiaries are the defendants in other 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 financial statements or is
covered by indemnification in favor of the Company or its subsidiaries, and,
that, therefore, the outcome of these lawsuits or proceedings, or the matters
referred to above, will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1997.

10
<PAGE>

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's Common Stock is traded in the over-the-counter market and is
listed on the NASDAQ Small-Cap. Market (RUNI). The Common Stock is also listed
on the Pacific Stock Exchange (RUN). Prior to the merger on April 19, 1996 the
Company's common stock was listed as Reunion Resources Company: NASDAQ small-
cap market (RUNR); Pacific Stock Exchange (RUN).

As of February 28, 1998, there were 1,457 holders of record of the Company's
Common Stock with an aggregate of 3,855,100 shares outstanding.

The table below reflects the high and low sales prices on the NASDAQ Small-
Cap. Market and on the Pacific Stock Exchange for the quarterly periods in the
two years ended December 31, 1997. The NASDAQ Small-Cap quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not necessarily represent actual transactions.

<TABLE>
<CAPTION>
NASDAQ SMALL PACIFIC STOCK
CAP. MARKET EXCHANGE
------------- -------------
QUARTER ENDED HIGH LOW HIGH LOW
- ------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
1997
March 31.......................................... $5.000 $3.875 $4.750 $4.250
June 30........................................... $4.125 $3.125 $3.875 $3.750
September 30...................................... $4.380 $3.813 $4.375 $4.250
December 31....................................... $5.250 $4.188 $5.000 $4.750
1996
March 31.......................................... $5.125 $4.625 $5.000 $4.750
June 30........................................... $5.000 $4.250 $4.625 $4.250
September 30...................................... $4.625 $3.875 $4.375 $4.125
December 31....................................... $4.500 $3.500 $4.125 $3.750
</TABLE>

No cash dividends have been declared or paid during the past three years
with respect to the Common Stock of the Company. The Board of Directors of the
Company currently follows a policy of retaining any earnings for operations
and for the expansion of the business of the Company. Therefore, the Company
anticipates that it will not pay any cash dividends on the Company's Common
Stock in the foreseeable future.

11
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- ------- -------
(1) (2)(3) (2)(4) (2)(5) (2)(6)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATIONS DATA
Continuing Operations:
Operating Revenue.............. $93,378 $60,305 $ 10,855 $ 1,619 $ 760
======= ======= ======== ======= =======
Operating Income (Loss)........ 2,513 1,449 (3,016) (2,481) (4,168)
Interest Expense............... (3,267) (2,402) (508) (269) (1,042)
Equity in Writedown of Joint
Venture Development Costs..... (855) (1,290) -- -- --
Gain on Sale of Mineral
Properties.................... -- -- -- 2,124 --
Other Income (Expense)......... 714 425 (57) (34) 343
Income Tax Expense............. (86) (876) -- -- 750
------- ------- -------- ------- -------
Loss From Continuing Operations.. (981) (2,694) (3,581) (660) (4,117)
------- ------- -------- ------- -------
Discontinued Operations:
Agriculture.................... 710 (710) -- -- --
Oil and Gas.................... -- 1,122 (10,389) (3,495) 3,585
Drilling and Workover.......... -- -- -- 65 5,886
------- ------- -------- ------- -------
Income (Loss) From Discontinued
Operations...................... 710 412 (10,389) (3,430) 9,471
------- ------- -------- ------- -------
Extraordinary Gain............... -- -- -- -- 7,742
------- ------- -------- ------- -------
Net Income (Loss)................ $ (271) $(2,282) $(13,970) $(4,090) $13,096
======= ======= ======== ======= =======
Earnings Per Share-Basic:
Continuing Operations.......... $ (0.25) $ (0.70) $ (.93) $ (.17) $ (1.16)
Discontinued Operations........ 0.18 0.11 (2.72) (.91) 2.66
Extraordinary Gain............. -- -- -- -- 2.18
------- ------- -------- ------- -------
Net Income(Loss)................. $ (0.07) $ (0.59) $ (3.65) $ (1.08) $ 3.68
======= ======= ======== ======= =======
Earnings Per Share-Diluted: $ (0.07) $ (0.59) $ (3.65) $ (1.08) $ 3.48
======= ======= ======== ======= =======
BALANCE SHEET DATA
Total Assets..................... $72,059 $75,176 $ 51,935 $51,639 $55,238
Long-term Obligations............ $12,654 $15,575 $ 7,947 $ 2,693 $ 3,332
Shareholders' Equity............. $28,317 $28,944 $ 31,254 $44,624 $48,707
Weighted Average Common Shares
Outstanding..................... 3,855 3,855 3,832 3,794 3,559
Cash Dividends per Common Share.. $ -0- $ -0- $ -0- $ -0- $ -0-
</TABLE>
- --------
(1) Operating income includes a $1.0 million charge for writedown of excess
equipment. Net income also includes a $0.9 million charge for equity in
the write-off of joint venture development costs and income of $0.7
million from reversal of the 1996 estimated loss on disposal of the
agricultural and real estate operations. See Item 1 "Business--
Agricultural Operations," Item 7 "Managements Discussion and Analysis of
Financial Condition and Results of Operations--Discontinued Operations"
and Notes 3 and 6 of the Notes to the Consolidated Financial Statements.
(2) During 1997, the Company's Board of Directors resolved to retain the
Company's agricultural operations which had previously been classified as
discontinued operations. The Selected Financial Data for prior years have
been reclassified to present the agricultural operations as continuing
operations.
(3) Includes the results of operations of Rostone subsequent to the Rostone
Acquisition on February 2, 1996. Includes the results of QMP and DPL
subsequent to their acquisitions on November 18, 1996. See Note 2 of the
Notes to the Consolidated Financial Statements. Includes a $1.3 million
impairment charge, a $0.7 million charge for the estimated loss on
disposal of the agricultural and real estate operations and a $1.1 million
net gain from the disposal of the oil and gas operations. See Notes 3 and
6 of the Notes to the Consolidated Financial Statements.
(4) Includes the results of operations of Oneida subsequent to the Oneida
Acquisition on September 14, 1995. Includes a $7.0 million impairment
charge against the Company's oil and gas properties and a $3.8 million
charge for the expected loss on disposal of the oil and gas operations.
See Notes 2 and 3 of the Notes to the Consolidated Financial Statements.
(5) Includes a $3.2 million impairment charge against the Company's oil and
gas properties, a $2.1 million gain on the sale of mineral properties, the
results of operations of acquired producing gas properties after May 1,
1994 and a change in the Company's proportionate share of agricultural
revenues and expenses.
(6) Includes the results of operations of the Company's Canadian operations
and partnership management operations through the dates of disposition, a
change in the Company's proportionate share of agricultural revenues and
expenses and a $1.6 million write down of agricultural assets.

12
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

On September 14, 1995, the Company acquired Oneida, which manufactures
precision plastic products and provides engineered plastics services. As a
result of the Oneida Acquisition, the Company's principal operations are in
the plastic products industry. The Company acquired Rostone in February 1996,
and acquired DPL and QMP in November 1996 which added new customers and
products to the plastic products segment. The Company is considering
additional acquisitions in the plastics industry and may consider acquisitions
in other industries.

In November 1995, the Company's Board of Directors resolved to sell the
Company's oil and gas assets and discontinue the Company's oil and gas
operations. During 1996, the Company sold substantially all of its oil and gas
assets, for a total price of approximately $11.4 million. Upon completion of
this transaction, the Company substantially discontinued oil and gas
operations.

Through December 1996, the Company was engaged in agricultural and real
estate operations consisting primarily of investments in The Juliana Preserve
and in certain real estate controlled by the Preserve. In December 1996, the
Company's Board of Directors concurred in the Preserve's plan to suspend the
residential development activities and seek a buyer or buyers for the entire
property. The Preserve was unsuccessful in finding a buyer for the entire
property in 1997, and the property is not currently listed for sale with a
broker. The Company is considering a limited wine grape development effort if
financing can be arranged. As a result, the Company has reclassified the
agricultural operations to continuing operations.

The Company recognized a net loss of $0.3 million in 1997 compared to a net
loss of $2.3 million in 1996 and a net loss of $14.0 million in 1995. The
following discussion of Results of Continuing Operations describes the
Company's continuing operations in plastic products and wine grape agriculture
separately from discontinued operations.

RESULTS OF CONTINUING OPERATIONS--1997 COMPARED TO 1996

The Company recognized a loss from continuing operations of $1.0 million in
1997 compared to a loss of $2.7 million in 1996. The 1997 loss includes a $1.0
million writedown of excess equipment and a charge of $0.9 million reflecting
the Company's equity in a write off of joint venture development costs. The
1996 loss reflects a full year of Oneida's results and the three additional
acquisitions in 1996, and includes a $1.3 million impairment charge relating
to the joint venture development costs and a $0.8 million charge to record an
allowance for possible denial of an income tax refund claim.

Plastics Products Segment: Revenues and operating income of the plastic
products segment were $93.4 million and $4.3 million, respectively, for the
year ended December 31, 1997. This compares to 1996 revenues and operating
profit of $60.3 million and $3.4 million respectively.

The increase in revenues is attributable primarily to a full year's results
of the acquired businesses offset somewhat by a strike at the Rostone
division. Plastic products sales increased $33.1 million, or 54.9% to $93.4
million for the year ended December 31, 1997 compared to $60.3 million for the
prior year period. Tooling sales decreased $2.4 million, or 32.9% to $4.9
million for 1997 compared to $7.3 million for 1996. Tooling revenues
associated with the production of customer tools are deferred until the tools
are completed and delivered to the customers. As a result, tooling sales
fluctuate dependent upon when projects are completed as happened in 1996 and
1997. Additionally, in 1997, there was a higher incidence of molding contracts
where the tools were provided by the customer. Plastic products segment
backlog totaled $21.9 million at December 31, 1997 compared to backlog of
$25.1 million at December 31, 1996. Backlog is down from 1996 as more major
customers move to just-in-time ordering and shorter delivery cycles.

13
<PAGE>

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 $2.1 million and $1.0
million, respectively, less than expected for the second quarter.

Cost of sales totaled $78.9 million or 84.5% of net sales, for the year
ended December 31, 1997 compared to $50.7 million, or 84.1% of net sales for
the year ended December 31, 1996. As a result of the increase in sales, offset
by the effects of the strike, gross margins rose to $14.5 million or 15.5% of
net sales, in 1997 from $ 9.6 million, or 15.9% of net sales in 1996.

During 1997, ORC recorded a $1.0 million writedown of surplus equipment.
This writedown was made in conjunction with the relocation of thermoplastic
molding production from the Clayton, N.C. facility to the Siler City, N.C.
facility acquired by the Company in November 1996.

Selling, general and administrative expenses were $9.2 million in 1997, $2.9
million more than in 1996 reflecting the businesses acquired in 1996.
Operating income was $4.3 million, or 4.6% of net sales in 1997 compared to
$3.4 million, or 5.6% of net sales in 1996.

Other Income and Expense: Interest expense was $3.3 million in 1997 compared
to $2.4 million in 1996 as a result of interest on ORC debt subsequent to the
Oneida, Rostone, QMP and DPL Acquisitions. Other income in 1996 includes a
$0.6 million insurance recovery on a business loss claim for a DPL customer
contract termination.

The Company participates in the wine grape agriculture industry through its
equity investment in the Juliana Preserve joint venture. The Company
recognized income of $0.3 million in 1997 compared to a loss of $0.3 million
in 1996 from its equity interest in the Preserve's results of operations. In
addition, the Company recorded an impairment charge of $1.3 million in 1996
and a further charge of $0.9 million in 1997 for its equity in the write off
of approximately $2.9 million of development costs by the joint venture.

Income Tax Expense: In September 1995, the Company amended its 1991 and 1992
Federal tax returns to request a refund of Alternative Minimum Tax ("AMT")
previously paid. The refund resulted from the carryback of a capital loss
originating from the sale, in 1993, of Reunion common stock owned by a
subsidiary of the Company. The Company recorded a receivable for this refund
in 1993 when the transaction occurred. The IRS has audited this refund request
and has issued a formal IRS agent's report denying the refund claim, and
asserting an additional tax deficiency for 1993. The Company has appealed the
case to the IRS appeals division. Management believes it has provided a
reasonable amount of documentation and technical arguments in support of its
claim and expects to resolve the claim in 1998. Because of the uncertainty
over realization of the refund, the Company recorded an allowance of $0.8
million for the possible denial of the AMT refund claim with a corresponding
charge to Income Tax Expense in 1996.

14
<PAGE>

RESULTS OF CONTINUING OPERATIONS--1996 COMPARED TO 1995

The Company recognized a loss from continuing operations of $2.7 million in
1996 compared to a loss of $3.6 million in 1995. The 1996 loss reflects a full
year of Oneida's results following the Oneida Acquisition in September 1995
and the three additional acquisitions in 1996 described in Item 1. "Business",
and includes a $1.3 million impairment charge relating to joint venture
development costs and a $0.8 million charge to record an allowance for
possible denial of an income tax refund claim. The 1995 loss included charges
of $1.3 million for severance and office closure costs recognized in
connection with the Company's decision to close its Houston headquarters
office and discontinue its oil and gas operations and a $0.5 million charge
related to the extension of the exercise period for two warrants to purchase
the Company's Common Stock.

Plastics Products Segment: The Oneida Acquisition on September 14, 1995
represented the Company's entry into a new operating segment, plastic
products. Oneida (renamed ORC) completed the Rostone, QMP and DPL Acquisitions
during 1996. Revenues and operating income of the plastic products segment
were $60.3 million and $3.4 million, respectively, for the year ended December
31, 1996. This compares to 1995 revenues and operating profit of $10.9 million
and $0.6 million, respectively for the three and one half months subsequent to
the Oneida Acquisition on September 14, 1995.

On a pro forma basis, as if the Oneida, Rostone QMP and DPL Acquisitions had
occurred as of January 1, 1995, revenues decreased $11.6 million to $85.3
million for the year ended December 31, 1996 from $96.9 million in the year
ended December 31, 1995. This 12.0% decrease in revenues is attributable
primarily to decreased sales of plastic products due to departures of select
parts programs and customer delays in bringing scheduled new parts programs
into production. Lower sales to existing customers reflects a general growth
slowdown in the market as well as customers withdrawing programs to their own
captive molding facilities. Tooling sales increased $0.5 million, or 7.4%, to
$7.3 million for the year ended December 31, 1996 compared to $6.8 million in
the prior year period. Plastic products segment backlog totaled $25.1 million
at December 31, 1996 compared to backlog, on a pro forma basis, of $29.9
million at December 31, 1995.

Pro forma cost of sales totaled $72.7 million, or 85.2% of net sales, for
the year ended December 31, 1996 compared to $82.8 million, or 85.4% of net
sales for the year ended December 31, 1995. As a result of the decrease in
sales, pro forma gross margins declined to $12.6 million, or 14.7% of net
sales, in 1996 from $14.1 million, or 14.6% of net sales, in 1995.

Selling, general and administrative expenses were $8.8 million on a pro
forma basis in 1996, $0.3 million less than in 1995 reflecting increased
payroll and benefit related costs offset by reduced sales-related costs.
Operating income on a pro forma basis was $3.8 million, or 4.4% of net sales,
in 1996 compared to $5.0 million, or 5.2% of net sales in 1995.

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 $1.9 million for the year ended December 31, 1996 compared to $3.6
million for the year ended December 31, 1995. The expenses for the year ended
December 31, 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 accrued in 1995. The
expenses for the year ended December 31, 1995 include a $0.5 million charge
related to the extension of the exercise period for certain warrants and $1.3
million of severance and office closure charges recorded in conjunction with
the Company's decision to close its Houston office and sell its oil and gas
assets.

Other Income and Expense: Interest expense was $2.4 million in 1996 compared
to $0.5 million in 1995 as a result of interest on ORC debt subsequent to the
Oneida, Rostone, QMP and DPL Acquisitions. On a pro forma basis, as if the
acquisitions had occurred as of January 1, 1995, interest expense was
approximately $2.8 million in 1996 and $3.0 million in 1995. Other income in
1996 includes a $0.6 million insurance recovery on a business

15
<PAGE>

loss claim for a DPL customer contract termination. The loss occurred prior to
the DPL Acquisition but was not approved by DPL's insurers until December.

The Company participates in the wine grape agriculture industry through its
equity investment in the Juliana Preserve joint venture. The Company
recognized a loss of $0.3 million in 1996 compared to a loss of $0.1 million
in 1995 from its equity interest in the Preserve's results of operations. In
addition, the Company recorded an impairment charge of $1.3 million in 1996
relating to joint venture real estate development costs.

DISCONTINUED OPERATIONS

The Company discontinued its U. S. oil and gas operations in 1995 and its
agricultural and real estate development operations in 1996. The Company
recognized income from discontinued operations of $0.7 million in 1997
compared to income of $0.4 million in 1996 and a loss of $10.4 million in
1995.

Through December 1996, the Company was engaged in agricultural and real
estate operations consisting primarily of investments in The Preserve and in
certain real estate controlled by the Preserve. In December 1996, the
Company's Board of Directors concurred in the Preserve's plan to suspend the
residential development activities and seek a buyer or buyers for the entire
property. Based on an appraisal of the property for agricultural use, and on
preliminary discussions with potential buyers, the Company recognized a loss
of $2.0 million in 1996 to recognize impairment of the real estate development
costs and to reduce the carrying value of the agricultural operations to net
realizable value, approximately $14.0 million. The Preserve was unsuccessful
in finding a buyer for the entire property in 1997, and the property is not
currently listed for sale with a broker. The Company is considering a limited
wine grape development effort if financing can be arranged. As a result, the
Company has reclassified the agricultural operations to continuing operations
and has reversed the $0.7 million estimated loss on disposal recognized in
1996.

The Company recognized a net gain of $1.1 million in 1996 from disposition
of the oil and gas assets, consisting of a $1.6 million insurance
reimbursement offset by $0.4 million of adjustments to the purchase price for
certain assets not sold and $0.1 million of provisions for environmental
remediation of those assets. Results of discontinued oil and gas operations
during 1996, prior to the disposition on May 24, 1996, were approximately
break even on revenues of $2.1 million. The Company recognized a loss from
discontinued oil and gas operations of $10.4 million in 1995. The Company
followed the full cost method of accounting for oil and gas properties and, as
a result of substantial decreases in prices received for natural gas,
recognized impairment losses of $7.0 million in 1995 to reduce the carrying
value of the investment in oil and gas properties to the "full cost ceiling."
The 1995 loss also includes a $3.8 million charge to reduce the carrying value
of the investment in oil and gas properties to their realizable value in
connection with the Company's decision to discontinue the oil and gas
operations and pursue the sale of these assets. Before these valuation
charges, the Company realized income from the discontinued oil and gas
operations of $0.4 million on revenues of $5.7 million in 1995. The 1995 loss
from discontinued operations included $0.9 million income from settlement of
certain litigation.

16
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Summary of 1997 Activities

Cash and cash equivalents totaled $2.1 million at December 31, 1997. During
the year ended December 31, 1997, cash increased $0.7 million, with $4.0
million provided by operations, $1.5 million used by investing activities and
$1.8 million used in financing activities.

Investing Activities: Capital expenditures were $3.9 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
$3.9 million in the year ended December 31, 1997. Proceeds from new term loan
borrowings totaled $2.7 million. Net repayments of revolving loan borrowings
totaled $0.7 million.

Operating Activities: Net cash provided by operating activities was $4.0
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 agricultural operations.

Corporate: Management estimates that corporate expenses, including salaries
and benefits, professional fees and other public company costs, will
approximate $1.6 million in 1998. The Company's source of funds for these
requirements and for future acquisitions, other than from additional
borrowings, are from permitted payments by ORC and from cash generated by the
operations or sale of discontinued operations and other assets held for sale.

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, dividend and tax
sharing fee payments to Reunion. In any event, the maximum amount of such
payments are not expected to be sufficient for Reunion's corporate operating
and debt service requirements.

In February 1997, the Company received payment on the $2.2 million note,
including interest thereon, from the sale of REC. The corporate cash balance
at December 31, 1997 was $1.6 million. Management believes that the Company
will have sufficient resources to meet its corporate obligations as they
become due over the next twelve months

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, during 1998. At
December 31, 1997 ORC had $1.1 million in revolving credit availability.

Agricultural Operations: On August 7, 1997, The Juliana Preserve sold
approximately 500 acres of the approximately 4,700 acres controlled by the
joint venture. Under the terms of the joint venture agreement, the net
proceeds were used to repay debt owed by the joint venture. The Company
recognized no gain or loss or cash proceeds as a result of this transaction.
In connection with the decision to reclassify agricultural operations as
continuing operations, the Company has agreed in principle with WFS for the
Company to buy the WFS 28.3% interest in the Preserve for $5.95 million. The
Company also plans to undertake a limited wine grape development effort, which
management believes will enhance the value of the property. Based on
projections of

17
<PAGE>

farming costs and capital requirements for the 1998 crop year, the Company
believes that it will need to obtain outside financing to fund the purchase of
the WFS interests and development effort. The Company is working with present
and prospective lenders to refinance existing agricultural debt and fund
development efforts, but there can be no assurances that such financing will
be arranged. Collateral for any new borrowings is expected to be provided by
the underlying agricultural assets and vineyard acreage. Management expects
the combination of farming revenues plus prospective borrowings to be
sufficient to fund the agricultural operations over the next twelve months.

YEAR 2000 COMPUTER COMPLIANCE

The Company has reviewed its computer and other systems for compliance with
the year 2000 problem. The year 2000 problem arises since many programs
manipulate and store dates as a two-digit field and are unable to recognize
dates past 1999. Any applications or data that are date sensitive could
potentially be affected by this problem.

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 year 2000 certification from
independent testing organizations. The Company is in the process of upgrading
all of its software to the year 2000 compliant releases, and expects to
complete these upgrades by the end of 1998. 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 1998.

Based on the above, management believes the Company's hardware, software and
systems will achieve year 2000 compliance by the end of 1998. Management
expects that no significant internal or external costs will be incurred to
achieve year 2000 compliance other than the routine purchase of software
upgrades and personal computer replacements. The costs of any such upgrades
will be capitalized and amortized over the useful life.

The Company expects the year 2000 date compliance process to be completed on
a timely basis. However failure of the Company or its vendors to achieve year
2000 compliance could have a material adverse impact on the operations of the
Company.

POSSIBLE MERGER WITH CHATWINS

The Company and Chatwins are considering the possible merger of Chatwins
with and into the Company in a tax-free exchange of stock. Such a merger will
be subject to, among other conditions, approval by the Boards of Directors and
the Stockholders of the Company and Chatwins and compliance by Chatwins with
the covenants in its financing agreements. The Company has retained an
investment banking firm that conducted appraisals of the values of each party
independent to the possible merger. In addition, outside legal counsel has
been retained and financing discussions have been held with prospective
lenders. If such a merger is proposed, requisite approvals are obtained and
other conditions are satisfied, then consummation of the merger could occur as
early as this year. There can be no assurances that this transaction will be
proposed or consummated.

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

18
<PAGE>

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 $0.7 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.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's 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.

19
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) Directors. The following is a list of Directors of the Company:

<TABLE>
<CAPTION>
PRINCIPAL POSITION DIRECTOR
NAME WITH THE COMPANY AGE SINCE
- ---- ------------------------- --- --------
<S> <C> <C> <C>
Thomas N. Amonett(1)(2)................. Director 54 1992
Charles E. Bradley, Sr.................. Director, President & CEO 68 1995
Thomas L. Cassidy(1).................... Director 69 1995
W. R. Clerihue(1)(2).................... Director 74 1996
Franklin Myers(2)....................... Director 45 1995(3)
John G. Poole........................... Director 55 1996
</TABLE>
- --------
(1) Member, Compensation Committee of the Board of Directors
(2) Member, Audit Committee of the Board of Directors
(3) Prior to his reappointment in October 1995, Mr. Myers was a Director of
the Company from July 1992 to June 1995.

The following is a summary of the business experience of each Director
during the past five years. If not otherwise indicated, each Director has been
engaged in his current occupation for at least five years.

Thomas N. Amonett has served as a Director of the Company since July 1, 1992
and served as the President and Chief Executive Officer of the Company from
July 1, 1992 until October 26, 1995. Mr. Amonett also served as the President
of Reunion Energy Company, then a wholly-owned subsidiary of the Company in
the oil and gas operating business, from July 1, 1992 until May 24, 1996. Mr.
Amonett is currently President, Chief Executive Officer and a Director of
American Residential Services, Inc., a company providing equipment and
services relating to residential heating, ventilating, air conditioning,
plumbing, electrical and indoor air quality systems and appliances. From July,
1996 until June, 1997, Mr. Amonett was Interim President and Chief Executive
Officer of Weatherford Enterra, Inc., an energy services and manufacturing
company. Prior to his affiliation with the Company, he had been engaged in the
practice of law with Fulbright & Jaworski in Houston, Texas, where he was of
counsel for more than five years. Mr. Amonett remains a Director of
Weatherford Enterra, Inc. and also serves as a Director of Petro Corp
Incorporated, a Houston-based oil and gas company, ITEQ, Inc. a provider of
manufactured equipment, engineered systems and services used in the
processing, treatment, storage and movement of gases and liquids, and Home
USA, Inc., a retailer of manufactured housing.

Charles E. Bradley, Sr. became a Director of the Company on June 20, 1995
and was appointed President and Chief Executive Officer of the Company on
October 26, 1995. Mr. Bradley was a co-founder of Stanwich Partners, Inc.
("SPI") in 1982 and has served as its President since that time. SPI is a
private investment company. Mr. Bradley has been a Director of Chatwins Group,
Inc. ("Chatwins") since 1986 and Chairman of the Board of Chatwins since 1988.
Chatwins is an industrial products manufacturing company. Mr. Bradley is a
Director of DeVlieg-Bullard, Inc. ("DBI"), a machine tool parts and services
company, General Housewares Corp., a manufacturer and distributor of
housewares, Consumer Portfolio Services, Inc. ("CPS"), engaged in the business
of purchasing, selling and servicing retail automobile installment sales
contracts, NAB Asset Corporation ("NAB"), engaged in mortgage and construction
lending, Audits and Surveys, Inc., an international marketing research firm,
and Zydeco Exploration Inc., an oil and gas reserve development company. Mr.
Bradley is currently the Chairman of the Board of DBI, Chairman and CEO of NAB
as well as President and acting Chief Financial Officer and a Director of
Sanitas, an inactive company, and President, acting Chief Financial Officer
and a Director of Texon Energy Corporation, an inactive company.

Thomas L. Cassidy became a Director of the Company on June 20, 1995. Mr.
Cassidy has been a Managing Director of Trust Company of the West ("TCW"), an
investment management firm, since 1984. He is also a

20
<PAGE>

Senior Partner of TCW Capital, an affiliate of TCW. He is a Director of DBI,
Holnam Inc., a cement manufacturing company, and Spartech Corporation, a
plastics manufacturing company.

W. R. Clerihue was elected to the Board of Directors in December 1996 in
connection with the Board's decision to increase the number of directors from
five to six. Mr. Clerihue has been Chairman of the Board of Directors of
Spartech Corporation since October 1991.

Franklin Myers served as a Director of the Company from July 1, 1992 until
June 20, 1995, when he resigned contemporaneously with the sale of 1,450,000
shares of the Company's common stock by Parkdale Holdings Corporation N.V.
("Parkdale") to Chatwins. Mr. Myers was reappointed as a Director of the
Company on October 26, 1995. On April 1, 1995, Mr. Myers became Senior Vice
President, General Counsel and Secretary of Cooper Cameron Corporation, an oil
field manufacturing company. Prior thereto he was Senior Vice President and
General Counsel of Baker Hughes Incorporated, an international oil field
service and equipment company, for more than six years.

John G. Poole became a Director of the Company on April 19, 1996. Mr. Poole
was a co-founder of SPI with Mr. Bradley in 1982 and has served as SPI's Vice
President since that time. Mr. Poole has been a Director of Chatwins since
1988, and is also a director of DBI, CPS and Sanitas, Inc.

(b) Executive Officers. The following is a list of executive officers of the
Company and its principal subsidiary:

<TABLE>
<CAPTION>
NAME POSITION AGE
- ---- -------- ---
<S> <C> <C>
Charles E. Bradley, Sr..... Director, President and Chief Executive Officer 68
of the Company
Richard L. Evans........... Executive Vice President, Chief Financial 45
Officer and Secretary of the Company
David N. Harrington........ President and Chief Operating Officer, ORC 57
</TABLE>

The business experience of Mr. Bradley is described under part (a) of this
Item 10.

Mr. Evans joined the Company as Executive Vice President and Chief Financial
Officer in October 1995. He was appointed Secretary of the Company in December
1995. From May 1993 to September 1995, he was Controller of Terex Corporation,
a capital goods manufacturer. From October 1989 to May 1993 Mr. Evans was
Controller of SPI.

Mr. Harrington has served as Chief Operating Officer of Oneida Molded
Plastics Corp. ("OMPC") (now a constituent of Oneida Rostone Corp., a wholly-
owned subsidiary of the Company), since December 1989 and as its President
since October 1990. From March 1986 through December 1989, Mr. Harrington
served as Vice President and General Manager of OMPC.

21
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION

The following table reflects all forms of compensation for services to the
Company for the years ended December 31, 1997, 1996 and 1995, of those
individuals who were at December 31, 1997 (i) the chief executive officer and
(ii) the other Named Executives:

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- STOCK
NAME AND PRINCIPAL OTHER ANNUAL OPTIONS ALL OTHER
POSITION YEAR SALARY BONUS(1) COMPENSATION(2) (SHARES) COMPENSATION(3)
------------------ ---- -------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Charles E. Bradley, Sr.
(4).................... 1997 $100,000 $ 0 $ 0 0 $ 300
President and Chief 1996 100,000 0 0 0 312
Executive Officer 1995 0 0 13,500(4) 0 0
Richard L. Evans(5)..... 1997 $150,000 $75,000 $ 0 0 4,662
Executive Vice 1996 135,000 30,000 0 50,000 4,352
President, Chief 1995 33,750(5) 0 0 0 693
Financial Officer and
Secretary
David N. Harrington(6).. 1997 $259,904 $51,000 $52,000 0 $2,614
President and Chief 1996 240,000 48,000 $52,000 0 2,297
Operating 1995 69,904(6) 32,813 15,543 0 672
Officer, ORC
</TABLE>
- --------
(1) Amounts shown for bonuses are amounts earned for the period shown,
although such bonuses are generally paid in the subsequent year.
(2) Includes automobile allowance, and certain deferred compensation.
(3) Contributions under nondiscriminatory defined contribution plan and
certain health insurance plans of the Company and/or its subsidiaries. The
Company maintains a voluntary employee retirement plan under which
employees of the Company and its subsidiaries may contribute up to 18% of
their pre-tax earnings, with the Company making matching contributions of
25% of each employee's contribution, not to exceed 4% of each
participant's pre-tax earnings.
(4) Mr. Bradley was appointed President and Chief Executive Officer of the
Company on October 26, 1995. His 1995 compensation consisted solely of
director's fees. Effective January 1, 1996, Mr. Bradley's annual salary
was $100,000, and he no longer receives director's fees.
(5) Mr. Evans was appointed Executive Vice President and Chief Financial
Officer on October 26, 1995. Amounts listed in the table for 1995 for Mr.
Evans are for his period of employment by the Company in 1995.
(6) Mr. Harrington is an employee of ORC, which was acquired by the Company on
September 14, 1995. Amounts listed in the table for 1995 for Mr.
Harrington are for his period of employment by the Company in 1995.

OPTIONS

No options were granted to named executive officers during 1997.

The following table sets forth information with respect to the unexercised
options to purchase shares of common stock granted under all stock option
plans to the named executive officers and held by them at December 31, 1997:

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT DECEMBER 31, 1997 DECEMBER 31, 1997(1)
ACQUIRED VALUE ---------------------------- ----------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE(2)
----------- -------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Evans........ 0 0 30,000 20,000 $22,500 $15,000
</TABLE>
- --------
(1) Amounts were calculated by multiplying the number of unexercised in-the-
money options exercisable or unexercisable, as the case may be, by the
closing sales price of the common stock on NASDAQ Small-Cap. Market on
December 31, 1997 ($5.1875) and subtracting the total exercise prices.
(2) These options become exercisable on July 1, 1998.

22
<PAGE>

ONEIDA PENSION PLAN

The Oneida Molded Plastics Corp. Employee Retirement Plan #3 (the "Oneida
Pension Plan") covers substantially all of the employees of the former Oneida
Molded Plastics Corp. (a constituent of ORC). The monthly amount payable at
age 65 is 1% of a participant's average monthly compensation for the five
highest consecutive years of compensation times years of participation to a
maximum of 30 years. Effective January 1, 1997, benefits for salaried
employees except certain executives were frozen under the Oneida Pension Plan
and no additional benefits will be earned for future service. In conjunction
with the freeze, these employees are eligible to participate in the Company's
401(k) Plan. Oneida hourly employees will continue to participate in the
Oneida pension plan.

The following table shows estimated annual gross benefits payable from the
Oneida Pension Plan as a single life annuity upon retirement at age 65 for
employees in the salary classifications and within the five years of
participation specified. Various optional forms of benefits are payable in
lieu of a single life annuity. The maximum annual benefit payable under the
Oneida Pension Plan is that permitted by applicable law or regulations.

PENSION PLAN TABLE

<TABLE>
<CAPTION>
YEARS OF PARTICIPATION
----------------------------------------------------------
REMUNERATION 10 20 25 30 35
------------ ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
125,000....... $18,750.00 $ 25,000.00 $ 31,250.00 $ 37,500.00 $ 37,500.00
150,000....... $22,500.00 $ 30,000.00 $ 37,500.00 $ 45,000.00 $ 45,000.00
175,000....... $26,250.00 $ 35,000.00 $ 43,750.00 $ 52,500.00 $ 52,500.00
200,000....... $30,000.00 $ 40,000.00 $ 50,000.00 $ 60,000.00 $ 60,000.00
225,000....... $33,570.00 $ 45,000.00 $ 56,250.00 $ 67,500.00 $ 67,500.00
250,000....... $37,500.00 $ 50,000.00 $ 62,500.00 $ 75,000.00 $ 75,000.00
300,000....... $45,000.00 $ 60,000.00 $ 75,000.00 $ 90,000.00 $ 90,000.00
400,000....... $60,000.00 $ 80,000.00 $100,000.00 $120,000.00 $120,000.00
450,000....... $67,500.00 $ 90,000.00 $112,500.00 $135,000.00 $135,000.00
500,000....... $75,000.00 $100,000.00 $125,000.00 $150,000.00 $150,000.00
</TABLE>

Mr. Harrington is eligible to participate in this Plan. Mr. Harrington's
compensation for 1997 (included in the executive compensation table) covered
by the Oneida Pension Plan is $160,000 and he currently has eleven years of
service.

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

ORC (then Oneida Molded Plastics Corp.) entered into an Employment Agreement
(the "Harrington Employment Agreement"), effective as of January 1, 1995, with
David N. Harrington, its President. Pursuant to the Harrington Employment
Agreement, Mr. Harrington received (i) an annual base salary of $225,000 in
1995, increased to $240,000 in 1996 and $255,000 in 1997, (ii) an annual cash
bonus of up to 50% of his annual base salary based upon ORC's actual
performance for the year as compared to ORC's budgeted performance for the
year, (iii) a monthly car allowance of $1,000 and (iv) coverage under ORC's
fringe benefit plans for executives. In certain circumstances, Mr. Harrington
is entitled to receive up to 24 months of his base salary upon termination of
his employment. During the term of the Harrington Employment Agreement, Mr.
Harrington is required to maintain a reverse split-dollar universal life
insurance policy on his life in the amount of $2 million payable to ORC. ORC
is required to reimburse Mr. Harrington for up to $26,244 of the annual
premiums paid for such policy. If Mr. Harrington's employment is terminated
for any reason other than death, he may request that ORC assign its right to
receive the proceeds of such life insurance policy to Mr. Harrington.
Effective January 1, 1995, Mr. Harrington is eligible to earn deferred
compensation at the rate of $3,333.33 per month.

23
<PAGE>

COMPENSATION OF DIRECTORS

Directors not otherwise compensated by the Company receive annual retainers
of $18,000 for service on the Board and $500 for each Board or committee
meeting attended. Compensation paid to non-employee directors during 1997 for
service in all Board capacities aggregated $104,000. Directors are reimbursed
for the actual cost of any travel expenses incurred.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

As of February 28, 1998, the Company had outstanding 3,855,100 shares of
common stock. The following table sets forth information regarding the
beneficial ownership of the Company's common stock at February 28, 1998, by
(i) each stockholder known to the Company to own 5% of more of the Company's
common stock, (ii) each Director of the Company, (iii) each of the chief
executive officer and the other named executive officers and (iv) all current
Directors and executive officers as a group. Except as set forth in the
footnotes to the following table, each stockholder has sole dispositive and
voting power with respect to the shares of the Company's common stock shown as
owned by him.

<TABLE>
<CAPTION>
AMOUNT AND PERCENT
NATURE OF
NAME (AND ADDRESS OF 5% OF BENEFICIAL OWNERS) OF OWNERSHIP CLASS
--------------------------------------------- ------------ -------
<S> <C> <C>
Chatwins Group, Inc................................... 1,862,490(1) 47.4%
300 Weyman Plaza, Suite 340
Pittsburgh, PA 15236
Parkdale Holdings Corporation N.V..................... 271,280(2) 7.0%
Nieuwestraat 4-6, P.O. Box 210
Curacao, Netherlands Antilles
Thomas N. Amonett..................................... 34,000(3) 0.9%
Charles E. Bradley, Sr................................ 1,862,490(4) 47.4%
Thomas L. Cassidy..................................... 15,000(3) 0.4%
W. R. Clerihue........................................ 5,000(3) 0.1%
Franklin Myers........................................ 141,210(3)(5) 3.6%
John G. Poole......................................... 0(3) 0.0%
Richard L. Evans...................................... 31,000(6) 0.8%
David N. Harrington................................... 0 0.0%
All Current Directors and Executive Officers as a
group (8 individuals)................................ 2,022,490(7) 50.1%
</TABLE>
- --------
(1) Includes 75,000 shares that may be purchased pursuant to currently
exercisable warrants, with respect to which Chatwins has dispositive power
only, and 337,490 shares (66,210 owned by Myers and 271,280 owned by
Parkdale) with respect to which Chatwins has sole voting power and no
dispositive power.
(2) Parkdale has granted a proxy to Chatwins to vote these shares.
(3) Excludes options to purchase 15,000 shares of common stock which were
granted February 12, 1998 but which grant is subject to approval by
Stockholders at a future meeting.
(4) Includes all shares of common stock shown as beneficially owned by
Chatwins. Mr. Bradley is Chairman of the Board of Chatwins as well as the
beneficial owner of more than 50% of the issued and outstanding shares of
Chatwins and may, under Rule 13d-3, be deemed beneficial owner of all
shares of the Company's common stock beneficially owned by Chatwins. Mr.
Bradley disclaims such beneficial ownership.
(5) Includes a currently exercisable warrant to purchase 75,000 shares of
common stock. Mr. Myers has granted Chatwins a three year proxy to vote
66,210 shares.
(6) Includes currently exercisable options to purchase 30,000 shares of common
stock.
(7) Includes currently exercisable warrants and options to purchase an
aggregate of 180,000 shares of common stock. Excludes options to purchase
an aggregate of 75,000 shares of common stock which were granted February
12, 1998, but which grant is subject to approval by Stockholders at a
future meeting.

24
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Chatwins Group, Inc. and Affiliates

On June 20, 1995, Chatwins acquired 1,450,000 shares, or approximately 38%,
of the Company's common stock (the "Purchased Shares") from Parkdale (the
"Chatwins Acquisition"). In connection with the Chatwins Acquisition, the
271,280 remaining shares of the Company's common stock owned by Parkdale as
well as 66,210 shares of common stock (the "Myers Shares") and a warrant to
purchase 75,000 shares of common stock (the "Myers Warrant" and, collectively
with the Myers Shares, the "Myers Securities") owned by Franklin Myers were
delivered into a 3-year escrow arrangement. Each of Myers and Parkdale also
entered into 3-year standstill agreements with Chatwins regarding the
purchase, sale and transfer of Company securities and delivered to Chatwins 3-
year proxies expiring June 20, 1998 to vote all of their respectively-owned
shares of common stock (the "Chatwins Proxies"). At the time of the Chatwins
Acquisition, Chatwins acquired from P. Dean Gesterkamp a warrant to purchase
75,000 shares of the Company's common stock (the "Chatwins Warrant"). As a
result of the Chatwins Acquisition and related transactions, Chatwins has
voting control over approximately 45% of the Company's common stock.

Charles E. Bradley, Sr., a Director of the Company since June 20, 1995 and
the President and Chief Executive officer of the Company since October 26,
1995, is the Chairman and a Director of Chatwins and the beneficial owner of
approximately 57% of the outstanding common stock of Chatwins. John G. Poole,
a Director of the Company since April 19, 1996, is a Director of Chatwins and
Thomas L. Cassidy, a Director of the Company since June 20, 1995, was a
director of Chatwins until June 1997.

ORC is indebted to CGI Investment Corp. ("CGII") pursuant to a $250,000
promissory note dated May 21, 1993. The note had an outstanding balance of
$440,000 (principal and accrued interest) on December 31, 1997, and is
subordinated to the prior payment of indebtedness owing by ORC to Congress,
except that if certain conditons are met, regularly scheduled monthly interest
payments may be paid when due. ORC is also permitted to recover certain
environmental remediation costs relating to soil and ground water
contamination at Rostone's Lafayette, Indiana site by offset against this
note. CGII is owned 51% by SPI and 49% by Chatwins. Mr. Bradley, Mr. Poole and
Mr. Evans are officers, directors and/or shareholders of SPI. Prior to the
Rostone/Oneida Merger certain officers of Oneida were also serving as officers
of Rostone and CGII.

To facilitate the closing of ORC'S Loan Facility with Congress, Mr. Bradley
entered into several financial arrangements with Congress. To induce Congress
to consummate the Loan Facility, Mr. Bradley guaranteed the obligations of ORC
under the Loan Facility subject to a cap of $4 million, which cap declines
over time to $2 million. Mr. Bradley will receive a credit support fee from
ORC and in an aggregate amount equal to 1% per annum of the amount guaranteed,
payable monthly. Mr. Bradley's rights to payment of the monthly installments
of the credit support fee are subordinated to the prior payment of
indebtedness owing by ORC to Congress, except that if certain conditions are
met, the monthly installments may be paid when due. As a further inducement to
Congress, Mr. Bradley entered into an environmental indemnity agreement
pursuant to which Mr. Bradley agreed to indemnify Congress against liabilities
that may arise from environmental problems that may be associated with ORC's
existing properties and to reimburse Congress for certain investigatory and
cleanup costs that Congress may incur should Congress request that those
activities be performed by ORC and should ORC fail to perform.

ORC is indebted to Mr. Bradley for a note in the amount of $1,017,112.50
bearing interest at 10% per annum which is subordinated to the prior payment
of indebtedness owed by ORC to Congress, except that if certain conditions are
met, regularly scheduled payments of interest may be paid when due.

Beginning in 1997, ORC has entered into leases for machinery and equipment
with CPS Leasing, a subsidiary of Consumer Portfolio Services, Inc. ("CPS").
Mr. Bradley and Mr. Poole are Directors and shareholders of CPS. The leases
are for terms of five to seven years, with aggregate future minimum rental
commitments of $706,000 as of December 31, 1997. The Company believes that the
terms of these leases are comparable to those available from third parties.

25
<PAGE>

Under the arrangements described above, the Company's consolidated statement
of operations for the year ended December 31, 1997 includes interest expense
of $112,000 to Mr. Bradley and $38,000 to CGII; guarantee fees of $41,000 to
Mr. Bradley; and rent expense of $64,000 to CPS Leasing. At December 31, 1997,
the Company's consolidated balance sheet includes interest and fees payable to
Mr. Bradley of $28,000 and CGII of $72,000 classified as Current Liabilities;
principal payable to Mr. Bradley of $1,017,000 and payable to CGII of $368,000
classified as Long Term Debt-Related Parties; and interest and fees payable to
Mr. Bradley under prior arrangements of $123,000 classified as Other
Liabilities. At December 31, 1997, future minimum rental commitments to CPS
Leasing under operating leases totaled $706,000.

The Company obtains its property, casualty and product and general liability
insurance coverage through a joint arrangement with Chatwins. The Company and
Chatwins share the costs in proportion to the coverages.

The Company subleases from SPI approximately 1,500 square feet of office
space in Stamford, Connecticut for its corporate offices. The terms of this
sublease are at least as favorable to the Company as would be in the case in
an arm's length transaction. Rent expense for 1997 totaled $32,000.

In May 1997, the Company loaned $1,500,000 to SST Acquisition Corp., a
company in which Mr. Bradley and Mr. Poole are shareholders. The loan was
repaid after three days with interest at 9% plus a $15,000 transaction fee.

26
<PAGE>

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-37)

Report of Independent Public Accountants
Consolidated Balance Sheets--December 31, 1997 and 1996
Consolidated Statements of Operations--Years Ended December 31, 1997, 1996
and 1995
Consolidated Statements of Cash Flows--Years Ended December 31, 1997, 1996
and 1995
Consolidated Statements of Shareholders' Equity--Years Ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements

2. FINANCIAL STATEMENT SCHEDULES (Pages S-1 through S-2)

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 the
Company's financial statements and related notes.

3. EXHIBITS

See pages E-1 through E-3 for a listing of exhibits filed with this report
or incorporated by reference herein.

(B) CURRENT REPORTS ON FORM 8-K

During the last quarter of the year ended December 31, 1997, the Company
filed no Current Reports on Form 8-K.

27
<PAGE>

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.

Dated: March 25, 1998

REUNION INDUSTRIES, INC.

/s/ Charles E. Bradley
By:__________________________________
Charles E. Bradley
President

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED:

Dated: March 25, 1998

/s/ Charles E. Bradley
By:____________________________________
Charles E. Bradley
Director, President and Chief
Executive Officer
(Principal Executive Officer)

/s/ Richard L. Evans
By:____________________________________
Richard L. Evans
Executive Vice President and Chief
Financial Officer
(Principal Accounting and Financial
Officer)

/s/ Thomas N. Amonett
By:____________________________________
Thomas N. Amonett
Director

/s/ Thomas L. Cassidy
By:____________________________________
Thomas L. Cassidy
Director

/s/ W. R. Clerihue
By:____________________________________
W. R. Clerihue
Director

/s/ Franklin Myers
By:____________________________________
Franklin Myers
Director

/s/ John G. Poole
By:____________________________________
John G. Poole
Director

28
<PAGE>

REUNION INDUSTRIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Price Waterhouse LLP..................................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Cash Flows.................................... F-5
Consolidated Statements of Shareholders' Equity.......................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Shareholders of Reunion Industries, Inc.

In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated
statements of operations, of cash flows and of shareholders' equity present
fairly, in all material respects, the financial position of Reunion
Industries, Inc. and its subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles. 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. For purposes of auditing the
consolidated financial statements for the year ended December 31, 1995, we did
not audit the combined financial statements of oil and gas operations of
Reunion Energy Company and Reunion Operating Company, wholly-owned
subsidiaries of Reunion Industries, Inc., which statements reflect excess of
expenses over revenues of $10,393,000 for the year then ended. Those
statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to
the amounts included for oil and gas operations of Reunion Energy Company and
Reunion Operating Company, is based solely on the report of the other
auditors. We conducted our audits of the consolidated financial statements in
accordance with generally accepted auditing standards 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 and the report of other
auditors provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP

Stamford, Connecticut
March 23, 1998

F-2
<PAGE>

REUNION INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
ASSETS 1997 1996
------ ------- -------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents.................................. $ 2,085 $ 1,407
Accounts Receivable, Less Allowance for Doubtful Accounts
of $375 and $434, respectively............................ 12,284 12,747
Inventories................................................ 7,570 7,381
Note Receivable from Sale of Oil and Gas Operations........ -- 2,200
Customer Tooling-in-process................................ 1,773 1,107
Other Current Assets....................................... 495 443
------- -------
Total Current Assets..................................... 24,207 25,285
------- -------
PROPERTY, PLANT AND EQUIPMENT--NET........................... 35,293 24,333
------- -------
OTHER ASSETS
Goodwill, net.............................................. 9,060 9,766
Investment in Joint Venture................................ 1,622 --
Assets of Discontinued Agricultural Operations............. -- 14,139
Debt Issuance Costs........................................ 344 637
Other Assets Held for Sale................................. 369 401
Other...................................................... 1,164 615
------- -------
12,559 25,558
------- -------
$72,059 $75,176
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Current Portion of Long-term Debt.......................... $11,568 $10,865
Accounts Payable........................................... 9,328 9,459
Advances From Customers.................................... 2,484 1,922
Accrued Salaries, Vacation and Benefits.................... 1,940 1,877
Accrued Environmental Costs................................ 983 690
Other Current Liabilities.................................. 1,731 2,608
------- -------
Total Current Liabilities................................ 28,034 27,421
Long-Term Debt............................................... 11,112 14,190
Long-Term Debt--Related Parties.............................. 1,542 1,385
Other Liabilities............................................ 3,054 3,236
------- -------
Total Liabilities........................................ 43,742 46,232
------- -------
COMMITMENTS AND CONTINGENCIES (NOTE 14)
SHAREHOLDERS' EQUITY
Common Stock ($.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).................. (578) (307)
Foreign Currency Translation Adjustments................... (385) (29)
------- -------
Total Shareholders' Equity............................... 28,317 28,944
------- -------
$72,059 $75,176
======= =======
</TABLE>

See Accompanying Notes to Consolidated Financial Statements.

F-3
<PAGE>

REUNION INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
OPERATING REVENUE
Plastic Products................................. $93,378 $60,305 $ 10,855
------- ------- --------
93,378 60,305 10,855
OPERATING COSTS AND EXPENSES
Plastic Products--Cost of Sales.................. 78,871 50,664 9,251
Writedown of Excess Equipment.................... 958 -- --
Selling, General and Administrative.............. 11,036 8,192 4,620
------- ------- --------
90,865 58,856 13,871
------- ------- --------
OPERATING INCOME (LOSS)............................ 2,513 1,449 (3,016)
------- ------- --------
OTHER INCOME AND (EXPENSE)
Interest Expense................................. (3,267) (2,402) (508)
Equity In Income (Loss) of The Juliana Preserve.. 330 (266) (118)
Equity In Writedown of The Juliana Preserve Real
Estate Development Costs........................ (855) (1,290) --
Other, Including Interest Income................. 384 691 61
------- ------- --------
(3,408) (3,267) (565)
------- ------- --------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES............................... (895) (1,818) (3,581)
Income Tax Expense............................... (86) (876) --
------- ------- --------
LOSS FROM CONTINUING OPERATIONS (981) (2,694) (3,581)
------- ------- --------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
Oil and Gas Operations........................... -- -- (6,559)
Disposal of Oil and Gas Operations............... -- 1,122 (3,830)
Disposal of Agriculture Operations............... 710 (710) --
------- ------- --------
710 412 (10,389)
------- ------- --------
NET LOSS........................................... $ (271) $(2,282) $(13,970)
======= ======= ========
EARNINGS PER SHARE--BASIC AND DILUTED
Loss from Continuing Operations.................. $ (0.25) $ (0.70) (0.93)
Income (Loss) from Discontinued Operations....... 0.18 0.11 (2.72)
------- ------- --------
Net Loss......................................... $ (0.07) $ (0.59) $ (3.65)
======= ======= ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING
Basic and Diluted................................ 3,855 3,855 3,832
======= ======= ========
</TABLE>

See Accompanying Notes to Consolidated Financial Statements.

F-4
<PAGE>

REUNION INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1997 1996 1995
------ ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss.......................................... $ (271) $(2,282) $(13,970)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities:
Depreciation, Depletion and Amortization......... 3,062 1,694 2,889
Goodwill Amortization............................ 706 591 108
Impairment of Assets............................. 958 -- 6,980
(Gain) Loss on Disposal of Discontinued
Operations...................................... (710) 710 3,974
Equity In Income of Joint Venture, Before
Depreciation.................................... (640) (39) (182)
Write Off Of Joint Venture Costs................. 855 1,290 --
Provision for Severance and Office Closure....... -- -- 1,290
Allowance for possible denial of AMT refund
claim........................................... -- 750 --
Extension of Warrants to Purchase Common Stock... -- -- 477
Gain on Sale of Property, Plant and Equipment.... -- -- (133)
------ ------- --------
3,960 2,714 1,433
Changes in Assets and Liabilities, net of effects
from acquisitions:
Decrease in Accounts Receivable.................. 113 120 1,656
(Increase) Decrease in Inventories............... (310) (29) 237
(Increase) Decrease in Other Current Assets...... (737) 74 622
Increase (Decrease) in Accounts Payable.......... 530 (1,113) (321)
Increase (Decrease) in Other Current Liabilities. 132 (847) (614)
Other............................................ 347 324 62
------ ------- --------
Net Cash Provided by (Used in) Operating Activities. 4,035 1,243 3,075
------ ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired... -- (7,159) (3,415)
Sale of Discontinued Operations................... 2,200 8,998 --
Sale of Property, Plant and Equipment............. -- 2,046 536
Exploration and Development of Oil and Gas
Properties....................................... -- -- (4,915)
Investment in and Advances to Joint Venture....... -- -- (1,157)
Other Capital Expenditures........................ (3,868) (985) (115)
Other............................................. 141 25 (394)
------ ------- --------
Net Cash Provided by (Used in) Investing Activities. (1,527) 2,925 (9,460)
------ ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt issuance costs............................... -- (786) (66)
Proceeds from Issuance of Debt.................... 2,746 12,284 1,708
Repayments of Debt................................ (3,889) (18,698) (2,836)
Proceeds From Exercise of Common Stock Options.... -- -- 123
Increase (Decrease) in Revolver Borrowings........ (702) 3,910 (546)
------ ------- --------
Net Cash Used in Financing Activities............... (1,845) (3,290) (1,617)
------ ------- --------
Effect of Exchange Rate on Cash..................... 15 -- --
------ ------- --------
Increase (Decrease) in Cash and Cash Equivalents.... 678 878 (8,002)
Cash and Cash Equivalents at Beginning of Period.... 1,407 529 9,225
Less Cash Reclassified to Net Assets of Discontinued
Operations......................................... -- -- (694)
------ ------- --------
Cash and Cash Equivalents at End of Period.......... $2,085 $ 1,407 $ 529
====== ======= ========
</TABLE>

See Accompanying Notes to Consolidated Financial Statements.

F-5
<PAGE>

REUNION INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
-------------- --------------- ---------------
SHARES AMOUNTS SHARES AMOUNTS SHARES AMOUNTS
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK, PAR VALUE $.01
PER SHARE
Beginning Balance............ 3,855 $ 38 4,112 $ 40 4,055 $ 40
Retirement of Treasury
Shares...................... -- -- (257) (2) -- --
Exercise of Stock Options.... -- -- -- -- 57 --
----- ------- ----- ------- ----- -------
Ending Balance............... 3,855 38 3,855 38 4,112 40
----- ------- ----- ------- ----- -------
ADDITIONAL PAID-IN CAPITAL
Beginning Balance............ 29,242 31,037 30,437
Retirement of Treasury
Shares...................... -- (1,795) --
Extension of Exercise Period
of Warrants................. -- -- 477
Exercise of Stock Options.... -- 123
------- ------- -------
Ending Balance............... 29,242 29,242 31,037
------- ------- -------
RETAINED EARNINGS
Beginning Balance............ (307) 1,975 15,945
Net Loss..................... (271) (2,282) (13,970)
------- ------- -------
Ending Balance............... (578) (307) 1,975
------- ------- -------
LESS TREASURY SHARES
Beginning Balance............ -- -- (257) (1,798) (257) (1,798)
Retirement of Treasury
Shares...................... -- -- 257 1,798 -- --
----- ------- ----- ------- ----- -------
Ending Balance............... -- -- -- -- (257) (1,798)
----- ------- ----- ------- ----- -------
FOREIGN CURRENCY TRANSLATION
ADJUSTMENTS
Beginning Balance............ (29) -- --
Current Year Adjustments..... (356) (29) --
------- ------- -------
Ending Balance............... (385) (29) --
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY..... 3,855 $28,317 3,855 $28,944 3,855 $31,254
===== ======= ===== ======= ===== =======
</TABLE>

See Accompanying Notes to Consolidated Financial Statements.

F-6
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Businesses

Reunion Industries, Inc. ("RII") is the successor by merger, effective April
19, 1996, of Reunion Resources Company ("RRC"). As used herein, the term
"Company" refers to RII, its predecessors and its subsidiaries unless the
context indicates otherwise. The Company, through its wholly owned subsidiary,
Oneida Rostone Corp. ("ORC"), manufactures high volume, precision plastic
products and provides engineered plastics services. As of December 31, 1997,
plastic products and services represents the Company's principal operating
segment. The Company is also engaged in wine grape agricultural operations in
Napa County, California through a joint venture. The Company was previously
primarily engaged in oil and gas production in the United States; this
business was discontinued in 1995 (see Note 3). Information presented in the
footnotes is based on continuing operations unless the context indicates
otherwise.

ORC had sales to a single customer which represented approximately 15% of
sales during 1997 and which represented approximately 13% of ORC's accounts
receivable at December 31, 1997. Accounts receivable at December 31, 1997
include no significant geographic concentrations of credit risk. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral.

Principles of Consolidation

The consolidated financial statements include the accounts of RII and its
majority owned subsidiaries. All intercompany transactions and accounts are
eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates with regard to these financial statements include the
estimates of the recoverable value of businesses and other assets held for
sale (see Notes 3 and 7).

Revenue Recognition

Revenue is recognized as products are delivered and services are provided to
customers. Revenues and costs associated with the production of customer tools
are deferred until the tools are completed and delivered to the customer.
These revenue and cost deferrals are classified as Advances from Customers and
Customer Tooling-in-process, respectively, in the Consolidated Balance Sheets.

Cash and Cash Equivalents

Cash equivalents include time deposits, certificates of deposit and all
highly liquid instruments with maturities when purchased of three months or
less.

F-7
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

Restricted cash balances aggregating $134 and $130 at December 31, 1997 and
1996, respectively, have been included in Other Assets and Other Assets held
for Sale based on the nature of the underlying obligation collateralized. Such
balances primarily relate to regulatory operating deposits and performance
bonds.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Work-in-process and finished goods
include material costs, labor costs and manufacturing overhead.

Property, Plant and Equipment

Property, plant and equipment is recorded at cost, including cost as
determined by the allocation of the purchase price in business acquisitions
accounted for using the purchase method. Expenditures for major renewals and
improvements are capitalized while expenditures for maintenance and repairs
not expected to extend the life of an asset are charged to expense when
incurred. Depreciation of property, plant and equipment is provided on the
straight-line method over their expected useful lives. Gains or losses are
recognized when property and equipment is sold or otherwise disposed of.

Goodwill

Goodwill recorded as a result of business acquisitions is being amortized
using the straight-line method over 15 years. The Company periodically
evaluates whether circumstances indicate that the remaining carrying value of
goodwill may not be recoverable, using estimates of future cash flows over the
estimated remaining life of the goodwill. If such evaluation indicates that
the value has been impaired, a loss is recognized.

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 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.

Grants

Capital grants have been received from the Irish Government Development
Agency which provide grants towards the cost of new buildings and equipment.
Capital grants have been recorded as follows:

(a) Purchased assets--recorded as deferred credits on the balance sheet and
amortized to income over the useful lives of the related assets.

(b) Leased assets--grants have reduced the net present value of lease
payments capitalized as leased machinery.

Training and feasibility study grants are credited against the related
expenses (principally training and travel expenses) as such costs are
incurred.

F-8
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

Translation of Foreign Currencies

All amounts in the accompanying consolidated financial statements are
denominated in U.S. dollars. Assets and liabilities of foreign subsidiaries
whose local currency is the functional currency are translated at exchange
rates in effect at the balance sheet date. Revenues and expenses of these
subsidiaries are translated at average exchange rates during the period.
Translation gains and losses are not included in the Consolidated Statement of
Operations, but are accumulated as a separate component of shareholders'
equity. Gains and losses from foreign currency transactions are included in
the Consolidated Statements of Operations.

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

The Company adopted the provisions of FASB Statement No. 128 "Earnings per
Share" in 1997. 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 (see Note
11).

Potential common shares relating to options and warrants to purchase common
stock were not included in the weighted average number of shares for the years
ended December 31, 1997, 1996 and 1995 because their effect would have been
anti-dilutive.

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. 130 "Reporting Comprehensive Income," which the Company
will adopt during 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 and foreign currency translation adjustments, 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 the consolidated
financial statements.

F-9
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

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 the consolidated
financial statements issued to shareholders for interim and annual periods.
Although the Company operates in one principal 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 in 1998.

Supplemental Cash Flow Information

<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ----
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest during the periods............. $3,093 $2,024 $716
Cash paid for income taxes during the periods......... 285 156 --
Supplemental disclosure of non-cash investing and
financing activities:
Assets acquired through capital leases................ 254 478 253
</TABLE>

Reclassifications

Certain amounts in prior period statements have been reclassified to conform
with current year presentation.

2. BUSINESS ACQUISITIONS

Oneida

On September 14, 1995, the Company acquired all of the outstanding preferred
and common stock of Oneida Molded Plastics Corp. ("Oneida") from a subsidiary
of Chatwins Group, Inc. ("Chatwins"), a related party (see Note 13). The
purchase price totaled approximately $3,415, including $3,107 paid to
Chatwins, which was funded entirely from internal cash reserves of the
Company. Oneida's liabilities on the closing date included $4,933 payable to
Chatwins, which was restructured as a 10% note due September 17, 1997 (the
"Chatwins Note"). The Company agreed to prepay the Chatwins Note if and to the
extent that it realized proceeds from the sale of its oil and gas and other
assets (see Note 3).

The acquisition was accounted for as a purchase, with the purchase price
allocated to the assets acquired and liabilities assumed based upon their
respective estimated fair values at the date of acquisition. The results of
Oneida's operations are included in the consolidated financial statements from
the date of the acquisition.

The fair values of assets and liabilities acquired, based on certain
estimates, appraisals and actuarial and other studies obtained, are summarized
as follows:

<TABLE>
<S> <C>
Accounts Receivable............................................. $ 5,333
Inventories..................................................... 2,784
Customer Tooling-in-process..................................... 1,415
Other Current Assets............................................ 135
Property, Plant and Equipment................................... 6,495
Other Assets.................................................... 10
Goodwill........................................................ 4,699
Accounts Payable and Other Current Liabilities.................. (12,116)
Long-term Debt.................................................. (4,652)
Other liabilities............................................... (688)
--------
Total......................................................... $ 3,415
</TABLE>

F-10
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

Rostone

On February 2, 1996, the Company acquired (the "Rostone Acquisition")
Rostone Corporation ("Rostone") which was merged with and into Oneida. The
surviving corporation changed its name to Oneida Rostone Corp. ("ORC"). The
purchase price payable to the stockholders of Rostone was an amount up to
$4,001 as follows: (i) $1 in 1996, (ii) up to $2,000 in 1997 if Rostone
achieved specified levels of earnings before interest and taxes (as provided
in the merger agreement ) for 1996 and (iii) up to $2,000 in 1998 if Rostone
achieved specified levels of earnings before interest and taxes for 1997. In
addition, the Company incurred approximately $435 in acquisition related
costs. Based on Rostone's earnings for 1996 and 1997, the Company will not pay
any additional purchase price.

The Rostone Acquisition was accounted for using the purchase method, with
the purchase price of $436, including acquisition costs, allocated to the
assets acquired and liabilities assumed based upon their respective estimated
fair values at the date of acquisition. The results of Rostone's operations
are included in the consolidated financial statements from the date of
acquisition.

The estimated fair values of assets and liabilities acquired in the Rostone
Acquisition are summarized as follows:

<TABLE>
<S> <C>
Cash............................................................ $ 318
Accounts Receivable............................................. 3,417
Inventories..................................................... 1,857
Other Current Assets............................................ 67
Property, Plant and Equipment................................... 6,445
Other Assets.................................................... 43
Goodwill........................................................ 4,500
Accounts Payable and Other Current Liabilities.................. (3,852)
Long-term Debt.................................................. (10,837)
Other liabilities............................................... (1,522)
--------
Total......................................................... $ 436
</TABLE>

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, for a cash payment of
$700. On November 18, 1996, DPLAC acquired an additional 68% of the
outstanding stock of DPL. Together, these transactions represent the "DPL
Acquisition." The purchase price paid by DPLAC for the additional 68% was
approximately $2,825, including a cash payment of $1,050 and a $1,775 three
year unsecured note, with interest at 10%. The total purchase price for the
combined 95.5% interest in DPL, including $100 in acquisition costs, was
$3,625, the cash portions of which were funded by the Company's cash balances.

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, with the
purchase price of $3,625, including acquisition costs, allocated to the assets
acquired and liabilities assumed based upon their respective estimated fair
values at the date of acquisition. The results of DPL's operations are
included in the consolidated financial statements from the date of
acquisition.

F-11
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

The estimated fair values of assets and liabilities acquired in the DPL
acquisition are summarized as follows:

<TABLE>
<S> <C>
Accounts Receivable.............................................. $ 2,343
Inventories...................................................... 786
Property, Plant and Equipment.................................... 5,231
Goodwill......................................................... 1,342
Accounts Payable and Other Current Liabilities................... (3,167)
Long-term Debt................................................... (1,811)
Other liabilities................................................ (1,099)
-------
Total.......................................................... $ 3,625
</TABLE>

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 purchase price paid by ORC was
approximately $3,000 cash and the assumption of approximately $6,800 of debt
and other liabilities. ORC borrowed approximately $4,100 under an existing
secured credit facility to fund the $3,000 QMP Acquisition purchase price and
repay a portion of the $3,100 bank debt assumed. The remaining $2,000 of the
bank debt assumed was repaid from the Company's cash balances.

The QMP Acquisition was accounted for using the purchase method, with the
purchase price of $3,416, including acquisition costs, allocated to the assets
acquired and liabilities assumed based upon their respective estimated fair
values at the date of acquisition. The purchase price was less than the fair
value of the net assets acquired, and the difference was allocated to
property, plant and equipment. The results of QMP's operations are included in
the consolidated financial statements from the date of acquisition.

The estimated fair values of assets and liabilities acquired in the QMP
Acquisition are summarized as follows:

<TABLE>
<S> <C>
Accounts Receivable.............................................. $ 2,315
Inventories...................................................... 2,149
Other Current Assets............................................. 63
Property, Plant and Equipment.................................... 5,687
Current Portion of Long-term Debt (1)............................ (1,599)
Accounts Payable and Other Current Liabilities................... (3,609)
Long-term Debt (1)............................................... (1,590)
-------
Total.......................................................... $ 3,416
</TABLE>
- --------
(1) Debt immediately repaid upon purchase as described above.

F-12
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

Pro Forma Results

The following unaudited pro forma results of operations for 1996 and 1995
have been prepared assuming the acquisitions of Oneida, Rostone, DPL and QMP
had occurred as of January 1, 1995. 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>
(UNAUDITED)
1996 1995
-------- --------
<S> <C> <C>
Revenues............................................. $ 85,282 $ 96,950
Loss From Continuing Operations...................... (2,865) $ (1,550)
Net Loss............................................. $( 2,453) $(11,939)
Loss per Share--Basic and Diluted.................... $ (.64) $ (3.12)
</TABLE>

3. DISCONTINUED OPERATIONS

Oil and Gas Operations

Through November 1995, the Company was engaged in exploring for, developing,
producing and selling crude oil and natural gas in the United States through
the Company's wholly-owned subsidiary, Reunion Energy Company ("REC"). In
November 1995, the Company's Board of Directors resolved to pursue the sale of
the Company's oil and gas assets and to discontinue the Company's oil and gas
operations. The Company engaged an investment bank specializing in oil and gas
transactions to assist in the sale of the oil and gas operations. On April 2,
1996, the Company entered into an agreement to sell REC, including
substantially all of its oil and gas assets, to Tri-Union Development Corp.
("Tri-Union", a subsidiary of Tribo Petroleum Corporation) for a total price
of approximately $11,375. On May 24, 1996 the Company completed the sale of
REC for proceeds of $8,000 cash and a $2,200 six month note bearing interest
at 12%. The purchase price received for REC's stock reflected adjustments for
intercompany cash transfers by REC to the Company and certain expenditures by
REC between January 1 and the May 24, 1996 closing date. The note was fully
paid in February 1997. Upon completion of this transaction, the Company has
substantially completed the disposal of its discontinued oil and gas
operations.

Based on negotiations for the agreement described above, the Company
estimated that its loss from disposition of the discontinued oil and gas
operations would be approximately $3,830 and recognized this loss in
discontinued operations in 1995. During 1995, the Company incurred $1,666 of
costs to replug a well that had originally been plugged and abandoned in 1994
and that had subsequently been found to be leaking. The Company submitted a
claim with its insurance companies for recovery of these costs, which claim
was initially denied. The Company provided additional information to the
insurance companies, but did not include any anticipated recovery on this
claim in determining the estimated loss from disposition of the oil and gas
operations. Under the terms of the agreement to sell REC, this claim was
retained by the Company.

During 1996, the Company was notified that the insurance companies had
approved the claim in the amount of $1,613 and the Company was paid in full.
Accordingly, the Company recorded income from the disposition of the
discontinued oil and gas operations of $1,122, net of $365 of adjustments to
the purchase price for certain assets not sold and $126 of provisions for
environmental remediation of those assets (See Note 14).

Revenues from the discontinued oil and gas operations were $2,137 for 1996
through the date of sale of REC and $5,748 for the year ended December 31,
1995.

F-13
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

Agricultural and Real Estate Operations

Through December 1996, the Company was engaged in agricultural and real
estate operations consisting primarily of investments in The Juliana Preserve
(the "Preserve") and in certain real estate controlled by the Preserve. In
December 1996, the Company's Board of Directors concurred in the Preserve's
plan to suspend the residential development activities and seek a buyer or
buyers for the entire property. Based on an appraisal of the property for
agricultural use, and on preliminary discussions with potential buyers, the
Company recognized a loss of $2,000 in 1996 to recognize impairment of the
real estate development costs and to reduce the carrying value of the
agricultural operations to net realizable value, approximately $14,000.

The Preserve was unsuccessful in finding a buyer for the entire property in
1997, and the property is not currently listed for sale with a broker. The
Company is considering a limited wine grape development effort if financing
can be arranged. As a result, the Company has reclassified the agricultural
operations to continuing operations and has reversed the $710 estimated loss
on disposal recognized in 1996. See Note 6 for a description of the Preserve
and agricultural operations.

4. INVENTORIES

Inventories at December 31, 1997 and 1996 consisted of the following:

<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Raw materials............................................... $3,461 $3,719
Work-in-process............................................. 1,440 1,170
Finished goods.............................................. 2,669 2,492
------ ------
Total..................................................... $7,570 $7,381
====== ======
</TABLE>

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at December 31, 1997 and 1996 consisted of the
following:

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Plastic Products Segment:
Machinery and equipment............................... $18,171 $19,255
Buildings and improvements............................ 6,763 5,837
Land and improvements................................. 563 554
------- -------
25,497 25,646
Accumulated depreciation.............................. (2,119) (1,313)
------- -------
Net................................................. $23,378 $24,333
------- -------
Agricultural Operations:
Land and improvements................................. 13,230
Equipment............................................. 793
-------
14,023
Accumulated depreciation.............................. (2,108)
-------
Net................................................. $11,915
-------
Total property, plant and equipment, net................ $35,293 $24,333
======= =======
</TABLE>

F-14
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

6. INVESTMENT IN THE JULIANA PRESERVE

The Company's agricultural operations consist primarily of investments in
The Juliana Preserve and certain real estate controlled by the Preserve. The
Preserve is a California general partnership, formed on October 1, 1994 by
Juliana Vineyards and Crescent Farms Company (wholly owned subsidiaries of the
Company, together referenced herein as "Juliana"), and Freedom Vineyards,
Inc., a California corporation ("Freedom Vineyards"), to jointly farm, manage,
develop and ultimately dispose of the combined interest of all the parties. In
forming the joint venture, the parties effectively contributed their ownership
interests in the agricultural and real estate operations in exchange for
undivided ownership interests in the joint venture of 71.7% to Juliana and
28.3% to Freedom Vineyards, based on independent appraisals of their
respective interests. Although Juliana has a 71.7% interest in the net income
and net assets of the joint venture, it has a 50% voting interest in matters
concerning the operation, development and ultimate disposition of the
property, and therefore accounts for its investment on the equity method.

The properties now controlled by The Juliana Preserve were originally
acquired by Juliana in 1974 and at December 31, 1997 consisted of
approximately 4,200 acres, of which approximately 1,400 acres are suitable for
wine grape production and of which 350 acres are currently in production.
Freedom Vineyards obtained its interest in 1993 when the Company conveyed 720
acres to Freedom Vineyards in satisfaction of $13,169 of indebtedness.
Although the Company has given effective control of this property to the
Preserve, it retains legal title. Accordingly, the property is presented as
Property, Plant and Equipment in the accompanying consolidated balance sheet,
and the Company's investment in the Preserve is presented as Investment in
Joint Venture.

In January 1995, the Preserve entered into a Development and Marketing
Agreement with Juliana Pacific, Inc., a California corporation and an
affiliate of Pacific Union Company ("Pacific Union"), to develop the Preserve
into a master-planned estate-oriented residential community encompassing the
entire vineyard. The joint venture agreement contemplated that development
costs associated with the project would be financed solely from the assets of
the joint venture, including the sale of such assets, or by development
financing. In October 1995, the joint venture entered into a loan agreement
with Washington Federal Savings ("WFS"), the parent of Freedom Vineyards, to
provide $3,000 of development financing for this project.

In December 1996, the Company's Board of Directors concurred with the joint
venture's plan to suspend the residential development activities and seek a
buyer or buyers for the entire property. During 1997, the Preserve abandoned
its plans to pursue development of the residential community because of
failure to obtain the necessary permits and approvals. In connection with
these decisions, the Company recorded an impairment charge of $1,290 in 1996
and a further charge of $855 in 1997 for its equity in the write off of
approximately $2,991 of development costs by the joint venture. The
development loan to WFS was fully repaid in January 1998.

The Company has agreed in principle with WFS for the Company to buy the WFS
28.3% interest in the Preserve for $5,950. The Company plans to undertake a
limited wine grape development effort, which management believes will enhance
the value of the property, if financing can be arranged. The Company is
presently seeking such financing, but there are no assurances that it can be
arranged.

F-15
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

In addition to the charges for write-off of development costs, the Company
recognized income from its equity interest in the Preserve, net of
depreciation on the real estate improvements and equipment owned by the
Company and used by the Preserve, of $330 in 1997. In 1996 and 1995, the
Company recognized losses, including depreciation, of $266 and $118 from its
equity interest in the Preserve.

At December 31, 1997, Juliana was obligated on indebtedness of $2,155
payable to an insurance company, which is collateralized by land and vineyards
(see Note 8).

7. ASSETS HELD FOR SALE

In connection with the sale of REC, the Company retained certain oil and gas
properties in Louisiana because of litigation concerning environmental
matters. As described in Note 14, the Company is in the process of
environmental remediation of these properties. The Company intends to sell
these properties when the litigation is resolved. The net carrying value was
$231 at December 31, 1997.

The Company 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, and the Company is pursuing the sale or
farmout of these interests. The carrying value for these properties is $138,
which the Company believes is realizable from the sale of these interests.

8. DEBT

Debt at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Congress Revolver.............................................. $ 6,514 $ 7,220
Congress Term Loan............................................. 6,843 9,099
Other ORC Debt................................................. 7,168 6,411
Notes Payable to an Insurance Company.......................... 2,155 2,325
Related Party Debt............................................. 1,542 1,385
------- -------
Total Debt................................................... $24,222 $26,440
======= =======
Current Portion of Long-Term Debt.............................. $11,568 $10,865
Long-Term Debt................................................. 11,112 14,190
Long-Term Debt--Related Parties................................ 1,542 1,385
------- -------
Total Debt................................................... $24,222 $26,440
======= =======
</TABLE>

Congress Credit Facility

The revolving credit and term loan facility (the "Loan Facility") with
Congress Financial Corp ("Congress"), is secured by substantially all of ORC's
domestic receivables, inventory, equipment, real property and general
intangibles. The maximum credit available under the Loan Facility, subject to
the availability of collateral, is $20,000. At December 31, 1997 the interest
rate on term loan borrowings was 10.75% (Prime + 2.25%) and the interest rate
on revolving credit borrowings was 10.5% (Prime + 2.0%). The Loan Facility
terminates on February 2, 1999. At December 31, 1997, ORC had additional
borrowing availability of $1,100 under the revolving credit facility. The
Company must comply with financial covenants requiring the

F-16
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997
maintenance of minimum levels of working capital and of net worth, and
covenants limiting other indebtedness, dividends and distributions and
transactions with affiliates. At December 31, 1997, the Company is in
compliance with all such covenants.

Other ORC Debt

Other ORC debt includes a $1,775 three-year 10% unsecured note issued in
connection with the DPL Acquisition (Note 2); a $1,017 10% note payable to a
creditor of Rostone, payable in quarterly installments subject to a
subordination agreement with Congress; $1,414 of variable-rate term loans from
DPL's bank, payable in monthly installments over twenty years; a $1,425 tax
qualified Irish business expansion loan bearing interest at 1% and payable in
2002 and $1,537 of capital lease obligations, economic development loans and
small business loans, generally secured by equipment or other assets of ORC
and DPL and bearing interest at rates ranging from 5% to 18% at December 31,
1997.

Notes Payable to an Insurance Company

Notes payable to an insurance company consist of three notes. The first note
in the amount of $1,611 is payable monthly with principal payments amortized
based on a 20-year rate and due in full in December 1998. The interest rate
was 6.7% per annum in 1996 and was adjusted to 8.0% in January 1997. The
second note in the amount of $419 is payable semiannually with fixed principal
payments and interest at 8.25% per annum and is due in full in January 1999.
The third note in the amount of $124 is payable monthly with an interest rate
of 8.25% per annum and is due in full in January 1999. The notes are
collateralized by certain Juliana land parcels.

Related Party Debt

To facilitate the Rostone Acquisition and closing of the Congress credit
facility. Mr. Bradley, the Chairman of Reunion Industries, purchased 50% of a
$2,034 balance owed to a Rostone creditor. As a result of this transaction,
Mr. Bradley and the creditor each hold a note from ORC in the amount of $1,017
bearing interest at 10% per annum and subordinated to the Congress
indebtedness except that if certain conditions are met, regularly scheduled
payments of interest may be paid when due (see Note 13).

ORC is indebted to CGII pursuant to a $250 promissory note dated May 21,
1993 bearing interest at 15%. The note is subordinated to the prior payment of
Congress indebtedness except that if certain conditions are met, monthly
interest payments may be paid. The note is subject to offset rights by ORC for
certain environmental costs incurred (See Note 14).

Beginning in 1997, ORC has entered into capital leases for machinery and
equipment with CPS Leasing, a subsidiary of Consumer Portfolio Services, Inc.
("CPS"). Mr. Bradley and Mr. Poole are Directors and shareholders of CPS. The
leases are for terms of five to seven years, with a present value of future
minimum lease payments of $157 as of December 31, 1997. The Company believes
that the terms of these leases are comparable to those available from third
parties.

F-17
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

Maturities

The aggregate amounts of debt maturities are as follows:

<TABLE>
<S> <C>
1998.............................................................. $11,568
1999.............................................................. 6,105
2000.............................................................. 3,087
2001.............................................................. 782
2002.............................................................. 1,531
Thereafter........................................................ 1,149
-------
Total........................................................... $24,222
=======
</TABLE>

9. EMPLOYEE BENEFITS

Pension Plans

The Company sponsors defined benefit pension plans for certain Oneida and
DPL employees.

Oneida Plan: ORC sponsors a defined benefit pension plan which covers
substantially all Oneida employees. Benefits under the pension plan are based
on years of service and average compensation for the five highest consecutive
years. Annually, Oneida contributes the minimum amount required by applicable
regulations. Assets of the pension plan are principally invested in fixed
income and equity securities. Contributions are intended to provide for
benefits attributed to employees' service to-date and for those benefits
expected to be earned from future service.

Effective January 1, 1997, benefits for salaried employees except certain
executives were frozen under the Oneida plan and no additional benefits will
be earned for future service. In conjunction with the freeze, these employees
are eligible to participate in the Company's merged 401(k) Plan as described
below. Oneida hourly employees will continue to participate in the Oneida
pension plan.

The following table sets forth the net periodic pension cost for the Oneida
Plan for the periods presented:

<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 14,
YEAR ENDED YEAR ENDED 1995 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Net Periodic Pension Cost:
Service cost......................... $ 156 $ 158 $ 58
Interest cost on projected benefit
obligation.......................... 151 136 40
Curtailment gain from benefits
freeze.............................. (217) -- --
Net amortization and deferral of
gains and losses.................... 164 17 47
Actual return on plan assets......... (288) (136) (70)
----- ----- ----
Net periodic pension expense........... $ (34) $ 175 $ 75
===== ===== ====
</TABLE>

DPL Plan: DPL sponsors a defined benefit pension plan for its salaried staff
employees. Benefits are based largely on years of service and salary over the
last three years of employment. A lump sum death benefit is also provided,
which is a multiple of salary. Hourly-paid employees are included for a modest
level of death benefit only. The cost of the plan is met entirely by
contributions paid by DPL. As recommended by its actuaries, DPL contributes a
level percentage of salary every year. These contributions are expected to
provide the benefits

F-18
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997
promised, allowing for future salary increases. The assets of the plan consist
entirely of units in a pooled fund operated by a life assurance company.

The following table sets forth the net periodic pension cost for the DPL
Plan for the periods presented:

<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 18,
YEAR ENDED 1996 TO
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Net Periodic Pension Cost
Service cost................................. $ 57 $10
Interest cost on projected benefit
obligation.................................. 31 4
Net amortization and deferral of gains and
losses...................................... 73 1
Actual return on plan assets................. (123) (7)
----- ---
Net periodic pension expense................... $ 38 $ 8
===== ===
</TABLE>

The following table sets forth the funded status of the plans based on the
most recent actuarial valuations, which were September 30, 1997 for the Oneida
Plan and December 31, 1997 for the DPL Plan:

<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
ONEIDA PLAN DPL PLAN ONEIDA PLAN DPL PLAN
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Funded Status of Defined Benefit
Pension Plan:
Actuarial present value of vested
benefit obligation.................. $1,832 $ 488 $1,418 $350
====== ===== ====== ====
Accumulated benefit obligation....... $2,104 488 $1,449 $350
Effect of projected future
compensation levels................. 159 174 346 243
------ ----- ------ ----
Projected benefit obligation for
service rendered to date............ 2,263 662 1,795 593
Plan assets at fair value............ 1,959 799 1,620 619
------ ----- ------ ----
Projected benefit obligation in
excess of plan assets............... 304 (137) 175 (26)
Unrecognized net gain................ 205 247 481 272
------ ----- ------ ----
Accrued pension cost................. $ 509 $ 110 $ 656 $246
====== ===== ====== ====
</TABLE>

The following table sets forth the actuarial assumptions used to develop the
net periodic pension costs for the periods presented:

<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount Rate:
Oneida Plan........................................... 7.5% 8.5% 8.5%
DPL Plan.............................................. 8.0% 8.0% --
Expected rate of return on plan assets:
Oneida Plan........................................... 9.0% 9.0% 8.5%
DPL Plan.............................................. 9.0% 9.0% --
Assumed compensation rate increase:
Oneida Plan........................................... 4.0% 4.0% 4.0%
DPL Plan.............................................. 6.0% 6.0% --
</TABLE>

F-19
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

Deferred Compensation Plans

The Company sponsors qualified contributory 401(k) plans covering
substantially all domestic employees. Employees may elect to contribute up to
an annually determined maximum amount permitted by law, and the Company makes
matching contributions up to specified limits. The Company's contributions to
the plan in each of the three years ended December 31, 1997 were not material.

Postretirement Benefits Other Than Pensions

ORC provides health care benefits for certain of Rostone's salaried and
union retirees and their dependents under two separate but substantially
similar plans. Generally, employees are eligible to participate in the medical
benefit plans if, at the time of retirement, they have at least 10 years of
service and have attained 62 years of age. Rostone's medical benefit plans are
contributory via employee contributions, deductibles and co-payments and are
subject to certain annual, lifetime and benefit-specific maximum amounts.

The components of the net periodic postretirement benefit cost are as
follows:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 2,
1996 TO
DECEMBER 31,
1997 1996
---- ------------
<S> <C> <C>
Service cost............................................ $ 52 $ 45
Interest cost........................................... 109 102
---- ----
Net periodic postretirement benefit cost................ $161 $147
==== ====
</TABLE>

Health care benefits are funded as claims are paid. In 1997 and 1996,
Rostone's cash payments for such benefits were approximately $50 and $64,
respectively.

The accumulated postretirement benefit obligation ("APBO") consisted of the
following components:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Retirees........................................ $ 607 $ 597
Fully eligible active participants.............. 44 20
Other active participants....................... 970 949
------ ------
Total........................................... 1,621 1,566
Plan assets at fair value....................... -- --
------ ------
APBO in excess of plan assets................... 1,621 1,566
Unrecognized net gain........................... 73 81
------ ------
Postretirement benefit liability................ $1,694 $1,647
====== ======
</TABLE>

Benefit costs were estimated assuming retiree health care costs would
initially increase at a 10.0% annual rate, decreasing gradually to 5.3% after
15 years. A 1.0% increase in the assumed health care cost trend rate would
have increased the APBO at December 31,1997 and postretirement benefit cost
for 1997 by $183 and $17, respectively. The discount rate used to estimate the
accumulated postretirement benefit obligation was 6.5% at December 31, 1997.

F-20
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

Postemployment Benefits

Other than unemployment compensation benefits required by law, the Company
does not provide postemployment benefits to former or inactive employees. The
estimated future cost of unemployment compensation benefits is accrued as
employee services are provided.

10. SHAREHOLDERS' EQUITY

Name Change and Reincorporation

On April 19, 1996, Reunion Resources Company merged with and into its
wholly-owned subsidiary, Reunion Industries, Inc. ("RII"), pursuant to a
merger agreement dated November 14, 1995. RII'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 (the
"Transfer Restrictions") which are designed to prevent any person or group of
persons from becoming a 5% shareholder of RII 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.

Treasury Stock

In June 1996, the Company retired 257 shares of treasury stock, which
reverted to unissued shares.

Additional Paid-in Capital

In 1996 paid-in capital was reduced $1,795, the cost of 257 shares of
treasury stock retired. Paid-in capital was increased $123 in 1995 from the
exercise of stock options (see Note 11). In 1995, $477 was credited to
additional paid-in capital as a result of extending the expiration date of two
warrants (see Note 11).

Dividends

No dividends have been declared or paid during the past three years with
respect to the common stock of the Company. Cash dividends are limited by the
availability of funds, including limitations on dividends and other transfers
to Reunion by ORC contained in ORC's lending agreements (see Note 8).

11. STOCK OPTIONS AND WARRANTS

At December 31, 1996, the Company has two stock option plans and outstanding
warrants 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 and warrants. 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. During 1995, the
Company extended the expiration date of certain warrants and recognized
compensation cost of $477.

F-21
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

Had compensation cost for the Company's stock option plans and warrants 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 net
income and earnings per share would have been reduced to the pro forma amounts
as indicated below:

<TABLE>
<CAPTION>
1997 1996 1995
----- ------- --------
<S> <C> <C> <C> <C>
Net Loss............................ As reported $(271) $(2,282) $(13,970)
Pro forma $(302) $(2,327) $(14,144)
Basic and Diluted
Net Loss per Share................ As reported $(.07) $ (.59) $ (3.65)
Pro forma $(.08) $ (.60) $ (3.69)
</TABLE>

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 used for grants in 1995 and 1996, respectively: dividend yield of
0 percent for all years; expected volatility of 60 percent, risk-free interest
rates of 6.1 percent and expected lives of 3 and 4 years. There were no
options granted during 1997. 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 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. 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. In August 1992, the Board of Directors granted
options to purchase 211,000 common shares at $1.562 per share, determined from
the average market price of the 90 days preceding the effective date, to its
four directors and a consultant to the Board of Directors. The options became
exercisable for two years after July 1, 1993.

1992 Warrants

In addition, during 1992 the Company's Board of Directors approved the
issuance of warrants to a director and to a consultant to the Board of
Directors to purchase an aggregate of 150,000 shares of the Company's common
stock at $1.562 per share, determined from the average market price of the 90
days preceding the effective date. The warrants became exercisable for two
years on July 1, 1993. In June 1995, the expiration date of these warrants was
extended to June 30, 1999 (see Note 13) and the Company recognized
compensation expense of $477.

1993 Option Plan

Effective September 28, 1993, the Board of Directors 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 December 1993, the Company granted 80,000 incentive stock options
to certain key employees at an exercise price of $6.00 per share. The

F-22
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997
options originally vested 50% in December 1994 and 50% in December 1995 and
remained exercisable until December 1996. In January 1995, the Company granted
62,750 incentive stock options to certain key employees at an exercise price
of $5.00 per share. The options originally vested 50% in January 1996 and 50%
in January 1997 and remain exercisable until January 1999. As a result of
Chatwins' acquisition of its common stock ownership in June 1995 (see Note
13), all of the outstanding options under the 1993 Option Plan at that date
became immediately exercisable. In July 1996, the Company granted 55,000
incentive stock options to two officers at an exercise price of $4.375 per
share. The options vest 20% in January 1997, 40% in July 1997 and 40% in July
1998, and are exercisable until July 1999.

A summary of the status of the Company's stock options and warrants as of
December 31, 1997, 1996 and 1995 and changes during the years ending on those
dates is presented below:

<TABLE>
<CAPTION>
1997 1996 1995
----------------- ------------------ ------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ------------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 215,750 $2.47 255,750 $3.23 269,500 $2.76
Granted................. -- $ -- 55,000 $4.44 62,750 $5.00
Exercised............... -- $ -- -- $ -- (56,500) $2.45
Forfeited/Expired....... -- $ -- (95,000) $5.63 (20,000) $5.50
------- ------- -------
Outstanding at end of
year................... 215,750 $2.47 215,750 $2.47 255,750 $3.23
Options exercisable at
year-end 193,750 $2.24 160,750 $1.97 255,750 $3.23
Weighted-average fair
value of options ranted
during the year........ $ -- $1.48 $2.44
</TABLE>

The following table summarizes information about stock options and warrants
outstanding at December 31, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED- WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICE AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE
- -------------- ----------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.562................... 150,000 2.5 yrs. $1.562 150,000 $1.562
$5.00.................... 10,750 1 yr. $ 5.00 10,750 $ 5.00
$4.44.................... 55,000 1.5 yrs. $ 4.44 33,000 $ 44
------- -------
215,750 193,750
</TABLE>

F-23
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

12. TAXES ON INCOME

The components of the Company's income tax expense are as follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current
Federal.................................................. $-- $750 $--
State.................................................... 86 126 --
Foreign.................................................. -- -- --
--- ---- ---
86 876 --
Deferred................................................. -- -- --
--- ---- ---
$86 $876 $--
</TABLE>

In September 1995, the Company amended its 1991 and 1992 Federal tax returns
to request a refund of Alternative Minimum Tax ("AMT") previously paid. The
refund resulted from the carryback of a capital loss originating from the
sale, in 1993, of Reunion common stock owned by a subsidiary of the Company.
The Company recorded a receivable for this refund in 1993 when the transaction
occurred. The IRS has audited this refund request and has issued a formal IRS
agent's report denying the refund claim, and asserting an additional tax
deficiency for 1993. The Company has appealed the case to the IRS appeals
division. Management believes it has provided a reasonable amount of
documentation and technical arguments in support of its claim and expects to
resolve the claim in 1998. Because of the uncertainty over realization of the
refund, the Company recorded an allowance of $750 for the possible denial of
the AMT refund claim with a corresponding charge to Income Tax Expense in
1996.

As a result of continuing losses and the existence of significant net
operating loss carryovers, the Company incurred no federal income tax
liability or benefit during 1997, 1996 or 1995. As of December 31, 1997, the
Company had net operating loss ("NOL") and investment tax credit ("ITC")
carryforwards for federal income tax purposes totaling approximately $215,900
and $1,400, respectively. The NOL and ITC carryforwards expire as follows:

The Company's ability to use these NOL's to offset future taxable income
would be limited if an "ownership change" were to occur for federal income tax
purposes. As described in Note 10, the merger of RRC into RII intended to
decrease the likelihood of such an ownership change occurring.

F-24
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

Significant components of the Company's deferred tax position at December
31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Excess tax depreciation and bases differences of
assets............................................ $ (1,359) $ (1,251)
Other.............................................. (31) (28)
-------- --------
Total deferred tax liabilities................... (1,390) (1,279)
-------- --------
Deferred tax assets:
NOL and ITC carryforwards.......................... 74,806 75,617
Bases differences of assets and liabilities........ 2,584 2,597
Other.............................................. 1,378 892
-------- --------
Total deferred tax assets........................ 78,768 79,106
-------- --------
Net deferred tax assets.............................. 77,378 77,827
Valuation allowance.................................. (77,378) (77,827)
-------- --------
$ --0-- $ --0--
======== ========
</TABLE>

The Company has continued to incur tax losses since emerging from bankruptcy
in 1988, and there can be no assurance that the Company will be able to
utilize the net operating and capital loss carryforwards in excess of that
required to offset temporary differences which will result in future taxable
income. Therefore, the Company has provided a valuation allowance for the net
deferred tax asset. This valuation allowance decreased $449 in 1997, increased
$1,388 during 1996, and decreased $11,399 during 1995 including $10,605
transferred to Net Assets of Discontinued Operations.

The Company files a consolidated U.S. federal income tax return and its U.S.
subsidiaries file combined or separate company income tax returns in states in
which they conduct business. The Company's consolidated federal income tax
returns for the years 1990 through 1993 are currently being audited in
connection with the IRS audit of the Company's claim for refund of $750 of
alternative minimum tax as a result of the capital loss carryback referred to
above.

13. RELATED PARTY TRANSACTIONS

Chatwins and Affiliates

On June 20, 1995, Chatwins acquired 1,450,000 shares of the Company's Common
Stock from Parkdale Holdings Corporation N. V. ("Parkdale") (the "Chatwins
Acquisition"), resulting in the ownership by Chatwins of approximately 38% of
the Common Stock outstanding. In connection with this transaction, Parkdale
and Franklin Myers, a Director of the Company, entered into three-year
standstill agreements with Chatwins regarding the purchase, sale and transfer
of Company securities and gave Chatwins three-year proxies to vote all of
their respectively-owned shares of the Company's common stock. As a result of
these transactions, Chatwins has voting control of approximately 45% of the
Company's outstanding Common Stock. Chatwins also acquired a warrant to
purchase 75,000 shares of the Company's Common Stock for $1.562 per share (the
"Chatwins Warrant").

F-25
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

Charles E. Bradley, Sr., a Director of the Company since June 20, 1995 and
the President and Chief Executive Officer of the Company since October 26,
1995, is the Chairman and a Director of Chatwins and the beneficial owner of
approximately 57% of the outstanding common stock of Chatwins. John G. Poole,
a Director of the Company since April 19, 1996, is a Director of Chatwins and
the beneficial owner of approximately 22% of the outstanding common stock of
Chatwins. Thomas L. Cassidy, a Director of the Company since June 20, 1995,
was a Director of Chatwins until June 1997.

On June 28, 1995, Chatwins proposed to the Board of Directors of the Company
and the Board of Directors subsequently resolved that the Company extend the
exercisability of the Chatwins Warrant and a similar warrant owned by Mr.
Myers (the "Myers Warrant"). The Chatwins Warrant and the Myers Warrant had
been scheduled to expire by their terms on July 1, 1995. These warrants now
expire on June 30, 1999. Contemporaneously with the Chatwins Acquisition,
Myers agreed not to exercise the Myers Warrant until June 21, 1998.

On September 14, 1995, the Company purchased from Chatwins Holdings, Inc.
("CHI"), a wholly-owned subsidiary of Chatwins, all of the issued and
outstanding common stock and preferred stock of Oneida (the "Oneida
Acquisition"). The aggregate purchase price paid to CHI for the shares totaled
$3,107 which was funded entirely from internal cash reserves of the Company.
Oneida's liabilities at the time of the Oneida Acquisition included $4,933
payable to Chatwins. The stock purchase agreement between the Company and
Chatwins required the Company to cause Oneida to repay the indebtedness to
Chatwins (the "Oneida/Chatwins Debt") plus interest thereon at 10% per annum
from September 1, 1995 on or before September 14, 1997, or earlier from the
net proceeds, if any, of the sale of the Company's other material assets. This
debt was repaid in May 1996 from the proceeds of the sale of the oil and gas
assets. The financial terms of the Oneida transaction were determined based on
Oneida's financial position and results of operations at and for the six
months ended June 30, 1995. The terms of the transaction were approved by the
unanimous vote of the directors of the Company at the time with Messrs.
Bradley and Cassidy abstaining.

In 1995, Mr. Bradley made loans totaling $1,350 to the Company, which the
Company then used as part of a $1,550 loan it advanced to Oneida evidenced by
a 10% promissory note of Oneida payable November 2, 1997. Oneida used these
funds to repay a portion of the Oneida/Chatwins Debt. The Company issued two
notes to Mr. Bradley for the $1,350 he advanced, each bearing interest at a
rate of 10% per annum and each due and payable on September 14, 1997. This
debt was repaid in May 1996 from the proceeds of the sale of the oil and gas
assets.

On February 2, 1996, Rostone was merged with and into Oneida (the "Rostone
Acquisition") pursuant to a Merger Agreement (the "Rostone/Oneida Agreement")
and Oneida, as the surviving corporation, changed its name to Oneida Rostone
Corp. ("ORC"). The purchase price payable by ORC under the Rostone/Oneida
Agreement to the stockholders of Rostone was an amount up to $4,001 as
follows: (i) $1 in 1996, (ii) up to $2,000 in 1997 if Rostone achieved
specified levels of earnings before interest and taxes (as provided in the
Rostone/Oneida Agreement) for the calender year 1996 and (iii) up to $2,000 in
1998 if Rostone achieved specified levels of earnings before interest and
taxes for the calendar year 1997. Based on Rostone's earnings for 1996 and
1997, the Company did not pay any additional purchase price in l997 and will
not pay any amount in 1998. The financial terms of the transaction were
determined based on Rostone's financial position and results of operations for
the fiscal year ended December 31, 1994 and for the eleven months ended
November 30, 1995. The terms of the Rostone Acquisition were approved by the
unanimous vote of the directors of the Company, including all disinterested
directors. In the Rostone Acquisition, ORC acquired 100% of the preferred and
common stock of Rostone from CGI Investment Corp. ("CGII") a company owned 51%
by Stanwich Partners, Inc. ("SPI") and 49% by Chatwins. Mr. Bradley, Mr. Poole
and Richard L. Evans, Executive Vice President, Chief Financial Officer and
Secretary of the Company, are officers, directors and/or shareholders of SPI.
Prior to the Rostone Acquisition certain officers of Oneida were also serving
as officers of Rostone and CGII.

F-26
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

In connection with the Oneida Acquisition and the Rostone Acquisition, the
Company hired Prudential Securities Incorporated ("Prudential") to act as its
financial advisor and to provide opinions as to the fairness of the
consideration paid by the Company in connection with each of the Oneida
Acquisition (the "Oneida Consideration") and the Rostone Acquisition (the
"Rostone Merger Consideration"). Prudential issued its opinions, dated
September 7, 1995 and January 15, 1996, respectively, that, as of such dates,
the Oneida Consideration and the Rostone Merger Consideration paid by the
Company were fair to the Company from a financial point of view.

Prior to the Rostone Acquisition, Rostone was indebted to CGII pursuant to a
$250 promissory note dated May 21, 1993. The note, which had an outstanding
balance of $368 (principal and accrued interest) on February 2, 1996 and
continues as an obligation of ORC, is subordinated to the prior payment of
indebtedness owing by ORC to Congress except that if certain conditions are
met, regularly scheduled monthly interest payments may be paid when due. The
note is also subject to offset rights by ORC for certain environmental costs
incurred (See Note 14).

To facilitate the closing of the Rostone Acquisition and the Loan Facility,
Mr. Bradley entered into several financial arrangements with Congress and an
existing creditor to Rostone. To induce Congress to consummate the Congress
credit facility, Mr. Bradley guaranteed the obligations of ORC and its
subsidiary under the Congress credit facility subject to a cap of $4,000,
which cap declines over time to $2,000. Mr. Bradley will receive a credit
support fee from ORC and subsidiary in an aggregate amount equal to one
percent (1%) per annum of the amount guaranteed, payable monthly. Mr.
Bradley's rights to payment of the monthly installments of the credit support
fee are subordinated to the prior payment of indebtedness owing by ORC to
Congress, except that if certain conditions are met, the monthly installments
may be paid when due. As a further inducement to Congress, Mr. Bradley entered
into an environmental indemnity agreement pursuant to which Mr. Bradley agrees
to indemnify Congress against liabilities that may arise from environmental
problems that may be associated with ORC's existing properties and to
reimburse Congress for certain investigatory and cleanup costs that Congress
may incur should Congress request that those activities be performed by ORC
and should ORC fail to perform them.

To induce an existing creditor of Rostone to permit the Rostone Acquisition
and Congress credit facility to be consummated, Mr. Bradley agreed to purchase
from this creditor 50% of the $2,034 owing to him by Rostone on February 2,
1996 if this indebtedness was restated to provide for quarterly amortization
over a two year period with interest at 10% per annum payable quarterly
subject, however, to a subordination agreement with Congress. As a result of
this transaction, Mr. Bradley and the creditor each holds a note from ORC in
the amount of $1,017 bearing interest at 10% per annum which is subordinated
to the prior payment of indebtedness owing by ORC to Congress, except that if
certain conditions are met, regularly scheduled payments of interest may be
paid when due.

On November 18, 1996, ORC completed the DPL Acquisition by acquiring 68% of
the outstanding stock of DPL, pursuant to a Stock Purchase Agreement with a
creditor of Texon Energy Corporation ("TEC") and its subsidiaries. The DPL
stock had been pledged by such subsidiaries as collateral for debt
obligations, and had been acquired by the creditor through foreclosure. Mr.
Bradley is President and a director of TEC and beneficial owner of
approximately 14% of TEC's outstanding stock.

Prior to DPL acquisition, DPL was indebted to Stanwich Oil and Gas, Inc.
("SOG") pursuant to a $250 loan agreement dated June 14, 1995. Mr. Bradley and
Mr. Poole are officers, directors and the principal shareholders of SOG. On
December 16, 1996, the Company purchased the indebtedness from SOG for $249,
representing the outstanding balance of principal and interest at that date.

F-27
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

In connection with the QMP Acquisition on November 18, 1996, Congress
extended to ORC a $1,000 temporary overformula line as part of the amendment
of the Loan Facility to increase the maximum amount to $20,000. Mr. Bradley
guaranteed the amounts, if any, borrowed under this overformula line, for a
credit support fee from ORC of $1 per month. The overformula line expired
February 14, 1997, and the fee terminated as of that date.

Beginning in 1997, ORC has entered into leases for machinery and equipment
with CPS Leasing, a subsidiary of Consumer Portfolio Services, Inc. ("CPS").
Mr. Bradley and Mr. Poole are Directors and shareholders of CPS. The leases
are for terms of five to seven years. The Company believes that the terms of
these leases are comparable to those available from third parties.

In May, 1997, the Company loaned $1,500 to SST Acquisition Corp., a company
in which Mr. Bradley and Mr. Poole are shareholders. The loan was repaid after
three days with interest at 9% plus a $15 transaction fee.

Under the arrangements described above, the consolidated financial
statements include the following amounts and balances:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest Expense:
Chatwins................................................ $-- $199 $139
Mr. Bradley............................................. 112 178 23
CGII.................................................... 38 37 --
SOG..................................................... -- 2 --
Rent Expense:
CPS Leasing............................................. 64 -- --
Chatwins and Mr. Bradley................................ -- 42 --
Guarantee fees: Mr. Bradley............................... 41 55 30
</TABLE>

<TABLE>
<CAPTION>
AS OF
DECEMBER
31,
-----------
1997 1996
----- -----
<S> <C> <C>
Current liabilities: interest and fees:
Mr. Bradley................................................. 28 20
CGII........................................................ 72 33
Long term debt-related parties:
Mr. Bradley................................................. 1,017 1,017
CGII........................................................ 368 368
CPS Leasing................................................. 157 --
Other liabilities: interest and fees payable to Mr. Bradley... 123 175
</TABLE>

<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
------------
<S> <C>
Future minimum rental commitments under noncancellable
operating leases: CPS Leasing............................. 706
</TABLE>

F-28
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

Effective April 1, 1996, the Company subleases from SPI approximately 1,500
square feet of office space in Stamford, Connecticut for its corporate
offices. The Company believes that the terms of this sublease are at least as
favorable to the Company as would be in the case in an arm's length
transaction. The rent expense under this lease totaled $32 in 1997 and $23 in
1996.

Boreta

In 1992, the former Board of Directors approved a $300 five year, unsecured
loan to John Boreta, the former President of the Company due on April 10,
1997. The loan bears interest at the London Interbank Offering Rate and
accrued interest was payable annually through maturity. In March 1997, the
Company agreed to accept payment of this note in installments, initially $5
per month and increasing to $20 per month, with final payment due April 1,
2000. The note will remain subject to immediate acceleration in the event any
payment is not made as agreed. During 1997, payments totaling $61 were
received.

14. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The Company and its subsidiaries are the defendants in a number of lawsuits
and administrative proceedings, which have arisen in the ordinary course of
business of the Company and its subsidiaries. The Company believes that any
material liability which can result from any of such lawsuits or proceedings
has been properly reserved for in the Company's consolidated financial
statements or is covered by indemnification in favor of the Company or its
subsidiaries, and therefore the outcome of these lawsuits or proceedings will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.

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 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.

F-29
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997
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 with respect to its oil and gas properties. Except as
described in the following paragraphs, the Company has not recorded any
accruals for environmental costs.

In February 1996, Rostone was informed by a contracted environmental
services consulting firm that soil and ground water contamination exists at
its Lafayette, Indiana site. The Company has accrued $160 based on current
estimates of remediation costs. Certain of these costs are recoverable from
the seller of Rostone.

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 of $685 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.

Other 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 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 $85 for certain other adjustments proposed.

Operating Leases

At December 31, 1997, the Company's minimum rental commitments under
noncancellable operating leases for buildings and equipment are as follows:

<TABLE>
<S> <C>
1998............................................................... $ 732
1999............................................................... 673
2000............................................................... 606
2001............................................................... 586
2002............................................................... 499
Thereafter......................................................... 368
------
Total............................................................ $3,464
======
</TABLE>

Total rental expenses were $702, $305 and $67 in 1997, 1996 and 1995,
respectively.

F-30
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

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.

Long term notes receivable. These notes, totaling approximately $459, were
issued by individuals in private transactions with the Company. One note, for
$274, bears interest at a variable rate and is payable in monthly installments
through March 2000. The other notes, totaling $185, bear interest at 11% and
mature in January 2000. It is not practicable to estimate the fair value of
these instruments because no ready market exists for these instruments.

Long term debt. Approximately 61% of the Company's long term debt has
variable rates of interest and 33% bears interest at fixed rates approximating
current market rates. Accordingly, management estimates that the carrying
amounts approximate the fair value, approximately $22,680 at December 31, 1997
and $25,055 at December 31,1996. Approximately 6% ($1,542) of the long term
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 10%, matures in installments through February
1999, is subject to subordination to the Company's Loan Facility, and is
subject to prepayment under certain circumstances (see Note 8).

F-31
<PAGE>

REUNION INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1997

16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Results of operations by quarter for the years ended December 31, 1997 and
1996 are set forth in the following tables:

<TABLE>
<CAPTION>
1997 QUARTER ENDED
---------------------------------
MARCH 31 JUNE 30 SEPT 30 DEC 31
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating Revenue........................... $24,672 $23,471 $21,734 $23,501
Less Operating Costs and Expenses........... 23,700 23,152 20,821 23,192
------- ------- ------- -------
Operating Income.......................... 972 319 913 309
------- ------- ------- -------
Income (Loss) from continuing operations.... 295 (418) 147 (1,005)
Income from discontinued operations......... -- -- -- 710
------- ------- ------- -------
Net Income (Loss)........................... $ 295 $ (418) $ 147 $ (295)
======= ======= ======= =======
Net Income (Loss) Per Share--Basic and
Diluted.................................... $ .07 $ (.11) $ .04 $ (.07)
======= ======= ======= =======

Significant items included above which might affect comparability are as
follows:

Continuing operations:
Writedown of excess equipment............. -- -- -- (958)
Writedown of joint venture development
costs.................................... -- -- -- (855)
Discontinued operations:
Reversal of loss on disposal of
agricultural operations.................. -- -- -- 710
</TABLE>

<TABLE>
<CAPTION>
1996 QUARTER ENDED
----------------------------------
MARCH 31 JUNE 30 SEPT 30 DEC 31
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating Revenue........................... $13,952 $14,292 $14,041 $18,020
Less Operating Costs and Expenses........... 13,923 13,694 13,845 17,394
------- ------- ------- -------
Operating Income.......................... 29 598 196 626
------- ------- ------- -------
Income (Loss) from continuing operations.... (542) 15 (160) (2,007)
Loss from discontinued operations........... -- 1,248 -- (836)
------- ------- ------- -------
Net Income (Loss)........................... $ (542) $ 1,263 $ (160) (2,843)
======= ======= ======= =======
Net Income (Loss) Per Share--Basic and
Diluted ................................... $ (.14) $ .33 $ (.04) $ (.74)
======= ======= ======= =======

Significant items included above which might affect comparability are as
follows:

Continuing operations:
Adjustment of provision for severance and
exit costs............................... -- 276 -- --
Impairment of joint venture development
costs.................................... -- -- -- (1,290)
Allowance for possible denial of AMT
refund claim............................. -- -- -- (750)
Discontinued operations:
Gain on disposal of oil and gas
operations............................... -- 1,248 -- (126)
Provision for loss on disposal of
agricultural operations.................. -- -- -- (710)
</TABLE>

F-32
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENTS SCHEDULE

To the Board of Directors
of Reunion Industries, Inc.

Our audit of the consolidated financial statements referred to in our report
dated March 23, 1998 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 conjunction with the related consolidated
financial statements.

PRICE WATERHOUSE LLP

Stamford, Connecticut
March 23, 1998

S-1

<PAGE>

REUNION INDUSTRIES, INC.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS
BALANCE ----------------
BEGINNING CHARGES TO BALANCE END
OF YEAR EARNINGS OTHER DEDUCTIONS(1) OF YEAR
--------- ---------- ----- ------------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1997:
Deducted from asset
accounts:
Allowance for doubtful
accounts--trade
receivables.......... $ 434 $ 4 $ -- $ (63) $ 375
Allowance for doubtful
accounts-- other
current assets....... 317 18 -- -- 335
Reserve for excess and
obsolete inventory... 321 224 -- (33) 512
Deferred tax asset
valuation reserve.... 77,827 -- -- (449) 77,378
------- ------ ---- -------- -------
Totals.............. $78,899 $ 246 $ -- $ (545) $78,600
Year ended December 31,
1996:
Deducted from asset
accounts:
Allowance for doubtful
accounts--trade
receivables.......... $ 315 $ 9 $305(2) $ (195) $ 434
Allowance for doubtful
accounts--other
current assets....... -- 317 -- -- 317
Reserve for excess and
obsolete inventory... 138 139 184(2) (140) 321
Deferred tax asset
valuation reserve.... 76,439 1,388 -- 77,827
------- ------ ---- -------- -------
Totals.............. $76,892 $1,853 $489 $ (335) $78,899
Year ended December 31,
1995:
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $ 215 $ 36 $283(2) $ (219)(3) $ 315
Reserve for excess and
obsolete inventory... -- 49 151(2) (62) 138
Deferred tax asset
valuation reserve.... 87,838 -- -- (11,399)(3) 76,439
------- ------ ---- -------- -------
Totals.............. $88,053 $ 85 $434 $(11,680) $76,892
</TABLE>
- --------
(1) Utilization of established reserves, net of recoveries
(2) Added with the acquisition of businesses
(3) Includes balances reclassified to discontinued operations and other
accounts

S-2

<PAGE>

EXHIBIT INDEX

<TABLE>
<C> <S>
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 (No. 33-64325).
3.1 --Certificate of Incorporation of Reunion Industries, Inc. Incorporated
by reference to Exhibit 3.1 to Registration Statement on Form S-4 (No.
33-64325).
3.2 --Bylaws of Reunion Industries, Inc. Incorporated by reference to
Exhibit 3.2 to Registration Statement on Form S-4 (No. 33-64325).
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 (Registration No.
33-64325).
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.
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.
10.3 --Form of Warrants expiring June 30, 1999 to purchase an aggregate of
150,000 shares of Common Stock of Reunion Industries, Inc. Incorporated
by reference to Exhibit 10.37 to the Company's Annual Report on Form
10-K for the year ended December 31, 1992.
10.4 --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.
10.5 --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.
10.6 --Vineyard Management Agreement between Juliana Vineyards and Freedom
Vineyards, Inc. dated June 4, 1993, as amended. Incorporated by
reference to Exhibit 4.27 to the Company's Current Report on Form 8-K
dated June 25, 1993.
10.7 --Joint Venture Agreement of The Juliana Preserve, a Joint Venture dated
as of October 1, 1994. Incorporated by reference to Exhibit 10.39 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994.
10.8 --Development and Marketing Agreement by and between The Juliana
Preserve, A Joint Venture, and Juliana Pacific, Inc. dated January 1,
1995. Incorporated by reference to Exhibit 10.42 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994.
10.9 --Stock Purchase Agreement dated September 14, 1995, between Reunion
Resources Company and Chatwins Holdings, Inc. relating to the purchase
of Oneida Molded Plastics Corporation. Incorporated by reference to
Exhibit 10.44 to the Company's Current Report on Form 8-K dated
September 14, 1995.
10.10 --Letter Agreement between Chatwins Group, Inc. and Reunion Resources
Company dated September 14, 1995. Incorporated by reference to Exhibit
10.45 to the Company's Current Report on Form 8-K dated September 14,
1995.
10.11 --Stock Purchase Agreement, dated April 2, 1996, between Tribo Petroleum
Corporation and Reunion Resources Company. Incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K dated April 2,
1996.
10.12 --Subordinated Promissory Note Date 1996, made May 24, 1996 by Tri-Union
Development Corporation in favor of Reunion Industries, Inc. in the
original principal amount of $2,200,000. Incorporated by reference to
Exhibit 2.2 to the Company's Current Report on Form 8-K dated May 24,
1996.
</TABLE>

<PAGE>

<TABLE>
<C> <S>
10.13 --Pledge Agreement dated as of May 24, 1996, between Tribo Petroleum
Corporation, as pledgor, and Reunion Industries, Inc., as secured
party, covering all issued and outstanding capital stock of Tri-Union
Development Corporation. Incorporated by reference to Exhibit 2.3 to
the Company's Current Report on Form 8-K dated May 24, 1996.
10.14 --Guaranty, dated May 24, 1996, made by Tribo Petroleum Corporation in
favor of Reunion Industries, Inc. Incorporated by reference to Exhibit
2.4 to the Company's Current Report on Form 8-K dated May 24, 1996.
10.15 --Share Purchase Agreement dated October 17, 1996 between Allied Irish
Banks Holdings and Investments Limited and DPL Acquisition Corp.
Incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K dated October 17, 1996.
10.16 --Stock Purchase Agreement dated as of October 17, 1996 among Frank J.
Guzikowski, DPL Acquisition Corp., Reunion Industries, Inc., Data
Packaging International, Inc. and DPL Holdings, Inc. Incorporated by
reference to Exhibit 2.2 to the Company's Current Report on Form 8-K
dated October 17, 1996.
10.17 --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.
10.18 --Loan and Security Agreement dated February 2, 1996 between Congress
Financial Corporation as Lender and Oneida Rostone Corp. and Oneida
Molded Plastics Corp. of North Carolina as borrowers. Incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the Period Ended September 30, 1996.
10.19 --Amendment No. 1 to Loan and Security Agreement dated October 21, 1996
modifying original Loan and Security Agreement dated February 2, 1996
between Congress Financial Corporation as Lender and Oneida Rostone
Corp. and Oneida Molded Plastics Corp. of North Carolina as borrowers.
Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the Period Ended September 30, 1996.
10.20 --Amendment No. 2 to Loan and Security Agreement dated November 18, 1996
modifying original Loan and Security Agreement dated February 2, 1996
between Congress Financial Corporation as Lender and Oneida Rostone
Corp. and Oneida Molded Plastics, Corp. of North Carolina as Borrowers.
Incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K dated November 18, 1996.
10.21 --Amendment No. 3 to Loan and Security Agreement dated December 31, 1996
modifying original Loan and Security Agreement dated February 2, 1996
between Congress Financial Corporation as Lender and Oneida Rostone
Corp. and Oneida Molded Plastics, Corp. of North Carolina as Borrowers.
Incorporated by reference to Exhibit 10.23 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
10.22 --Employment Agreement effective January 1, 1995 between Oneida Molded
Plastics Corporation as Employer and David N. Harrington as Employee.
Incorporated by reference to Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
11.1 --Computation of Earnings Per Share.*
21.1 --List of subsidiaries and jurisdictions of organization.*
23.1 --Consent of Independent Public Accountants--Price Waterhouse LLP.*
23.2 --Consent of Independent Public Accountants--Arthur Andersen LLP.*
23.2 --Consent of Prudential Securities Incorporated. Incorporated by
reference to Exhibit 23.2 to the Company's Registration Statement on
Form S-4 (No. 33-64325).
27 --Financial Data Schedule*
99.1 --Opinion of Arthur Andersen LLP, dated March 27, 1996.*
</TABLE>
- --------
* Filed herewith

<PAGE>

Exhibit 11.1

REUNION INDUSTRIES, INC.

COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER DATA)

<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
Income (loss) from continuing
operations (981) (2,694) (3,581)

Income (loss) from discontinued
operations 710 412 (10,389)
------- ------- --------
Net income (loss) $ (271) $(2,282) $(13,970)
======= ======= ========
Weighted average common shares
outstanding 3,855 3,855 3,855

Net additional shares outstanding
assuming all stock options exercised
using the Treasury Stock Method (a) - - -
------ ------ ------
Average common shares and
common share equivalents
outstanding 3,855 3,855 3,855
====== ====== ======
Net income (loss) per common
share and common share equivalent:

Income (loss) from continuing
operations $ (.25) $ (.70) $ (.93)

Income (loss) from discontinued
operations .18 .11 $(2.72)
------ ------ ------
Net income (loss) $ (.07) $ (.59) $(3.65)
====== ====== ======
</TABLE>
Notes:

(a) The 1997, 1996 and 1995 computation of common share equivalents excludes
anti-dilutive shares.

<PAGE>

EXHIBIT 21.1

REUNION INDUSTRIES, INC.
SUBSIDIARIES AS OF DECEMBER 31, 1997

Company Incorporated Parent
------- ------------ ------
<S> <C> <C> <C> <C>
1 Reunion Industries, Inc. Delaware
2 Oneida Rostone Corp. New York 1
3 DPL Acquisition Corp. Delaware 2
4 Data Packaging Holdings Limited Ireland 3 (95.5%)
5 Data Packaging Limited Bermuda 4
6 Data Packaging Limited Ireland 4
7 Juliana Vineyards California 1
8 Crescent Farms Company Texas 1
9 The Juliana Preserve, a California
Partnership California 7,8 (71.7%)
10 Juliana Preserve Operating Company California 9
11 Buttes Drilling-C Company Texas 1
12 Reunion Titan, Inc. Texas 11
13 Reunion Potash Company Delaware 1

INACTIVE COMPANIES
------------------
14 Buttes Farms California 1
15 Buttes Resources Canada, Ltd. Delaware 1
16 Buttes Resources International, Inc. Delaware 1
17 Northern Enterprises, Ltd. Nevada 1
18 Ocean Phoenix Transport, Inc. District of Columbia 1
19 Reunion Sub I Inc. Delaware 1
20 Reunion Sub II Inc. Delaware 1
21 Reunion Sub III Inc. Delaware 1
22 Asie-Dolphin Drilling SDN BHD Malaysia 11 (49%)
23 Buttes Gas & Oil do Brasil, Ltda. Brazil 1 (49%)
24 Dolphin Titan (Malaysia) SDN BHD Malaysia 11
25 Dolphin Titan do Brazil Servicos
de Perfuracoes, Ltd. Brazil 11
26 Monaco Corporation British Virgin Is. 11
27 Ocean Phoenix Holdings, N. V. Netherlands Antilles 1
28 Progress Drilling International, Inc. Panama 11
29 Progress Perfuracoes do Brasil, Ltd. Brazil 28

</TABLE>

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 33-77566) and
the incorporation by reference in the Registration Statement on Form S-8 (No.
33-77232) of Reunion Industries, Inc. of our report dated March 23, 1998
appearing on page F-2 of this Form 10-K. We also consent to the incorporation
by reference of our report on the Financial Statement Schedule, which appears on
page S-1 of this Form 10-K.

/s/ PRICE WATERHOUSE LLP
- -----------------------------
Price Waterhouse LLP

Stanford, Connecticut
March 23, 1998

<PAGE>

EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our report on the combined financial statements of Reunion Energy Company and
Reunion Operating Company (the company) dated March 27, 1996 included in this
Form 10-K, into Reunion Industries, Inc.'s previously filed Registration
Statements on Form S-3 (No. 33-77566) and Form S-8 (No. 33-77232). It should
be noted that we have not audited any financial statements of the company
subsequent to December 31, 1995 or performed any audit procedures subsequent
to the date of our report.

ARTHUR ANDERSEN LLP

Houston, Texas
March 24, 1998

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED 12/31/97 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,085
<SECURITIES> 0
<RECEIVABLES> 12,659
<ALLOWANCES> 375
<INVENTORY> 7,570
<CURRENT-ASSETS> 24,207
<PP&E> 39,520
<DEPRECIATION> 4,227
<TOTAL-ASSETS> 72,059
<CURRENT-LIABILITIES> 28,034
<BONDS> 12,654
0
0
<COMMON> 38
<OTHER-SE> 28,279
<TOTAL-LIABILITY-AND-EQUITY> 72,059
<SALES> 93,378
<TOTAL-REVENUES> 93,378
<CGS> 78,871
<TOTAL-COSTS> 79,829
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,267
<INCOME-PRETAX> (895)
<INCOME-TAX> 86
<INCOME-CONTINUING> (981)
<DISCONTINUED> 710
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (271)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)

</TABLE>

<PAGE>

EXHIBIT 99.1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of Reunion Energy Company and
Reunion Operating Company:

We have audited the combined statement of assets and liabilities directly
attributable to oil and gas operations (See Note 1) of Reunion Energy Company
and Reunion Operating Company (both Delaware corporations and collectively
referred to as "the Company") as of December 31, 1995, and the related
combined statements of revenues and expenses and cash flows for the year then
ended. 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 audit.

The accompanying financial statements omit those assets and liabilities and
revenues and expenses of the Company that are not directly attributable to its
oil and gas operations. Therefore, these financial statements are not intended
to be a complete presentation of the Company's assets and liabilities and
revenues and expenses.

We conducted our audit in accordance with generally accepted auditing
standards. 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 assets and liabilities directly attributable to
oil and gas operations of Reunion Energy Company and Reunion Operating Company
as of December 31, 1995, and their related revenues and expenses and cash
flows for the year then ended, in conformity with generally accepted
accounting principles.

Arthur Andersen LLP

Houston, Texas
March 27, 1996