<PAGE>
As filed with the Securities and Exchange Commission on March , 1999
Registration No. 333-56153
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Post-Effective Amendment No. 1
to
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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REUNION INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware 3089 06-1439715
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction Classification Code Number) Identification No.)
of Incorporation or
Organization)
One Stamford Landing
62 Southfield Avenue
Stamford, Connecticut 06902
(203) 324-8858
(Address, including ZIP code, and telephone number, including area code, of
Registrant's Principal Executive Offices)
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Name, address, including ZIP code, and telephone number, including area code,
of Agent for Service:
Richard L. Evans Copies to:
Reunion Industries, Inc. Herbert B. Conner, Esq.
One Stamford Landing Stephen W. Johnson, Esq.
62 Southfield Avenue Buchanan Ingersoll
Stamford, Connecticut 06902 Professional Corporation
(203) 324-8858 One Oxford Centre
301 Grant Street, 20th Floor
Pittsburgh, Pennsylvania 15219
(412) 562-8800
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Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective time of the merger described
in this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Proposed Maximum Amount of
Title of Each Class of Amount to be Maximum Offering Aggregate Offering Registration
Securities to be Registered Registered(1)(2) Price Per Unit(2) Price(2) Fee(3)(4)
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<S> <C> <C> <C> <C>
Common Stock, par value
$.01................... 9,000,000 shares Not Applicable Not Applicable $0.24
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</TABLE>
(1) This Post-Effective Amendment No. 1 amends the Registrant's Registration
Statement on Form S-4, as amended (Registration No. 333-56153) filed on
June 26, 1998, and includes additional material information regarding the
merger of Chatwins Group, Inc. into the Registrant.
(2) Represents the maximum number of shares to be issued in connection with the
merger. Estimated solely for the purpose of calculating the registration
fee.
(3) Pursuant to Rule 457(f)(2), the registration fee is computed on the basis
of one-third of the aggregate par value of the capital stock of Chatwins
Group to be cancelled in the Merger, Chatwins Group having an accumulated
capital deficit. The calculation of the registration fee is as follows:
(.000295) x ( 1/3 of $2,474.46).
(4) Previously paid.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
REUNION INDUSTRIES, INC.
One Stamford Landing
62 Southfield Avenue
Stamford, CT 06902
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 8, 1999
To the Stockholders of Reunion
Industries, Inc.:
NOTICE IS HEREBY GIVEN that the annual meeting of stockholders of REUNION
INDUSTRIES, INC., a Delaware corporation ("Reunion Industries"), will be held
at the Holiday Inn Select Stamford, 700 Main Street, Stamford, Connecticut, at
10:00 a.m., local time, on June 8, 1999, for the following purposes:
1. To consider and act upon a proposal to approve the merger agreement,
dated as of March 30, 1999 between Reunion Industries and Chatwins Group,
Inc., a Delaware corporation that currently owns approximately 38% of
Reunion Industries' outstanding common stock ("Chatwins Group"). The merger
agreement provides, among other things, for (i) Chatwins Group to be merged
with and into Reunion Industries, (ii) the conversion of the common stock
of Chatwins Group outstanding immediately prior to the merger into the
right to receive an aggregate of 8,500,000 shares of Reunion Industries
common stock plus up to an additional 500,000 shares of Reunion Industries
common stock if Chatwins Group and certain other business units achieve
specified performance levels in 1999, and (iii) the conversion of the
outstanding preferred stock of Chatwins Group into preferred stock of
Reunion Industries;
2. To elect six directors to the Board of Directors of Reunion
Industries; and
3. To transact such other business as may properly come before the
meeting.
The Board of Directors of Reunion Industries has fixed the close of business
on April 23, 1999, as the record date for the determination of stockholders of
Reunion Industries entitled to notice of and to vote at the annual meeting and
at any adjournment thereof. Only holders of record on such date will be
entitled to vote at the annual meeting. A copy of the proxy
statement/prospectus relating to the annual meeting and a form of proxy is
being provided to you along with this notice. The proxy statement/prospectus
also describes the manner in which the shares of Reunion Industries' common
stock will be issued to the stockholders of Chatwins Group in connection with
the merger.
You are urged to read the attached material carefully. It is important that
your shares be represented at the Reunion Industries annual meeting. Whether or
not you plan to attend the annual meeting, you are requested to complete, date,
sign and return the enclosed proxy card promptly in the enclosed pre-addressed
and postage-paid envelope so that it will be received no later than June 3,
1999. If you attend the annual meeting, you may vote in person if you wish,
even though you have previously returned your proxy. Action may be taken on any
of the above items at the annual meeting or on any date to which the annual
meeting has been adjourned or postponed.
PLEASE COMPLETE, DATE, SIGN AND MAIL THE ENCLOSED PROXY IN THE ACCOMPANYING
RETURN ADDRESSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED
STATES. IF YOU LATER DESIRE TO REVOKE OR CHANGE YOUR PROXY FOR ANY REASON, YOU
MAY DO SO AT ANY TIME BEFORE THE ANNUAL MEETING BY DELIVERING TO REUNION
INDUSTRIES A WRITTEN NOTICE OF REVOCATION OR A DULY EXECUTED PROXY BEARING A
LATER DATE OR BY ATTENDING THE ANNUAL MEETING AND VOTING IN PERSON.
By Order of the Board of Directors,
Richard L. Evans
Secretary
Stamford, Connecticut
April , 1999
<PAGE>
REUNION INDUSTRIES, INC.
One Stamford Landing
62 Southfield Avenue
Stamford, Connecticut 06902
PROXY STATEMENT/PROSPECTUS
for the Annual Meeting of Stockholders of Reunion Industries, Inc.
to be held June 8, 1999
and
for the issuance of up to
9,000,000 shares of Reunion Industries, Inc. Common Stock, Par Value $.01 Per
Share,
in the Merger of
Chatwins Group, Inc. into Reunion Industries, Inc.
This proxy statement/prospectus constitutes (i) a proxy statement, by which
the Board of Directors of Reunion Industries is soliciting proxies for the
Reunion Industries annual meeting of stockholders to be held at the Holiday Inn
Select Stamford, 700 Main Street, Stamford, Connecticut, at 10:00 a.m., local
time, on June 8, 1999, and (ii) a prospectus for the issuance of up to
9,000,000 shares of Reunion Industries common stock in the merger of Chatwins
Group, Inc. into Reunion Industries.
This proxy statement/prospectus also constitutes notice to Chatwins Group
stockholders of appraisal rights with respect to the merger pursuant to Section
262 of the Delaware General Corporation Law.
This proxy statement/prospectus is first being mailed to stockholders of
Reunion Industries on or about April , 1999.
The information in this proxy statement/prospectus is not complete and may
be changed. Reunion Industries may not issue the Reunion Industries common
stock in the merger until the registration statement filed with the Securities
and Exchange Commission is effective. This proxy statement/prospectus is not an
offer to sell such securities and it is not soliciting an offer to buy such
securities in any state where the offer or sale is not permitted.
The common stock of Reunion Industries is listed for quotation on the NASDAQ
Small-Cap Market under the symbol "RUNI" and traded on the Pacific Exchange,
Inc. under the symbol "RUN."
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the Reunion Industries common stock to
be issued in the merger or determined if this proxy statement/prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Consider carefully the risk factors beginning on page 16 in this proxy
statement/prospectus.
The date of this proxy statement/prospectus is , 1999.
<PAGE>
PROXY STATEMENT/PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Description Number
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER.................................. 1
SUMMARY................................................................. 3
RISK FACTORS............................................................ 16
THE ANNUAL MEETING...................................................... 22
PROPOSAL 1: THE MERGER.................................................. 24
OTHER MERGER-RELATED MATTERS.......................................... 57
DESCRIPTION OF CAPITAL STOCK; DIVIDENDS; TRANSFER AGENT............... 62
COMPARATIVE RIGHTS OF SECURITY HOLDERS................................ 64
MERGER-RELATED TRANSACTIONS........................................... 66
INTERESTS OF CERTAIN PERSONS IN THE MERGER............................ 68
LEGAL MATTERS......................................................... 70
REUNION INDUSTRIES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.......................... 71
REUNION INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.......................... 74
INFORMATION ABOUT REUNION INDUSTRIES.................................. 77
INFORMATION ABOUT CHATWINS GROUP...................................... 95
OWNERSHIP INFORMATION................................................. 116
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND MATERIAL CONTACTS
WITH THE COMPANY BEING ACQUIRED...................................... 118
PROPOSAL 2: THE ELECTION OF DIRECTORS................................... 125
EXPERTS................................................................. 134
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.............................. F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS...................... F-2
REUNION INDUSTRIES, INC. FINANCIAL STATEMENTS AND NOTES................. F-3
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS...................... F-35
CHATWINS GROUP, INC. FINANCIAL STATEMENTS AND NOTES..................... F-36
ANNEX A--MERGER AGREEMENT DATED AS OF MARCH 30, 1999 BETWEEN REUNION
INDUSTRIES, INC. AND CHATWINS GROUP, INC............................... A-1
ANNEX B--OPINION DATED MARCH 30, 1999 OF LEGG MASON WOOD WALKER,
INCORPORATED, TO THE BOARD OF DIRECTORS OF REUNION INDUSTRIES, INC..... B-1
ANNEX C--DELAWARE GENERAL CORPORATION LAW SECTION 262:
APPRAISAL RIGHTS....................................................... C-1
</TABLE>
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
PROPOSAL 1: THE MERGER
Q: What is the merger?
A: Reunion Industries and Chatwins Group, Inc. have agreed to merge. In the
merger:
. the outstanding common stock of Chatwins Group will be converted into a
total of 8,500,000 shares of Reunion Industries common stock, plus up to
an additional 500,000 shares of Reunion Industries common stock if
Chatwins Group and certain other business units achieve specified
performance levels in 1999
. the preferred stock of Chatwins Group outstanding will be converted into
Reunion Industries 10% redeemable Series A preferred stock with an
aggregate initial redemption price of $8.7 million, assuming that the
merger occurs on June 29, 1999
The merger agreement, which is the legal document governing the merger, is
attached as Annex A.
Q: What will happen to outstanding shares of Reunion Industries common stock in
the merger?
A: Except for shares of Reunion Industries common stock and warrants to
purchase common stock held by Chatwins Group, which will be retired,
currently outstanding shares of Reunion Industries common stock will remain
outstanding after and will be unaffected by the merger. After the merger:
. shares of Reunion Industries common stock will reflect the combined assets
and businesses of Reunion Industries and Chatwins Group
. former stockholders of Chatwins Group will own approximately 78% of the
outstanding shares of Reunion Industries common stock
The Reunion Industries preferred stock issued in the merger and in a related
acquisition will be senior to the Reunion Industries common stock.
Q: What vote is required to approve the merger?
A: Under Delaware law, the merger agreement must be approved by a majority of
the [3,900,065] shares of Reunion Industries common stock outstanding in
order for the merger to occur. Directors and executive officers of Reunion
Industries and their affiliates, including Chatwins Group, who we expect to
vote in favor of the merger agreement, own [1,887,455] shares, or [48.4]%,
of Reunion Industries common stock.
The merger agreement has already been approved by the holders of a majority
of the Chatwins Group common stock outstanding, as required for the merger to
occur.
Q: Is the merger taxable?
A: Reunion Industries expects the merger to be tax free. The merger is
structured so that neither Chatwins Group stockholders nor Reunion
Industries stockholders should recognize any gain or loss for U.S. federal
income tax purposes in the merger, except with respect to any cash that the
Chatwins Group stockholders will receive in lieu of fractional shares.
Q: Are Reunion Industries stockholders entitled to appraisal rights?
A: No. Under Delaware law, holders of Reunion Industries common stock are not
entitled to appraisal rights in connection with the merger.
Q: Are Chatwins Group stockholders entitled to appraisal rights?
A: Yes. Under Delaware law, holders of Chatwins Group common stock have the
right to demand payment of the "fair value" of their shares, as determined
by a court, in cash. It is a condition of the merger that the holders of not
more than 5% of Chatwins Group common stock exercise their appraisal rights.
To exercise your appraisal rights you must carefully follow the procedures
described in this proxy statement/prospectus.
Q: When do you expect to complete the merger?
A: We expect to complete the merger late in the second quarter of 1999.
However, we cannot predict the exact timing of the merger because it is
subject to certain conditions, including Reunion Industries having obtained
certain financing.
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Q: How do Reunion Industries stockholders vote?
A: To vote, mail your signed proxy card in the enclosed return envelope as
soon as possible so that your shares will be represented at the annual
meeting. You may also vote in person at the annual meeting.
Q: Can I change my vote?
A: Yes. You may change your vote by delivering a later-dated, signed proxy
card to Reunion Industries' corporate secretary before the annual meeting,
or by attending the annual meeting and voting in person.
Q: Whom can I call with questions?
A: If you have any questions about the merger or the annual meeting, please
call Richard L. Evans, Secretary, Reunion Industries, at (203) 324-8858.
2
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SUMMARY
This summary highlights selected information from this proxy
statement/prospectus, and may not contain all of the information that is
important to you. To better understand the merger and to obtain a more complete
description of the legal terms of this transaction, you should read this entire
document carefully. See also "Where You Can Find More Information" on page 14.
The Annual Meeting (see page 22)
The annual meeting of the Reunion Industries stockholders will be held on
June 8, 1999, at 10:00 a.m. local time at the Holiday Inn Select Stamford,
Stamford, Connecticut.
The record date for the Reunion Industries stockholders entitled to receive
notice of and to vote at the Reunion Industries annual meeting is the close of
business on April 23, 1999. On that date, there were [3,900,065] shares of
Reunion Industries common stock outstanding.
The purpose of the annual meeting is:
. to approve the merger agreement
. to elect six directors to the Board of Directors
. to take action on any other matters properly brought before the meeting
The Companies
Reunion Industries, Inc. One
Stamford Landing 62 Southfield
Avenue Stamford, Connecticut 06902
(203) 324-8858
Reunion Industries manufactures high volume, precision plastic products and
provides engineered plastics services through its wholly-owned subsidiary,
Oneida Rostone Corp. ("ORC") . ORC designs and produces injection molded parts
and provides secondary services such as hot stamping, welding, printing,
painting and assembly of such products. In addition, ORC designs and builds
custom molds at its tool shops to produce component parts for specific
customers. ORC also compounds and molds thermoset polyester resins. ORC's
products are primarily sold to original equipment manufacturers.
Reunion Industries is also engaged in wine grape agricultural operations in
Napa County, California.
Chatwins Group, Inc. 300 Weyman
Plaza Suite 340 Pittsburgh,
Pennsylvania 15236 (412) 885-5501
Chatwins Group designs, manufactures and markets a broad range of fabricated
and machined metal industrial parts and products through its six manufacturing
divisions:
. ""CP Industries" produces large, seamless pressure vessels for highly
pressurized gases
. ""Klemp'' produces high quality steel and aluminum grating
. ""Hanna'' produces industrial hydraulic and pneumatic cylinders
. ""Alliance Machine" produces industrial cranes and large mill equipment
. ""Steelcraft'' produces cold-rolled steel leaf springs
. ""Auto-Lok" produces high quality roll formed storage racks
These products are primarily sold to original equipment manufacturers and
end-users in a variety of industries.
The Merger (see page 24)
The proposed merger involves the following:
. Chatwins Group will merge with and into Reunion Industries and its
independent corporate existence will cease
. the common stock of Chatwins Group outstanding prior to the merger will
be
3
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converted into the right to receive a total of 8,500,000 shares of
Reunion Industries common stock plus up to an additional 500,000 shares
of Reunion Industries common stock if Chatwins Group and two business
units--King-Way and NAPTech--being acquired by Reunion Industries as
described below, achieve specified performance levels in 1999
. shares of Chatwins Group preferred stock outstanding immediately prior to
the merger will be converted into the right to receive new Reunion
Industries 10% redeemable Series A preferred stock, having an aggregate
initial redemption price of $8.7 million assuming the merger occurs on
June 29, 1999
. the Reunion Industries common stock currently held by Chatwins Group will
be retired
. after the merger, the former stockholders of Chatwins Group will own
approximately 78% of Reunion Industries common stock
Reunion Industries' Reasons for the Merger (see page 27)
The Board of Reunion Industries has determined that the merger provides
Reunion Industries with the opportunity to combine with Chatwins Group on terms
that are fair from a financial point of view to Reunion Industries and its
stockholders other than Chatwins Group. This determination is supported by an
opinion letter of Legg Mason Wood Walker, Incorporated which is described
below. The Board believes that the merger will, among other things:
. strengthen Reunion Industries' financial condition and make additional
financing more feasible
. be accretive to Reunion Industries' earnings on a pro forma and projected
basis
. permit Reunion Industries to broaden its strategic focus
. increase the net operating loss carryforwards that Reunion Industries
will be able to utilize before they expire
Importantly, as to the first point, based on discussions with its financial
advisor in connection with the high-yield debt offering referred to below,
management believes that the merger will make obtaining additional financing
more feasible. Without additional financing, management believes that Reunion
Industries will not have sufficient liquidity to meet its cash obligations as
they become due over the next 12 months. As discussed more fully below,
completion of the merger is a condition to the completion of a proposed $100
million high-yield debt offering and a refinancing transaction by Reunion
Industries. See "--High-Yield Debt Offering" and "--Refinancing Transaction."
Opinion of Reunion Industries' Financial Advisor (see page 28)
Reunion Industries' financial advisor with respect to the merger, Legg Mason
Wood Walker, Incorporated, has given a written opinion to Reunion Industries'
Board of Directors that, as of March 26, 1999, the consideration to be paid in
the merger is fair from a financial point of view to Reunion Industries and its
stockholders other than Chatwins Group. The opinion is subject to the
qualifications and limitations referred to in the opinion. This opinion is
attached to this proxy statement/prospectus as Annex B and we encourage you to
read it carefully.
Chatwins Group Reasons for the Merger (see page 41)
The Board of Chatwins Group has determined that the merger is in the best
interests of Chatwins Group. The Board believes that the merger will, among
other things:
. make borrowing less expensive and less restrictive
. provide Chatwins Group stockholders with the liquidity of a publicly-
traded stock
. give Chatwins Group the opportunity to shelter a portion of its future
earnings from
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taxation by using Reunion Industries' net operating loss carryforwards
The Chatwins Group Board determined that the terms of the merger by which
these benefits will be realized are fair to and in the best interests of
Chatwins Group and its stockholders.
Terms of the Merger Agreement (see page 42)
The merger agreement between Reunion Industries and Chatwins Group, which is
the legal document that governs the merger, is attached as Annex A. We
encourage you to read this document. Reunion Industries has also filed with the
Securities and Exchange Commission other related documents as exhibits to its
registration statement. Please see the section titled "Where You Can Find More
Information," on page 12, for instructions on how to obtain copies of those
exhibits.
Merger Consideration
The consideration Reunion Industries will pay in the merger is set forth
above, immediately under the section titled "--The Proposed Merger."
Conditions to Consummation of the Merger (see page 46)
Reunion Industries will complete the merger only if certain conditions are
satisfied or waived, including the following:
. approval of the merger agreement by the stockholders of Reunion
Industries and Chatwins Group and the exercise of dissenters rights by
the holders of not more than 5.0% of Chatwins Group common stock
. receipt of a fairness opinion by the Board of Reunion Industries, a
condition which has been satisfied
. there having occurred no material adverse change in the business,
financial condition or results of operations of Reunion Industries or
Chatwins Group
. Chatwins Group having caused all of its outstanding warrants either to be
converted into common stock or to terminate
. Reunion Industries having obtained financing sufficient to redeem
Chatwins Group's $50 million 13% Senior Notes and to provide adequate
working capital after the merger
Termination (see page 47)
The merger agreement may be terminated in the following circumstances:
. by mutual consent of Reunion Industries and Chatwins Group
. by Reunion Industries or Chatwins Group at any time if for any reason the
merger shall not have been consummated within 120 days after the date of
the merger agreement and the failure to consummate the merger is not
caused by a breach of the merger agreement by the terminating party
. by Reunion Industries if there has been a misrepresentation or breach on
the part of Chatwins Group in its representations, warranties and
covenants which has not been cured or waived
. by Chatwins Group if there has been a misrepresentation or breach on the
part of Reunion Industries in its representations, warranties and
covenants which has not been cured or waived
. by either party if any court of competent jurisdiction or other competent
governmental or regulatory authority shall have issued a nonappealable
order restricting, preventing or otherwise prohibiting the merger
Amendment or Extension (see page 47)
Consistent with Delaware law, the merger agreement provides that Reunion
Industries and Chatwins Group may, by mutual agreement, amend, modify,
supplement, extend or abandon the merger agreement at any time prior to the
effective time of the merger, even following stockholder approval. The merger
agreement permits the boards of directors of Reunion Industries and Chatwins
Group to amend the merger agreement after stockholder
5
<PAGE>
approval, if the amendment does not (i) alter or change the amount or kind of
merger consideration received, (ii) alter or change any term of the certificate
of incorporation of Reunion Industries, or (iii) alter or change any of the
terms and conditions of the merger agreement if such change would adversely
affect the holders of any class or series of securities held by such
stockholders.
Accounting Treatment (see page 60)
Reunion Industries will account for the merger as a purchase under APB
Opinion No. 16, "Business Combinations." Chatwins Group will be the acquirer
for purposes of applying purchase accounting to the merger, and, therefore,
Chatwins Group's assets and liabilities will continue to be carried at their
historical book values after the merger, and 62% of Reunion Industries' assets
and liabilities (representing the percentage of Reunion Industries common stock
not currently owned by Chatwins Group) will be revalued at the time of the
merger with the excess of (i) the "purchase price" of the merger over (ii) the
fair value of 62% of Reunion Industries' assets and liabilities designated as
goodwill to be amortized by Reunion Industries over fifteen years.
Post-Merger Board of Directors (see page 53)
The merger agreement provides that, upon completion of the merger, Reunion
Industries will increase the number of directors on its Board by two and that
Chatwins Group will designate the persons to fill these positions.
Federal Income Tax Consequences (see page 57)
Reunion Industries expects the merger to qualify as a tax-free
reorganization for federal income tax purposes, so no gain or loss will be
recognized by Chatwins Group stockholders or Reunion Industries stockholders in
the merger, except to the extent that Chatwins Group stockholders receive cash
for fractional share interests. Neither Reunion Industries nor Chatwins Group
has requested a ruling from the Internal Revenue Service with respect to the
federal income tax consequences of the merger.
Appraisal Rights (see page 48)
Under Delaware law:
. holders of Reunion Industries common stock will not have appraisal rights
in connection with the merger
. holders of Chatwins Group common stock have the right to demand payment
of fair value for their shares, in cash, as determined by a court, in
lieu of the Reunion Industries common stock they are entitled to receive
in the merger
It is a condition to the merger that the holders of not more than 5% of
Chatwins Group common stock exercise appraisal rights. This condition may be
waived by Reunion Industries and Chatwins Group. Chatwins Group stockholders
who desire to exercise their appraisal rights must carefully follow the
procedures described in this proxy statement/prospectus.
Stock Listing
Reunion Industries' common stock will continue to be listed on the Pacific
Exchange and NASDAQ Small Cap Market after the merger.
High-Yield Debt Offering
Concurrent with the solicitation of proxies for approval of the merger at
the annual meeting, Reunion Industries is pursuing an offering of up to $100
million of senior unsecured notes which are expected to carry an interest rate
of 10 3/4% to 11 3/4% per annum, or higher, and to be due in 10 years.
Completion of the merger and the acquisitions of King-Way and NAPTech are
effectively conditions to completion of that offering as currently
contemplated. The proceeds of the offering will be used (i) to redeem Chatwins
Group's $50 million 13% Senior Notes, the redemption of which is a condition to
the merger, and (ii) to refinance a portion of Reunion Industries' bank debt
and the indebtedness assumed by Reunion Industries in connection with the
acquisitions of King-Way and NAPTech, described below.
This proxy statement/prospectus is not an offer of those notes. The notes to
be offered will not be registered under the securities laws and may not be
offered or sold in the U.S. absent registration or an exemption from
registration.
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There is no assurance that Reunion Industries will be able to consummate this
high-yield debt offering on favorable terms or at all. This possible
transaction is sometimes referred to in this proxy statement/prospectus as the
"high-yield debt offering."
Refinancing Transaction (see page 66)
Reunion Industries currently anticipates that on or about the effective time
of the merger, it will enter into senior secured credit facilities totaling up
to $70.0 million with Bank of America Business Credit. These credit facilities
are expected to have three components: (i) a $50.0 million revolving credit
facility, (ii) a $15.0 million term loan facility amortizing in 28 quarterly
principal payments, and (iii) a $5.0 million capital expenditure term facility
amortizing in 20 quarterly principal payments. These three facilities have a
three-year initial term and automatically renew for additional one-year
increments unless either party gives the other notice of termination prior to
the beginning of the next one-year term.
Reunion Industries will be required to pay certain closing, commitment and
agent fees in connection with these credit facilities. These credit facilities
will be secured by a first priority lien on substantially all of the assets of
Reunion Industries (which, after the merger, will include the assets of
Chatwins Group).
There is no assurance that Reunion Industries will be able to complete this
refinancing transaction on favorable terms or at all. This possible refinancing
transaction is sometimes referred to in this proxy statement/prospectus as the
"refinancing transaction."
King-Way Acquisition
Reunion Industries has entered into a merger agreement dated as of March 30,
1999 providing for the acquisition of Stanwich Acquisition Corp., which does
business as King-Way Material Handling Company ("King-Way"). King-Way is a
materials handling company that is expected to be combined with the Auto-Lok
division of Chatwins Group after the merger. For the year ended December 31,
1998, King-Way had total sales of approximately $17.5 million. At December 31,
1998, King-Way had total assets of approximately $20.8 million. In the
acquisition, Reunion Industries will:
. pay $100,000 in cash in exchange for the common stock of King-Way
. issue shares of new Reunion Industries Series B preferred stock in
exchange for shares of King-Way preferred stock
. assume approximately $13.8 million of King-Way indebtedness, which
indebtedness was incurred or replaces indebtedness that was incurred in
connection with the acquisition of King-Way by its current owners
The new Series B preferred stock will be redeemable for $5,000,000 (plus
accrued but unpaid dividends), will accrue a cumulative annual dividend of 15%
on $5,000,000 ($1.2 million of dividends will have been deemed accrued at the
time of issuance), will be senior as to dividends to shares of Reunion
Industries common stock and Series A preferred stock and, as to assets upon
liquidation, will be junior in right of payment to the Series A preferred stock
and senior in right of payment to the common stock.
Completion of the merger between Reunion Industries and Chatwins Group and
the high-yield debt offering as presently contemplated are conditions to
completion of the King-Way acquisition. Reunion Industries stockholder approval
is not required for the King-Way acquisition. There is no assurance that
Reunion Industries will be able to successfully complete the King-Way
acquisition.
Mr. Charles E. Bradley, Sr., who is the President and Chief Executive
Officer and, after the merger is expected to become the Chairman of Reunion
Industries, owns 42.5% of the common stock of King-Way. His son, Mr. Kimball
Bradley, who is expected to become Executive Vice President of Reunion
Industries effective upon the merger, owns 42.5% of the common stock of King-
Way and Mr. Richard L. Evans, Executive Vice President, Chief Financial Officer
and Secretary of Reunion Industries, owns 15% of the common stock of King-
7
<PAGE>
Way. Stanwich Financial Services is the holder of $7.6 million of debt and 100%
of the preferred stock of King-Way and will be the owner of the Reunion
Industries Series B preferred stock after the King-Way acquisition. Mr. Charles
E. Bradley, Sr. owns 42.5% of the common stock of Stanwich Holdings, Inc., the
parent of Stanwich Financial Services Corp.; Mr. Charles E. Bradley, Jr. owns
42.5% of the common stock of Stanwich Holdings; and Mr. John G. Poole, who is a
director and is expected to become the Vice-Chairman of Reunion Industries,
owns 7.5% of the common stock of Stanwich Holdings. See also "--Interests of
Certain Persons in the Merger."
Based on a number of factors, including (i) the importance of the King-Way
acquisition to the high-yield debt offering as presently contemplated, (ii) the
fact that the proposed purchase price represents only a small premium over the
purchase price paid for King-Way by the current owners plus their carrying
costs, and (iii) the advice of an independent financial advisor, the Board of
Directors of Reunion Industries (including, by separate vote, the independent
directors with respect to the transaction, consisting of Messrs. Amonett,
Cassidy, Clerihue, Myers and Poole) determined the transaction to be in the
best interests of Reunion Industries and its stockholders and unanimously
approved the agreement providing for the King-Way acquisition.
NAPTech Acquisition
Reunion Industries has entered into a merger agreement dated as of March 30,
1999 for the acquisition of NPS Acquisition Corp., doing business as NAPTech
Pressure Systems ("NAPTech"). NAPTech manufactures seamless steel pressure
vessels and is expected to be combined with the CP Industries division of
Chatwins Group after the merger. For the year ended December 31, 1998, NAPTech
had total sales of approximately $6.2 million. At December 31, 1998, NAPTech
had total assets of approximately $9.0 million.
In the acquisition, Reunion Industries will:
. pay $10,000 in exchange for the common stock of NAPTech
. assume approximately $7.4 million of indebtedness of NAPTech incurred in
connection with the acquisition of NAPTech by its present owner
Completion of the merger between Reunion Industries and Chatwins Group and
the high-yield debt offering referred to above are conditions to the completion
of the NAPTech acquisition. Reunion Industries' stockholder approval is not
required for the NAPTech acquisition. There is no assurance that Reunion
Industries will be able to successfully complete the NAPTech acquisition.
Mr. Charles E. Bradley, Sr. owns all of the common stock of NAPTech and is
the guarantor on the indebtedness that will be assumed by Reunion Industries in
the acquisition. Mr. Bradley will receive all of the consideration paid by
Reunion Industries for NAPTech plus a fee of $90,000 for the personal guaranty
he gave for the acquisition indebtedness. See also "--Interests of Certain
Persons in the Merger."
Based on a number of factors, including (i) the fact that the proposed
purchase price represents only a small premium over the purchase price paid for
NAPTech by the current owner, and (ii) the advice of an independent financial
advisor, the Board of Directors of Reunion Industries (including, by separate
vote, the independent directors with respect to the transaction, consisting of
Messrs. Amonett, Cassidy, Clerihue, Myers and Poole) determined the transaction
to be in the best interests of Reunion Industries and its stockholders and
unanimously approved the agreement providing for the NAPTech acquistion.
Interests of Certain Persons in the Merger (see page 68)
Certain relationships between the directors, officers and stockholders of
Reunion Industries and Chatwins Group could raise the question of conflicts of
interest in the negotiation of the terms and conditions of the merger. Those
relationships include the following:
. Mr. Charles E. Bradley, Sr., a director and the President and Chief
Executive Officer of Reunion Industries, is the Chairman and a director
of Chatwins Group and a beneficial owner of approximately 48% of the
8
<PAGE>
outstanding common stock of Chatwins Group
. Mr. Poole, a director of Reunion Industries, is a director of Chatwins
Group and a beneficial owner of approximately 67% of the outstanding
common stock of Chatwins Group
. Thomas L. Cassidy, a director of Reunion Industries, was a director of
Chatwins Group until June 1997 and beneficially owns 100 shares of
Chatwins Group common stock
. Mr. Bradley, Mr. Poole and Mr. Cassidy are holders of Chatwins Group
notes and Mr. Bradley and Mr. Poole are beneficial owners of the Chatwins
Group preferred stock
Because of these potential conflicts of interest, the independent directors
of Reunion Industries negotiated and separately considered and approved the
merger agreement between Reunion Industries and Chatwins Group and the merger
provided for therein.
Shares Eligible for Future Sale (see page 61)
Chatwins Group stockholders who, at the time the merger agreement is
submitted to Chatwins Group for approval, are deemed to be affiliates of
Reunion Industries for purposes of Rule 145 under the Securities Act of 1933
will be subject to certain restrictions on the resale of the Reunion Industries
common stock received by them in the merger. Chatwins Group stockholders who
are not Reunion Industries affiliates may resell the Reunion Industries common
stock acquired by them in the merger free of these restrictions.
Exemption of Merger from and Extension of Transfer Restrictions; Preservation
of Tax Benefits (see page 58)
Under the Internal Revenue Code of 1986, as currently in effect (the
"Code"), net operating loss carryforwards for federal tax purposes offset
taxable income in future years and generally eliminate income taxes otherwise
payable on such taxable income. As of December 31, 1998, Reunion Industries'
net operating loss carryforwards were approximately $258.1 million.
Reunion Industries established certain transfer restrictions on its common
stock to prevent ownership changes from occurring which would trigger an
adverse effect on its net operating loss carry-forwards under the Code. The
Board of Directors of Reunion Industries has exempted the shares to be issued
in the merger from the transfer restrictions and has extended the transfer
restrictions until at least the day after the third anniversary of the date of
the merger.
9
<PAGE>
Market for Common Stock (see page 84)
Reunion Industries common stock is listed for quotation on the NASDAQ Small-
Cap Market under the symbol "RUNI" and on the Pacific Exchange under the symbol
"RUN." The common stock issued in the merger will be listed similarly. The
table below reflects the high and low prices of the common stock on the NASDAQ
Small-Cap Market for the periods presented. The 1999 periods separately present
the high and low prices through February 25, 1999, the last day preceding the
announcement that Reunion Industries had entered into negotiations regarding a
possible merger with Chatwins Group, and the period after that announcement.
The closing price of the common stock as reported by the NASDAQ Small-Cap
Market on February 25, 1999, was $3.8125 per share and on April , 1999, the
latest practicable date prior to the date of this proxy statement/prospectus,
was $ per share.
<TABLE>
<CAPTION>
Period High Low
------ ------- -------
<S> <C> <C>
February 26 through [ , 1999]......................... [$ ] [$ ]
January 1 through February 25, 1999..................... $4.375 $2.625
Calendar Year 1998...................................... $7.625 $2.406
Calendar Year 1997...................................... $5.250 $3.125
</TABLE>
There is no active trading market for Chatwins Group common stock. Assuming
that 8,500,000 shares of Reunion Industries common stock are issued in the
merger and that there are 292,887.4 shares of Chatwins Group common stock
outstanding at the time of the merger (which assumes that all outstanding
warrants are exercised prior to the merger), each share of Chatwins Group
common stock will be converted into 29.02 shares of Reunion Industries common
stock in the merger. The equivalent per share value of the Chatwins Group
common stock as of April , 1999, which is calculated by multiplying 29.02
times the closing market price of Reunion Industries common stock on that date,
was $ per share.
Voting of Directors, Executive Officers and Affiliate Shares
Reunion Industries. Under Delaware law, adoption of the merger agreement
requires the affirmative vote of the holders of at least a majority of the
shares of common stock entitled to vote thereon. Directors and executive
officers of Reunion Industries, and their respective affiliates, including
Chatwins Group, have the power to vote approximately [48.4]% of the outstanding
Reunion Industries common stock. Reunion Industries believes that the directors
and executive officers of Reunion Industries, and their respective affiliates,
including Chatwins Group, will vote for approval of the merger agreement.
Chatwins Group. Under Delaware law, adoption of the merger agreement
requires the affirmative vote of the holders of at least a majority of the
shares of common stock of Chatwins Group entitled to vote thereon. Directors
and executive officers of Chatwins Group and their respective affiliates have
the power to vote approximately 83% of the outstanding Chatwins Group common
stock. On March 30, 1999, a majority of the stockholders of Chatwins Group
approved and adopted the merger agreement by written consent.
10
<PAGE>
Selected Financial Data
The following tables set forth selected historical consolidated financial
data of Reunion Industries and Chatwins Group. We derived the consolidated
income statement data below and the consolidated balance sheet data below from
financial statements audited by PricewaterhouseCoopers LLP, independent
accountants, whose report on Reunion Industries contains an explanatory
paragraph on going concern matters. All data are reported in thousands, except
for per-share data.
Reunion Industries
For a more complete discussion of the financial information presented in the
table below, see "Information about Reunion Industries--Selected Financial
Data" and "Reunion Industries, Inc. Financial Statements and Notes."
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1998(1) 1997(2) 1996(3) 1995(4) 1994(5)
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Continuing Operations Data
Operating Revenue.............. $ 97,318 $93,378 $60,305 $10,855 $ 1,619
Loss From Continuing
Operations.................... $(10,440) $ (981) $(2,694) $(3,581) $ (660)
Income (Loss) Per Share--
Continuing
Operations--Diluted........... $ (2.69) $ (0.25) $ (0.70) $ (0.93) $ (0.17)
Balance Sheet Data
Total Assets................... $ 74,874 $72,059 $75,176 $51,935 $51,639
Long-term Obligations and
Redeemable Preferred Stock.... $ 17,237 $12,654 $15,575 $ 7,947 $ 2,693
Cash Dividends per Common
Share......................... $ -0- $ -0- $ -0- $ -0- $ -0-
</TABLE>
- --------
(1) Includes Juliana Vineyards as a consolidated subsidiary subsequent to the
September 1998 purchase of joint venture partner's interest. See
"Information about Reunion Industries--Business--Agricultural Operations."
Operating income includes a $9.2 million charge to record entry of the
judgment and related costs in Reunion Industries' litigation with Bargo
Energy Company. See "Information about Reunion Industries--Legal
Proceedings." Net income includes a $1.2 million charge for increase in a
provision for environmental remediation and a $0.5 million charge for a
provision for tax settlement, included in Discontinued Operations. See
"Information about Reunion Industries--Business--Environmental Regulation"
and "Information about Reunion Industries--Management's Discussion and
Analysis of Financial Condition and Results of Operations of Reunion
Industries--Contingencies and Uncertainties."
(2) 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 "Information about Reunion Industries--
Business--Agricultural Operations," "Information about Reunion Industries--
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Reunion Industries--Discontinued Operations" and "Reunion
Industries, Inc. Notes to Consolidated Financial Statements--Notes 3 and
6."
(3) Includes the results of operations of the Rostone division of ORC
subsequent to the Rostone acquisition on February 2, 1996. Includes the
results of Quality Molded Products, Inc. ("QMP") and DPL subsequent to
their acquisitions on November 18, 1996. See "Reunion Industries, Inc.
Notes to the Consolidated Financial Statements--Note 2." 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 "Reunion
Industries, Inc. Notes to Consolidated Financial Statements--Notes 3 and
6."
(4) Includes the results of operations of the Oneida division of ORC subsequent
to the Oneida acquisition on September 14, 1995. Includes a $7.0 million
impairment charge against Reunion Industries' oil and gas
11
<PAGE>
properties and a $3.8 million charge for the expected loss on disposal of
the oil and gas operations. See "Reunion Industries, Inc. Notes to
Consolidated Financial Statements--Notes 2 and 3."
(5) Includes a $3.2 million impairment charge against Reunion Industries' 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 Reunion Industries' proportionate share of
agricultural revenues and expenses.
Chatwins Group
For a more complete discussion of the financial information presented in the
table below, see "Information about Chatwins Group--Selected Financial Data of
Chatwins Group" and "Chatwins Group, Inc. Financial Statements and Notes."
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings Data(1):
Net Sales...................... $191,586 $188,920 $153,480 $183,408 $154,710
Income from continuing
operations.................... $ 1,635 $ 2,321 $ 17 $ 4,425 $ 1,255
Income (Loss) from continuing
operations per common
share(2)...................... $ 4.03 $ 6.37 $ (1.49) $ 13.55 $ 2.74
Balance Sheet Data:
Total assets................... $117,366 $111,269 $101,330 $106,290 $ 94,491
Total long-term debt(3)........ $ 50,699 $ 50,723 $ 50,746 $ 50,770 $ 51,646
Cash dividends per Common
Share......................... $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
- --------
(1) Chatwins Group holds a minority voting interest in Reunion Industries which
it accounts for under the equity method. Income from continuing operations
is presented excluding Chatwins Group's equity in the results of operations
of Reunion Industries. On September 14, 1995, Chatwins Group sold Oneida to
Reunion Industries. Such transaction was treated as the disposal of a
portion of a line of business with Oneida's historical operating results
and resulting gain on sale classified within continuing operations through
September 14, 1995.
(2) Includes the dilutive effect of the Chatwins Group Warrants.
(3) Excludes borrowings under revolving credit facilities and includes current
maturities of Senior Notes.
12
<PAGE>
Unaudited Selected Pro Forma Combined Financial Information
The table below sets forth unaudited selected historical financial data as
of and for the year ended December 31, 1998 and certain pro forma financial
information for Reunion Industries assuming that the merger, the acquisitions
of King-Way and NAPTech, the high-yield debt offering and the refinancing
transaction had occurred on January 1, 1998.
The pro forma presentation is subject to the assumptions set forth in the
notes to the unaudited pro forma consolidated financial information appearing
elsewhere in this proxy statement/prospectus. You should read the information
presented in conjunction with the unaudited pro forma consolidated financial
information and notes thereto and the financial statements and corresponding
notes thereto for Reunion Industries and Chatwins Group contained elsewhere in
this proxy statement/prospectus. All data are reported in thousands, except for
per share data.
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-------------------------------
Reunion
Industries
Historical Pro Forma
-------------- --------------
<S> <C> <C>
Operations Data
Net Sales.............................. $ 97,318 $312,598
Income (Loss) From Continuing Opera-
tions................................. $(10,440) $ (7,663)
Income (Loss) From Continuing Opera-
tions Available to Common Stockhold-
ers................................... $(10,440) $ (9,322)
Income (Loss) From Continuing Ops--Per
Share
Basic................................ $ (2.69) $ (0.85)
Diluted.............................. $ (2.69) $ (0.85)
Balance Sheet Data
Total Assets........................... $ 74,874 $219,287
Long-Term Indebtedness and Redeemable
Preferred Stock....................... $ 17,237 $139,388
Cash Dividends Per Common Share........ 0.00 0.00
</TABLE>
13
<PAGE>
Comparative Per Common Share Data
The table below sets forth historical per share financial information for
the year ended December 31, 1998 and pro forma per share financial information
for Reunion Industries and Chatwins Group assuming that the merger, the
acquisitions of King-Way and NAPTech, the high-yield debt offering and the
refinancing transaction had occurred on January 1, 1998. The pro forma data is
not necessarily indicative of the actual or future operating results or
financial position that would have occurred or will occur upon consummation of
these transactions. The pro forma presentation is subject to the assumptions
set forth in the notes to the unaudited pro forma consolidated financial
information appearing elsewhere in this proxy statement/prospectus. The
information presented should be read in conjunction with such unaudited pro
forma consolidated financial information and notes thereto and the financial
statements and notes thereto for Reunion Industries and Chatwins Group
contained elsewhere in this proxy statement/prospectus. All data are reported
in thousands except per share data.
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------
Reunion Chatwins
Industries Group
Historical Historical Pro Forma
---------- ---------- ---------
<S> <C> <C> <C>
Book Value Per Share....................... $ 4.16 $(34.34) $(0.35)
Cash Dividends Per Share................... 0.00 0.00 0.00
Income (Loss) Per Share From Continuing Op-
erations
Basic.................................... $(2.69) $4.45 $(0.85)
Diluted.................................. $(2.69) $4.03 $(0.85)
Weighted Average Number of Common Shares
(Thousands)
Basic.................................... 3,881 265 10,931
Diluted.................................. 3,881 293 10,931
</TABLE>
Where You Can Find More Information
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Chatwins Group also files annual, quarterly and
special reports with the SEC. You may read and copy any reports, statements or
other information we file at the SEC's public reference rooms in Washington,
D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-
SEC-0330 for further information about the public reference rooms. Our SEC
filings are also available to the public from commercial document retrieval
services and at the Internet world wide web site maintained by the SEC at
www.sec.gov.
We filed a Registration Statement on Form S-4 to register with the SEC the
Reunion Industries common stock to be issued to the Chatwins Group stockholders
in the merger (the "Registration Statement"). This proxy statement/prospectus
is a part of Post-Effective Amendment No. 1 to that Registration Statement and
constitutes a prospectus of Reunion Industries, as well as being a proxy
statement of Reunion Industries for our annual meeting of stockholders.
As allowed by SEC rules, this proxy statement/prospectus does not contain
all the information you can find in the Registration Statement or the exhibits
to the Registration Statement.
Reunion Industries has supplied all information contained in this proxy
statement/prospectus relating to Reunion Industries and Chatwins Group has
supplied all such information relating to Chatwins Group.
You should rely only on the information contained in this proxy
statement/prospectus. We have not authorized anyone to provide you with
information that is different from what is contained in this proxy
statement/prospectus. This proxy statement/prospectus is dated April , 1999.
You should not assume that the information contained in the proxy
statement/prospectus is accurate as of any date other than that date, and
neither the mailing of this proxy statement/prospectus to stockholders nor the
issuance of Reunion Industries common stock in the merger shall create any
implication to the contrary.
14
<PAGE>
Cautionary Statement Regarding Forward-Looking Statements
This proxy statement/prospectus contains forward-looking statements within
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 with respect to Reunion Industries' and Chatwins Group's financial
condition, results of operations and businesses, the merger and related
transactions. These statements include:
. statements regarding the impact of the merger on Reunion Industries, with
or without the merger, the high yield debt offering and the refinancing
transaction having been consummated
. forecasts, projections and descriptions of anticipated benefits of the
merger
. statements regarding the markets for the products and services,
anticipated capital expenditures, regulatory or legal developments,
competition
. statements regarding projected growth strategies and penetrations of new
markets, mergers and joint ventures, financings and/or refinancings, and
transactions with affiliates
. statements regarding the effects of the Year 2000 problem on electronic
technology on which Reunion Industries and Chatwins Group are directly or
indirectly dependent
. any statements preceded by, followed by or that include the words
"believes," "expects," "anticipates," "intends," or similar expressions
. others statements contained in this proxy statement/prospectus regarding
matters that are not historical facts
These forward-looking statements are not guarantees of future performance
and are subject to risks and uncertainties that could cause actual results to
differ materially from the results contemplated by the forward-looking
statements. These risks and uncertainties include, without limitation, the
"Risk Factors" beginning on page 16, domestic and international economic
conditions which affect the volume and pricing of sales of business and
consumer goods, the cost and availability of materials, labor and other goods
and services used in the operations of Reunion Industries and Chatwins Group,
the availability of credit on reasonable terms, and the cost of interest on
Reunion Industries' and Chatwins Group's debt. All forward-looking statements
are expressly qualified in their entirety by these factors and all related
cautionary statements. You are cautioned not to place undue reliance on these
forward-looking statements. These statements speak only as of the date of this
proxy statement/prospectus and neither Reunion Industries nor Chatwins Group
undertakes any obligation to update any forward-looking statement to reflect
events or circumstances after this date or to reflect the occurrence of
unanticipated events. All subsequent written and oral forward-looking
statements attributable to Reunion Industries or Chatwins Group or persons
acting on their behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section.
15
<PAGE>
RISK FACTORS
In addition to the other information contained in this proxy
statement/prospectus, you should carefully consider the following risk factors
in connection with the merger. The risks and uncertainties described below are
not the only ones facing Reunion Industries and Chatwins Group. Additional
risks and uncertainties may also harm our business operations.
Our viability as a going concern is in doubt if the merger does not occur.
We believe that, without additional financing, we will not have sufficient
liquidity to meet our cash obligations as they become due over the next 12
months. See "Information about Reunion Industries--Management's Discussion and
Analysis of Financial Condition and Results of Operations of Reunion
Industries--Liquidity and Capital Resources." If the merger does not occur,
the high yield debt offering and the refinancing transaction will not be
completed as presently contemplated. In that event, we will be forced to
pursue an alternative funding strategy, which may include:
. reducing or delaying necessary capital expenditures
. seeking additional debt financing or equity capital
. selling assets
. restructuring or refinancing our indebtedness
We can not assure you that any such strategy could be implemented on terms
satisfactory to us, or at all.
The merger may not be completed, even if Reunion Industries stockholders
approve the merger agreement.
The completion of the merger is subject to a number of conditions,
including:
. no material adverse change in the business, financial condition or
results of operations of Reunion Industries or Chatwins Group shall have
occurred
. the holders of no more than 5.0% of Chatwins Group common stock shall
exercise their appraisal rights under Delaware law
. Reunion Industries shall have entered into one or more credit facilities,
the proceeds of which are sufficient to redeem Chatwins Group's $50
million 13% Senior Notes due 2003 and to provide adequate working capital
after the merger
There is no assurance that these conditions will be satisfied or waived.
See "The Merger--Conditions to Consummation of the Merger." For example, we
are pursuing the high yield debt offering and the refinancing transaction in
order to satisfy the condition in the third bullet point, above; however,
there can be no assurance that these financing transactions will be completed
on terms satisfactory to us, or at all. If all of the conditions to the merger
are not satisfied or waived, the merger will not occur or will be delayed and
Reunion Industries and Chatwins Group may lose some or all of the intended
benefits of the merger.
Our increased debt obligations may adversely affect our ability to do
business.
Reunion Industries is highly leveraged and will continue to be highly
leveraged after the merger. The following table sets forth certain financial
information as of December 31, 1998, assuming that the following transactions
had occurred: (i) the merger, (ii) the acquisitions of King-Way and NAPTech,
(iii) the high-yield debt offering, and (iv) the refinancing transaction (all
data in thousands):
16
<PAGE>
<TABLE>
<CAPTION>
Pro Forma as of
December 31, 1998
-----------------
<S> <C>
Total Indebtedness........................................ $144,015
Series A Preferred Stock.................................. $ 8,482
Series B Preferred Stock.................................. $ 5,875
Redeemable Preferred Stock of Consolidated Subsidiary..... $ 607
Stockholders' equity...................................... $ (3,865)
Debt and Redeemable Preferred Stock to Equity Ratio....... N/M
</TABLE>
In addition, assuming that the indicated transactions had occurred on
January 1, 1998, earnings would have been insufficient to cover fixed charges
by $8.5 million for the year ended December 31, 1998.
As indicated above, we believe that, without additional financing, we will
not have sufficient liquidity to meet our cash obligations as they become due
over the next 12 months. See "Information about Reunion Industries--
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Reunion Industries--Liquidity and Capital Resources." While
Reunion Industries believes that the merger will make additional financing
more feasible, Reunion Industries' indebtedness will increase upon completion
of merger. As a result of the increase, significant demands on our cash
resources will continue after the merger, which could have important effects
on your investment in Reunion Industries common stock. Our increased levels of
indebtedness could, for example:
. require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the amount
of our cash flow available for working capital, capital expenditures,
acquisitions and other general corporate purposes
. limit our flexibility in planning for, or reacting to, changes in our
industry (including the pursuit of our growth strategy)
. place us at a competitive disadvantage compared to our competitors that
have fewer debts and significantly greater operating and financing
flexibility than we do
. limit, along with the financial and other restrictive covenants
applicable to our indebtedness, among other things, our ability to borrow
additional funds even when necessary to maintain adequate liquidity
. increase our vulnerability to general adverse economic and industry
conditions
. result in an event of default upon a failure to comply with these
covenants which, if not cured or waived, could have a material adverse
effect on our business, financial condition or results of operations
If we are unable to service our indebtedness and fund our business, we will
be forced to adopt an alternative strategy that may include any or all of the
following:
. reducing or delaying necessary capital expenditures
. seeking additional debt financing or equity capital
. selling assets
. restructuring or refinancing our indebtedness
We cannot assure you that any such strategy could be implemented on terms
satisfactory to us, or at all.
17
<PAGE>
Issuance of stock will dilute our current stockholders' interest.
The issuance of common stock and preferred stock in the merger will have the
effect, among other things, of:
. diluting the common stock interest of the current stockholders of Reunion
Industries other than Chatwins Group from approximately 62% to
approximately 22%
. subjecting the rights of the holders of Reunion Industries common stock
to the prior rights of the Reunion Industries preferred stock to be
issued in the merger and in the acquisition of King-Way
. reducing the aggregate voting power of our current stockholders (other
than Chatwins Group)
. reducing our current stockholders' interests in the assets of Reunion
Industries in the event of liquidation
. preventing or discouraging an attempt by another person or entity to
acquire control of Reunion Industries following effectiveness of the
merger without the approval of our board of directors
Failure to properly manage the merger and growth after the merger could
adversely affect our business.
Business combinations involve a number of special risks and challenges,
including:
. diversion of management's attention
. potential failure to retain key employees
. assumption of unanticipated liabilities and other problems
. difficulties integrating systems, operations and culture
. amortization of acquired intangible assets
. adverse short-term effects on reported operating results
As a result of the merger and the King-Way and NAPTech acquisitions, Reunion
Industries will experience a significant increase in the number of business
units, revenues and employees. This growth will place significant demands on
our managerial, administrative and operational resources. Effective management
of our growth will require us to continue to improve our operational, financial
and other management processes and systems and to quickly and efficiently
integrate the acquired businesses. We cannot be sure that we will be able to
manage our growth after the merger. Our reputation is a valuable asset and
performance problems and client dissatisfaction with an acquired business could
adversely affect our reputation and our business.
The relationship between Reunion Industries and Chatwins Group may raise
questions of possible conflicts of interest in the negotiation and approval of
the merger agreement.
Certain relationships between the directors, officers and stockholders of
Reunion Industries and Chatwins Group could raise questions of conflicts of
interest in the negotiation of the terms and conditions of the merger. These
relationships include:
. Mr. Charles E. Bradley, Sr., a director and the President and Chief
Executive Officer of Reunion Industries, and who after the merger is
expected to become Chairman of Reunion Industries, is the Chairman and a
director of Chatwins Group and a beneficial owner of approximately 48% of
the outstanding common stock of Chatwins Group
. Mr. Poole, a director of Reunion Industries, and who after the merger is
expected to become Vice Chairman of Reunion Industries, is a director of
Chatwins Group and a beneficial owner of approximately 67% of the
outstanding common stock of Chatwins Group
. Thomas L. Cassidy, a director of Reunion Industries, was a director of
Chatwins Group until June 1997
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. Mr. Charles E. Bradley, Sr., Mr. Poole and Mr. Cassidy are holders of
$4.35 million principal amount of Chatwins Group 13% Senior Notes and Mr.
Charles E. Bradley, Sr. and Mr. Poole are beneficial owners of the
Chatwins Group preferred stock
. Mr. Charles E. Bradley, Sr. owns 42.5% of the common stock of King-Way;
his son, Mr. Kimball Bradley, who is expected to become Executive Vice
President of Reunion Industries effective upon the merger, owns 42.5% of
the common stock of King-Way and Mr. Richard L. Evans, Executive Vice
President, Chief Financial Officer and Secretary of Reunion Industries,
owns 15% of the common stock of King-Way. Stanwich Financial Services is
the holder of $7.6 million of debt and 100% of the preferred stock of
King-Way and will be the owner of the Reunion Industries Series B
preferred stock after the King-Way acquisition. Mr. Charles E. Bradley,
Sr. owns 42.5% of the common stock of Stanwich Holdings, Inc., the parent
of Stanwich Financial Services Corp.; his son, Mr. Charles E. Bradley,
Jr. owns 42.5% of the common stock of Stanwich Holdings; and Mr. John G.
Poole owns 7.5% of the common stock of Stanwich Holdings
As a result of these interests, these directors and officers will benefit
from the merger and could be more likely to vote to approve the merger
agreement than if they did not hold these interests. You should consider
whether these interests may have influenced these directors and officers to
support or recommend the merger. See "Interests of Certain Persons in the
Merger."
Mr. Charles E. Bradley, Sr. and Mr. John G. Poole and their respective families
will control Reunion Industries after the merger.
As a result of the Reunion Industries common stock they are expected to
receive in the merger, Mr. Charles E. Bradley, Sr. and Mr. John G. Poole and
their respective families will beneficially own more than a majority of the
shares of Reunion Industries common stock outstanding. As a result, they will
control the election of directors and the appointment of officers of Reunion
Industries, and will thus have the ability to control the business strategy of
Reunion Industries. They will also have the ability to approve important
corporate matters, such as amendments to the Certificate of Incorporation and
Bylaws, mergers, business acquisitions, dispositions and share issuances,
without the approval of our other stockholders. See "The Merger--Pre-Merger and
Post-Merger Security Ownership of Certain Beneficial Owners and Management."
The merger could make a takeover of the company less likely.
After the merger, Mr. Charles E. Bradley, Sr. and Mr. Poole and members of
their respective families will control Reunion Industries. This ownership
structure may prevent or discourage an attempt by another person or entity to
acquire control of Reunion Industries and may make it more difficult for a
third party to effect a merger or similar transaction with us, even if such
transaction is favored by a majority of the independent stockholders. Thus, the
merger may have the effect of discouraging or defeating mergers, proxy contests
or management changes that the independent stockholders may determine to be in
their best interests and may also prevent a party from acquiring an interest
large enough to effect a change in management.
We will not be able to fully utilize our net operating loss carryforwards.
The potential use of Reunion Industries' net operating loss carryforwards is
one of the reasons that both Reunion Industries and Chatwins Group decided to
merge. Even after the merger, Reunion Industries will not generate sufficient
taxable income to be able to fully utilize its net operating loss
carryforwards. Further, we may be unable to use these net operating loss
carryforwards if, among other things, we are unable to prevent the occurrence
of an "ownership change," as defined in the tax laws. In any case, if we are
not able to utilize our net operating loss carryforwards as expected, one of
the intended benefits of the merger will not be fully realized.
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We have an adverse judgment against us which could significantly impact our
liquidity.
In litigation between Reunion Industries and Bargo Energy Company and its
general partners, after a jury trial, the trial court entered a judgment
against Reunion Industries in the amount of $8.5 million. We have appealed this
decision. If our appeal is unsuccessful or if we elect to settle this case
prior to a decision from the appellate court, we could be required to pay a
significant amount of cash to Bargo and its general partners, which would place
a significant strain on our financial resources. See "Information About Reunion
Industries--Legal Proceedings."
Chatwins Group stockholders have appraisal rights in the merger which, if
exercised, could place a strain on our financial resources.
Under Delaware law, Chatwins Group stockholders have the right to dissent
from the merger and seek payment of the fair value of their shares in cash from
Reunion Industries. Our obligation to complete the merger is conditioned on the
holders of not more than 5% of the Chatwins Group common stock exercising these
appraisal rights. This condition may be waived by Reunion Industries and
Chatwins Group. If any Chatwins Group stockholders exercise their dissenters
rights and the merger is completed, Reunion Industries will be required to pay
cash to those stockholders for their shares of Chatwins Group common stock. The
amount and timing of any such payment is not certain, but in any event could
place a strain on our financial resources.
We operate in highly competitive markets.
Reunion Industries now operates, and after the merger will continue to
operate, in highly competitive markets. There are a large number of
competitors, many of whom have significantly greater financial, technical,
marketing, human resources and greater name recognition than we do. Competitive
pressures and other factors could cause our products and services to lose
market acceptance or result in significant price erosion, with a material
adverse effect upon results of operations.
The nature of our business exposes us to potential liability to customers.
Many of our customer orders involve projects that are critical to the
operation of our clients' businesses and provide benefits that may be difficult
to quantify. This is also true of Chatwins Group and will thus continue to be
the case after the merger. We attempt to limit our liability contractually and
by means of insurance for damages arising from errors, mistakes, omissions or
negligent acts in rendering our products and services. We cannot be sure that
our attempts to limit liability will be successful. If we fail to meet a
client's expectations, it could have an adverse effect on our client. Such an
event could give rise to claims against us or damage our reputation, both of
which could adversely affect our business.
Our operations and properties require us to comply with numerous environmental
regulations.
Our operations involve and, after the merger, will continue to involve, the
handling and use of substances that are subject to federal, state and local
environmental laws and regulations that impose limitations on the discharge of
pollutants into the soil, air and water and establish standards for their
discharge and disposal. Although we believe we are in material compliance with
these laws, the violation of these laws could have a material adverse effect on
our business, financial condition, results of operations or prospects.
Certain environmental laws provide for strict, joint and several liability
for investigation and remediation of spills and other releases of hazardous
materials. These laws typically impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of any hazardous
materials. Persons who arrange for the disposal or treatment of hazardous
materials also may be liable for the costs of investigation, removal or
remediation of such materials at the disposal or treatment site, regardless of
whether the affected site is owned or operated by them. Such liability is
strict, and may be joint and several.
Because we own and operate a number of facilities, and because we arrange
for the disposal of hazardous materials at many disposal sites, we may incur
costs for investigation, removal and remediation, as well as
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capital costs associated with compliance with environmental laws and
regulations. Although such environmental costs have not been material in the
past and are not expected to be material in the future, changes in
environmental laws and regulations or unexpected investigations and clean-up
costs could have a material adverse effect on our business, financial condition
or results of operations.
We cannot assure you (i) that additional environmental or remediation
obligations will not be incurred in the future, (ii) that existing or future
environmental liabilities could not have a material adverse effect on our
business, financial condition, results of operations or prospects, or on our
ability to make payments on our indebtedness when due, or (iii) that currently
unknown matters, new laws and regulations or stricter interpretations of
existing laws or regulations will not have a material adverse effect on our
business, financial condition, results of operation or prospects or on our
ability to make payments on our indebtedness. See "Information about Reunion
Industries--Business--Environmental Regulation" and "Information about Chatwins
Group, Inc.--Business--Environmental."
Our transaction-related costs are difficult to estimate, may be higher than
expected and may harm the financial results of the combined companies.
We estimate that we and Chatwins Group will incur aggregate direct expenses
related to the merger, the high yield debt offering and the refinancing
transactions of approximately $3.5 million and other transaction-related
charges of $0.5 million. These expenses and charges are difficult to estimate.
If the total cost of the transactions exceed these estimates, then the
financial results of the combined company could be adversely affected.
We potentially have exposure to the Year 2000 problem.
We and Chatwins Group utilize electronic technology which includes computer
hardware and software systems that process information and perform calculations
that are date- and time-dependent. The coming of the Year 2000 ("Y2K") poses
pervasive and complex problems in that virtually every computer operation
(including manufacturing equipment and other non-information systems
equipment), unless it is Y2K compliant, will be affected in some way by the
rollover of the two-digit year value from "99" to "00" and the inadvertent
recognition by the electronic technology of "00" as the year 1900 rather than
Y2K. We may not only be negatively affected by the failure of our own systems
to be Y2K compliant, but may also be negatively affected by the Y2K non-
compliance of our vendors, customers, lenders and any other party with which we
transact business.
Our failure or the failure of any party with which we conduct business to be
Y2K compliant in a timely manner could have a material adverse impact on our
operations. If our systems or the systems of our significant vendors,
customers, lenders and other outside parties with which we transact business
were to fail because they were not Y2K compliant, we would incur significant
costs and inefficiencies. Due to general uncertainty inherent in the Y2K
problem, resulting in part from the uncertainty of the Y2K readiness of third
parties, we cannot be sure that we will be able to resolve problems associated
with the Y2K issue in a timely and cost effective manner. Our inability to do
so may adversely affect our operations and business, or expose us to third-
party liability.
See "Information about Reunion Industries--Management's Discussion and
Analysis of Financial Condition and Results of Operations of Reunion
Industries--Year 2000 Computer Compliance" and "Information About Chatwins
Group--Management's Discussion and Analysis of Financial Condition and Results
of Operations of Reunion Industries--The Year 2000."
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THE ANNUAL MEETING
Date, Time and Place of the Annual Meeting
We will hold the annual meeting at 10:00 a.m., local time, on June 8, 1999,
at the Holiday Inn Select Stamford, 700 Main Street, Stamford, Connecticut. We
are furnishing you with a copy of this proxy statement/prospectus and a proxy
card so that you can vote your shares if you do not attend the annual meeting.
Matters to be Considered at the Annual Meeting
At the annual meeting, Reunion Industries stockholders will:
1. Consider and act upon a proposal to approve the merger agreement dated
as of March 30, 1999 between Reunion Industries and Chatwins Group,
which provides, among other things, for (i) Chatwins Group to merge into
Reunion Industries, (ii) the conversion of the common stock of Chatwins
Group outstanding immediately prior to the merger into the right to
receive an aggregate of 8,500,000 shares of Reunion Industries' common
stock, plus up to an additional 500,000 shares of Reunion Industries
common stock if Chatwins Group and certain other business units achieve
specified performance levels in 1999, plus cash in lieu of the issuance
of fractional shares and (iii) the conversion of the outstanding
preferred stock of Chatwins Group into preferred stock of Reunion
Industries;
2. Elect six directors to the Board of Directors of Reunion Industries; and
3. Transact such other business as may properly come before the meeting or
any adjournment thereof.
Voting at the Annual Meeting; Record Date; Quorum
The Board of Directors has fixed the close of business on April 23, 1999, as
the record date for the determination of stockholders of Reunion Industries
entitled to notice of and to vote at the annual meeting and at any adjournment
or postponement thereof. Only holders of record on the record date will be
entitled to vote at the annual meeting. As of April 23, 1999, Reunion
Industries had [3,900,065] shares of common stock outstanding. In connection
with the annual meeting please note the following:
. each stockholder of record on April 23, 1999 is entitled to cast one vote
per share
. stockholders do not have cumulative voting rights in the election of
directors
. stockholders may vote their shares at the annual meeting either in person
or by proxy
. the presence, in person or by proxy, of the holders of a majority of our
outstanding common stock entitled to vote at the annual meeting is
necessary to constitute a quorum at the annual meeting. If a quorum is
not present or represented at the annual meeting, the stockholders
entitled to vote who are present in person or by proxy, may, by majority
vote, adjourn the annual meeting from time to time until a quorum is
present or represented
. the merger agreement must be adopted by the affirmative vote of the
holders of a majority of the shares of Reunion Industries common stock
entitled to vote
. directors will be elected by a plurality of the votes cast
. management believes that all of the shares of common stock held by
directors and executive officers of Reunion Industries and their
affiliates, including Chatwins Group, aggregating [1,887,455] shares as
of the record date, or approximately [48.4%] of the issued and
outstanding Reunion Industries common stock, will be voted in favor of
the merger agreement and the election of each of the nominees for the
Board of Directors
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Proxies
Who is Soliciting Proxies? We are furnishing you with this proxy
statement/prospectus in connection with the solicitation of proxies by and on
behalf of the Reunion Industries Board of Directors for use at the annual
meeting.
How will the Proxies be Voted? Proxies in the form enclosed, which are
properly executed and returned and not subsequently revoked, will be voted at
the annual meeting. These proxies will be voted in accordance with the
directions specified thereon. If no directions are indicated on a properly
executed proxy, such proxy will be voted for approval of the merger agreement
and for the election of the nominees for director named in this proxy
statement/prospectus.
If any other matters are properly presented at the annual meeting for
consideration, the persons named in the enclosed forms of proxy will have
discretion to vote on such matters in accordance with their best judgment.
However, proxies voting against a specific proposal may not be used by the
persons named in the proxies to vote for adjournment of the meeting for the
purpose of giving management additional time to solicit votes to approve such
proposal.
How do I Revoke My Proxy? The grant of a proxy on the enclosed form does not
preclude you from attending the annual meeting and voting in person. You may
revoke a proxy at any time before it is voted by:
. delivering a written notice of revocation bearing a later date than the
proxy before the vote is taken at the annual meeting
. duly executing a later dated proxy relating to the same shares of common
stock and delivering it as indicated below before the vote is taken at
the annual meeting; or
. attending the annual meeting and voting in person
Attendance at the annual meeting will not in and of itself constitute a
revocation of a proxy. Any written notice of revocation or subsequent proxy
must be delivered to Reunion Industries, Inc., 62 Southfield Avenue, One
Stamford Landing, Stamford, CT 06902, Attention: Richard L. Evans, Secretary,
before the vote is taken at the annual meeting.
Who is Paying for the Solicitation? We will bear all expenses of our
solicitation of proxies for the annual meeting. In addition to solicitation by
use of the mails, proxies may be solicited from stockholders by our directors,
officers and employees. Solicitation may take place in person or by telephone,
facsimile or other means of communication. Such directors, officers and
employees will not be additionally compensated, but may be reimbursed for
reasonable out-of-pocket expenses in connection with such solicitation.
Arrangements may be made with brokerage houses, custodians, nominees and
fiduciaries for forwarding of proxy solicitation materials to beneficial owners
of our common stock held of record by such brokerage houses, custodians,
nominees and fiduciaries. We will reimburse such brokerage houses, custodians,
nominees and fiduciaries for their reasonable expenses incurred in doing so.
How are Broker Non-votes and Abstentions Treated? Brokers who hold shares in
street name for customers who are the beneficial owners of such shares are
permitted to vote their customers' shares on certain routine matters, such as
the uncontested election of directors, even if they do not receive specific
voting instructions from such customers. However, brokers are prohibited from
giving a proxy to vote their customers' shares with respect to certain non-
routine matters, such as approval of the merger agreement, in the absence of
specific instructions from such customers. Proxies which are voted by a broker
with respect to a routine matter but which are not voted on a non-routine
matter at the same meeting are known as broker non-votes with respect to the
non-routine matter. Broker non-votes and abstentions will be tabulated
separately and will be counted as present at the meeting for purposes of
determining whether a quorum is present at the annual meeting. Because the
merger agreement requires the approval of the holders of at least a majority of
the outstanding shares of Reunion Industries common stock, broker non-votes and
abstentions will have the effect of votes against the merger agreement. Broker
non-votes and abstentions will have no effect on the election of directors.
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PROPOSAL 1
THE MERGER
At the annual meeting, Reunion Industries' stockholders will be asked to
approve the merger agreement, pursuant to which Chatwins Group will merge with
and into Reunion Industries. The merger agreement has been unanimously approved
by each of Reunion Industries' and Chatwins Group's Board of Directors and has
been approved by the requisite majority of the stockholders of Chatwins Group.
The merger agreement is attached as Annex A to this proxy statement/prospectus.
Background of the Merger
Over the past several years, Reunion Industries has been engaged in a
process of implementing the change in its strategic focus from oil and gas to
manufacturing operations. We accomplished this through several acquisitions
which eventually became the basis of Oneida Rostone, a wholly-owned subsidiary
of Reunion Industries. While ORC's operations were profitable and generated
cash flow for Reunion Industries, ORC's financial arrangements, particularly
ORC's credit facility with The CIT Group/Business Credit, Inc. ("CITBC"),
restricted our ability to take advantage of this cash flow. We also have
sizable net operating loss carryforwards (NOLs) from our reorganization and our
oil and gas operations. The merger is a continued implementation of our new
strategic focus.
In June 1995, Chatwins Group acquired approximately 38% of Reunion
Industries' common stock. When it first invested in Reunion Industries,
Chatwins Group declared its intention to strongly influence the management and
affairs of Reunion Industries and that it might consider a merger of itself
into Reunion Industries after June 1998 if the transfer restrictions put into
place by Reunion Industries to preserve its NOLs would then permit it.
In May 1997, the Board of Directors of Reunion Industries began to explore
whether there was an opportunity after June 1998 for Reunion Industries to
effect a series of transactions that would strengthen its financial condition,
allow a refinancing of its existing indebtedness and broaden its strategic
focus, without jeopardizing its ability to use its NOLs. A principal focus of
this exploration was a possible combination of Chatwins Group and Reunion
Industries. Such a combination would allow Reunion Industries to take advantage
of the greater size and financial resources of Chatwins Group, refinance
certain existing debt, diversify into other industries and simplify its capital
structure without jeopardizing its ability to utilize its NOLs.
In June 1997, Reunion Industries hired Legg Mason Wood Walker, Incorporated
("Legg Mason") to serve as a financial advisor in connection with its
consideration of a merger with Chatwins Group.
In November 1997, Legg Mason reported to the Board on its initial valuations
of Reunion Industries and Chatwins Group. The Board of Directors judged these
relative valuations to be in ranges that made it feasible to consider a tax-
free transaction in which Reunion Industries and Chatwins Group would merge,
with Reunion Industries being the surviving company. The Board of Directors
authorized management to begin preparing a proposal for such a transaction.
Thereafter management began preparing such a proposal. On May 19, 1998 the
Board met to consider the proposal. It heard presentations from management, an
updated analysis from Legg Mason and presentations from Chatwins Group
regarding terms of the transaction. Because certain of the directors of Reunion
Industries are also directors of Chatwins Group, Messrs. Amonett, Cassidy,
Clerihue and Myers, the directors who did not also serve on the Chatwins Group
Board, met separately with management, Legg Mason, Reunion Industries' counsel
and Chatwins Group to develop the proposal. These directors proposed to
Chatwins Group a plan of merger that would involve the issuance of 8,500,000
shares of Reunion Industries common stock to Chatwins Group stockholders.
Representatives of Chatwins Group asserted that 9,000,000 shares would be the
minimum acceptable consideration. Chatwins Group then informed Reunion
Industries of its discussions with respect to the possible acquisition of King-
Way, and its expectation that the King-Way acquisition would increase the value
of Chatwins Group.
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The independent Reunion Industries' directors then reported to the full
Board of Directors that they believed it was appropriate to issue 9,000,000
shares of Reunion Industries' common stock if Chatwins Group concluded the
King-Way acquisition prior to the merger for an amount not in excess of the
present owner's cost to acquire King-Way, including fees and expenses, plus
interest on such amounts at such owner's cost of capital (the "King-Way
Price"). The full Board of Directors adopted this recommendation, subject to
receiving an opinion from Legg Mason, that the payment of such consideration by
Reunion Industries was fair from a financial point of view to Reunion
Industries and its stockholders, other than Chatwins Group, and subject to the
negotiation of a definitive merger agreement.
Following this meeting, counsel to Chatwins Group advised that, based on its
review of the terms of Chatwins Group's credit facilities, it did not believe
that Chatwins Group could agree definitively to an acquisition of King-Way
prior to refinancing its existing indebtedness, and thus the acquisition of
King-Way could not be assured. Representatives of Chatwins Group and Reunion
Industries then discussed setting alternative terms of the merger, and agreed
to bring to their respective boards a proposal that contemplated the issuance
of 9,000,000 shares of Reunion Industries' common stock to Chatwins Group
stockholders, assuming that Chatwins Group consummated, or had the
unconditional right to consummate the contemplated King-Way acquisition at or
prior to the merger for an amount not in excess of the King-Way Price, or
8,500,000 shares if the contemplated acquisition of King-Way was not
accomplished prior to the merger.
Reunion Industries' Board of Directors met by telephone on June 1, 1998 to
consider the revised proposal and a definitive merger agreement detailing it.
The Board of Directors heard further presentations from Legg Mason with respect
to the proposed transactions. Messrs. Amonett, Cassidy, Clerihue and Myers
discussed the transaction and, voting separately, unanimously resolved that the
merger agreement and the transactions contemplated thereby were in the best
interests of the stockholders of Reunion Industries and approved the merger
agreement and the transactions contemplated thereby, subject to the receipt of
a definitive opinion from Legg Mason to the effect that the consideration to be
paid by Reunion Industries in the merger was fair to Reunion Industries and its
stockholders, other than Chatwins Group, from a financial point of view. A
committee of Messrs. Amonett, Cassidy, Clerihue and Myers was appointed to
receive and evaluate the definitive opinion of Legg Mason. The full Board of
Directors then considered the proposal, and after further discussion and upon
further consideration of the reasons for the merger, concluded that the merger
agreement and the transactions contemplated thereby were in the best interests
of the stockholders of Reunion Industries and approved the merger agreement and
the transactions contemplated thereby, subject to receipt of such opinion.
On June 3, 1998, the committee consisting of Messrs. Amonett, Cassidy,
Clerihue and Myers met to receive the definitive Legg Mason opinion. Voting
unanimously, such directors concluded that the definitive opinion was
satisfactory to support the determination of the Board of Directors with
respect to the amount of consideration to be paid in the merger. At the same
time, because of the small Chatwins Group equity interest held by Mr. Cassidy,
Messrs. Amonett, Clerihue and Myers voted separately to confirm the earlier
conclusions reached on May 19 and June 1, 1998 and earlier that day.
Mr. Cassidy did not participate in that vote.
Reunion Industries and Chatwins Group executed a merger agreement on June 3,
1998. The respective Boards of Directors of Chatwins Group and Reunion
Industries subsequently authorized the amendment of the merger agreement on
June 25, 1998, to provide that the Chatwins Group preferred stock would be
converted at the effective time of the merger into Reunion Industries preferred
stock rather than notes of Reunion Industries. This change was made to reduce
the amount of debt on Reunion Industries' post merger balance sheet to improve
its ability to remain in compliance with the financial covenants of the
anticipated new credit facility. On July 1, 1998, Reunion Industries mailed
proxy materials for an annual meeting of stockholders of Reunion Industries to
address the contemplated merger and other matters.
On August 4, 1998, and after concluding that negotiations on the financing
arrangements which were a condition to the merger were not proceeding as
rapidly as expected and were likely to change from those contemplated in the
proxy materials circulated in advance of the annual meeting, Reunion Industries
determined that action on the merger agreement should be deferred, and the
meeting was therefore adjourned to September 1, 1998.
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In connection with the proposed merger, two purported class action lawsuits
were filed in the court of Chancery of the State of Delaware against Reunion
Industries and its directors and Chatwins Group. These lawsuits, which were
consolidated and were purportedly filed on behalf of all the public
stockholders of Reunion Industries, sought to enjoin the merger and/or obtain
damages from the defendants. The lawsuits alleged that the public stockholders
of Reunion Industries would be excessively diluted in the merger as compared to
the Chatwins Group stockholders and that the defendant directors breached their
fiduciary duties in arriving at the exchange ratio in the merger.
Subsequent to the decision to adjourn the special stockholders meeting to
consider the merger, market conditions for Reunion Industries' proposed bond
offering became unattractive to Reunion Industries. As a result, on October 20,
1998, Reunion Industries announced that it intended to discontinue pursuit of
the bond offering and Reunion Industries and Chatwins Group had agreed to
abandon the proposed merger. Subsequently, the purported class action lawsuits
that had been filed with respect to the merger were dismissed without prejudice
to the plaintiffs to bring an action in the future.
On January 28, 1999, Reunion Industries' Board of Directors decided to
resume negotiations with Chatwins Group regarding a possible business
combination. This decision was made after consulting with Reunion Industries'
financial advisor for the proposed high-yield debt offering, which advised,
among other things, that market conditions had improved since the fall of 1998
so that a high-yield debt offering on terms acceptable to Reunion Industries
was again possible and that a merger of Chatwins Group and Reunion Industries,
as well as the acquisition by Reunion Industries of King-Way and NAPTech, would
make such an offering more feasible. The respective managements of Reunion
Industries and Chatwins Group then proceeded to negotiate the terms of the
merger and the acquisitions of King-Way and NAPTech.
On February 26, 1999, Reunion Industries publicly announced that it had
resumed discussions with Chatwins Group regarding a possible merger
transaction.
At a meeting on March 24, 1999, management of Reunion Industries presented
to the Board of Directors, including Messrs. Amonett, Clerihue and Myers, the
terms of a proposed merger with Chatwins Group and the terms for the proposed
acquisitions of King-Way and NAPTech. At the meeting, Legg Mason also made a
detailed presentation regarding the relative values of Reunion Industries,
Chatwins Group, King-Way and NAPTech, and an analysis of the financial impact
of the merger on Reunion Industries and its stockholders other than Chatwins
Group.
The independent directors then met alone with their counsel and with Legg
Mason to discuss the proposed merger. Legg Mason then rendered its oral opinion
that, subject to the completion of its due diligence, as of March 19, 1999, the
consideration to be paid by Reunion Industries in the merger was fair, from a
financial point of view, to Reunion Industries and its stockholders other than
Chatwins Group. After further discussion of the reasons for the merger
described below, each director, including each independent director, expressed
his support for the proposed merger and the proposed acquisitions of King-Way
and NAPTech on the revised terms, subject to their further consideration of
Legg Mason's analysis and the material legal documents and to the receipt of a
written opinion from Legg Mason to the effect that the consideration to be paid
by Reunion Industries in the merger is fair from a financial point of view to
Reunion Industries and its stockholders other than Chatwins Group.
The Reunion Industries Board of Directors met again on March 30, 1999. At
that meeting, management again reviewed with the directors the terms of the
proposed merger and indicated that further negotiations had resulted in a
revision to the contingent shares proposed to be issued in the merger. As
discussed at the March 24, 1999 Board meeting, the Chatwins Group common stock
would have been converted into the right to receive an aggregate of 8,500,000
shares of Reunion Industries common stock plus an additional 0.4 shares for
each dollar by which the earnings before interest expense, taxes, depreciation
and amortization ("EBITDA")
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of Chatwins Group in 1999 exceeded Chatwins Group's budgeted EBITDA for 1999,
up to 400,000 shares, and an additional 100,000 shares if Chatwins Group's 1999
EBITDA exceeded the budgeted amount by more than $1,000,000. As proposed to be
revised, 200,000 shares would be issued if Chatwins Group achieved its 1999
budgeted EBITDA as defined in the agreement and 0.3 shares would be issued for
each dollar by which Chatwins Group exceeded its 1999 budgeted EBITDA up to an
additional 300,000 shares. See "The Merger--Terms of the Merger--Conversion or
Cancellation of Chatwins Group Common Stock." The directors discussed the
reasons for and impact of this proposed change with management and with Legg
Mason. Legg Mason then delivered its written opinion that the consideration to
be paid by Reunion Industries in the merger is fair from a financial point of
view to Reunion Industries and its stockholders other than Chatwins Group.
After further discussion and consideration of the reasons for the merger
described below, Messrs. Amonett, Clerihue and Myers, as the independent
directors of Reunion Industries, concluded that the consideration to be paid by
Reunion Industries in the merger is fair to and in the best interests of
Reunion Industries. The independent directors then voted unanimously to approve
the merger agreement and the transactions contemplated thereby, including the
merger, and to recommend the merger agreement to the Reunion Industries
stockholders for approval. The full Board of Directors then considered the
proposed merger and, after further discussion, concluded that the merger
agreement and the transactions contemplated thereby, including the merger, are
fair to and in the best interests of Reunion Industries and its stockholders.
The full Board then voted unanimously to approve the merger agreement and the
transactions contemplated thereby, including the merger, and to recommend the
merger agreement to the Reunion Industries stockholders for approval.
At the same time, the Board of Directors (including, with respect to the
King-Way and NAPTech acquisitions, the independent directors, voting
separately) approved the King-Way and NAPTech acquisitions and authorized
management to pursue the high-yield debt offering and the refinancing
transaction.
Reunion Industries' Reasons for the Merger
In reaching its decision to approve the merger agreement and the
transactions contemplated thereby, (including the merger) and to recommend that
Reunion Industries' stockholders approve and adopt the merger agreement, the
Board of Directors considered a number of factors including, among others:
. the current and prospective liquidity situation at Reunion Industries and
the difficulty Reunion Industries would have in obtaining additional
financing in the absence of the merger
. the percentage of the combined company that would be owned by
stockholders of Reunion Industries other than the former stockholders of
Chatwins Group
. the accretive nature of the merger, assuming each company achieved its
projected results, as contrasted with the results that might be achieved
through the continued implementation of Reunion Industries' business
plan, other possible acquisitions or other business combinations
. the relative financial condition and earnings histories of Chatwins Group
and Reunion Industries
. the recommendation of the proposed merger by the management of Reunion
Industries
. the presentations made by Legg Mason at the meetings of the Board of
Directors held on March 24, 1999 and March 30, 1999, and Legg Mason's
opinion dated March 30, 1999 that the consideration to be paid by Reunion
Industries in the merger is fair to Reunion Industries and the
stockholders of Reunion Industries other than Chatwins Group from a
financial point of view (See "--Opinion of Reunion Industries' Financial
Advisor)
. the fact that the merger will significantly expand Reunion Industries'
business, thereby making it less susceptible to downturns in a single
line of business
. the opportunity to acquire King-Way and NAPTech and the fact that those
acquisitions cannot be effected unless the merger occurs
. the terms and conditions of the merger agreement, including the number of
shares to be issued to Chatwins Group stockholders, the contingent nature
of a portion of the merger consideration based on
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Chatwins Group's 1999 performance, the parties' representations,
warranties and covenants and the conditions to their respective
obligations
. the expiration dates of Reunion Industries' NOLs, the small likelihood
that Reunion Industries' stand- alone earnings would utilize them fully
prior to their expiration, the fact that the consummation of the merger
would require the extension of the transfer restrictions in order to
better assure that Reunion Industries would be able to continue to
utilize its NOLs and the likelihood that Reunion Industries would be able
to more fully utilize its NOLs after the merger
. the historical market prices of Reunion Industries' common stock
. the fact that the merger would not be a taxable transaction to the
stockholders of Reunion Industries
Following consideration of the information and factors described above
(including reliance on the opinion of Legg Mason that the consideration to be
paid by Reunion Industries in the merger is fair to Reunion Industries and to
the stockholders of Reunion Industries other than Chatwins Group from a
financial point of view), on March 30, 1999 the Board of Directors concluded
that the merger is in the best interests of Reunion Industries and its
stockholders other than Chatwins Group. In reaching this conclusion, the Board
of Directors did not assign relative or specific weights to the above
information and factors or determine that any particular information or factor
was of unique importance. Instead, the Board of Directors based its
recommendation upon the totality of the information and factors presented to it
or otherwise known to its members.
For the reasons set forth above and elsewhere in this proxy
statement/prospectus, the Reunion Industries Board of Directors recommends that
stockholders vote FOR approval of the merger agreement.
Opinion of Reunion Industries' Financial Advisor
At the March 24, 1999 Reunion Industries Board meeting, Legg Mason delivered
its oral Opinion to the Reunion Industries Board that, as of March 19, 1999,
the amount of consideration to be paid by Reunion Industries under the terms of
the merger agreement is fair to Reunion Industries and its stockholders, other
than Chatwins Group, from a financial point of view. At the March 30, 1999
Reunion Industries Board meeting, Legg Mason delivered a written opinion (the
"Legg Mason Opinion") that, as of March 26, 1999, the amount of consideration
to be paid by Reunion Industries under the terms of the merger agreement is
fair to Reunion Industries and its stockholders, other than Chatwins Group,
from a financial point of view. There is no current intention to update the
Legg Mason Opinion. The full text of the Legg Mason Opinion, which sets forth
the assumptions made, matters considered, scope and limitations of the review
undertaken and procedures followed by Legg Mason in rendering its Opinion, is
attached to this proxy statement prospectus as Annex B and Legg Mason has
consented to its attachment hereto. Reunion Industries stockholders are urged
to read the Opinion carefully and in its entirety. The Legg Mason Opinion is
directed only to the fairness from a financial point of view to Reunion
Industries and its stockholders, other than Chatwins Group, of the
consideration to be paid by Reunion Industries in the merger with Chatwins
Group and does not constitute a recommendation to any Reunion Industries
stockholder as to how such stockholder should vote at the annual meeting.
In arriving at its Opinion, Legg Mason has, among other things: (i) reviewed
the merger agreement; (ii) reviewed certain publicly available audited and
unaudited financial statements of Reunion Industries and Chatwins Group and
certain other publicly available information of Reunion Industries and Chatwins
Group; (iii) reviewed certain internal information, primarily financial in
nature, concerning Reunion Industries and Chatwins Group prepared by their
respective managements; (iv) discussed the past and current operations and
financial condition and prospects of Reunion Industries with the senior
management of Reunion Industries; (v) discussed the past and current operations
and financial condition and prospects of Chatwins Group with the senior
management of Chatwins Group; (vi) reviewed forecast financial statements of
Reunion Industries prepared and furnished to Legg Mason by the senior
management of Reunion Industries; (vii) reviewed forecast financial statements
of Chatwins Group prepared and furnished to Legg Mason by the senior management
of Chatwins Group; (viii) held meetings and discussions with certain officers
and employees of Reunion Industries
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and Chatwins Group, concerning the operations, financial condition and future
prospects of the combined company; (ix) reviewed certain publicly available
financial and stock market data relating to selected public companies that Legg
Mason considered relevant to its inquiry; (x) considered the pro forma
financial effects of the merger on Reunion Industries; and, (xi) conducted such
other financial studies, analyses and investigations and considered such other
information as Legg Mason deemed necessary or appropriate.
In connection with its review, Legg Mason assumed and relied upon the
accuracy and completeness of all financial and other information supplied to it
by the managements of Reunion Industries and Chatwins Group and all publicly
available information, and did not independently verify such information. Legg
Mason also relied upon the managements of Reunion Industries and Chatwins Group
as to the reasonableness and achievability of the financial projections (and
the assumptions and bases therein) provided to Legg Mason for Reunion
Industries and Chatwins Group, respectively, and assumed that such projections
were reasonably prepared on bases reflecting the best currently available
estimates and judgments of management as to the future operating performance of
each respective entity, including, without limitation, the tax benefits
available to the combined company as well as to Reunion Industries on a stand
alone basis. In arriving at the Legg Mason Opinion, Legg Mason relied upon the
financial data for 1999, 2000, 2001 and 2002, which data were the latest
available projections for Reunion Industries, Chatwins Group and the combined
company provided to Legg Mason by the managements of Reunion Industries and
Chatwins Group as of the date of the Legg Mason Opinion. Neither Reunion
Industries nor Chatwins Group customarily discloses internal management
projections of the type provided to Legg Mason in connection with Legg Mason's
review of the merger. Such projections were not prepared with the expectation
of public disclosure. The projections were based on numerous variables and
assumptions that are inherently uncertain, including, without limitation,
factors related to general economic and competitive conditions. Accordingly,
actual results could vary significantly from those set forth in such
projections.
Legg Mason was not requested to make, and did not make, an independent
appraisal or evaluation of the assets, properties, facilities or liabilities of
either Reunion Industries or Chatwins Group and, with the exception of certain
appraisals related to the Juliana Preserve, was not furnished with any such
appraisal or evaluation.
The Legg Mason Opinion is necessarily based on stock prices and economic and
other conditions and circumstances as existed or were in effect on, and the
information made available to it as of, the date set forth in its Opinion. Legg
Mason expressed no opinion as to what the value of Reunion Industries common
stock actually will be when issued to the stockholders of Chatwins Group
pursuant to the merger agreement or as to the price or trading range at which
Reunion Industries common stock may trade following the merger.
In connection with rendering its Opinion, Legg Mason performed a variety of
financial analyses. While all of the material analyses performed are summarized
below, the summary does not purport to be a complete description of the
analyses performed and factors considered by Legg Mason in arriving at its
Opinion. Legg Mason believes that its analysis must be considered as a whole
and that selecting portions of its analyses and of the factors considered by
it, without considering all analyses and factors, would create a misleading
view of the processes underlying its Opinion. The preparation of a Fairness
Opinion is a complex process and is not necessarily susceptible to a partial
analysis or summary description. Legg Mason was not authorized to solicit, and
did not solicit, indications of interest from any third party with respect to
an acquisition of Reunion Industries, its assets, or any part thereof. Legg
Mason assumed that the merger and related transactions described elsewhere in
this proxy statement prospectus will be consummated according to the terms and
conditions described in the forms of the agreements reviewed by Legg Mason,
without any waiver of material terms or conditions by Reunion Industries or
Chatwins Group, and that obtaining any necessary regulatory approvals or
satisfying any other conditions for consummation of the merger would not have
an adverse effect on the combined company.
The following is a summary of the principal financial and valuation analyses
performed by Legg Mason in connection with the preparation of the Legg Mason
Opinion. These analyses were presented to the Reunion Industries Board at its
meeting on March 24, 1999, and were based on stock price information through
the
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close of the market on March 19, 1999 and subsequently updated for stock price
information through the close of the market on March 26, 1999 for presentation
to the Board on March 30, 1999.
Summary of Legg Mason's Valuation Approach
Analysis of Consideration to be Paid for Chatwins Group. Legg Mason analyzed
the value of the consideration to be paid by Reunion Industries for Chatwins
Group according to the terms of the proposed merger based on the merger
agreement dated March 30, 1999. The consideration analyzed included: (i) the
purchase price for the equity of Chatwins Group based on: (a) Reunion
Industries' current share price as of March 26, 1999 and (b) Reunion
Industries' share price as of January 25, 1999 (one month and one day prior to
the February 26, 1999 announcement that Reunion Industries was selling ORC and
had resumed discussions with Chatwins Group regarding a possible merger
transaction and (ii) the enterprise value of Chatwins Group based on the
proposed merger terms. Legg Mason then compared the implied transaction
multiples to multiples that Legg Mason calculated based on the valuation
methodologies detailed below.
Relative Valuation Analysis. Legg Mason completed a series of valuation
methodologies to determine a value for Chatwins Group. In addition, Legg Mason
applied the same valuation methodologies to Reunion Industries and compared the
terms of the transaction to the relative equity values of both companies after
deducting net debt and preferred stock and adjusting for other non-operating
assets and liabilities. Under this methodology Legg Mason primarily relied upon
comparable companies and comparable transactions, focusing on latest twelve
months ("LTM") net income multiples and latest twelve months' earnings before
interest and taxes ("LTM EBIT") multiples. Legg Mason then compared the results
of the Comparable Companies and Comparable Transaction Analyses to the
Discounted Cash Flow ("DCF") Analysis and the Leveraged Buyout ("LBO")
Analysis, all of which are described below. Legg Mason gave less weight to the
DCF and LBO Analyses because of the inherent uncertain nature of projections
and because projections included increases in revenue and operating margins in
excess of historical levels.
Pro Forma Merger Analysis. Legg Mason performed a pro forma merger analysis
of the merged entity of Reunion Industries and Chatwins Group, including the
effects of the proposed transaction both on a historical and projected basis.
In this analysis, Legg Mason focused on historical latest twelve months ended
December 31, 1998 net income from continuing operations available to common
stockholders for Reunion Industries, on a stand alone basis. Legg Mason then
calculated the combined entity's pro forma latest twelve months net income from
continuing operations available to common stockholders. Reunion Industries'
latest twelve months net income from continuing operations was then compared to
the combined entity's pro forma latest twelve months net income from continuing
operations (actual net income adjusted for one-time write-offs and charges and
excluding the Juliana operations). Legg Mason determined the merger to be
accretive based on historical net income from continuing operations available
to common stockholders for the latest twelve months ended December 31, 1998.
Analysis of Consideration to be Paid for Chatwins Group
Legg Mason calculated the amount of consideration being paid for Chatwins
Group.
The amount of consideration being paid for Chatwins Group was calculated by
applying Reunion Industries' current share price of $5.13, as of March 26,
1999, to the 8,500,000 million shares of Reunion Industries that the
stockholders of Chatwins Group will receive in connection with the merger for a
total of $43.6 million. The value of Chatwins Group's current ownership of
Reunion Industries was then calculated as 1.45 million shares valued at the
Reunion Industries share price of $5.13 for a total value of $7.4 million. The
value of Chatwins Group's current ownership of Reunion Industries, $7.4
million, was then deducted from the equity value of Chatwins Group of $43.6
million to determine a purchase price for the equity of Chatwins Group of $36.1
million. Chatwins Group's net debt was $95.3 million (calculated as Chatwins
Group's debt of $87.1 million, including its unfunded pension liability of $0.6
million and its accumulated postretirement benefit obligation of $0.9 million,
and preferred stock of $8.5 million, offset by Chatwins Group's cash of $0.3
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million). The enterprise value of Chatwins Group was $131.4 million, calculated
as the total of its equity value of $36.1 million and its net debt of $95.3
million.
Legg Mason then calculated the implied multiples that Reunion Industries is
paying for Chatwins Group based on Chatwins Group's equity value and enterprise
value. Legg Mason calculated the multiple of the purchase price for Chatwins
Group's equity to LTM net income, 1999 projected net income and 2000 projected
net income to be 22.1x, 10.9x and 5.3x, respectively. These multiples were
based on Chatwins Group LTM net income, and 1999 projected net income and 2000
projected net income of $1.6 million, $3.3 million and $6.8 million,
respectively. Legg Mason also calculated the multiple of Chatwins Group's
enterprise value to latest twelve months earnings before interest, taxes,
depreciation and amortization ("LTM EBITDA") and LTM EBIT to be 7.6x and10.3x,
respectively. These multiples were calculated based on LTM EBITDA and LTM EBIT
of $17.3 million and $12.8 million, respectively. These multiples that were
calculated based on the purchase price of Chatwins Group were then compared to
the multiples that were calculated in the Comparable Companies and Comparable
Transactions Analyses as well as the implied multiples based on the Discounted
Cash Flow and Leveraged Buyout Analyses that were conducted. For further
information related to these valuation analyses see the detailed information
below.
The above analysis was based on Reunion Industries' share price of $5.13 as
of March 26, 1999. It should be noted that although Reunion Industries is
publicly traded, it has severe restrictions on the sale of its stock (i.e.,
certain transfer restrictions placed on persons who hold 5% or more of the fair
market value of Reunion Industries' stock). These restrictions, combined with
small float (i.e., the number of shares held by stockholders other than
Chatwins Group and Reunion Industries management) result in a relatively
illiquid market in the Reunion Industries shares.
As a result of the volatility in Reunion Industries' stock and the increase
in Reunion Industries' share price since the February 26, 1999 announcement
that Reunion Industries had resumed discussions with Chatwins Group regarding a
possible merger transaction, Legg Mason reviewed the merger terms utilizing a
stock price of $3.38 as of January 25, 1999, one month and one day prior to the
February 26, 1999 announcement. A valuation based on a stock price as of
January 25, 1999 was utilized in order to remove the impact of the February 26,
1999 announcement from the value of Reunion Industries' stock price.
The acquisition of Chatwins Group was calculated by applying Reunion
Industries' share price of $3.38, as of January 25, 1999, to the 8,500,000
million shares of Reunion Industries that the stockholders of Chatwins Group
will receive in connection with the merger for a total of $28.7 million. Next
the value of Chatwins Group's current ownership of Reunion Industries was
calculated as 1.45 million shares valued at the Reunion Industries share price
of $3.38 for a total value of $4.9 million. The value of Chatwins Group's
current ownership of Reunion Industries, $4.9 million, was then deducted from
the equity value of Chatwins Group of $28.7 million to determine a purchase
price for the equity of Chatwins Group of $23.8 million. Chatwins Group's net
debt was $95.3 million (calculated as Chatwins Group's debt of $87.1 million,
including its unfunded pension liability of $0.6 million and its accumulated
postretirement benefit obligation of $0.9 million, and preferred stock of $8.5
million, offset by Chatwins Group's cash of $0.3 million). The enterprise value
of Chatwins Group was $119.1 million, calculated as the total of its equity
value of $23.8 million and its net debt of $95.3 million.
Legg Mason then calculated the implied multiples that Reunion Industries is
paying for Chatwins Group based on Chatwins Group's equity value and enterprise
value. Legg Mason calculated the multiple of the purchase price for Chatwins
Group's equity to LTM net income, 1999 projected net income and 2000 projected
net income to be 14.5x, 7.2x and 3.5x, respectively. These multiples were based
on Chatwins Group LTM net income, and 1999 projected net income and 2000
projected net income of $1.6 million, $3.3 million and $6.8 million,
respectively. Legg Mason also calculated the multiple of Chatwins Group's
enterprise value to LTM EBITDA and LTM EBIT to be 6.9x and 9.3x, respectively.
These multiples were calculated based on LTM EBITDA and LTM EBIT of $17.3
million and $12.8 million, respectively. These multiples that were calculated
based on the purchase price of Chatwins Group were then compared to the
multiples that were calculated in the
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Comparable Companies and Comparable Transactions Analyses as well as the
implied multiples based on the Discounted Cash Flow and Leveraged Buyout
Analyses that were conducted. For further information related to these
valuation analyses see the detailed information below.
Legg Mason also noted that the merger terms state that the stockholders of
Chatwins Group may receive up to an additional 5,000,000 shares based on the
satisfaction of 1999 performance goals. Legg Mason reviewed the merger
consideration based on the stockholders of Chatwins Group receiving the
8,500,000 non-contingent shares. However, if the additional 500,000 contingent
shares were issued to the stockholders of Chatwins Group, the amount of
consideration would still be considered fair. According to the merger terms,
Chatwins Group stockholders would receive 200,000 additional shares of Reunion
Industries common stock if Chatwins Group's (including King-Way Material
Handling and NAPTech) 1999 EBITDA were at least $27.9 million. In addition,
Chatwins Group would receive 0.3 shares of Reunion Industries' common stock for
each dollar of 1999 EBITDA in excess of $27.9 million up to $28.9 million. The
200,000 additional shares would represent a range of $0.7 million (based on a
share price of $3.38 as of January 25, 1999) to $1.0 million (based on a share
price of $5.13 as of March 26, 1999) of additional consideration representing a
0.6% to 0.8% increase in consideration paid to the stockholders of Chatwins
Group. Legg Mason noted this percentage increase in consideration compared
favorably to the percentage increase in Chatwins Group's 1999 EBITDA necessary
to earn the additional shares. To receive the additional 200,000 shares,
Chatwins Group's (including King-Way Material Handling and NAPTech) 1999 EBITDA
would have to increase 15.3% from its pro forma 1998 EBITDA. The additional
300,000 contingent shares would represent a range of $1.0 million (based on a
share price of $3.38 as of January 25, 1999) to $1.5 million (based on a share
price of $5.13 as of March 26, 1999) of additional consideration. Legg Mason
noted that the value of this additional consideration would compare favorably
to the value of the incremental EBITDA based on comparable company LTM EBITDA
multiples and comparable transactions LTM EBITDA multiples. The additional $1.0
million of EBITDA would represent incremental enterprise value of $6.0 million
based on comparable company LTM EBITDA multiples or $8.8 million based on
comparable transactions LTM EBITDA multiples.
Relative Valuation Analysis
To complement the above mentioned analysis, Reunion Industries and Chatwins
Group were valued utilizing the analyses described below and Legg Mason
considered the relative value of both companies.
Reunion Industries. Reunion Industries was valued on a fully taxed operating
basis utilizing each of the analyses described below. Then the value of Reunion
Industries' non-operating assets and liabilities, as detailed below, was added
to the value of Reunion Industries.
Non-operating assets and liabilities. Legg Mason analyzed Reunion Industries
based on its on-going operations, after adjustment for non-recurring write-offs
and charges. Then Legg Mason analyzed the non-operating assets and liabilities
of Reunion Industries. The overall net value of Reunion Industries' non-
operating assets and liabilities, as detailed below, was an addition to the
value of Reunion Industries of $9.0 million. This net addition in the value of
Reunion Industries was applied to Reunion Industries' equity value as
calculated based on the Comparable Companies, Comparable Transactions,
Discounted Cash Flow and Leveraged Buyout Analyses. Below are descriptions of
Reunion Industries' non-operating assets and liabilities.
Present Value of Note Receivable. Reunion Industries sold its interest
in certain California farm property and as part of the consideration,
Reunion Industries received notes receivable due in year 2000 with interest
payments of approximately 8%-9%. Management believes the recorded value of
$0.2 million approximates the cash value of this receivable. In Legg
Mason's analysis, the present value of the notes receivable is an addition
of $0.2 million to Reunion Industries' equity value.
Restricted Cash. Restricted cash balances 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. The two restricted cash balances
include
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collateral for a Potash Bond, of $51,000, which will become unrestricted
when Reunion Industries sells its Potash operations and collateral for its
Chevron agreement, of $20,000, which is in conjunction with the cleanup of
the Louisiana properties and will be unrestricted when the cleanup is
finished. Per discussion with Reunion Industries' management, these two
restricted cash amounts represent their net realizable values. The other
restricted cash balance of $83,000 is offset by a corresponding liability
and is considered to be worthless. In Legg Mason's analysis, the restricted
cash is an addition of $0.1 million to Reunion Industries' equity value.
Juliana Operations. Reunion Industries, through its subsidiary Juliana
Vineyards ("Juliana"), is engaged in wine grape development and the growing
and harvesting of wine grapes for the premium table wine market. Juliana's
wine grape agricultural operations consist of approximately 3,800 acres, of
which approximately 1,200 acres are suitable for wine grape production and
of which approximately 325 acres are currently in production. Legg Mason
evaluated Juliana, on a stand alone basis, by reviewing summaries of the
appraisals conducted in June 1998 on the parcels of property that comprise
Juliana and which appraisals were given to Legg Mason by the management of
Reunion Industries. Legg Mason valued Juliana on the assumption that this
property is to be sold and it is assumed that the sale process would take
approximately one year to complete. Therefore, Legg Mason discounted back
the value to Reunion Industries, calculated as the aggregate value of the
appraisal summaries, based on Reunion Industries' weighted average cost of
capital of 14.5%. This analysis resulted in Juliana's present value to
Reunion Industries to be approximately $14.9 million. This valuation, which
is based on the assumption that Juliana is sold, may overvalue Juliana as
this analysis does not consider the losses and capital expenditure
requirements that Reunion Industries projects for Juliana over the next
several years. In Legg Mason's analysis, the Juliana operations is an
addition of $14.9 million to Reunion Industries' equity value.
Book Value of Potash Mineral Rights and Oil and Gas Properties. Reunion
Industries holds interests in federal and state leases totaling
approximately 55,000 acres near Moab, Utah, known as Ten Mile Potash.
Sylvanite, a potash mineral, is the principal mineral of interest and
occurrence in the Ten Mile Potash property. To date, Ten Mile Potash has
not yielded any significant revenues from mining operations or any other
significant revenues, and Reunion Industries is pursuing the sale or
farmout of these interests. Reunion Industries is attempting to sell its
mineral interests. It has been and is currently in discussions with a
potential buyer. Management has advised Legg Mason that the selling price
that has been discussed with this potential buyer has been higher than the
carrying amount of $0.1 million. Reunion Industries' interest in its oil
and gas properties relates to Reunion Industries' discontinued oil and gas
operations. Reunion Industries believes that the carrying amount of these
oil and gas properties of $0.2 million is a conservative estimate and
reflects its cash value. In Legg Mason's analysis, the book value of
Reunion Industries' Potash Mineral Rights and its oil and gas properties is
an addition of $0.3 million to Reunion Industries' equity value.
Present Value of Net Operating Loss Carryforward ("NOL"). Legg Mason
utilized Reunion Industries management's earnings projections to calculate
Reunion Industries' after tax savings resulting from its NOL. Each year's
saving was discounted back at Reunion Industries' weighted average cost of
capital, calculated to be 14.5%, to arrive at a present value of the NOL.
This analysis provided an implied present value of the NOL to Reunion
Industries, on a stand alone basis, of $5.0 million. This analysis
calculated the present value of the NOLs based on projections that were
provided to Legg Mason by Reunion Industries.
In addition to the above mentioned analysis of the present value of
Reunion Industries' NOL on a stand alone basis, Legg Mason also calculated
the value of the projected, unused portion of the NOLs by Reunion
Industries on a stand alone basis. In performing this analysis, Legg Mason
also utilized projections provided by Reunion Industries' management. The
amount of the unused portion of the NOL that expired each year was
calculated and then discounted back at Reunion Industries' weighted average
cost of capital of 14.5%. This resulted in a present value of the unused
portion of Reunion Industries'
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NOL of approximately $62.5 million. In Legg Mason's analysis, the present
value of the NOL is an addition of $5.0 million to Reunion Industries'
equity value.
Bargo Energy Company Legal Liability. Reunion Industries filed suit
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
Reunion Industries Energy Company ("REC"). Bargo had agreed to pay Reunion
Industries $15.1 million for Reunion Industries Energy Company's capital
stock. A jury found that Bargo had a right to terminate the agreement
because Reunion Industries had fraudulently induced Bargo to enter into the
agreement. Damages have been assessed at $8.8 million, which includes one
year of interest. Reunion Industries has accrued $8.4 million on its
Balance Sheet. Reunion Industries is currently in settlement negotiations
and expects a settlement in the range of $0.2 million to $6.5 million. In
Legg Mason's analysis, the Bargo Energy Company legal liability is a
deduction of $6.5 million, the highest proposed settlement amount, to
Reunion Industries' equity value.
Environmental Liability. In connection with the sale of Reunion
Industries' wholly-owned subsidiary, Reunion Industries Energy Company,
Reunion Industries retained certain oil and gas properties in Louisiana
because of litigation concerning environmental matters. Reunion Industries
is in the process of environmental remediation under a plan approved by the
Louisiana Office of Conservation. Reunion Industries has made an accrual
for $1.5 million for remaining cleanup charges. In Legg Mason's analysis,
the environmental liability is a deduction of $1.5 million to Reunion
Industries' equity value.
California State Franchise Tax Settlement. Based on audits for 1991 to
1993, the Company has been assessed an aggregate amount of $0.7 million by
the State of California Franchise Tax Board related to the sales of certain
Canadian assets in 1991. Reunion Industries classified these asset sales as
non-business income. The State of California is stating that these sales
should be classified as business income. The management of Reunion
Industries has accrued $0.6 million on its Balance Sheet and estimates
Reunion Industries' full exposure is $1.4 million. In Legg Mason's
analysis, the California State Franchise Tax Settlement is a deduction of
$1.4 million to Reunion Industries' equity value.
Unfunded Pension Liability. Reunion Industries currently has an unfunded
pension liability of $0.7 million as of December 31, 1998. In Legg Mason's
analysis, the unfunded pension liability is a deduction of $0.7 million to
Reunion Industries' equity value.
Accumulated Postretirement Benefit Obligation. Reunion Industries
currently has an accumulated postretirement benefit obligation of $1.4
million as of December 31, 1998. In Legg Mason's analysis, the accumulated
postretirement benefit obligation is a deduction of $1.4 million to Reunion
Industries' equity value.
Chatwins Group. Chatwins Group was valued on a fully taxed operating basis
utilizing each of the analyses described below. In addition, the value of
Chatwins Group's 38% ownership in Reunion Industries was added, post-valuation,
to the derived value of Chatwins Group. The value of Reunion Industries that
was utilized to calculate the value of Chatwins Group ownership of Reunion
Industries was calculated utilizing a methodology consistent with each
methodology utilized to value Chatwins Group.
Legg Mason noted that since the merger of Reunion Industries and Chatwins
Group does not constitute a change of control of Reunion Industries, the
combined entity can fully benefit from the utilization of Reunion Industries'
NOLs subject to the combined company's operating performance.
In addition, Legg Mason noted that no other potential buyer of Reunion
Industries, other than the previously mentioned merger with Chatwins Group,
would be able to utilize Reunion Industries' NOLs as a merger of Reunion
Industries and any other company would result in a change in control issue
which would
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reduce the amount of NOLs that could be utilized. Therefore, the value of
Reunion Industries' NOLs to its stockholders would be significantly less if
Reunion Industries merged with another due to IRC section 382 which details the
change of control regulations.
Comparable Companies Analysis
Legg Mason compared the relevant historical, current and projected financial
and operating results of both Reunion Industries and Chatwins Group with the
operating results of selected publicly traded companies that in Legg Mason's
judgment are and would be comparable to Reunion Industries and Chatwins Group
(collectively the "Comparable Companies"). The Comparable Companies were chosen
by Legg Mason based on general business, operating and financial
characteristics representative of companies in the industries in which Reunion
Industries and Chatwins Group do and would operate. No company or business used
in the Comparable Companies analysis is identical to Reunion Industries or
Chatwins Group. Accordingly, an analysis of the results of the following is not
entirely mathematical; rather, it involved complex considerations and judgments
concerning differences in financial and operating characteristics and other
factors that could affect the public trading value of either the Comparable
Companies or the company to which they are being compared; therefore, the
resulting multiples relied upon for this analysis are subject to
interpretation. Legg Mason recognized that each of the Comparable Companies is
and would be distinguishable from both Reunion Industries and Chatwins Group in
certain respects.
In performing its analyses, Legg Mason examined both the aggregate equity
value of the outstanding common equity (defined as the number of outstanding
shares times the current price per share as of March 26, 1999, hereafter the
"Equity Value") and the Equity Value plus preferred equity (if any) at
liquidation value and total debt net of cash and cash equivalents (the
"Enterprise Value") of the Comparable Companies. Using each Comparable
Company's Enterprise Value, Legg Mason calculated multiples of, among other
things, each Comparable Company's LTM EBIT and LTM EBITDA (collectively, the
"Enterprise Value Multiples").
Using each Comparable Company's Equity Value, and based on published
security analysts' estimates, Legg Mason also calculated multiples of, among
other things, each company's LTM net income, projected 1999 net income and
projected 2000 net income.
The multiples that Legg Mason applied to Reunion Industries and Chatwins
Group are described in detail below.
Using the foregoing information, Legg Mason derived a range of estimated
values based upon implied Enterprise Values and Equity Values derived by
applying the aforementioned mean Enterprise Value Multiples and Equity Value
Multiples of the Comparable Companies to the appropriate financial statistics
of Reunion Industries and Chatwins Group. In cases where Legg Mason's analysis
indicated that the multiple for a particular Comparable Company was not
meaningful (e.g. because of recently depressed financial and operating
performance), Legg Mason excluded that multiple and relied upon the mean
multiples of the other Comparable Companies. Legg Mason has advised that such
exclusions did not affect the reliability of its analysis.
Reunion Industries. In using the Comparable Companies analysis to value
Reunion Industries on a stand alone basis, Legg Mason analyzed financial
information which included, among other things: (i) operating performance; (ii)
growth rates; (iii) capitalization ratios; (iv) ratios of common stock share
prices to LTM, 1999 projected and 2000 projected earnings per share and book
value per share; and (v) ratios of Enterprise Value to LTM EBITDA and LTM EBIT.
On an LTM basis, Reunion Industries was valued based on continuing operations
which have been adjusted to exclude the 1998, non-cash, one-time charge of $9.2
million provision for the Bargo judgement as well as the $0.4 million net
losses associated with the Company's Juliana operations. In addition, all
financial data related to Juliana was excluded from Reunion Industries'
operations as the Juliana operations were valued based on the methodology
previously mentioned and the present value of the net consideration that
Reunion Industries would receive upon the sale of Juliana was then added to the
values of Reunion Industries as calculated based on the comparable companies.
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For the purposes of this analysis, the Comparable Companies selected by Legg
Mason for Reunion Industries were the following companies that operate in the
plastics manufacturing industry: Advanced Technical Products, Inc., Deswell
Industries, Inc., Furon Co., Triple S Plastics, Inc. and Worthington
Industries, Inc.
Legg Mason noted that the mean multiples of Equity Value to LTM, projected
1999 and projected 2000 net income were 10.1x, 8.6x and 9.6 x, respectively.
Applying these mean multiples to Reunion Industries' adjusted LTM net income,
as adjusted for non-recurring items mentioned above, projected 1999 and
projected 2000 net income yielded implied equity values of the on-going
operations of Reunion Industries, excluding the value of its non-operating
assets and liabilities, of $3.9 million, $4.1 million and $18.1 million,
respectively. Including the value of its non-operating assets and liabilities
resulted in implied equity values of Reunion Industries of $12.8 million, $13.1
million and $27.0 million, respectively. Legg Mason noted that the mean
multiples of Enterprise Value to LTM EBIT and LTM EBITDA were 8.2x and 5.1x,
respectively. Applying the mean multiples to Reunion Industries' LTM EBIT and
LTM EBITDA yielded implied equity values of Reunion Industries, excluding the
value of its non-operating assets and liabilities, of $-3.4 million and $9.6
million, respectively. Including the value of Reunion Industries' non-operating
assets and liabilities resulted in implied equity values of Reunion Industries
of $5.5 million and $18.5 million, respectively.
Chatwins Group. In using the Comparable Companies analysis to value Chatwins
Group on a stand alone basis, Legg Mason analyzed financial information which
included, among other things: (i) operating performance; (ii) growth rates;
(iii) capitalization ratios; (iv) ratios of common stock share prices to LTM
1998, 1999 projected and 2000 projected earnings per share and book value per
share; and (v) ratios of Enterprise Value to LTM EBITDA and EBIT.
For the purposes of this analysis, the Comparable Companies selected by Legg
Mason for Chatwins Group were the following companies that operate in the
diversified industrial manufacturing industry: A.M. Castle & Co., Commercial
Intertech Corporation, Harnischfeger Industries, Inc., Harsco Corporation, Katy
Industries, Inc., Keystone Consolidated Industries, Inc., Owosso Corporation,
SIFCO Industries, Inc., Synalloy Corporation, Trinity Industries, Varlen
Corporation and Worthington Industries, Inc.
Legg Mason noted that the mean multiples of Equity Value to LTM, projected
1999 and projected 2000 net income were 13.9x, 9.0x and 7.7x, respectively. In
addition, Legg Mason noted that the mean multiples of Enterprise Value to LTM
EBIT and LTM EBITDA were 10.6x and 6.0x, respectively. Applying the mean
multiples to Chatwins Group LTM, 1999 projected and 2000 projected earnings
yielded implied equity values of Chatwins Group, excluding the value of its
ownership in Reunion Industries, of $22.7 million, $29.7 million and $52.5
million, respectively. Including the value of its ownership in Reunion
Industries (based on Chatwins Group ownership percentage of Reunion Industries
and based on LTM, projected 1999 and projected 2000 net income as adjusted for
Reunion Industries' non-operating assets and liabilities) resulted in implied
equity values of Chatwins Group of $27.5 million, $34.5 million and $62.5
million, respectively. Applying the mean multiples to Chatwins Group's LTM EBIT
and LTM EBITDA yielded implied equity values of Chatwins Group, excluding the
value of its ownership in Reunion Industries, of $40.3 million and $8.7
million, respectively. Including the value of its ownership in Reunion
Industries (valued at LTM EBIT and EBITDA and then adjusted for Reunion
Industries' non-operating assets and liabilities) resulted in implied equity
values of Chatwins Group of $42.3 million and $15.6 million, respectively.
Relative Valuation. The relative value of each entity was calculated, based
on equity values, utilizing each of the Comparable Companies' multiples in
turn, and including the value of Reunion Industries' non-operating assets and
liabilities and Chatwins Group's ownership in Reunion Industries.
With Reunion Industries' non-operating assets and liabilities, the ownership
based on the relative value of Chatwins Group to Reunion Industries using LTM,
projected 1999 and projected 2000 multiples of net income was calculated to be
68%:32%, 73%:27% and 70%:30%, respectively (shown as Chatwins Group%:Reunion
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Industries%). The ownership based on the relative value of Chatwins Group to
Reunion Industries using LTM EBIT, and LTM EBITDA multiples was calculated to
be 88%:12% and 46%:54%, respectively.
Comparable Transactions Analysis
Legg Mason conducted an analysis of comparable merger and acquisition
transactions as a method of valuing Reunion Industries and Chatwins Group. A
Comparable Transactions Analysis reviews and analyzes transactions, and the
resulting implied multiples, involving companies in the same or similar
industries as the company under review. This analysis compares certain
financial and operating statistics of a company with certain financial and
operating statistics of selected similar companies immediately prior to their
being acquired (the "Acquired Companies").
In performing this analysis, Legg Mason analyzed the acquisition of publicly
traded and private plastics manufacturing companies for Reunion Industries and
diversified manufacturing companies for Chatwins Group. The range of multiples
of these transactions was then applied to Reunion Industries' and Chatwins
Group's financial results, respectively, to value Reunion Industries and
Chatwins Group, respectively. In this analysis, it was determined that there
were no acquisitions of companies that are directly comparable to Reunion
Industries and Chatwins Group. Therefore, in performing this analysis, Legg
Mason selected certain Standard Industrial Classification ("SIC") codes of
plastics manufacturing companies and diversified manufacturing companies and
reviewed recent acquisitions of these companies. Legg Mason then calculated the
acquisition multiples paid for these companies. These multiples included
Enterprise Value to LTM EBITDA and Enterprise Value to LTM EBIT. Legg Mason
calculated mean, median, high and low multiples for each of these categories
based on these comparable transactions.
Legg Mason then applied the mean comparable transactions multiples obtained
to Chatwins Group's and Reunion Industries' LTM EBITDA and LTM EBIT to
determine approximate enterprise valuations of each respective company.
The multiples that Legg Mason applied to Reunion Industries and Chatwins
Group are described in detail below.
Using the foregoing information, Legg Mason derived a range of estimated
values upon implied Enterprise Values and Equity Values derived by applying the
aforementioned mean Enterprise Value Multiples of the Comparable Transactions
Analysis to the appropriate financial statistics of Reunion Industries and
Chatwins Group. In cases where Legg Mason's analysis indicated that the
multiple for a particular Comparable Transaction was not meaningful (e.g.
because of insufficient financial and transaction data available), Legg Mason
excluded that multiple and relied upon the mean multiples of the other
Comparable Transactions. Legg Mason has advised that such exclusions did not
affect the reliability of its analysis.
Reunion Industries. In using the Comparable Transactions analysis to value
Reunion Industries on a stand alone basis, Legg Mason analyzed financial
information which included, among other things: (i) similar operating
performance; (ii) growth rates; (iii) similar operating characteristics; and
(iv) ratios of Enterprise Value to LTM EBITDA and LTM EBIT. On an LTM basis,
Reunion Industries was valued based on continuing operations which have been
adjusted to exclude the 1998, non-cash, one-time charge of $9.2 million
provision for the Bargo judgement as well as the $0.4 million net losses
associated with Reunion Industries' Juliana operations. In addition, all
financial data related to Juliana was excluded from Reunion Industries'
operations as the Juliana operations were valued based on the methodology
previously mentioned and the present value of the net consideration that
Reunion Industries would receive upon the sale of Juliana was then added to the
values of Reunion Industries as calculated based on the comparable
transactions.
For the purposes of this analysis, the Comparable Transactions selected by
Legg Mason for Reunion Industries were the following acquisitions of plastic
manufacturing companies: Summa Industries, Inc. acquisition of Calnetics Corp.;
Tekni-Plex Inc.'s acquisition of PureTec Corp.; PCD Inc.'s acquisition of Wells
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Electronics; Kerr Group Inc.'s acquisition of Sun Coast Industries Inc.; and
Synetic Inc.'s acquisition of Point Plastic Inc.
Legg Mason noted that the mean, median, high and low multiples of Enterprise
Value to LTM EBITDA were 9.0x, 7.0x, 16.8x and 5.5x, respectively. The mean,
median, high and low multiples of Enterprise Value to LTM EBIT were 12.4x,
10.6x, 23.4x and 6.6x, respectively. Applying the mean multiples of Enterprise
Value to LTM EBITDA and LTM EBIT yielded implied enterprise values of Reunion
Industries, excluding the value of its non-operating assets and liabilities, of
$65.1 million and $36.3 million, respectively. Including the value of Reunion
Industries' non-operating assets and liabilities resulted in implied equity
values of Reunion Industries of $46.6 million and $17.9 million, respectively.
Chatwins Group. In using the Comparable Transactions analysis to value
Chatwins Group on a stand alone basis, Legg Mason analyzed financial
information which included, among other things: (i) similar operating
performance; (ii) growth rates; (iii) similar operating characteristics; and
(iv) ratios of Enterprise Value to EBITDA and EBIT.
For the purposes of this analysis, the Comparable Transactions selected by
Legg Mason for Chatwins Group were the following acquisitions of diversified
manufacturing companies: R-B Capital Corp.'s acquisition of Peerless Industrial
Group Inc.; Chart Industries Inc.'s acquisition of Cryenco Sciences Inc.;
Harsco Corp.'s acquisition of Chemi-Trol Chemical Co.; J. Richard Industries
Inc.'s acquisition of Portec Inc.; and Applied Power Inc.'s acquisition of Zero
Corp.
Legg Mason noted that the mean, median, high and low multiples of Enterprise
Value to LTM EBITDA were 8.8x, 8.8x, 12.4x and 5.1x, respectively. The mean,
median, high and low multiples of Enterprise Value to LTM EBIT were 13.1x, 10.9
x, 17.8x and 9.0x, respectively.
Applying the mean multiples to Chatwins Group's LTM EBITDA and LTM EBIT
yielded implied enterprise values of Chatwins Group, excluding the value of its
ownership in Reunion Industries, of $153.0 million and $167.8 million,
respectively. Including the value of its ownership in Reunion Industries
(valued at LTM EBITDA and LTM EBIT and then adjusted for Reunion Industries'
non-operating assets and liabilities) resulted in implied equity values of
Chatwins Group of $75.1 million and $79.2 million, respectively.
Relative Valuation. The relative value of each entity was calculated, based
on equity values, utilizing the Comparable Transactions' multiples, and
including the value of Reunion Industries' non-operating assets and liabilities
and Chatwins Group's ownership in Reunion Industries.
With Reunion Industries' non-operating assets and liabilities, the ownership
based on the relative value of Chatwins Group to Reunion Industries using LTM
EBIT and LTM EBITDA multiples was calculated to be 82%:18% and 62%:38%,
respectively.
Discounted Cash Flow Analysis
Legg Mason reviewed a discounted cash flow analysis of Reunion Industries
and Chatwins Group premised upon the assumptions summarized below. The
discounted cash flow analysis was based upon the financial and operating
information relating to the business, operations and prospects of Reunion
Industries and Chatwins Group supplied by the management of Reunion Industries
and Chatwins Group and covering calendar years 1999 through 2003.
Reunion Industries. Using discount rates ranging from 9.5% to 19.5%, Legg
Mason calculated the present value of the projected stream of Net Unleveraged
Cash Flow (as defined below) for calendar years 1999 through 2003 and the
present cash value of the terminal value (the "Terminal Value") of Reunion
Industries at December 31, 2003. Legg Mason applied discount rates derived from
Reunion Industries' implied weighted average cost of capital (using a pricing
model known as the Capital Asset Pricing Model and based on general
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and systemic risk factors reflected by the Comparable Companies) and developed
a range of rates which reflected the risk implied by Reunion Industries' recent
and projected operating performance. "Net Unleveraged Cash Flow," as used in
the analysis, is defined, for each period, as projected EBIT, less taxes at an
estimated rate of 40.0%, plus projected depreciation and amortization, less
projected capital expenditures, plus or minus projected changes in non-cash
working capital. The Terminal Value was computed by multiplying Reunion
Industries' projected EBIT by terminal multiples of 4.0x to 8.0x. Legg Mason
adjusted the calculated present value of the Net Unleveraged Cash Flow and
Terminal Value by subtracting the debt on Reunion Industries' balance sheet,
and adding cash and cash equivalents, to calculate a range of equity values for
Reunion Industries. Legg Mason believes the ranges of discount rates and
terminal multiples were appropriate in view of Reunion Industries' current
performance, projected performance and Legg Mason's estimate of Reunion
Industries' weighted average cost of capital of 14.5%.
Based on the range of discount rates and terminal multiples referred to
above, Legg Mason calculated a range of equity values for Reunion Industries,
excluding the value of its non-operating assets and liabilities, of $-4.6
million to $22.8 million. The equity value calculated using Reunion Industries'
estimated weighted average cost of capital as a discount rate and a 6.0x EBIT
Terminal Value is calculated at $6.7 million. Including the value of Reunion
Industries' non-operating assets and liabilities resulted in an implied equity
value of Reunion Industries of $15.7 million.
Chatwins Group. Using discount rates ranging from 8.0% to 18.0%, Legg Mason
calculated the present value of the projected stream of Net Unleveraged Cash
Flow (as defined below) for calendar years 1999 through 2003 and the present
cash value of the terminal value (the "Terminal Value") of Chatwins Group at
December 31, 2003. Legg Mason applied discount rates derived from Chatwins
Group's implied weighted average cost of capital (using a pricing model known
as the Capital Asset Pricing Model and based on general and systemic risk
factors reflected by the Comparable Companies) and developed a range of rates
which reflected the additional risk implied by Chatwins Group's recent and
projected operating performance. "Net Unleveraged Cash Flow," as used in the
analysis, is defined, for each period, as projected EBIT, less taxes at an
estimated rate of 40.0%, plus projected depreciation and amortization, less
projected capital expenditures, plus or minus projected changes in non-cash
working capital. The Terminal Value was computed by multiplying Chatwins
Group's projected EBIT by terminal multiples of 4.0x to 8.0x. Legg Mason
adjusted the calculated present value of the Net Unleveraged Cash Flow and
Terminal Value by subtracting the debt and preferred stock on Chatwins Group's
balance sheet, and adding cash and cash equivalents, to calculate a range of
equity values for Chatwins Group. Legg Mason believes the ranges of discount
rates and terminal multiples were appropriate in view of Chatwins Group's
current performance, projected performance and Legg Mason's estimate of
Chatwins Group's weighted average cost of capital of 13.0%.
Based on the range of discount rates and terminal multiples referred to
above, Legg Mason calculated a range of equity values for Chatwins Group,
excluding the value of its ownership in Reunion Industries, $3.5 million to
$137.8 million. The equity value calculated using Chatwins Group estimated
weighted average cost of capital as a discount rate and a 6.0x EBIT Terminal
Value is $58.8 million. Including the value of its ownership in Reunion
Industries resulted in an implied equity value of Chatwins Group of $64.6
million.
Relative Valuation. The relative value of each entity was calculated
utilizing the Discounted Cash Flow values calculated using each entities'
estimated weighted average cost of capital as a discount rate and a 6.0x EBIT
Terminal Value, and including the value of Reunion Industries' non-operating
assets and liabilities and Chatwins Group's ownership in Reunion Industries in
Reunion Industries' and Chatwins Group's valuations, respectively. These
relative valuations were calculated for Reunion Industries and Chatwins Group.
When adjusting for Reunion Industries' non-operating assets and liabilities,
the ownership based on the relative value of Chatwins Group to Reunion
Industries was calculated to be 80%:20% (shown as Chatwins Group%:Reunion
Industries%).
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Leveraged Buyout Analysis
Legg Mason also reviewed a leveraged buyout analysis of Reunion Industries
and Chatwins Group as a means of establishing the value of each company
assuming that it was purchased by a financial buyer. A leveraged buyout
involves the acquisition or recapitalization of a company financed primarily by
incurring debt that is serviced by the post-LBO operating cash flow of the
company.
Reunion Industries. Based on this analysis, Legg Mason calculated an equity
value for Reunion Industries, excluding the value of its non-operating assets
and liabilities, of $-1.4 million. Including the value of Reunion Industries'
non-operating assets and liabilities resulted in an implied equity value of
Reunion Industries of $7.6 million.
Chatwins Group. Based on this analysis, Legg Mason calculated an equity
value for Chatwins Group and excluding the value of its ownership in Reunion
Industries, of $3.4 million. Chatwins Group and including the value of its
ownership in Reunion Industries resulted in an implied equity value of Chatwins
Group of $6.2 million.
Relative Valuation. The relative value of each entity was calculated
utilizing the LBO analysis values calculated above, and including the value of
Reunion Industries' non-operating assets and liabilities and Chatwins Group's
ownership in Reunion Industries in Reunion Industries' and Chatwins Group's
valuations, respectively. The ownership based on the relative value of Chatwins
Group to Reunion Industries was calculated to be 45%:55% (shown as Chatwins
Group%:Reunion Industries%).
Asset Liquidation Analysis
Legg Mason also considered an asset liquidation analysis as a method of
valuing Reunion Industries and Chatwins Group. An asset liquidation assumes
that a company is dissolved and its assets sold for cash proceeds equal to
estimated fair market values. Legg Mason advised the Reunion Industries Board
that an asset liquidation tends to yield a lower value than that derived from
other analyses because a liquidation does not attribute any value to the
operation of the liquidated entity as a going concern. In the course of
considering this type of analysis, Legg Mason determined that an asset
liquidation analysis would not provide a reliable measure of the value of
either Reunion Industries or Chatwins Group, as the liquidation values of the
assets of operating companies in general represent only a small portion of such
entities' going concern value. While an asset liquidation analysis for Chatwins
Group and Reunion Industries was not considered reliable, Legg Mason did note
that in the event Reunion Industries needed additional cash flow to service its
debt or pay non-operating liabilities, certain non-operating assets of Reunion
Industries could be liquidated.
Pro Forma Merger Analysis
In this analysis, Legg Mason calculated and Reunion Industries' management
confirmed the calculation of Reunion Industries' historical net income
available to common stockholders for the latest twelve months ended December
31, 1998, from continuing operations (net income adjusted for one-time write-
offs and charges and excluding the Juliana operations) to be $0.4 million, or
$0.10 per share. Then Legg Mason calculated pro forma latest twelve months
ended December 31, 1998 net income available to common stockholders from
continuing operations for the combined entity, Reunion Industries and Chatwins
Group (net income adjusted for one-time write-offs and charges and excluding
the Juliana operations) to be $2.2 million, or $0.20 per share, representing
101.2% accretion for Reunion Industries' stockholders.
Legg Mason utilized management's projected earnings for the Reunion
Industries and Chatwins Group combined entity to calculate the present value of
the NOL to the combined company. Each year's saving was discounted back at
Reunion Industries' weighted average cost of capital, calculated to be 14.5%,
to arrive at a present value of the NOL. This analysis provided an implied
present value of the NOL to Reunion Industries and Chatwins Group of $30.9
million. These analyses calculated the present value of the NOLs based on
projections that were provided to Legg Mason by the managements of Reunion
Industries and Chatwins Group.
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Other Factors
In rendering its Opinion, Legg Mason considered certain other factors,
including a review of the business and operations of and the industries in
which Reunion Industries or Chatwins Group operate, a review of Reunion
Industries' and Chatwins Group's historical operating results and the financial
and operating information with respect to the business, operations and
prospects of Reunion Industries and Chatwins Group, a review of the current and
historic stock price performance of Reunion Industries and other factors it
deemed relevant.
Legg Mason is a nationally recognized investment banking firm which has
substantial experience in, among other things, the valuation of businesses and
securities in connection with mergers, acquisitions, underwritings, sales and
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. In the ordinary course of
its business, Legg Mason may actively trade in the securities of Reunion for
its own account and the accounts of its customers, and accordingly, may at any
time hold a long or short position in such securities.
Pursuant to the terms of an engagement letter, Reunion agreed to pay Legg
Mason $100,000 for acting as financial advisor in connection with Reunion's
analysis of the financial terms of the Merger. Of this amount $25,000 was paid
upon the engagement of Legg Mason and $25,000 on the presentation of findings
to the Reunion Board of Directors in March 1999 and Reunion paid Legg Mason a
fee of $50,000 for rendering the Legg Mason Opinion. Reunion has agreed to
reimburse Legg Mason for its out-of-pocket expenses, and to indemnify Legg
Mason and certain related parties against certain liabilities, including
liabilities under the federal securities laws, arising out of or in connection
with the services rendered by Legg Mason under its engagement letter. Reunion
previously paid Legg Mason a total of $400,000 in connection with the merger of
Reunion and Chatwins that was proposed but abandoned prior to February 1999.
Chatwins Group's Reasons for Merger
In reaching its decision to enter into the merger agreement, Chatwins
Group's management and Board of Directors considered a number of factors
including, among others:
. the potential reduction in its overall effective borrowing rate as a
result of the replacement of its existing credit facilities with new
credit facilities (the high-yield debt offering and the refinancing
transaction)
. the potential reduction in restrictions on consummation of acquisitions
and incurrence of indebtedness as a result of the replacement of Chatwins
Group's existing credit facilities with the new credit facilities (the
high-yield debt offering and the refinancing transaction)
. the ability for the Chatwins Group stockholders to achieve greater
liquidity through a merger into an already public company
. the possibility of sheltering some of Chatwins Group's future earnings
through utilization of Reunion Industries' NOLs
. the opportunity for possible operating synergies as a result of a
combined Reunion Industries/Chatwins Group entity
. the terms and conditions of the merger agreement, including the number of
Reunion Industries shares to be issued to the Chatwins Group stockholders
. the fact that the Chatwins Group preferred stock will be automatically
converted at its redemption value into Reunion Industries preferred stock
(Reunion Industries Series A preferred stock)
. the possibility that Reunion Industries' manufacturing and non-
manufacturing assets might be sold for cash that could be reinvested in
acquisitions more consistent with the manufacturing operations of Reunion
Industries and Chatwins Group
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. the fact that the merger will not be a taxable transaction to the common
stockholders of Chatwins Group
Following consideration of the information and factors described above,
Chatwins Group's Board of Directors concluded that the merger is in the best
interests of Chatwins Group and its stockholders and approved the merger
agreement by unanimous written consent dated March 30, 1999. In reaching this
conclusion, Chatwins Group's Board of Directors did not assign relative or
specific weights to the above factors or determine that any particular factor
was of unique importance. Instead, Chatwins Group's Board of Directors based
its decision upon the totality of the information and factors presented to it
or otherwise known to its members.
On March 30, 1999, a majority of the stockholders of Chatwins Group approved
and adopted the merger agreement by written consent.
Terms of the Merger
The description of the merger agreement set forth below describes the
material terms of that agreement but does not purport to describe all of the
terms of the merger agreement. All stockholders are urged to read the merger
agreement, which is attached as Annex A to this proxy statement/prospectus, in
its entirety.
The merger will be accomplished under the Delaware General Corporation Law
("DGCL") pursuant to the merger agreement by and between Reunion Industries and
Chatwins Group. Pursuant to the merger agreement, Chatwins Group will be merged
with and into Reunion Industries and the independent corporate existence of
Chatwins Group shall cease as of the effective time of the merger.
Conversion or Cancellation of Chatwins Group Common Stock
At the effective time of the merger, the common stock of Chatwins Group
theretofore issued and outstanding and held by the stockholders of Chatwins
Group shall be automatically converted into the right to
. an aggregate of 8,500,000 shares of Reunion Industries common stock
. plus up to an additional 500,000 shares of Reunion Industries common
stock in the event that Chatwins Group, King-Way and NAPTech achieve
specified performance levels in 1999
. plus cash in lieu of any fractional share interests
The 500,000 shares of Reunion Industries common stock, the issuance of which
is contingent on the performance of Chatwins Group, King-Way and NAPTech, as
described in the second bullet point above, will be issued as follows:
. 200,000 shares of Reunion Industries common stock if the aggregate EBITDA
of those business units (as defined below) is at least $27,911,000 (which
is the budgeted aggregate EBITDA for these business units for the year
ended December 31, 1999)
. 0.3 shares of Reunion Industries common stock for each dollar by which
the aggregate EBITDA of those business units exceeds $27,911,000 for the
year ended December 31, 1999 up to an additional 300,000 shares
For purposes of this determination, EBITDA means the earnings before
interest expense, taxes, depreciation and amortization of Chatwins Group's
business units, including King-Way and NAPTech, but excluding headquarters
overhead expense, determined in accordance with generally accepted accounting
principles, consistently applied.
Neither Reunion Industries nor Chatwins Group can predict whether the EBITDA
for 1999 will exceed $27,911,000 or, if it does, the amount by which it will
exceed $27,911,000. Thus, the precise number of shares
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of Reunion Industries common stock to be issued in the merger to Chatwins Group
stockholders cannot be predicted. Assuming that 8,500,000 shares of Reunion
Industries common stock are issued in the merger and that there are 292,887.4
shares of Chatwins Group common stock outstanding at the time of the merger
(which assumes that all outstanding warrants are exercised prior to the
merger), each share of Chatwins Group common stock will be converted into 29.02
shares of Reunion Industries common stock in the merger. The equivalent per
share value of the Chatwins Group common stock as of April , 1999, which is
calculated by multiplying 29.02 times the closing market price of Reunion
Industries common stock on that date, was $ per share.
The shares of Reunion Industries common stock issued in the merger will be
allocated among the holders of Chatwins Group common stock pro rata, based on
their percentage ownership of Chatwins Group common stock at the effective time
of the merger. As of April 23, 1999, there were [289,677.4] shares of Chatwins
Group common stock outstanding, plus exercisable warrants to purchase an
additional [3,210] shares of Chatwins Group common stock, which must be
exercised or terminated prior to the merger.
The shares of Reunion Industries' common stock currently owned by Chatwins
Group, aggregating approximately 38% of the issued and outstanding common stock
of Reunion Industries, as well as a warrant to purchase an additional 75,000
shares of its common stock owned by Chatwins Group will be retired in
connection with the merger. All shares of Chatwins Group common stock held by
Chatwins Group as treasury shares will be canceled and retired at the effective
time of the merger and no shares of Reunion Industries' common stock will be
issuable in respect thereof.
Conversion of Chatwins Group Preferred Stock
Chatwins Group has three classes of issued and outstanding preferred stock.
At the effective time of the merger, each share of the Chatwins Group preferred
stock will be automatically converted into one share of Reunion Industries
Series A preferred stock. The Reunion Industries Series A preferred stock will
have the following material rights, preferences, privileges and restrictions:
. subject to any restrictions provided by law, Reunion Industries'
certificate of incorporation or the terms of any Reunion Industries
indebtedness, it will be redeemable at any time at the option of Reunion
Industries at the redemption price then in effect, plus accumulated but
unpaid dividends, so long as no shares of Series B preferred stock
expected to be issued in connection with the acquisition of King-Way are
outstanding
. the aggregate initial redemption price will be $8.7 million, assuming the
merger occurs on June 29, 1999
. it will carry a cumulative dividend of 10% of the redemption price per
annum, payable as and when declared by the Board of Directors of Reunion
Industries
. as to dividends, it will be senior in right of payment to dividends on
the Reunion Industries common stock but junior in right of payment to
dividends on the Reunion Industries Series B preferred stock
. it will not be entitled to any voting rights (except as required by law)
and will not have any right of conversion into the common stock or any
other securities of Reunion Industries
. upon a liquidation of Reunion Industries, the holders will be entitled to
be paid, out of the assets of Reunion Industries available for payment to
the holders of its capital stock, an amount equal to the redemption price
plus accrued but unpaid dividends; their right to such payment being
senior to any payment on liquidation to holders of Reunion Industries
common stock and Series B preferred stock
Mr. Charles E. Bradley, Sr. and Mr. Poole are beneficial owners of all of
the Chatwins Group preferred stock presently outstanding.
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Cash in Lieu of Fractional Shares
No certificate or scrip representing fractional shares of Reunion Industries
common stock will be issued in the merger upon the surrender for exchange of
Chatwins Group common stock, and any fractional share interests will not
entitle the owner to vote or to any rights as a stockholder of Reunion
Industries. In lieu of any such fractional shares, each person who would
otherwise have been entitled to a fraction of a share of Reunion Industries
common stock will receive a cash payment from Reunion Industries. The cash
payments for fractional interests received in the conversion of Chatwins Group
common stock held at the effective time of the merger will be determined by
multiplying (i) the market price per share of Reunion Industries' common stock
on the NASDAQ Small-Cap Market at the close of business on the date the merger
is effected by (ii) the fractional share interest to which such holder would
otherwise be entitled.
Effective Time of Merger
The merger will be consummated on the earliest practicable date after all of
the conditions thereto have been satisfied,or waived including the approval of
the merger agreement by Reunion Industries' stockholders at the annual meeting.
A majority of the Chatwins Group's stockholders approved the merger agreement
by partial written consent on March 30, 1999. Reunion Industries and Chatwins
Group have designated June 29, 1999 as the date the merger is to be effected in
the merger agreement, although there can be no assurances that the merger will
be consummated by that time. The merger will become effective immediately upon
the filing of a certificate of merger in accordance with Delaware law or such
later date as may be specified in the certificate of merger.
Representations and Covenants
The merger agreement contains representations, warranties and covenants by
both Reunion Industries and Chatwins Group.
Chatwins Group has made certain representations and warranties to Reunion
Industries with respect to, among other things:
. its corporate organization
. its power and authority to enter into and consummate the merger
. its capitalization and voting rights
. the accuracy of its recent publicly-filed financial information
. changes in its business since December 31, 1998
. litigation and other disputes
. the ownership of its intellectual property
. the existence of any conflicts with its charter documents and other
agreements that may be caused by the merger agreement or the merger
. violations or breaches that may occur or be caused by the merger
agreement or the merger
. certain contracts and agreements to which it is a party
. title to its property and assets
. certain labor and tax matters
. compliance with applicable laws
Reunion Industries has made certain representations and warranties to
Chatwins Group with respect to, among other things:
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. its corporate organization
. its power and authority to enter into and consummate the merger
. the existence of any conflicts with its charter documents and other
agreements that may be caused by the merger agreement or the merger
. violations or breaches that may occur or be caused by the merger
agreement or the merger
. the legality of the consideration being paid in the merger
. the accuracy of its recent publicly-filed financial information
. changes in its business since December 31, 1998
. its capitalization
. certain legal proceedings involving Reunion Industries
. compliance with applicable laws
Chatwins Group has covenanted to Reunion Industries that, among other
things:
. it will conduct its business in the regular course during the period
prior to the effective time of the merger
. it will not amend its corporate charter documents or enter into certain
types of transactions during the period prior to the effective time of
the merger
. it will afford Reunion Industries and its representatives access to
information about Chatwins Group
. it will use its best efforts to obtain all required approvals by
regulatory and governmental authorities as soon as possible
Chatwins Group also covenanted to Reunion Industries that it would promptly
solicit the approval of the merger agreement by the stockholders of Chatwins
Group. Chatwins Group obtained this approval on March 30, 1999.
Reunion Industries has covenanted to Chatwins Group that, among other
things:
. it will conduct its business in the regular course during the period
prior to the effective time of the merger
. it will not amend its corporate charter documents, issue or sell any
capital stock or stock options, or enter into certain types of
transactions during the period prior to the effective time of the merger
. it will afford Chatwins Group and its representatives access to
information about Reunion Industries
. it will use its best efforts to obtain all required approvals by
regulatory and governmental authorities as soon as possible
Reunion Industries also covenanted to Chatwins Group that it would promptly
seek the approval of the merger agreement by the stockholders of Reunion
Industries.
Reunion Industries and Chatwins Group have agreed that each will bear its
own costs and expenses in connection with the merger, with Reunion Industries
being responsible for the costs of soliciting the approval of Reunion
Industries stockholders, Legg Mason's advisory fees, and for registering with
the SEC (and any required state authorities) the common stock to be issued in
connection with the merger. Reunion Industries and Chatwins Group have also
agreed to cooperate to complete the closing of the refinancing transaction and
to equally share related expenses.
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Conditions to Consummation of the Merger; Regulatory Requirements
The obligation of each of Chatwins Group and Reunion Industries to
consummate the merger is subject to the prior fulfillment or waiver of the
following conditions:
. Reunion Industries and Chatwins Group receiving the requisite stockholder
approval under Delaware law and the holders of no more than 5.0% of the
Chatwins Group common stock exercising their appraisal rights under
Delaware law
. the representations and warranties of the other party remaining true in
all material respects
. the respective covenants of the other party having been performed in all
material respects
. the receipt of all orders, consents or approvals, governmental or
otherwise, that may be required
. there being an enforceable agreement for new credit facilities the
proceeds of which are sufficient to redeem the Chatwins Group $50 million
13% Senior Notes due 2003 and to provide adequate working capital after
the merger
. no material changes having occurred in the business, assets or financial
condition of the other party to the merger
. the receipt by Reunion Industries from Legg Mason of an opinion that the
consideration to be paid for Chatwins Group is fair to Reunion Industries
and its stockholders, other than Chatwins Group, from a financial point
of view, which condition has been satisfied
Chatwins Group's obligation to consummate the merger is further conditioned
upon:
. the Registration Statement on Form S-4, of which this proxy
statement/prospectus is a part, having been filed with the SEC and
declared "effective" in accordance with Section 8(a) of the Securities
Act
. Reunion Industries having complied with all applicable "Blue Sky" state
securities regulatory obligations with respect to the merger
. Reunion Industries retaining its Pacific Exchange and NASDAQ Small-Cap
Market listings following the merger and causing the shares of common
stock to be issued in connection with the merger to be listed thereon
Except for compliance with state and federal securities laws, Reunion
Industries and Chatwins Group believe that no material federal or state
regulatory approvals are necessary for the consummation of the merger. Reunion
Industries and Chatwins Group previously filed the required pre-merger
notification form under the Hart-Scott-Rodino Act and early termination of the
waiting period required under that Act was granted.
Reunion Industries believes that all of the conditions precedent to the
merger will be satisfied on or prior to June 29, 1999, the date on which the
merger is anticipated to be effected.
No Solicitations
Reunion Industries and Chatwins Group have agreed in the merger agreement
that, except as required by law, so long as the merger agreement is in effect,
neither Reunion Industries nor Chatwins Group will, or will permit its
officers, directors or other agents to, take any action to seek, initiate,
negotiate, or encourage, or enter into or participate in any discussions
regarding, any offer from any third party to acquire any securities of such
party, or to sell securities of Reunion Industries or Chatwins Group to such
third party, to merge or consolidate with such third party, or to otherwise
acquire any significant portion of the assets of such third party or to sell
its assets to such third party. The acquisitions of King-Way and NAPTech by
Reunion Industries are expressly permitted by the merger agreement.
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Amendment, Extension or Termination
The merger agreement provides that Reunion Industries and Chatwins Group
may, by mutual agreement, amend, modify, supplement, extend, terminate or
abandon the merger agreement at any time prior to the effective time of the
merger even following stockholder approval. The merger agreement permits the
boards of directors of Reunion Industries and Chatwins Group to amend the
merger agreement after stockholder approval, if the amendment does not (i)
alter or change the amount or kind of merger consideration received, (ii) alter
or change any term of the certificate of incorporation of Reunion Industries,
or (iii) alter or change any of the terms and conditions of the merger
agreement if such change would adversely affect the holders of any class or
series of securities held by such stockholders. In addition, either Reunion
Industries or Chatwins Group can terminate the merger agreement (i) if the
merger is not consummated within 120 days after the date of the merger
agreement, unless such failure to close was caused by a breach of the merger
agreement by the party seeking to terminate, (ii) if the other party has
breached certain representations, warranties and covenants contained in the
merger agreement and such breach has not been cured within ten days, or (iii)
if a court or governmental or regulatory authority has issued a final order
restricting or prohibiting the merger.
Indemnification
Reunion Industries and Chatwins Group have agreed in the merger agreement to
indemnify and hold one another harmless against all losses, damages, or
liabilities to which the other may become subject by virtue of a breach of a
representation, warranty, covenant or agreement contained in the Merger
Agreement, or certain liabilities which may arise under the Securities Act of
1933, as amended. No actions for indemnity may be brought or maintained after
the effective time of the merger.
Exchange of Certificates
As soon as practicable after the effective date of the merger, Reunion
Industries will furnish a letter of transmittal to stockholders of Chatwins
Group for use in exchanging their stock certificates, which will contain
instructions with respect to the surrender of Chatwins Group stock certificates
and the distribution of Reunion Industries common stock certificates and
Reunion Industries Series A preferred stock certificates. Reunion Industries'
existing stockholders do not need to exchange any stock certificates at any
time before or after the merger.
Chatwins Group stockholders who fail to exchange their Chatwins Group stock
certificates on or after the effective date of the merger by surrendering such
certificates, together with a properly completed letter of transmittal, to the
agent designated by Reunion Industries (the "Exchange Agent") will not receive
their Reunion Industries common stock certificates or Reunion Industries Series
A preferred stock certificates until such time as their Chatwins Group stock
certificates are later surrendered to the Exchange Agent for transfer,
accompanied by such instruments of transfer and supporting evidence as Reunion
Industries may reasonably require. Any dividends declared or distributions made
on shares of Reunion Industries common stock or Reunion Industries Series A
preferred stock which such holders have a right to receive will be retained by
Reunion Industries until such holders surrender their Chatwins Group stock
certificates in exchange for Reunion Industries common stock certificates or
Reunion Industries Series A preferred stock certificates or until paid to a
public official pursuant to applicable abandoned property, escheat or similar
laws. No interest will accrue or be payable with respect to any dividends or
distributions retained on unissued Reunion Industries common stock certificates
or Reunion Industries Series A preferred stock certificates.
On the effective date of the merger, holders of certificates representing
Chatwins Group capital stock will cease to have any rights with respect to such
shares and each such certificate will be deemed for all corporate purposes to
evidence only the right to receive shares of Reunion Industries common stock
(plus cash for any fractional shares) or Reunion Industries Series A preferred
stock for which such shares may be exchanged. The stock transfer books of
Chatwins Group will be closed from and after the closing of the transactions
contemplated by the merger agreement, and the holders of record of Chatwins
Group capital stock as of such
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closing of the merger will be the stockholders entitled to exchange their
shares of Chatwins Group capital stock for shares of Reunion Industries common
stock or Reunion Industries Series A preferred stock as provided in the Merger
Agreement. No transfer or assignment of any shares of Chatwins Group capital
stock will take place after closing until the certificates for such shares are
exchanged pursuant to the merger agreement. In the event of a transfer of
ownership of any such shares which is not registered in the stock transfer
records of Chatwins Group, no shares of Reunion Industries common stock or
Reunion Industries Series A preferred stock exchangeable for such shares will
be issued to the transferee until the certificate or certificates representing
such transferred shares are delivered to the Exchange Agent together with all
documents required to evidence and effect such transfer. In addition, it will
be a condition to the issuance of any certificate for any shares of Reunion
Industries common stock or Reunion Industries Series A preferred stock in a
name other than the name in which the surrendered Chatwins Group capital stock
is registered that the person requesting the issuance of such certificate or
note either pay to the Exchange Agent any transfer or other taxes required by
reason of the issuance of a certificate of Reunion Industries common stock or
Reunion Industries Series A preferred stock in a name other than the registered
holder of the certificate surrendered, or establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not applicable.
In no event will the Exchange Agent or Reunion Industries be liable to any
holder of Chatwins Group capital stock for shares of Reunion Industries common
stock or Reunion Industries Series A preferred stock, or dividends or
distributions thereon, delivered in good faith to a public official pursuant to
any applicable abandoned property, escheat or similar law. All shares of
Reunion Industries common stock or Reunion Industries Series A preferred stock
issued upon the surrender of shares of Chatwins Group capital stock shall be
deemed to have been issued in full satisfaction of all rights pertaining to
such shares of Chatwins Group capital stock, subject, however, to Reunion
Industries' obligation to pay any dividends or make any other distributions
with a record date prior to the effective date of the merger which may have
been declared or made by Chatwins Group on such shares of Chatwins Group
capital stock prior to the effective date of the merger and that remain unpaid
as of the effective date of the merger.
Appraisal Rights
Reunion Industries Common Stock. Reunion Industries is a Delaware
corporation. Section 262 of the Delaware General Corporation Law ("DGCL")
provides appraisal rights (sometimes referred to as "dissenters' rights") under
certain circumstances to stockholders of a Delaware corporation that is
involved in a merger. However, Section 262 appraisal rights are not available
to stockholders of a corporation whose securities are listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc. Because Reunion Industries' common stock is traded on the Pacific
Exchange, a national securities exchange, stockholders of Reunion Industries
will not have appraisal rights with respect to the merger.
Chatwins Group Common Stock. Chatwins Group is also a Delaware corporation.
The minority stockholders of Chatwins Group will have appraisal rights with
respect to the merger. A majority of the stockholders of Chatwins Group have
approved the merger agreement by consent and, therefore, have waived their
appraisal rights.
The following discussion is not a complete statement of the law pertaining
to appraisal rights under the DGCL and is qualified in its entirety by the full
text of Section 262, which is reprinted in its entirety as Annex C to this
prospectus/proxy statement. All references in Section 262 to a "stockholder"
and in this discussion to a "record holder" are to the record holders of the
shares of Chatwins Group immediately prior to the effective time of the merger
as to which appraisal rights are asserted. A person having a beneficial
interest in shares of Chatwins Group held of record in the name of another
person, such as a broker or nominee, must act promptly to cause the record
holder to follow the steps summarized below properly and in a timely manner to
perfect appraisal rights.
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Under the DGCL, record holders of Chatwins Group common stock who follow the
procedures set forth in Section 262 will be entitled to have their shares of
Chatwins Group common stock appraised by the Delaware Court of Chancery and to
receive payment of the "fair value" of such shares, exclusive of any element of
value arising from the accomplishment or expectation of the merger, together
with a fair rate of interest, as determined by the Delaware Court of Chancery.
Under Section 262, where a merger agreement is approved by partial written
consent, either before the effective date of the merger or within ten days
thereafter, Chatwins Group must notify each of its stockholders entitled to
appraisal rights that such appraisal rights are available and include in each
such notice a copy of Section 262. This proxy statement/prospectus constitutes
that notice. Any holder of Chatwins Group common stock who wishes to exercise
appraisal rights or wishes to preserve such holder's right to do so should
review the following discussion and Annex C carefully because failure to timely
and properly comply with the procedures specified in Section 262 will result in
the loss of appraisal rights under the DGCL.
A holder of Chatwins Group common stock entitled to and wishing to exercise
such holder's appraisal rights must, within 20 days after the date of mailing
of this appraisal notice, deliver to Chatwins Group a written demand for
appraisal of such holder's Chatwins Group common stock and must reasonably
inform Chatwins Group of the identity of the holder of record as well as the
intention of the holder to demand an appraisal of the fair value of the shares
held. In addition, a holder of Chatwins Group common stock wishing to exercise
appraisal rights or wishing to preserve such holder's right to do so must hold
of record such shares on the date the written demand for appraisal is made and
must continue to hold such shares through the effective time of the merger.
Failure to deliver a written demand for appraisal within 20 days after the date
of mailing of this notice to Chatwins Group stockholders will result in the
loss of appraisal rights.
Only a holder of record of Chatwins Group common stock is entitled to assert
appraisal rights for Chatwins Group common stock registered in such holder's
name. A demand for appraisal should be executed by or on behalf of the holder
of record, fully and correctly, as such holder's name appears on such holder's
stock certificates, and must state that such holder intends thereby to demand
appraisal of such holder's shares of Chatwins Group common stock.
If the shares of Chatwins Group common stock are owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian, execution of
the demand should be made in that capacity, and, if the shares of Chatwins
Group common stock are owned of record by more than one person, as in a joint
tenancy or tenancy in common, the demand should be executed by or on behalf of
all joint owners. An authorized agent, including one or more joint owners, may
execute a demand for appraisal on behalf of a holder of record; however, the
agent must identify the record owner or owners and expressly disclose the fact
that, in executing the demand, the agent is agent for such owner or owners. A
record holder, such as a broker who holds Chatwins Group common stock as
nominee for several beneficial owners, may exercise appraisal rights with
respect to the shares of Chatwins Group common stock held for one or more
beneficial owners while not exercising such rights with respect to the Chatwins
Group common stock held for other beneficial owners. In such case, however, the
written demand should set forth the number of shares of Chatwins Group common
stock as to which appraisal is sought. If no number of shares of Chatwins Group
common stock is expressly mentioned, the demand will be presumed to cover all
Chatwins Group common stock held in the name of the record owner. Holders of
Chatwins Group common stock who hold their shares in brokerage accounts or
other nominee forms and who wish to exercise appraisal rights are urged to
consult with their brokers to determine the appropriate procedures for the
making of a demand for appraisal by such nominee.
All written demands for appraisal of Chatwins Group common stock should be
faxed to (412) 885-5512 or mailed or otherwise delivered to Chatwins Group at
300 Weyman Plaza, Suite 340, Pittsburgh, Pennsylvania 15236, Attention: Russell
S. Carolus, so as to be received no later than April , 1999.
Within 120 days after the effective time of the merger, but not thereafter,
Chatwins Group, or any holder of Chatwins Group common stock entitled to
appraisal rights under Section 262 and who has complied with the
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foregoing procedures, may file a petition in the Delaware Court of Chancery
demanding a determination of the fair value of such shares. Chatwins Group is
not under any obligation, and has no present intention, to file a petition with
respect to the appraisal of the fair value of the Chatwins Group common stock.
Accordingly, it is the obligation of the holders of the shares of Chatwins
Group common stock to initiate all necessary action to perfect their appraisal
rights within the time prescribed in Section 262.
Within 120 days after the effective time of the merger, any record holder of
Chatwins Group common stock who has complied with the requirements for exercise
of appraisal rights will be entitled to request in writing a statement from
Chatwins Group setting forth the aggregate number of shares of Chatwins Group
common stock with respect to which demands for appraisal have been received and
the aggregate number of holders of such shares. Such statement must be mailed
within 10 days after the written request has been received by Chatwins Group or
within 10 days after expiration of the period for delivery of demands for
appraisal, whichever is later.
If a holder of Chatwins Group common stock timely files a petition for
appraisal and serves a copy of such petition upon Chatwins Group, Chatwins
Group will then be obligated within 20 days to file with the Delaware Register
in Chancery a duly verified list containing the names and addresses of all
stockholders who have demanded an appraisal of their shares and with whom
agreements as to the value of their shares have not been reached. After notice
to such stockholders as required by the Delaware Court of Chancery, the
Delaware Court of Chancery is empowered to conduct a hearing on such petition
to determine those stockholders who have complied with Section 262 and who have
become entitled to appraisal rights. The Delaware Court of Chancery may require
the holders of shares of Chatwins Group common stock who demanded payment for
their shares to submit their stock certificates to the Delaware Register in
Chancery for notation of the pendency of the appraisal proceeding. If any
stockholder fails to comply with such direction, the Delaware Court of Chancery
may dismiss the proceedings as to such stockholder.
After determining the holders of Chatwins Group common stock entitled to
appraisal, the Delaware Court of Chancery will appraise the fair value of their
shares of Chatwins Group common stock, exclusive of any element of value
arising from the accomplishment or expectation of the merger, together with a
fair rate of interest, if any, to be paid upon the amount determined to be the
fair value. Holders considering seeking appraisal should be aware that the fair
value of their Chatwins Group common stock as determined under Section 262
could be more than, the same as or less than the value of the consideration
that they would otherwise receive in the merger if they did not seek appraisal
of their Chatwins Group common stock and that investment banking opinions as to
fairness from a financial point of view are not necessarily opinions as to fair
value under Section 262. The Delaware Supreme Court has stated that "proof of
value by any techniques or methods which are generally considered acceptable in
the financial community and otherwise admissible in court" should be considered
in the appraisal proceedings. More specifically, the Delaware Supreme Court has
stated that: "Fair value, in an appraisal context, measures "that which has
been taken from the stockholder, viz., his proportionate interest in a going
concern.' In the appraisal process the corporation is valued "as an entity,'
not merely as a collection of assets or by the sum of the market price of each
share of its stock. Moreover, the corporation must be viewed as an on-going
enterprise, occupying a particular market position in the light of future
prospects." In addition, Delaware courts have decided that the statutory
appraisal remedy, depending on factual circumstances, may or may not be a
stockholder's exclusive remedy. The Delaware Court of Chancery will also
determine the amount of interest, if any, to be paid upon the amounts to be
received by persons whose shares of Chatwins Group common stock have been
appraised. The costs of the action may be determined by the Delaware Court of
Chancery and taxed upon the parties as the Delaware Court of Chancery deems
equitable. The Delaware Court of Chancery may also order that all or a portion
of the expenses incurred by any holder of Chatwins Group common stock in
connection with an appraisal, including, without limitation, reasonable
attorneys' fees and the fees and expenses of experts utilized in the appraisal
proceeding, be charged pro rata against the value of all of the shares of
Chatwins Group common stock entitled to appraisal.
Any holder of Chatwins Group common stock who has duly demanded an appraisal
in compliance with Section 262 will not, after the effective time of the
merger, be entitled to vote the shares of Chatwins Group
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common stock subject to such demand for any purpose or be entitled to the
payment of dividends or other distributions on those shares (except dividends
or other distributions payable to holders of record of Chatwins Group common
stock as of a date prior to the effective time of the merger).
If any holder of Chatwins Group common stock who demands appraisal of such
holder's shares of Chatwins Group common stock under Section 262 fails to
perfect, or effectively withdraws or loses such holder's right to appraisal, as
provided in the DGCL, the Chatwins Group common stock of such holder will be
unaffected by the Merger Agreement (other than any diluted effect) and remain
the same number of pre-merger shares of Chatwins Group common stock. A holder
of Chatwins Group common stock will fail to perfect, or will effectively lose,
the right to appraisal if no petition for appraisal is filed within 120 days
after the effective time of the merger. A holder may withdraw a demand for
appraisal by delivering to Chatwins Group a written withdrawal of the demand
for appraisal and an acceptance of the merger. Any such attempt to withdraw
made more than 60 days after the effective time of the merger will, however,
require the written approval of Chatwins Group. Further, once a petition for
appraisal is filed, the appraisal proceeding may not be dismissed as to any
holder absent court approval.
Failure to follow the steps required by Section 262 for perfecting appraisal
rights may result in the loss of such rights.
The foregoing is a summary of certain of the provisions of Section 262 and
is qualified in its entirety by reference to the full text of such Section 262,
a copy of which is attached as Annex C to this proxy statement/prospectus.
A majority of the stockholders of Chatwins Group entitled to vote on the
merger have waived their appraisal rights under the DGCL as described above in
connection with the merger.
Post-Merger Management
Effective upon the merger, it is expected that the following individuals
will serve as executive officers of Reunion Industries subject to appointment
by the Board of Directors:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Charles E. Bradley, Sr............... 69 Chairman of the Board and Chief
Executive Officer
Joseph C. Lawyer..................... 53 President and Chief Operating Officer
Richard L. Evans..................... 46 Executive Vice President of
Administration and Secretary
Kimball J. Bradley................... 33 Executive Vice President of Operations
John M. Froehlich.................... 56 Executive Vice President of Finance
and Chief Financial Officer
</TABLE>
JOSEPH C. LAWYER has been President, Chief Executive Officer and a director
of Chatwins Group since 1988. Prior to purchasing CP Industries, Inc., the
corporate predecessor of Chatwins Group's CPI division, with Stanwich Partners,
Inc. in 1986, Mr. Lawyer was General Manager of USX's Specialty Steel Products
division, where he was employed for over 17 years. Mr. Lawyer has been a
director of Respironics, Inc., a company engaged in design, manufacture and
sale of home and hospital respiratory medical products, since November 16,
1994.
KIMBALL J. BRADLEY has been a Senior Vice President of Chatwins Group since
August 1998 and a Vice President since January 1996. Until August 1998, Mr.
Bradley was Division President of Auto-Lok beginning in November 1995 after
having served as acting President of Auto-Lok beginning in August 1995. Prior
to assuming that position, Mr. Bradley managed various special projects at
Chatwins Group's corporate
51
<PAGE>
office beginning in November 1993 and at Chatwins Group's CPI division from
February 1993 to November 1993. Mr. Bradley was employed by Metalsource, a
company engaged in the steel service center business, from 1990 to 1993,
completing the executive training program and holding various sales and
purchasing positions. Mr. Bradley is the son of Charles E. Bradley, Sr. and the
brother of Charles E. Bradley, Jr.
JOHN M. FROEHLICH has been a Vice President of Chatwins Group since 1989 and
its Chief Financial Officer and Treasurer since 1988. Mr. Froehlich was
Assistant Treasurer and Director of Accounting for Incom International, Inc.
from 1975 to 1988.
The business experience of Messrs. Charles E. Bradley, Sr. and Richard L.
Evans are described in "Proposal 2. The Election of Directors--Nominees" and
"--Executive Officers."
The following table reflects all forms of compensation for services to
Reunion Industries or Chatwins Group by the persons expected to be executive
officers of the merged company.
Summary Compensation Table
Annual Compensation
<TABLE>
<CAPTION>
Long-Term
Compensation
Name and Principal Other Annual Stock Option All Other
Position Year Salary Bonus(/1/) Compensation (Shares) Compensation
- ------------------ ---- -------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Charles E. Bradley,
Sr. ................... 1998 $250,000 $ 0 $ 0 75,000 $ 0
President and Chief
Executive 1997 $200,000 0 0 0 300(/2/)
Officer of Reunion
Industries 1996 $200,000 0 0 0 312(/2/)
and Chairman of
Chatwins Group
Joseph C. Lawyer........ 1998 $427,316 $65,000 0 0 75,363(/3/)
President and Chief
Executive Officer of 1997 $388,404 $65,000 0 0 52,777(/3/)
Chatwins Group 1996 $354,144 0 0 52,277(/3/)
Richard L. Evans........ 1998 $165,000 $15,000 0 20,000 7,411(/2/)
Executive Vice 1997 $150,000 $75,000 0 0 4,662(/2/)
President, Chief
Financial Officer and 1996 $135,000 $30,000 0 50,000 4,352(/2/)
Secretary of
Reunion Industries
Kimball J. Bradley...... 1998 $141,661 $25,000 0 0 9,208(/4/)
Senior Vice President
of 1997 $105,000 0 0 0 6,825(/4/)
Chatwins Group 1996 $105,000 $55,000 0 0 8,400(/4/)
John M. Froehlich....... 1998 $145,184 $50,000 0 0 12,210(/5/)
Vice President, Chief
Financial Officer 1997 $138,276 $52,266 0 0 11,664(/5/)
and Treasurer of
Chatwins Group 1996 $132,960 $20,043 0 0 11,398(/5/)
</TABLE>
- --------
(1) Amounts shown for bonuses are amounts earned for the period shown, although
such bonuses are generally paid in the subsequent year.
(2) Contributions under nondiscriminatory defined contribution plan and certain
health insurance plans maintained by Reunion Industries currently covering
Messrs. Bradley and Evans.
(3) Includes 401(k) matching payments of $4,950, $4,750 and $4,750 in 1998,
1997 and 1996, respectively; premiums paid by Chatwins Group for life
insurance for the benefit of Mr. Lawyer of $62,413 in 1998 and $40,027 in
each of 1997 and 1996, respectively; and payments under the Chatwins Group,
Inc. Money Purchase Pension Plan of $8,000 in each of 1998 and 1997 and
$7,500 in 1996. Regarding the premiums paid by Chatwins Group for life
insurance, Mr. Lawyer has agreed with Chatwins Group that if the policy
proceeds are insufficient to reimburse Chatwins Group for the full amount
of premiums paid, he will pay the shortfall to Chatwins Group. The policy
has a face value of $1.5 million.
(4) Includes 401(k) matching payments of $2,125, $1,575 and $3,150 in 1998,
1997 and 1996, respectively; and payments under the Chatwins Group, Inc.
Money Purchase Pension Plan of $7,083, $5,250 and $5,250 in 1998, 1997 and
1996, respectively.
(5) Includes 401(k) matching payments of $4,950, $4,750 and $4,750 in 1998,
1997 and 1996, respectively; and payments under the Chatwins Group, Inc.
Money Purchase Plan of $7,260, $6,914 and $6,648 in 1998, 1997 and 1996,
respectively.
Further compensation information with respect to Messrs. Charles E. Bradley,
Sr. and Evans is set forth in "Proposal 2. The Election of Directors--Executive
Compensation and Other information."
Upon completion of the merger, it is expected that, subject to the approval
of the Reunion Industries Board, (i) Mr. Charles E. Bradley, Sr.'s annual base
compensation as an officer of Reunion Industries and of
52
<PAGE>
Chatwins Group will be combined, for a post-merger annual base compensation of
$250,000, and (ii) Mr. Poole will be compensated at a base rate of $60,000 per
annum, and will no longer be compensated as a non-employee director of Reunion
Industries.
Executive Employment Agreements
Chatwins Group entered into an employment agreement, dated as of August 1,
1996, with Joseph C. Lawyer to serve as President and Chief Executive Officer
of Chatwins Group. The employment agreement expires on July 31, 1999 but
automatically renews annually thereafter if not previously renegotiated. This
employment agreement replaced an earlier agreement between Mr. Lawyer and
Chatwins Group that expired on July 31, 1996. Pursuant to the employment
agreement, Mr. Lawyer receives (i) an annual base salary, which was established
at $354,144 for 1996, $388,404 for 1997 and $427,316 for 1998, (ii) an annual
bonus of up to 65% of his base salary based on Chatwins Group's performance
relative to its annual projections, (iii) a $600 per month automobile
allowance, (iv) two club memberships, (v) a $1.0 million life insurance policy
and a $1.5 million split-dollar life insurance policy, and (vi) coverage under
Chatwins Group other fringe benefit plans for executive officers. The annual
base salary for 1999 was determined by the Board of Directors. In the event
that the employment agreement is terminated due to Mr. Lawyer's death or
disability, Chatwins Group will continue to pay the base salary for not less
than a one year period. In the event that Chatwins Group otherwise terminates
the employment agreement without cause or in the event that Mr. Lawyer resigns
with good reason or following a change of control approved by Chatwins Group's
Board of Directors and stockholders (other than a change of control resulting
from a foreclosure or bankruptcy of one or more stockholders of Chatwins Group
or the threat of such an action), Mr. Lawyer will be entitled to receive his
base salary (subject to a dollar-for-dollar reduction for any salary received
from other employment), health coverage and life insurance coverage for one and
one-half years or for the balance of the term of the employment agreement,
whichever is greater. This employment agreement is expected to be replaced by a
substantially identical agreement between Mr. Lawyer and Reunion Industries.
Post-Merger Board of Directors
Following the consummation of the merger, two persons designated by Chatwins
Group will be appointed to serve on the Board of Directors of Reunion
Industries. It is currently anticipated that Mr. Lawyer and Mr. Kimball Bradley
will be the persons designated by Chatwins Group to serve on Reunion Industries
Board of Directors. If the merger is consummated, the post-merger Board of
Directors will be comprised as follows:
<TABLE>
<CAPTION>
Name Age
---- ---
<S> <C>
Charles E. Bradley, Sr. ................. 69
John G. Poole............................ 56
Thomas N. Amonett........................ 55
Thomas L. Cassidy........................ 70
W.R. Clerihue............................ 75
Franklin Myers........................... 46
Joseph C. Lawyer......................... 53
Kimball J. Bradley....................... 33
</TABLE>
The business experience of Messrs. Charles E. Bradley, Sr., Poole, Amonett,
Cassidy, Clerihue and Myers is in "Proposal 2--The Election of Directors--
Nominees."
The business experience of Messrs. Lawyer and Kimball Bradley is described
in "General Merger Terms-- Post-Merger Management."
Compensation of Directors
Information regarding the compensation of Messrs. Charles E. Bradley, Sr.,
Amonett, Cassidy, Clerihue, Myers and Poole in their capacity as directors of
Reunion Industries is set forth in "Proposal 2. The Election of Directors--
Director Compensation."
53
<PAGE>
Charles E. Bradley, Sr. is entitled to receive a stipend in his capacity as
Chairman of the Board of Chatwins Group at a rate of $100,000 per year.
Chatwins Group paid Mr. Bradley's $100,000 stipend in 1998. As of June 29,
1994, Chatwins Group and Mr. Bradley agreed to a split dollar life insurance
arrangement. Pursuant to this arrangement, Chatwins Group agreed to maintain
three universal type life policies on Mr. Bradley and his wife. Chatwins Group
will be reimbursed for the premiums it pays for such policies from either the
death benefit of the policies or their cash surrender value. Mr. Bradley has
agreed with Chatwins Group that if the policy proceeds are insufficient to
reimburse Chatwins Group for the full amount of premiums paid, Mr. Bradley will
pay the shortfall to Chatwins Group. The annual premiums paid by Chatwins Group
totalled $355,375 in 1998.
John G. Poole is entitled to receive a stipend in his capacity as a director
of Chatwins Group and liaison with investment banks of $42,000 per year.
Chatwins Group paid Mr. Poole's $42,000 stipend in 1998. As of December 12,
1995, Chatwins Group and Mr. Poole agreed to a split dollar life insurance
arrangement. Pursuant to this arrangement, Chatwins Group agreed to maintain
two universal type life policies on Mr. Poole. Chatwins Group will be
reimbursed for the premiums it pays for such policies from either the death
benefit of the policies or their cash surrender value. Mr. Poole has agreed
with Chatwins Group that if the policy proceeds are insufficient to reimburse
Chatwins Group for the full amount of premiums paid, Mr. Poole will pay the
shortfall to Chatwins Group. The annual premiums paid by Chatwins Group
totalled $116,453 in 1998.
Compensation Committee Interlocks
From 1994 through 1999, Charles E. Bradley, Sr., Chairman of the Board and
Joseph C. Lawyer, President and Chief Executive Officer of Chatwins Group,
participated in deliberations of Chatwins Group's Board of Directors concerning
executive officer compensation for 1994 through 1999. No other officer or
employee of Chatwins Group participated in such deliberations regarding
executive officer compensation for these years.
Pre-Merger and Post-Merger Security Ownership of Certain Beneficial Owners and
Management
As of April 23, 1999, Reunion Industries had outstanding [3,900,065] shares
of common stock. There will be approximately [10,950,000] shares of Reunion
Industries common stock outstanding immediately after the merger. The following
table sets forth information regarding the beneficial ownership of Reunion
Industries' common stock at April 23, 1999 and the expected beneficial
ownership of Reunion Industries common stock immediately after the merger, by
(i) each stockholder known to Reunion Industries to own 5% of more of Reunion
Industries common stock, (ii) each director of Reunion Industries, (iii) each
of the chief executive officer and the other named executive officers of
Reunion Industries and (iv) all current directors and executive officers of
Reunion Industries 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 Reunion Industries common stock shown as owned by him.
54
<PAGE>
<TABLE>
<CAPTION>
Pre-Merger Post-Merger
---------------------------- ----------------------
Name (and Address Amount and Percent Amount and Percent
of 5% of Beneficial Nature of Nature of
Owners) of Ownership Class of Ownership Class
------------------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Chatwins Group, Inc....... 1,525,000(1) 38.4% --(2) --
300 Weyman Plaza, Suite
340
Pittsburgh, PA 15236
Bradley Family Limited
Partnership.............. 1,525,000(3) 38.4% 4,032,424 36.8%
c/o Stanwich Partners,
Inc.
62 Southfield Avenue
One Stamford Landing
Stamford, CT 06902
Stanwich Partners, Inc.... 1,525,000(3) 38.4% --(3) --
62 Southfield Avenue
One Stamford Landing
Stamford, CT 06902
Stanwich Financial
Services Corp............ 271,280(4) 7.0% 271,280 2.5%
c/o Stanwich Partners,
Inc.
62 Southfield Avenue
One Stamford Landing
Stamford, CT 06902
Thomas N. Amonett......... 49,000(5) 1.3% 49,000 0.4%
Charles E. Bradley, Sr.... 1,538,800(6) 38.6% 4,118,066 37.5%
Thomas L. Cassidy......... 30,000(5) 0.8% 30,000 0.3%
W. R. Clerihue............ 20,000(5) 0.5% 20,000 0.2%
Franklin Myers............ 118,710(5) 3.0% 118,710 1.1%
John G. Poole............. 1,540,000(2)(3)(5) 38.6% 1,309,331(3) 11.9%
Richard L. Evans.......... 63,000(7) 1.6% 63,000 0.6%
David N. Harrington....... 0 0.0% 0 0.0%
All current directors and
executive officers as a
group (8 individuals).... 1,834,510(8) 44.5% 5,708,107 51.4%
</TABLE>
- --------
(1) Includes 75,000 shares that may be purchased pursuant to currently
exercisable warrants, with respect to which Chatwins Group has dispositive
power only.
(2) Pursuant to the merger agreement, all shares of Reunion Industries common
stock and all warrants to purchase shares of Reunion Industries common
stock held by Chatwins Group will be retired in the merger.
(3) Includes all shares of common stock shown as beneficially owned by Chatwins
Group. The Bradley Family Limited Partnership (the "Bradley FLP"),
established by Mr. Bradley in May 1998 for estate planning purposes and of
which Mr. Bradley owns 1% as general partner and 55% as a limited partner.
The Bradley FLP has designated Stanwich Partners, Inc. ("SPI") to vote
these shares and SPI in turn has designated Mr. Poole, who is one of its
officers, as the person to vote these shares on its behalf. Pursuant to
Rule 13d-3, the Bradley FLP may be deemed to be the beneficial owner of
these shares with shared dispositive power with respect thereto, and SPI
and Mr. Poole may be deemed to be the beneficial owner of these shares with
voting power with respect thereto. Upon the effectiveness of the merger,
Mr. Kimball J. Bradley will replace SPI as the person designated by the
Bradley FLP to vote these shares. Therefore, as a result of the merger, SPI
and Mr. Poole will no longer be deemed to be beneficial owners of these
shares and Mr. Kimball J. Bradley will be deemed to be the beneficial owner
of 4,728,937 shares, or 43.2% of the common stock outstanding immediately
after the merger.
55
<PAGE>
(4) Acquired by Stanwich Financial Services Corp. from Parkdale Holdings
Corporation N.V. pursuant to a settlement agreement with respect to loans
secured by these shares. On January 28, 1999, Reunion Industries Board of
Directors resolved to permit this transaction notwithstanding the Transfer
Restrictions in Reunion Industries' Certificate of Incorporation after
determining that, based on the facts presently in existence, the
transaction will not jeopardize Reunion Industries' full utilization of its
tax benefits.
(5) Includes options to purchase 15,000 shares of common stock.
(6) Includes all shares of common stock shown as beneficially owned by Chatwins
Group. Mr. Charles E. Bradley, Sr. is Chairman of the Board of Chatwins
Group as well as the beneficial owner of more than 50% of the issued and
outstanding shares of Chatwins Group and may, under Rule 13d-3, be deemed
beneficial owner of all shares of Reunion Industries common stock
beneficially owned by Chatwins Group. Mr. Bradley disclaims such beneficial
ownership. Includes currently exercisable options to purchase 13,800 shares
of common stock.
(7) Includes currently exercisable options to purchase 54,535 shares of common
stock.
(8) Includes currently exercisable warrants and options to purchase an
aggregate of 218,335 shares of common stock.
56
<PAGE>
OTHER MERGER-RELATED MATTERS
Federal Income Tax Consequences of the Merger
The following discussion does not include any state, local and foreign tax
consequences, and does not specifically address the consequences to common
stockholders of Chatwins Group or Reunion Industries other than individual
United States citizens who hold their securities as a capital asset. This
discussion is for general information only and each stockholder of Chatwins
Group or Reunion Industries is urged to consult with his or her own tax
advisor as to the consequences of the merger.
Federal Income Tax Consequences to Chatwins Group's Common Stockholders
Consummation of the merger is not conditioned upon the receipt of a ruling
from the Internal Revenue Service as to the tax consequences of the
transactions, and no such ruling has been requested. The Board of Directors of
Reunion Industries believes that, and has received an opinion of Finn Dixon &
Herling LLP, to the effect that,
(i) the merger will be treated as a tax-free reorganization under
Section 368(a)(1)(A) of the Code;
(ii) no gain or loss will be recognized by Chatwins Group's common
stockholders on the receipt of shares of Reunion Industries common stock
solely in exchange for shares of Chatwins Group common stock;
(iii) the tax basis of shares of Reunion Industries common stock
received pursuant to the merger will equal the tax basis of the shares of
Chatwins Group common stock exchanged therefor;
(iv) provided that the shares of Chatwins Group common stock are held as
capital assets at the time of the merger, the holding period of the shares
of Reunion Industries common stock received in the merger will include the
holding period of the shares of Chatwins Group common stock exchanged
therefor; and
(v) no gain or loss will be recognized by the stockholders of Reunion
Industries solely as a result of the consummation of the merger.
In rendering its opinion, Finn Dixon & Herling LLP considered the
applicable provisions of the Code, Treasury Regulations, pertinent judicial
authorities, interpretive rulings of the Internal Revenue Service, and such
other authorities as they considered relevant.
Finn Dixon & Herling LLP has not rendered an opinion on the prospective
effectiveness of the transfer restrictions imposed by the Board of Directors
on Reunion Industries common stock in preserving the net operating loss
carryforwards ("NOLs") of Reunion Industries, and has not been requested to do
so by Reunion Industries. Although Reunion Industries believes that these
transfer restrictions, as designed, can effectively preserve the NOLs, future
transactions cannot be predicted or addressed with the degree of certainty
necessary to support a legal opinion. Accordingly, no assurances of counsel
are or can be given to Reunion Industries and its stockholders that the NOLs
will not, in spite of the transfer restrictions, be severely limited under
Section 382 of the Code by reason of any such future transactions. See "Risk
Factors--We may not have the ability to fully utilize our net operating loss
carryforwards."
Federal Income Tax Consequences to Reunion Industries and Current
Stockholders
No gain or loss should be recognized by Reunion Industries or its
stockholders on the transfer of Chatwins Group assets to Reunion Industries or
Reunion Industries' accession to Chatwins Group's liabilities as a result of
the merger. The basis of Chatwins Group's assets acquired by Reunion
Industries in the merger should be the same as the basis of those assets in
Chatwins Group's hands immediately prior to the merger, and Reunion
Industries' holding period should include the Chatwins Group's holding period
with respect to the assets. The tax basis of Reunion Industries' common stock
held by existing stockholders of Reunion Industries prior to the merger will
remain the same after the merger.
57
<PAGE>
Chatwins Group's tax attributes generally will carry over to Reunion
Industries. Reunion Industries also should succeed to Chatwins Group's earnings
and profits. Reunion Industries should be treated as a continuation of Chatwins
Group for purposes of computing depreciation and for other specified purposes.
Extension of Transfer Restrictions; Preservation of Tax Benefits
Under the Code, net operating loss carryforwards for federal tax purposes
offset taxable income in future years and eliminate income taxes otherwise
payable on such taxable income (except for purposes of calculating alternative
minimum tax liability). As of December 31, 1998, Reunion Industries' NOLs were
approximately $258.1 million. Reunion Industries' NOLs expire as follows: $44.1
million in 1999, $87.3 million in 2000 and $126.7 million during the years 2001
through 2018.
On June 20, 1995 Chatwins Group acquired 1.45 million shares of common
stock, or approximately 38% of Reunion Industries' outstanding common stock,
held by Parkdale Holdings Corporation, N.V. ("Parkdale"). As a result, the
availability of Reunion Industries' NOLs might have been limited by Section 382
of the Code and the Treasury Regulations promulgated thereunder if an
"Ownership Change," as that term is defined in the Code, occurred in the
subsequent three-year period ending June 19, 1998.
The transfer restrictions described below were established by Reunion
Industries to prevent an Ownership Change from occurring. In view of the fact
that at least three years have passed since the Chatwins Group acquisition and
during such period there has been no material change in the percentage
ownership of Reunion Industries, except for the acquisition of approximately 7%
of Reunion Industries common stock by Stanwich Financial from Parkdale, by any
direct or indirect holder whose changes must be taken into account for purposes
of determining whether or not an Ownership Change has occurred, the Board of
Directors has determined, based upon an opinion of Finn Dixon & Herling LLP,
that the merger itself will not result in an Ownership Change and therefore
will not jeopardize Reunion Industries' full utilization of its NOLs under
Section 382 of the Code. Accordingly, the Board of Directors' approval of the
merger required by the transfer restrictions has been granted.
Reunion Industries believes that the transfer restrictions were successful
in preventing an Ownership Change during the three years subsequent to the
Chatwins Group acquisition of Reunion Industries common stock described above,
but the transactions contemplated by the merger will again create a risk that,
absent the continuance of the transfer restrictions for at least three years
after the merger, an Ownership Change could result if any other person acquires
5% or more of Reunion Industries' common stock in the future. Accordingly, the
Board of Directors of Reunion Industries has determined, based upon an opinion
of Finn Dixon & Herling LLP, to extend the transfer restrictions until the day
after the third anniversary of the effective date of the merger as being
necessary or desirable to preserve the NOL's.
Accordingly, the common stock of Reunion Industries outstanding immediately
prior to the merger, the common stock to be issued by Reunion Industries to the
stockholders of Chatwins Group in connection with the merger, and any common
stock issuable upon exercise of options granted under any of Reunion
Industries' stock option plans, will be subject to the transfer restrictions,
which are set forth in Article V of the certificate of incorporation of Reunion
Industries. All Reunion Industries common stock certificates will contain a
legend informing holders and transferees of the transfer restrictions.
Section 382 of the Code provides that, if a corporation undergoes an
Ownership Change, its ability to use its NOLs in the future may be limited. An
Ownership Change occurs when the aggregate cumulative increase in the
percentage ownership of a corporation's capital stock owned by persons holding
5% or more of the fair market value of such stock ("5-Percent Stockholders") is
more than 50 percentage points within a three-year testing period. For purposes
of determining percentage ownership, Section 382 generally defines stock to
include all issued and outstanding stock, except certain preferred stock. In
addition, recent Treasury Regulations provide that certain stock that may be
acquired pursuant to warrants, options, rights to purchase stock, rights to
convert other instruments into stock, and options or other rights to acquire
any such interest
58
<PAGE>
may under certain circumstances be deemed to have been acquired prior to the
actual issuance or transfer of such stock for purposes of determining the
existence of an Ownership Change under Section 382 of the Code.
In determining whether the aggregate cumulative increase in the percentage
ownership of capital stock by 5-Percent Stockholders is more than 50 percentage
points in any three-year testing period, certain special rules apply. All
stockholders who are not 5-Percent Stockholders individually are aggregated
into one or more public groups, each of which is considered to be a 5-Percent
Stockholder. Ownership of stock is generally attributed to the ultimate
individual beneficial owner, and ownership by nominees, corporations,
partnerships, trusts or other entities generally is disregarded (except to the
extent used to identify different public groups or other 5-Percent
Stockholders). When 5% or more of a corporation's stock is owned by another
entity (such as a corporation, trust or partnership) at any time during the
testing period, the owners of the other entity may be treated as one or more
separate, segregated groups of stockholders that are 5-Percent Stockholders of
the corporation, depending on whether such owners indirectly own as much as 5%
of the corporation's stock. Similarly, the purchasers of any stock from the
entity may be treated as a separate, segregated group of stockholders that is a
5-Percent Stockholder.
The applicable Treasury Regulations also provide that purchasers of stock
from the issuing corporation in a public offering may under certain
circumstances be considered a separate stockholder group that is treated as a
5-Percent Stockholder that previously owned no stock. The transfer
restrictions, accordingly, are generally designed to prohibit transfers to
persons holding or who thereafter hold sufficient Reunion Industries common
stock, either directly or constructively, such that they would be treated as 5-
Percent Stockholders under the applicable Treasury Regulations and are intended
to prevent an Ownership Change and thereby preserve Reunion Industries' ability
to maximize use of the NOLs.
If an Ownership Change occurs within the meaning of Section 382 of the Code,
the amount of NOLs that a company may use to offset income in any future
taxable year is limited, in general, to an amount determined by multiplying the
fair market value of such company's outstanding capital stock on the change
date by the "long-term tax-exempt rate," which is published monthly by the
Internal Revenue Service. For purposes of this calculation, the fair market
value of a company's outstanding capital stock is adjusted to exclude any
capital infusions occurring during the prior two years.
The following is a summary of the transfer restrictions on Reunion
Industries common stock, imposed by the Board of Directors of Reunion
Industries, which are set forth in Article V of Reunion Industries' certificate
of incorporation. The transfer restrictions apply to transfers of Reunion
Industries common stock and any other instrument that would be treated as
"stock," as determined under applicable Treasury Regulations (collectively,
"Stock"). They are intended to prevent any person or group of persons from
becoming a 5-Percent Stockholder of Reunion Industries and to prevent an
increase in the percentage Stock ownership of any existing person or group of
persons that constitutes a 5-Percent Stockholder. Under the transfer
restrictions, if a stockholder transfers or agrees to transfer Stock, the
transfer will be prohibited and void to the extent that it would cause the
transferee to hold a prohibited ownership percentage, which is defined under
Reunion Industries certificate of incorporation by reference to complex federal
tax laws and regulations, but generally means direct and indirect ownership of
5% or more (based on value) of Stock or any other percentage that would cause a
transferee to be considered a 5-Percent Stockholder under applicable Treasury
Regulations (a "Prohibited Ownership Percentage"). A transfer is also
prohibited and void if either it would result in the transferee's ownership
percentage increasing if the transferee had held a Prohibited Ownership
Percentage within the three prior years or the transferee's ownership
percentage already exceeds the Prohibited Ownership Percentage, unless
otherwise agreed to by Reunion Industries. The transfer restrictions do not
prevent transfers of Stock between persons who do not hold a Prohibited
Ownership Percentage.
The acquisition of Stock from an individual or entity that owns directly 5%
of the Stock would be deemed to result in the identification of a separate,
segregated "public group" which is a new 5-Percent Stockholder. Consequently,
the transfer restrictions will prohibit certain transfers of equity interests
by, and other actions
59
<PAGE>
involving, persons having a Prohibited Ownership Percentage, unless the
transfer or other action is approved by Reunion Industries' Board of Directors
in advance or permitted by a resolution of such board.
The transfer restrictions do not apply to any transfer that has been
approved by Reunion Industries' Board of Directors if such approval is based
upon a determination by the Board that such proposed transfer will not
jeopardize Reunion Industries' full utilization of the NOLs. The Board may or
may not grant any such transfer requests based upon existing facts and
circumstances at the time. Board approval of any prohibited transfer
transactions must be based upon an opinion of counsel.
In addition to voiding prohibited transfers, the transfer restrictions
provide a method of nullifying the effect of certain prohibited transfers after
the transfers have purportedly occurred. If such a purported transfer is made
in violation of the transfer restrictions, the transferee (the "Purported
Acquiror") will not be recognized as the owner of the Stock. If Reunion
Industries determines that such a purported transfer has violated the transfer
restrictions, it shall require the Purported Acquiror to surrender the relevant
Stock and any dividends he or she has received on them to an agent designated
by Reunion Industries (the "Agent"). The Agent will sell the Stock in an arm's
length transaction. If the Purported Acquiror has resold the Stock before
receiving Reunion Industries' demand to surrender such Stock, the Purported
Acquiror generally will be required to transfer to the Agent the proceeds of
the sale and any distributions he or she has received on the Stock. After
repaying its own expenses and reimbursing the Purported Acquiror for the price
paid for the Stock (or the fair market value of the Stock at the time of the
attempted transfer to the Purported Acquiror by gift, inheritance or similar
transfer), the Agent will pay any remaining amounts to the person who sold such
Stock to the Purported Acquiror. If the identity of the person who sold such
Stock cannot be determined through inquiry of the Purported Acquiror, the Agent
or Reunion Industries shall hold such amounts pending the determination of such
identity and, if after 90 days, such identity cannot be determined, then such
amounts may be paid over to a court or governmental agency or to a tax-exempt
entity designated under Section 501(c)(3) of the Code.
The transfer restrictions (i) may have the effect of impeding an attempt of
a person or entity to acquire a significant or controlling interest in Reunion
Industries, (ii) may render it more difficult to effect a merger or similar
transaction even if such transaction is favored by a majority of the
independent stockholders and (iii) may serve to entrench management. Management
believes, however, that the tax benefits of the transfer restrictions outweigh
any other effects they may have on Reunion Industries or its stockholders.
Termination or Extension of Transfer Restrictions
The transfer restrictions, as extended by the Board of Directors at its
March 30, 1999 Board of Directors meeting, will terminate upon the earliest to
occur of: (i) the day after the third anniversary of the effective date of the
merger; (ii) the repeal of Section 382 of the Code if Reunion Industries' Board
of Directors determines that the transfer restrictions are no longer necessary;
or (iii) the beginning of a taxable year as to which Reunion Industries' Board
of Directors determines prior to the beginning of such taxable year that no
NOLs or other tax benefits otherwise available to Reunion Industries may be
carried forward (the "Expiration Date"). In addition, the Board of Directors of
Reunion Industries is authorized to accelerate or extend the Expiration Date if
the Board determines, based on an opinion of counsel, that such acceleration or
extension is reasonably necessary or desirable to preserve the NOLs or other
tax benefits or that the transfer restrictions are no longer necessary for the
preservation thereof.
Accounting Treatment
The merger will be accounted for as a purchase under APB Opinion No. 16
"Business Combinations" ("APB16"). Chatwins Group will be the acquirer for
purposes of applying purchase accounting to the merger, and, therefore,
Chatwins Group's assets and liabilities will continue to be carried at their
historical book values after the merger, and 62% of Reunion Industries' assets
and liabilities (representing the percentage of Reunion Industries' common
stock not currently owned by Chatwins Group) will be revalued at fair value at
the time of the merger, with the excess, if any, of (i) the "purchase price" of
the merger over (ii) the fair value of 62% of
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Reunion Industries' assets and liabilities designated as goodwill to be
amortized by Reunion Industries over fifteen years. The value of Reunion
Industries' common stock to be used for determining the "purchase price" will
be the quoted market value of the common stock owned by all stockholders of
Reunion Industries other than Chatwins Group at the time the terms of the
merger are announced. The resulting amount is the APB16 purchase price for the
approximately 62% of Reunion Industries not currently owned by Chatwins Group.
This amount is compared to 62% of the fair value of Reunion Industries' assets
and liabilities to determine the amount of goodwill to be recognized.
Shares of Reunion Industries Common Stock Eligible for Future Sale
All shares of Reunion Industries common stock that will be issued in the
merger will be freely transferable, subject to the transfer restrictions in the
Reunion Industries certificate of incorporation and except for certain
restrictions on "affiliates" of Reunion Industries. Shares of Reunion
Industries common stock received by persons who are deemed to be affiliates of
Reunion Industries may be resold by them only in transactions permitted by the
resale provisions of Rule 145 (or Rule 144 in the case of such persons who
become affiliates of Reunion Industries) or as otherwise permitted under the
Securities Act of 1933, as amended. Persons who may be deemed to be affiliates
of Reunion Industries generally include certain officers, directors and
significant stockholders of Reunion Industries.
This proxy statement/prospectus does not cover resales of Reunion Industries
common stock to be received by the stockholders of Chatwins Group in the
merger, and no person is authorized to make any use of this proxy
statement/prospectus in connection with any such resale.
Anti-Takeover Effects
The transfer restrictions and the consummation of the merger, which would
result in the issuance of up to 9,000,000 shares of Reunion Industries common
stock and the cancellation of the 1,450,000 shares of common stock and 75,000
warrants currently held by Chatwins Group, may prevent or discourage an attempt
by another person or entity to acquire control of Reunion Industries. In
addition, the transfer restrictions and new common stock issuance resulting in
control of Reunion Industries by the beneficial owners of Chatwins Group of
approximately 78% of the outstanding common stock of Reunion Industries (see
"Ownership Information --Security Ownership of Certain Beneficial Owners and
Management") may render it more difficult for a third party to effect a merger
or similar transaction, even if such transaction is favored by a majority of
the independent stockholders. The transfer restrictions and the consolidation
of control may discourage or defeat mergers, proxy contests, or management
changes that stockholders may determine to be in the best interests of Reunion
Industries. The transfer restrictions may also prevent a party from acquiring
an interest in Reunion Industries large enough to effect a change in management
of Reunion Industries. Reunion Industries has proposed the merger, however, for
reasons set forth in this proxy statement/prospectus and has extended the
transfer restrictions in order to protect the availability of Reunion
Industries' significant NOLs (see "--Extension of Transfer Restrictions;
Preservation of Tax Benefits"), and not as part of an anti-takeover plan or
strategy.
No employment, credit or other agreements to which Reunion Industries is
party, individually or in the aggregate, are likely to have any anti-takeover
effects. Other than (i) the transfer restrictions, (ii) Article VI of the
Certificate of Incorporation and Section 3.1 of the Bylaws of Reunion
Industries, which establish a maximum number of directors (12), and (iii)
Article IX of the Certificate of Incorporation and Section 2.10 of the Bylaws,
which abolish cumulative voting by stockholders in director elections, no
provisions of Reunion Industries' Certificate of Incorporation or Bylaws can be
considered to have an anti-takeover effect.
The merger has not been proposed to forestall or hinder any specific effort
to accumulate Reunion Industries' securities or to obtain control of Reunion
Industries by means of a merger, tender offer, solicitation in opposition to
management or otherwise. At the present time, the Board of Directors does not
have any plan or intention to propose any anti-takeover measures in the future.
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DESCRIPTION OF CAPITAL STOCK; DIVIDENDS; TRANSFER AGENT
Reunion Industries is authorized to issue 20,000,000 shares of common stock,
$.01 par value, of which [3,900,065] were issued and outstanding as of April
23, 1999. Each share of common stock has one vote on all matters presented to
the stockholders. Since the common stock does not have cumulative voting
rights, the holders of more than 50% of the shares may, if they choose to do
so, elect all of the directors and, in that event, the holders of the remaining
shares will not be able to elect any directors. Subject to the rights and
preferences of any preferred stock which may be designated and issued
(including the Reunion Industries Series A and Series B preferred stock (see
"General Merger Terms")), the holders of common stock are entitled to dividends
when and as declared by the Board of Directors and are entitled on liquidation
to all assets remaining after payment of liabilities. The common stock has no
preemptive or other subscription rights. There are no conversion rights or
sinking fund provisions with respect to the common stock. The common stock to
be issued in connection with the merger will have the same relative powers,
designations, preferences, rights and qualifications as the common stock
outstanding immediately prior to the merger, and, like all of the common stock,
will be subject to the transfer restrictions described above under "Other
Merger--Related Matters--Extension of Transfer Restrictions; Preservation of
Tax Benefits."
The effects of the issuance of additional common stock, and in some cases
the Reunion Industries Series A and Series B preferred stock, upon the post-
merger rights of the existing stockholders of Reunion Industries will include
(i) dilution of the aggregate equity interest of the stockholders, (ii)
dilution of the aggregate voting power of the stockholders, (iii) a reduction
of existing stockholders' interests in the assets of Reunion Industries in the
event of liquidation, and (iv) the prevention or discouraging of an attempt by
another person or entity to acquire control of Reunion Industries following
effectiveness of the merger without the approval of its Board of Directors.
For many years, Reunion Industries has reinvested any earnings in its
business and, accordingly, has not paid any dividends on its common stock.
Although Reunion Industries intends to continue to invest any future earnings
in its business, it may determine at such future date that the payment of cash
dividends on its common stock would be desirable. The payment of any such
dividends would depend, among other things, upon the earnings and financial
condition of Reunion Industries.
Registrar and Transfer Company, Cranford, New Jersey, is the transfer agent
and registrar for the Reunion Industries common stock.
Reunion Industries is also authorized to issue 10,000,000 shares of "blank
check" preferred stock, par value $.01 per share. The term "blank check"
preferred stock refers to stock for which the designations, preferences,
conversion rights, cumulative, relative, participating, optional or other
rights, including voting rights, qualifications, limitations or restrictions
thereof are determined by a corporation's board of directors. Accordingly, the
Board of Directors of Reunion Industries is able to authorize the creation and
issuance of up to 10,000,000 shares of preferred stock in one or more series,
with such rights, qualifications, limitations and restrictions as may be
determined in the Board's sole discretion, with no further authorization
required of the stockholders. The existence of the authorized and unissued
preferred stock may enable the Board of Directors of Reunion Industries to
render more difficult or to discourage an attempt to obtain control of Reunion
Industries by means of a merger, tender offer, proxy contest or otherwise.
The Reunion Industries Series A preferred stock to be issued in exchange for
the Chatwins Group preferred stock in the merger is a series of Reunion
Industries "blank check" preferred stock. The Reunion Industries Series A
preferred stock is described in "Proposal 1. The Merger--Conversion of Chatwins
Group Preferred Stock."
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The Reunion Industries Series B preferred stock to be issued in the
acquisition of King-Way in exchange for the preferred stock of King-Way is a
series of Reunion Industries "Blank Check" preferred stock. The Reunion
Industries Series B preferred stock will have the following material rights,
preferences, privileges and restrictions:
. subject to any restrictions provided by law, Reunion Industries'
certificate of incorporation or the terms of any Reunion Industries
indebtedness, it will be redeemable at any time at the option of Reunion
Industries at the redemption price then in effect, plus accumulated but
unpaid dividends, and will be senior to Series A preferred stock in such
voluntary redemption
. the aggregate initial redemption price will be $5.0 million, plus
approximately $1.2 million of accrued dividends
. it will carry a cumulative dividend of 15% of the redemption price per
annum from November 3, 1997, meaning that, assuming the Series B
preferred stock is issued on June 29, 1999, it will have accrued but
unpaid dividends of approximately $1.2 million on the date of issuance,
payable as and when declared the Board of Directors of Reunion Industries
. as to dividends, it will be senior in right of payment to dividends on
the Reunion Industries common stock and the Reunion Industries Series A
preferred stock
. it will not be entitled to any voting rights (except as required by law)
and will not have any right of conversion into the common stock or any
other securities of Reunion Industries
. upon a liquidation of Reunion Industries, the holders will be entitled to
be paid, out of the assets of Reunion Industries available for payment to
the holders of its capital stock, an amount equal to the redemption price
plus accrued but unpaid dividends; their right to such payment being
junior to any payment on liquidation to holders of Reunion Industries
Series A preferred stock, but senior to any payment on liquidation to
holders of Reunion Industries common stock
The Reunion Industries Series A preferred stock and Series B preferred stock
will be privately held and Reunion Industries has no plans or obligations at
this time to register the Reunion Industries Series A or Series B preferred
stock with the Securities and Exchange Commission. The Reunion Industries
Series A and Series B preferred stock will not be subject to the transfer
restrictions, Mr. Charles E. Bradley, Sr. and Mr. John G. Poole are beneficial
owners of all of the Chatwins Group Preferred presently outstanding.
The number of shares of Reunion Industries' Series A preferred stock that
will be issued cannot yet be determined. Reunion Industries will issue 5,000
shares of Series B preferred stock if the King-Way acquisition is completed.
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COMPARATIVE RIGHTS OF SECURITY HOLDERS
General. At the effective time of the merger, the stockholders of Chatwins
Group will become stockholders of Reunion Industries. As Reunion Industries
stockholders, their rights will be governed by the DGCL and Reunion Industries'
Certificate of Incorporation and Reunion Industries' Bylaws rather than by
Chatwins Group's Restated Certificate of Incorporation and Chatwins Group's
Bylaws. Following are summaries of the material differences between the rights
of Reunion Industries' stockholders and the rights of Chatwins Group's
stockholders. For additional information regarding the rights of Reunion
Industries' stockholders, see "Description of the Capital Stock; Dividends;
Transfer Agent." The following summaries of provisions of Reunion Industries'
Certificate of Incorporation and Bylaws are qualified in their entirety by
reference to the complete copies of those documents previously filed with the
SEC and available in the SEC's public reference rooms (See "Summary--Where You
Can Find More Information").
Both Reunion Industries and Chatwins Group are organized under the laws of
the State of Delaware. Any differences, therefore, in the rights of holders of
Reunion Industries' capital stock and Chatwins Group's capital stock arise
solely from differences in their respective certificates of incorporation and
bylaws. The identification of specific differences is not meant to indicate
that other equally or more significant differences do not exist.
Authorized Capital. Reunion Industries' authorized capital stock consists of
20 million shares of common stock, par value $0.01 per share, and 10 million
shares of preferred stock, par value $0.01 per share. Chatwins Group's
authorized capital stock consists of 400,000 shares of common stock, par value
$0.01 per share; 2,249 shares of Class D, Series A preferred stock, par value
$0.01 per share; 800 shares of Class D, Series B preferred stock, par value
$0.01 per share; 1,510 shares of Class D, Series C preferred stock, par value
$0.01 per share; and 1,500 shares of Class E preferred stock, par value $0.01
per share (which Class E has been retired by Chatwins Group).
Reunion Industries and Chatwins Group Preferred Stock. The DGCL permits a
corporation's certificate of incorporation to allow its board of directors to
issue, without stockholder approval, one or more series of preferred stock and
to designate their rights, preferences, privileges and restrictions. Reunion
Industries' Certificate of Incorporation authorizes the issuance of preferred
stock in one or more series. Reunion Industries' Board is authorized to fix the
voting rights, designations, powers and preferences and the relative,
participating, optional or other rights, if any, and the qualifications,
limitations or restrictions of any series. Chatwins Group's Certificate of
Incorporation does not grant such "blank check" power to the Chatwins Group
Board; rather, all of the rights, designations, powers and preferences of the
Chatwins Group preferred stock are specifically set forth in Chatwins Group's
Certificate of Incorporation.
Payment of Dividends. The DGCL permits the payment of dividends out of a
corporation's surplus. Dividends may, in certain cases, also be paid out of net
profits for the fiscal year in which declared or out of net profits for the
preceding fiscal year. Reunion Industries' Certificate of Incorporation and
Bylaws do not contain any provisions limiting the payment of dividends within
the parameters of the DGCL. Chatwins Group's Certificate of Incorporation
places certain limitations on the amount of dividends that may be paid in
respect of its preferred stock, but not its common stock (so long as such
dividends on its common stock are paid ratably).
Directors. The DGCL permits the certificate of incorporation or bylaws of a
corporation to contain provisions governing the number and qualification of
directors. Reunion Industries' Certificate of Incorporation provides for a
board of directors of at least three and no more than twelve directors, elected
annually for a term of one year, or until their respective successors shall be
elected and qualify. Reunion Industries currently has six directors. The
Chatwins Group bylaws provide for the number of directors to be fixed from time
to time by resolution passed by a majority of the Chatwins Group Board or by
its stockholders. Chatwins Group currently has four directors.
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Stockholder Meetings. The DGCL provides that a meeting of stockholders may
be called by the board of directors or by such person or persons as may be
authorized by a corporation's certificate of incorporation or bylaws. Reunion
Industries' Certificate of Incorporation provides that a meeting of
stockholders may be called at any time by (i) Reunion Industries' Board of
Directors, (ii) the Chairman of the Board, (iii) the President, or (iv) the
holders of at least 30% of the common stock entitled to vote for the election
of directors. Chatwins Group's bylaws provide that a meeting of stockholders
may be called by (i) any two directors of the Board of Directors, (ii) the
President, (iii) any Vice President or (iv) any stockholder owning a majority
of the capital stock of Chatwins Group entitled to vote.
Indemnification of Officers and Directors. Under the DGCL, a corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil or criminal, administrative or investigative (other than an action by or
in the right of the corporation) by reason of the fact that such person is or
was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if such person acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
DGCL permits similar indemnification in the case of derivative actions, except
that no indemnification may be made with respect to any claim, issue or matter
as to which such person shall have been adjudicated to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Reunion Industries' Certificate of Incorporation provides that the
corporation shall, to the fullest extent permitted by law, indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (including a derivative action) by reason of
the fact that he is or was a director or officer of Reunion Industries, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Reunion Industries' Certificate of Incorporation also authorizes the
advancement of expenses in certain circumstances.
Chatwins Group's Certificate of Incorporation also provides that directors
and officers of Chatwins Group shall be indemnified by the corporation to the
fullest extent permitted by the DGCL, but does not address the issue of
advancement of expenses.
Business Combinations with Interested Stockholder. Section 203 of the DGCL
prohibits a corporation that does not opt out of its provisions from entering
into certain business combination transactions with "interested stockholders"
(generally defined to include persons beneficially owning 15% or more of the
corporation's outstanding capital stock) for a period of three years following
the date such person became an interested stockholder unless prior to that
date, the board of directors approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder
or unless certain super-majority votes are obtained from the stockholders.
Reunion Industries has opted in its Certificate of Incorporation not to be
governed by Section 203, whereas Chatwins Group has not opted out of Section
203.
Transfer Restrictions. The Certificate of Incorporation of Reunion
Industries contains the transfer restrictions (see "Other Merger Related
Issues-Extension of Transfer Restrictions; Preservation of Tax
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Benefits"), whereas Chatwins Group's Certificate of Incorporation does not
contain any similar provisions restricting the transferability of its capital
stock.
MERGER-RELATED TRANSACTIONS
Possible High-Yield Debt Offering
Reunion Industries is currently pursuing an offering of up to $100 million
of senior unsecured high-yield debt. See "Summary--High Yield Debt Offering."
Refinancing Transaction
It is a condition to Reunion Industries' obligation to close the merger that
Reunion Industries have an enforceable agreement with one or more lenders for
refinancing sufficient to redeem the Chatwins Group $50 million 13% Senior
Notes due 2003 and to provide adequate working capital to Reunion Industries
after giving effect to the merger.
Reunion Industries currently anticipates that on or about the effective time
of the merger, it will enter into senior secured facilities totaling $70.0
million with Bank of America. These credit facilities will have three
components: (i) a $50.0 million revolving credit facility, (ii) a $15.0 million
term loan facility amortizing in 28 quarterly principal payments, and (iii) a
$5.0 million capital expenditures facility amortizing in 20 quarterly principal
payments.
These three facilities have a three-year initial term and automatically
renew for additional one-year increments unless either party gives the other
notice of termination at least 60 days prior to the beginning of the next one-
year term.
Interest will accrue on loans outstanding under the facilities at variable
rates tied to either Bank of America's prime rate as that term would be defined
in the financing agreements, or LIBOR, at the option of Reunion Industries. The
interest rate tied to the prime rate will initially be the prime rate for the
revolving credit facility and the prime rate plus .25% for the term loan and
capital expenditures facilities. The interest rate tied to LIBOR will initially
be LIBOR plus 2.25% for the revolving credit facility and LIBOR plus 2.50% for
the term loan and capital expenditure facilities. These interest rates are
subject to quarterly adjustment after the first year based on the ratio of
Reunion Industries' total funded debt to earnings before interest, taxes,
depreciation and amortization.
It is expected that any amounts borrowed by Reunion Industries under the new
facilities will be secured by a first priority lien on, and security interest
in, substantially all of the current and after-acquired assets of Reunion
Industries, which after the merger will include the assets of Chatwins Group,
including, without limitation, all accounts receivable, inventory and proceeds,
property, plant and equipment, chattel paper, documents, instruments, deposit
accounts, contract rights and general intangibles.
The new facilities will require Reunion Industries to comply with financial
covenants and other covenants, including cash flow coverage and leverage tests.
In addition, the new facilities will contain various affirmative and negative
covenants customarily found in credit agreements for similar transactions,
including limitations on stockholder and related party distributions. The new
facilities will require Reunion Industries to pay the reasonable expenses
incurred by the lenders in connection with the new facilities.
It is expected that Reunion Industries will be required to pay a closing fee
to Bank of America equal to $500,000.
The closing of the new facilities is conditioned upon, among other things,
Bank of America's completion of a satisfactory investigation of Reunion
Industries and Chatwins Group; there being no material adverse change, in the
opinion of Bank of America, in Reunion Industries' and Chatwins Group's assets,
liabilities, business, financial condition and results of operations; and
approval of the facilities by Bank of America.
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There is no assurance that Reunion Industries will be able to complete this
refinancing transaction on favorable terms or at all.
King-Way and NAPTech Acquisitions
Reunion Industries has entered into agreements to acquire King-Way and
NAPTech. See "Summary--King-Way Acquisition" and "--NAPTech Acquisition."
Chatwins Group Warrants
On May 3, 1993, Chatwins Group issued 50,000 warrants pursuant to a Warrant
Agreement, dated as of May 1, 1993, with State Street Bank and Trust Company
(as successor warrant agent to The First National Bank of Boston) (the "Warrant
Agreement"). Each warrant is exercisable into one share of Chatwins Group
common stock at $0.01 per share. The Warrants were not exercisable except upon
the occurrence of certain trigger events as defined in the Warrant Agreement
or, if no trigger event had occurred prior to May 3, 1998, upon Chatwins
Group's failure to consummate a repurchase offer due to a payment blockage,
both as defined in the Warrant Agreement. No trigger event had occurred through
May 3, 1998 and a payment blockage existed on such date, resulting in the
Warrants becoming exercisable as of May 3, 1998. Consistent with the Warrant
Agreement, Chatwins Group notified holders of the Warrants of the existence of
a payment blockage within 30 days of such date. On June 5, 1998, in connection
with the previously proposed merger of Reunion Industries and Chatwins Group,
Chatwins Group sent the Chatwins Group warrantholders a Bring-Along Notice
under, and as defined in, the Warrant Agreement. Pursuant to the Warrant
Agreement the warrantholders had 30 days from the date of the Bring-Along
Notice to exercise their Chatwins Group Warrants (the "Bring-Along Period");
however, the Bring-Along Period was subsequently suspended indefinitely when
the previously proposed merger was abandoned. Through April 23, 1999, [46,790]
warrants have been exercised at $.01 per share resulting in an additional
46,790 shares of Chatwins Group common stock outstanding. Warrants exercisable
for 3,210 shares of Chatwins Group common stock remain outstanding. Of these,
2,110 are owned by Messrs. Charles E. Bradley, Sr. and Mr. Lawyer and are
expected to be exercised by them prior to the merger. In connection with the
proposed merger, Chatwins Group will send the Chatwins Group warrantholders a
new Bring-Along Notice which will renew the Bring-Along Period. Pursuant to the
Warrant Agreement, warrantholders who exercise their Chatwins Group Warrants
will automatically be deemed to consent to the merger.
Certain Indebtedness to Chatwins Group
Mr. Charles E. Bradley, Sr. and Mr. Poole are indebted to Chatwins Group in
the amount of $1.01 million in connection with the May 1988 issuance of certain
Chatwins Group preferred stock. In connection with the merger, it is
anticipated that the interest free, demand notes evidencing this indebtedness
will be amended and restated to provide that the indebtedness will be repayable
only out of dividends paid on or redemption proceeds of the Series A preferred
stock they receive in the merger.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of Reunion Industries Board of Directors
with respect to the merger agreement, the issuance of Reunion Industries common
stock and the creation and issuance of Reunion Industries preferred stock in
connection with the merger, you should be aware that certain stockholders,
directors and members of the management of Reunion Industries and certain
stockholders, directors and members of the management of Chatwins Group have
interests in the merger and related transactions which are different from, and
in addition to, the stockholders of Reunion Industries generally.
Except as provided below, Reunion Industries believes that the interest of
Reunion Industries' management and principal stockholders in the consummation
of the merger arises solely from their respective positions as fiduciaries of
Reunion Industries and/or their ownership of securities of Reunion Industries,
and that such persons will receive no extra or special benefit from the merger
that is not shared on a pro rata basis by all other stockholders. See also
"Certain Relationships and Related Transactions and Material Contacts with the
Company Being Acquired."
. Chatwins Group is the record owner of approximately 38% of the
outstanding common stock of Reunion Industries and owns a currently
exercisable warrant to purchase an additional 1% of Reunion Industries'
common stock. Accordingly, the beneficial owners of the common stock of
Chatwins Group currently have the right to vote up to approximately 38%
of Reunion Industries' common stock and upon exercise of the warrant
would have the right to vote approximately 39% of Reunion Industries'
common stock. In the merger, the stockholders of Chatwins Group will be
issued Reunion Industries common stock representing approximately 78% of
Reunion Industries' common stock outstanding after the merger.
. Mr. Charles E. Bradley, Sr. a director of Reunion Industries since June
20, 1995 and the President and Chief Executive Officer of Reunion
Industries since October 26, 1995, is the Chairman and a director of
Chatwins Group and a beneficial owner of approximately 48% of the
outstanding (both on a basic and on a fully diluted basis) common stock
of Chatwins Group owned of record by the Bradley Family Limited
Partnership (the "Bradley FLP"). Following the merger, the Bradley FLP
(of which Mr. Bradley is the sole general partner) will beneficially own
approximately 37% of Reunion Industries' common stock (the voting rights
in respect of which will be controlled after the effective time of the
merger by Mr. Bradley's son, Mr. Kimball Bradley) (assuming that all of
the Chatwins Group warrants are exercised into common stock of Chatwins
Group prior to the effective time of the merger). In addition, on May
19, 1998, Mr. Charles E. Bradley, Sr. was granted options to purchase an
additional 75,000 shares of common stock by the Board of Directors of
Reunion Industries. See "The Merger--Pre-Merger and Post-Merger Security
Ownership of Certain Beneficial Owners and Management."
. Mr. Poole, a director of Reunion Industries since April 19, 1996, is a
director of Chatwins Group and a beneficial owner of approximately 67%
of the outstanding (both on a basic and on a fully diluted basis) common
stock of Chatwins Group. Approximately 48% of Mr. Poole's beneficial
ownership arises by virtue of his right to vote the Chatwins Group
common stock held of record by the Bradley FLP prior to the merger.
After the merger, Mr. Poole will beneficially own approximately 12% of
Reunion Industries' common stock (assuming that all of the Chatwins
Group warrants are exercised into common stock of Chatwins Group prior
to the effective time of the merger). In addition, on February 13, 1998,
Mr. Poole was granted options to purchase an additional 15,000 shares of
the common stock of Reunion Industries. See "The Merger--Pre-Merger and
Post-Merger Security Ownership of Certain Beneficial Owners and
Management.".
. As a result of the merger, the former stockholders of Chatwins Group in
general, and Messrs. Charles E. Bradley and Poole, and their respective
families, in particular, will have the ability to control the election
of directors and the appointment of officers of Reunion Industries,
meaning that they will have
68
<PAGE>
the ability to direct the business strategy of the company. They will also
have the ability to approve important corporate matters, such as
amendments to the Certificate of Incorporation and Bylaws of Reunion
Industries, mergers, business acquisitions, dispositions and share
issuances, without the approval of the other stockholders of Reunion
Industries.
. Thomas L. Cassidy, a director of Reunion Industries since June 20, 1995,
was a director of Chatwins Group until June 1997 and currently owns less
than 1% of the outstanding and fully diluted common stock of Chatwins
Group.
. After the merger, it is expected that Mr. Charles E. Bradley, Sr. and
Mr. Poole will become the Chairman and Vice Chairman, respectively, of
Reunion Industries. Upon completion of the merger, it is expected that,
subject to the approval of the Reunion Industries Board, (i) Mr. Charles
E. Bradley, Sr.'s annual base compensation as an officer of Reunion
Industries and of Chatwins Group will be combined, for a post-merger
annual base compensation of $250,000, and (ii) Mr. Poole will be
compensated at a base rate of $60,000 per annum, and will no longer be
compensated as a non-employee director of Reunion Industries.
. Mr. Charles E. Bradley, Sr. and Mr. Poole beneficially own 100% of the
Chatwins Group preferred stock outstanding. In the merger, the Chatwins
Group preferred stock will be converted into new Reunion Industries
Series A preferred stock. See "The Merger--Terms of the Merger--
Conversion of Chatwins Group Preferred Stock."
. Mr. Charles E. Bradley, Sr., Mr. Poole and Mr. Cassidy are holders of an
aggregate of $4.35 million principal amount of Chatwins Group 13% Senior
Notes. The redemption of the Chatwins Group $50 million 13% Senior Notes
is a condition to completion of the merger, meaning that if the merger
occurs, the 13% Senior Notes held by Messrs. Charles E. Bradley, Sr.,
Poole and Cassidy will be redeemed at a redemption price of 104.33% of
the principal amount thereof.
. Mr. Charles E. Bradley, Sr. owns 42.5% of the common stock of King-Way.
His son, Mr. Kimball Bradley, who is expected to become Executive Vice
President of Reunion Industries after the merger and who is currently
Senior Vice President of Chatwins Group, owns 42.5% of the common stock
of King-Way. Mr. Evans, Executive Vice President, Chief Financial
Officer and Secretary of Reunion Industries, owns 15% of the common
stock of King-Way. As a result of this ownership structure, Mr. Charles
E. Bradley, Sr., Mr. Kimball Bradley and Mr. Evans will receive 100% of
the $100,000 cash consideration paid by Reunion Industries for the
acquisition of King-Way. See "Summary--King-Way Acquisition."
. Mr. Charles E. Bradley, Sr. owns 42.5% of the common stock of Stanwich
Holdings, Inc. Mr. Charles E. Bradley, Jr. owns 42.5% of the common
stock of Stanwich Holdings, Inc. and Mr. Poole owns 7.5% of the common
stock of Stanwich Holdings, Inc. Stanwich Holdings is the parent of
Stanwich Financial Services Corp. Stanwich Financial Services is the
holder of $7.4 million of debt and $5.0 million of preferred stock of
King-Way. As a result of this ownership of Stanwich Financial Services,
Mr. Charles E. Bradley, Sr., Mr. Charles E. Bradley, Jr. and Mr. Poole
will indirectly receive 100% of the Reunion Industries Series B
preferred stock issued by Reunion Industries for the acquisition of
King-Way and will indirectly benefit from the repayment of approximately
$13.8 million of King-Way indebtedness assumed by Reunion Industries in
the acquisition of King-Way and expected to be repaid from the proceeds
of the high-yield debt offering. See "Summary--King-Way Acquisition" and
"Description of Capital Stock; Dividends; Transfer Agent."
. Reunion Industries owes Stanwich Financial Services approximately
$350,000 as of the date of this proxy statement/prospectus. As a result
of the refinancing transaction, this indebtedness is expected to be
repaid by Reunion Industries. As a result of their ownership of Stanwich
Financial Services, Mr. Charles E. Bradley, Sr., Mr. Charles E. Bradley,
Jr. and Mr. Poole will indirectly benefit from the repayment of this
indebtedness by Reunion Industries.
. Stanwich Financial Services owns approximately 271,280 shares of Reunion
Industries common stock.
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<PAGE>
. Mr. Charles E. Bradley, Sr. personally guarantees the obligations of ORC
and Reunion Industries under ORC's credit facilities with CIT Business
Credit. At December 31, 1998, the amount outstanding under this credit
facility was approximately $14.5 million, plus a guarantee of a letter of
credit in the amount of $9.7 million, which supports the appeal bond in
Reunion Industries' litigation with Bargo Energy. As a result of the
high-yield debt offering and the refinancing transaction, the CIT
Business Credit credit facilities will be refinanced and Mr. Charles E.
Bradley, Sr. will benefit from the release of his personal guaranty of
those credit facilities.
. Mr. Charles E. Bradley Sr. owns 100% of the common stock of NAPTech. As
a result, Mr. Bradley will receive all of the $10,000 cash consideration
paid by Reunion Industries for the acquisition of NAPTech. Mr. Bradley,
also personally guarantees approximately $7.4 million of NAPTech
indebtedness and, as a result of the assumption of this indebtedness by
Reunion Industries, Mr. Bradley will be released of this obligation and
he will be paid $90,000 in consideration for having undertaken this
guaranty obligation. See "Summary--NAPTech Acquisition."
. Mr. Charles E. Bradley, Sr. and Mr. Poole are indebted to Chatwins Group
in the amount of $1.01 million in connection with the May 1988 issuance
of certain Chatwins Group preferred stock. In connection with the
merger, it is anticipated that the interest free, demand notes
evidencing this indebtedness will be amended and restated to provide
that the indebtedness will be repayable only out of dividends paid on or
redemption proceeds of the Series A preferred stock they receive in the
merger.
Each of Reunion Industries and Chatwins Group are being represented by
separate legal counsel in connection with the merger. Reunion Industries has
retained Legg Mason, an investment banking firm, to conduct evaluations of the
relative values of Reunion Industries and Chatwins Group. In addition, one-half
of the directors on the Board of Directors of Reunion Industries, which is
unanimously recommending approval of the Merger Agreement and the merger by the
stockholders of Reunion Industries at the Annual Meeting, have no affiliation,
whether by security ownership or otherwise, with Chatwins Group.
LEGAL MATTERS
Buchanan Ingersoll Professional Corporation has rendered an opinion as to
the validity of the shares of Reunion Industries common stock and the Reunion
Industries Series A Preferred Stock to be issued in connection with the merger.
The federal income tax consequences of the merger to Reunion Industries' and
Chatwins Group's common and preferred stockholders have been passed upon for
Reunion Industries by Finn Dixon & Herling LLP.
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<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
The accompanying unaudited pro forma consolidated condensed financial
statements and related notes are presented in accordance with the SEC rules and
regulations to show the pro forma effects of the merger of all of the assets
and business of Chatwins Group with and into Reunion Industries. (See "The
Merger Proposal.")
The merger will be accounted for as a purchase under APB Opinion No. 16
"Business Combinations" with Chatwins Group as the acquirer for purposes of
applying purchase accounting. Accordingly, the Chatwins Group assets and
liabilities will be accounted for at historical book values and the assets and
liabilities of Reunion Industries will be revalued at their estimated fair
value subject to adjustment upon completion of a closing date balance sheet.
Any excess of purchase price over fair value of assets acquired and liabilities
assumed (goodwill) for the 62% not previously owned by Chatwins Group will be
capitalized and amortized over 15 years. For purposes of this presentation, the
purchase price in the transaction is deemed to be approximately $11.9 million,
consisting of 2,450,065 shares of Reunion Industries' common stock valued at an
assumed price of $4.875 per share. In June, 1995 Chatwins Group had previously
acquired 1.45 million shares or 38% of Reunion Industries' then outstanding
common stock. The consideration paid above reflects the 62% of Reunion
Industries' common stock outstanding not previously owned by Chatwins Group.
Contemporaneously with the closing of the merger and related refinancing,
Reunion Industries plans to acquire King-Way and NAPTech. These acquisitions
will be accounted for as purchases under APB Opinion No. 16. The pro forma
consolidated condensed financial statements assume that the consideration for
the purchases of King-Way and NAPTech will include the assumption of $19.6
million of King-Way's debt and preferred stock (including accumulated dividends
thereon) and $7.5 million of NAPTech's debt. Amounts related to King-Way and
NAPTech are segregated in the following pro forma financial statements because
King-Way's and NAPTech's results are not included in either Reunion Industries'
or Chatwins Group's historical results. The King-Way amounts are deemed from
audited financial statements and NAPTech amounts are derived from unaudited
financial statements.
In conjunction with the merger, Reunion Industries expects to close on the
high-yield debt offering and the new credit facilities to refinance existing
debt, acquire King-Way and NAPTech and pay transaction and certain other costs
as described herein. The high-yield debt offering is assumed to carry an
interest rate of 11.5%. The new credit facilities provide for a $50.0 million
revolving credit facility, a $15.0 million term loan facility and a $5.0
million capital expenditures facility. The interest on borrowings is indexed to
LIBOR plus 2.25% to 2.50%, or to Prime Rate plus 0% to 0.25%, at Reunion
Industries' option.
The unaudited pro forma consolidated condensed balance sheet is based on the
assumption that the merger, the acquisitions of King-Way and NAPTech, the high-
yield debt offering and the refinancing were completed on December 31, 1998.
The unaudited pro forma consolidated condensed statements of operations for the
year ended December 31, 1998 are presented as if the merger, the King-Way and
NAPTech Acquisitions, the high-yield debt offering and the refinancing had
occurred on January 1, 1998.
Pro forma data are based on assumptions and include adjustments as explained
in the notes to the unaudited pro forma consolidated condensed financial
statements. The pro forma data are not necessarily indicative of the financial
results that would have occurred had the transactions been effective on January
1, 1998, and should not be viewed as indicative of operations in future
periods. The unaudited pro forma consolidated condensed financial statements
should be read in conjunction with the accompanying notes and with Reunion
Industries' and Chatwins Group's financial statements. The financial
statements, management's discussion and analysis of financial condition and
results of operations and a description of the businesses of Reunion Industries
and Chatwins Group have been included in this proxy statement/prospectus.
71
<PAGE>
REUNION INDUSTRIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
December 31, 1998 (in Thousands)
<TABLE>
<CAPTION>
Reunion Chatwins NAPTech
Industries Group King-Way Pro Pro Forma Pro Forma
Historical Historical Historical Forma Adjustments Combined
---------- ---------- ---------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and Cash
Equivalents........... $ 2,009 $ 341 $ 661 $ 467 $ 3,478
Receivables............ 12,389 38,340 4,201 615 55,545
Inventories............ 7,104 20,745 1,071 510 29,430
Other Current Assets... 1,700 4,735 97 99 6,631
------- -------- ------- ------ --------
Total Current Assets... 23,202 64,161 6,030 1,691 95,084
Property, Plant and
Equipment, Net......... 41,353 32,371 2,279 1,234 77,237
Goodwill................ 8,371 4,505 12,351 6,028 11,944 (3)
7,091 (4)
(21,849)(5)
2,692(6) 31,133
Investment in Reunion
Industries............. 6,707 (6,707)(4) 0
Due from Related
Parties................ 1,403 (1,403)(6) 0
Deferred Financing
Costs.................. 1,088 2,525 326 484(6)
(423)(7) 4,000
Other................... 860 5,694 53 (384)(4)
5,610(5) 11,833
------- -------- ------- ------ -------- --------
Total Assets............ $74,874 $117,366 $21,039 $8,953 $ (2,945) $219,287
======= ======== ======= ====== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities
Current Maturities of
Debt.................. $ 2,612 $ 25,766 $13,745 $(40,287)(6) $ 1,836
Short Term Debt-Related
Parties............... 1,015 (1,015)(6) 0
Revolving Credit....... 8,543 34,005 (10,293)(6)
(14,500)(7) 17,755
Trade Payables......... 8,684 20,444 1,053 472 30,653
Advances from
Customers............. 1,249 669 132 2,050
Accrued Bargo
Judgment.............. 8,425 8,425
Other Current
Liabilities........... 5,591 9,617 1,595 737 (2,354)(6) 15,186
------- -------- ------- ------ -------- --------
Total Current
Liabilities........... 36,119 90,501 16,393 1,341 (68,449) 75,905
Long-Term Debt
High-Yield Notes....... 100,000(6) 100,000
Other Long-Term Debt... 15,245 25,737 7,361 (38,919)(6) 9,424
New Term Debt.......... 15,000 (7) 15,000
Due to Related
Parties............... 1,385 190 (1,575)(6) 0
Other Liabilities....... 3,279 1,612 4,891
------- -------- ------- ------ -------- --------
Total Liabilities...... 56,028 117,850 16,393 8,892 6,057 205,220
Minority Interests...... 2,000 968 2,968
Redeemable Preferred
Stock and Warrants..... 607 8,496 5,875 (14)(1) 14,964
------- -------- ------- ------ -------- --------
Common Stock............ 39 3 25 5 106 (3)
(39)(5)
(30)(6) 109
Additional Paid-in
Capital................ 29,332 1,860 14(1)
(500)(2)
11,838 (3)
(29,332)(5) 13,212
Treasury Stock.......... (500) 500 (2) 0
Stockholder Notes
Receivable............. (1,001) (1,001)
Cumulative Translation
Adjustment............. (171) (1,354) 171 (5) (1,354)
Retained Earnings
(Accumulated Deficit).. (12,961) (8,956) (1,254) 56 12,961 (5)
(923)(7)
(3,754)(6) (14,831)
------- -------- ------- ------ -------- --------
Total Stockholders'
Equity................ 16,239 (9,948) (1,229) 61 (8,988) (3,865)
------- -------- ------- ------ -------- --------
Total Liabilities and
Equity................ $74,874 $117,366 $21,039 $8,953 $ (2,945) $219,287
======= ======== ======= ====== ======== ========
</TABLE>
72
<PAGE>
REUNION INDUSTRIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(In Thousands, except per share amounts)
<TABLE>
<CAPTION>
Reunion Chatwins NAPTech
Industries Group King-Way Pro Pro Forma Pro Forma
Historical Historical Historical Forma Adjustments Combined
---------- ---------- ---------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Sales............... $ 97,318 $191,586 $17,474 $6,220 $ $312,598
Operating Costs and
Expenses
Cost of Sales.......... 83,088 154,980 12,144 4,621 254,833
Selling, General and
Administrative........ 12,735 23,217 2,660 373 38,985
Other.................. 572 838 411 1,821
-------- -------- ------- ------ ------- --------
Operating Profit....... 1,495 12,817 1,832 815 16,959
Other Income and
(Expense)
Interest Expense....... 3,221 10,099 2,183 676 (271)(a) 15,908
Equity in Juliana
Preserve.............. 388 388
Provision for Bargo
Judgment and Costs.... 9,239 9,239
Other, Including
Interest Income....... (252) (252)
-------- -------- ------- ------ ------- --------
Income (Loss) Before
Taxes................. (11,101) 2,718 (351) 139 271 (8,324)
Income Tax Provision
(Benefit)............. (661) 1,083 (1,083)(b) (661)
-------- -------- ------- ------ ------- --------
Income (Loss) from
Continuing Operations.. (10,440) 1,635 (351) 139 1,354 (7,663)
Preferred Stock
Dividends.............. (456) (750) (453)(c) (1,659)
-------- -------- ------- ------ ------- --------
Income Available to
Common Stockholders.... $(10,440) $ 1,179 $(1,101) $ 139 $ 901 $ (9,322)
======== ======== ======= ====== ======= ========
Income (loss) per Common
Share
Basic.................. $(2.69) $4.45 $(0.85)
======== ======== ========
Diluted................ $(2.69) $4.03 $(0.85)
======== ======== ========
Weighted Average Number
of Common Shares
Basic.................. 3,881 265 10,931
======== ======== ========
Diluted................ 3,881 293 10,931
======== ======== ========
</TABLE>
73
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The unaudited pro forma consolidated condensed balance sheet is based on
Reunion Industries', Chatwins Group's, and King-Way's audited balance sheets at
December 31, 1998, NAPTech's unaudited balance sheet at December 31, 1998 and
upon the adjustments described below. The unaudited pro forma consolidated
condensed statements of operations for the year ended December 31, 1998 are
based on Reunion Industries', Chatwins Group's and King-Way's audited financial
statements for the year ended December 31, 1998, NAPTech's pro forma unaudited
financial statements for the year ended December 31, 1998 and upon the
adjustments described below. NAPTech was acquired in August 1998 by NPS. The
1998 unaudited financial statements for NAPTech are pro forma as if such
acquisition occurred on January 1, 1998.
Note 2. Pro Forma Adjustments
The unaudited pro forma consolidated condensed balance sheet reflects the
following adjustments as though the merger, the King-Way and NAPTech
Acquisitions and the high-yield debt offering and the refinancing transactions
occurred as of December 31, 1998:
(1)To record assumed exercise of Chatwins Group Warrants prior to the
merger.
(2)To retire Chatwins Group's treasury stock.
(3) To record issuance of 8.5 million shares of Reunion Industries' common
stock to Chatwins Group stockholders. Purchase price determined based
on 2.45 million shares times $4.875 assumed market price of Reunion
Industries' common stock.
(4)To eliminate Chatwins Group investment in Reunion Industries.
(5) To eliminate Reunion Industries consolidated equity accounts and record
a deferred tax asset of $5.6 million based on management's best
estimate of the probable use of the NOL during the carryforward period.
(6) To record the high-yield debt offering:
74
<PAGE>
Refinancing proceeds and application of proceeds:
<TABLE>
<S> <C> <C>
Gross Refinancing proceeds................................ $100,000
New debt issuance costs................................... (3,500)
--------
Net Refinancing proceeds................................ $96,500
========
Chatwins Group Senior Note redemption:
Senior Notes at par--current portion...................... $(25,000)
Senior Notes at par--long-term............................ (25,000)
Accrued interest.......................................... (1,083)
Prepayment penalty........................................ (3,250) (54,333)
--------
Acquisition of King-Way:
Acquire King-Way common stock............................. (100)
Notes payable............................................. (13,745) (13,845)
--------
Acquisition of NAPTech:
Acquire NAPTech common stock.............................. (10)
Notes payable............................................. (7,361)
Accrued interest.......................................... (236)
Note payable and Accrued fees--related party.............. (190) (7,797)
--------
Retirement of Reunion Industries' debt:
Revolving credit.......................................... (8,543)
Long-term debt............................................ (6,000)
Notes payable............................................. (2,200)
Notes payable--related party.............................. (2,032) (18,775)
--------
Pay down Chatwins Group revolving credit.................. (1,750)
--------
Application of net Refinancing proceeds................. $(96,500)
========
Write-off prior debt issuance costs....................... $ (2,975)
========
Eliminated intercompany payables among the combined
companies................................................ $ (1,403)
========
Retire the common stocks of King-Way/NAPTech.............. $ (30)
========
</TABLE>
(7) To record the refinancing, including the revolving credit facility and
the $15.0 million new term loan. Includes $500 of new deferred
financing costs and write-off of $923 of remaining deferred financing
costs from the terminated facilities.
The unaudited pro forma consolidated condensed statements of operations
reflect the following adjustments as though the merger, the King-Way and
NAPTech Acquisitions and the high-yield debt offering and refinancing had
occurred as of January 1, 1998.
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<PAGE>
(a) To record the effect on interest expense resulting from the
refinancing:
<TABLE>
<CAPTION>
Year Ended
Pro Forma December 31,
Interest Rates Balance 1998
-------------- --------- ------------
<S> <C> <C> <C>
Pro Forma Interest Expense:
High Yield Debt......................... 11.5% $100,000 $ 11,500
New Credit Facility
Revolver.............................. LIBOR + 2.25% 15,761 1,245
Term Loan............................. LIBOR + 2.75% 15,000 1,260
--------
Juliana debt--actual 1998............... 489
Other Debt--actual 1998................. 578
Letter of credit and unused line fees... 298
--------
Total Pro Forma Cash Interest......... 15,370
Amortization of deferred financing
costs.................................. 517
--------
Total Pro Forma Interest.............. 15,887
Less: Historical Interest Expense....... (16,158)
--------
Pro Forma Interest Adjustment......... $ (271)
========
</TABLE>
(b) To adjust the Chatwins Group's income tax provision for pro forma
utilization of Reunion Industries' Federal net operating loss carryovers.
(c) To record incremental dividends on Reunion Industries Preferred A at
10% per annum.
76
<PAGE>
INFORMATION ABOUT REUNION INDUSTRIES
Business
General
Reunion Industries, a Delaware corporation, is the successor by merger,
effective April 19, 1996, of Reunion Resources Company ("RRC"). As used herein,
the term "Reunion Industries" refers to Reunion Industries, its predecessors
and its subsidiaries unless the context indicates otherwise. Reunion
Industries' executive offices are located at 62 Southfield Avenue, One Stamford
Landing, Stamford, Connecticut 06902 and its telephone number is (203) 324-
8858.
Reunion Industries, 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 Reunion Industries' custom injection molding capacity. Reunion
Industries is also engaged in wine grape agricultural operations in Napa
County, California.
On February 26, 1999, Reunion Industries announced that it had commenced
discussions with a third party to sell ORC and had reinstituted its merger
discussions with Chatwins Group, Inc. ("Chatwins Group"), which owns
approximately 38% of Reunion's outstanding common stock. See "--Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Possible Merger with Chatwins Group" and "Certain Relationships and Related
Transactions." The discussions with the third party to sell ORC have
subsequently been terminated. Reunion Industries has now decided to suspend its
plans for the sale of ORC in light of the ongoing discussions regarding the
possible merger with Chatwins Group and the related refinancings. Reunion
Industries has also had discussions regarding possible acquisitions of Stanwich
Acquisition Corp., doing business as King-Way Material Handling Company ("King-
Way") and of NPS Acquisition Corp., doing business as NAPTech ("NAPTech"), at
the same time as the Chatwins Group merger. King-Way and NAPTech are affiliates
of Chatwins Group and Reunion Industries. See "--Management's Discussion and
Analysis of Financial Condition and Results of Operations--Possible Merger with
Chatwins Group and acquisitions of King-Way and NAPTech" and "Certain
Relationships and Related Transactions." Reunion has engaged legal and
financial advisors in connection with these transactions. In addition,
financing discussions have been held with prospective lenders. There can be no
assurances that these transactions will be agreed to, approved or consummated.
Reunion Industries will consider alternative strategies for ORC if the merger
and refinancing are not completed.
General information about each of Reunion Industries' 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 "Reunion
Industries, Inc. Consolidated Financial Statements--Note 3."
During the five year period ended December 31, 1998, Reunion Industries,
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, Reunion Industries' Board of Directors resolved to pursue the
sale of Reunion Industries' oil and gas assets and discontinue Reunion
Industries' oil and gas operations. On May 24, 1996, Reunion Industries
completed the sale of its wholly owned subsidiary, Reunion Energy Company
("REC"), which included substantially all of Reunion Industries' oil and gas
assets.
Reunion Industries' original predecessor was organized in California in
1929. Reunion Industries' predecessor, Buttes Gas and Oil Co. ("BGO"), and
certain of its subsidiaries emerged in December 1988 from
77
<PAGE>
a reorganization in bankruptcy (the "Reorganization") under Chapter 11 of the
United States Bankruptcy Code. Effective June 29, 1993, the Articles of
Incorporation of BGO were amended to affect 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 Exchange, Inc. (the "Pacific 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 stock split). BGO was
then merged into RRC, a Delaware corporation. RRC merged into Reunion
Industries effective April 19, 1996.
Reunion Industries' 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% stockholder of
Reunion Industries and to prevent an increase in the percentage stock ownership
of any existing person or group of persons that constitutes a 5% stockholder by
prohibiting and voiding any transfer or agreement to transfer stock to the
extent that it would cause the transferee to hold such a prohibited ownership
percentage. The Transfer Restrictions are intended to help assure that Reunion
Industries' 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 Reunion Industries' Board of Directors if such approval is based on
a determination that the proposed transfer will not jeopardize the full
utilization of Reunion Industries' net operating loss carryforwards.
Plastic Products and Services
On September 14, 1995, Reunion Industries 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 ORC. Oneida and
Rostone operate as divisions of ORC. On November 18, 1996, ORC acquired (the
"QMP Acquisition") the assets and business of QMP and completed the acquisition
(the "DPL Acquisition") of 95.5% of the outstanding shares of DPL. QMP became
part of the Oneida division of ORC. DPL is 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 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 Phoenix, New York and Siler City, North
Carolina. Oneida has three injection molding facilities, which are located in
Oneida and Phoenix, New York and Siler City, North Carolina.
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
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<PAGE>
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 nine
separate regional offices throughout the eastern United States. Oneida
generally pays commissions of between 2% and 5% percent of sales, based upon
volume. During 1998, 1997 and 1996, one customer, Xerox Corporation, was
responsible for more than 20% of Oneida's net sales. Sales to Xerox were
approximately 22% of Oneida's sales during 1998 (11% of ORC consolidated
sales), and receivables from Xerox were approximately 18% of Oneida's accounts
receivable at December 31, 1998. The loss of this customer could have a
material adverse effect on the results of operations of Oneida. Sales to Xerox
have declined as a percentage of ORC sales in 1998 and 1997 as Reunion
Industries diversifies its customer base. In addition to Xerox Corporation,
Oneida has approximately 500 customers in the various industries described
above. Oneida continues to seek additional customers in the business machines,
consumer products and medical products industries. Reunion Industries 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. Rostone has two molding
facilities, which are located in Lafayette, Indiana and Clayton, North
Carolina.
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 3% and 5% of sales based on volume. During 1998, 1997
and 1996, one customer, Cutler Hammer, was responsible for more than 20% of
Rostone's sales. Sales to Cutler Hammer were approximately 29% of Rostone's
sales during 1998 (7% of ORC consolidated sales) and receivables from Cutler
Hammer were approximately 36% of Rostone's accounts receivable at December 31,
1998. The loss of this customer could have a material adverse effect on
Rostone's results of operations. Rostone continues to seek new customers in the
industries described above and in other industries.
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
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<PAGE>
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. When possible if shortages occur, Rostone engineers 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 1998 and 1997, one
customer was responsible for more than 20% of DPL's net sales. Dell Computer
represented approximately 42% of DPL's sales during 1998 (9% of ORC
consolidated sales) and receivables from Dell Computer were approximately 53%
of DPL's accounts receivables at December 31, 1998. The loss of this customer
could have a material adverse effect on DPL's results of operations. DPL
continues to seek new customers in the office equipment and telecommunications
industries in Europe.
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 2004, whichever is earlier.
Until fully vested, any manager's shares revert to Reunion Industries upon
termination of employment. When fully vested, management has the right to put,
and Reunion Industries 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, Reunion Industries accounts for this
arrangement as a deferred compensation plan and not as a minority interest. At
December 31, 1998, management was provisionally vested in 40% of their 15%
ownership and deferred compensation of $0.4 million had been accrued.
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<PAGE>
Backlog. ORC's backlog of orders believed firm at December 31, 1998 and
December 31, 1997 were approximately $16.7 million and $21.9 million,
respectively, substantially all of which are expected to ship within a year.
Backlog is down from 1997 as more major customers move to just-in-time ordering
and shorter delivery cycles and because of customer deferrals of new programs.
Agricultural Operations
Reunion Industries, through its subsidiary Juliana Vineyards ("Juliana"), is
engaged in wine grape vineyard development and the growing and harvesting of
wine grapes for the premium table wine market. Reunion Industries' wine grape
agricultural operations consist of approximately 3,800 acres, of which
approximately 1,200 acres are suitable for wine grape production and of which
approximately 325 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. The company 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.
From October 1994 to September 1998, Juliana conducted its agricultural
operations through the Juliana Preserve (the "Preserve"), a joint venture
organized as a California general partnership. Juliana had a 71.7% interest in
the net income and net assets of the joint venture, but had a 50% voting
interest in matters concerning the operation, development and disposition of
the joint venture assets. In September 1998, Juliana purchased the interest of
its joint venture partner for approximately $5.9 million.
In August 1997, the Preserve sold approximately 500 acres, including
approximately 300 plantable acres, to a Napa Valley winery. In September 1998,
Juliana sold approximately 400 acres, including approximately 250 plantable
acres, to an Australian winery. Also during 1998, Juliana formed the Juliana
Mutual Water Company ("JMWC") to own and operate the water storage and
transmission system for the entire property originally owned by the Preserve.
Ownership of JMWC is generally in proportion to plantable acres as specified in
the JMWC bylaws.
Juliana has undertaken a limited wine grape development effort which
management believes will enhance the value of the property. Approximately 95
acres were planted in 1998. These new plantings should reach production in four
or five years. Additional plantings may be made in future years if additional
funds can be obtained through financing or from additional property sales. One
parcel including approximately 65 plantable acres has been leased to a Napa
Valley winery. Juliana also expects to provide vineyard development and farm
management services to certain of the third party owners and lessees of parcels
in the Preserve.
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 Reunion Industries' operations.
In addition, environmental laws and regulations typically impose "strict
liability" upon Reunion Industries for certain environmental damages.
Accordingly, in some situations, Reunion Industries could be liable for clean
up costs even if the situation resulted from previous conduct of Reunion
Industries 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 Reunion Industries or events outside the control of Reunion
Industries. Such clean up or costs associated with changes in environmental
laws and regulations could be substantial and could have a material adverse
effect on Reunion Industries' consolidated financial position, results of
operations or cash flows.
Reunion Industries' plastic products and service business routinely uses
chemicals and solvents, some of which are classified as hazardous substances.
Reunion Industries' vineyard operations routinely use fungicides and
insecticides, the handling, storage and use of which is regulated under the
Federal Insecticide, Fungicide
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and Rodenticide Act, as well as California laws and regulations. Reunion
Industries' former 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.
Except as described in the following paragraphs, Reunion Industries 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, Reunion
Industries has also employed outside consultants from time to time to advise
and assist Reunion Industries' environmental compliance efforts. Except as
described in the following paragraphs, Reunion Industries is not aware of any
conditions or circumstances relating to environmental matters that will require
significant capital expenditures by Reunion Industries 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. Reunion Industries has initiated a remediation plan
under an agreement with the Indiana Department of Environmental Management and
expects to substantially complete the remediation during 2000. Reunion
Industries has expended approximately $0.2 million and has accrued an
additional $0.2 million based on current estimates of remediation costs .
Certain of these costs are recoverable from CGI Investment Corp., the seller of
Rostone. See "Certain Relationships and Related Transactions."
In connection with the sale of REC, Reunion Industries retained certain oil
and gas properties in Louisiana because of litigation concerning environmental
matters. Reunion Industries is in the process of environmental remediation
under a plan approved by the Louisiana Office of Conservation. Reunion
Industries has recorded an accrual for its proportionate share of the remaining
estimated costs to remediate the site based on plans and estimates developed by
the environmental consultants hired by Reunion Industries. During 1998 Reunion
Industries increased this accrual by a charge of $1.2 million to discontinued
operations, based on revised estimates of the remaining remediation costs. At
December 31, 1998, the balance accrued for these remediation costs was
approximately $1.5 million. Owners of a portion of the property have objected
to Reunion Industries' proposed cleanup methodology and have filed suit to
require additional procedures. Reunion Industries is contesting this
litigation, and believes its proposed methodology is well within accepted
industry practice for remediation efforts of a similar nature. No accrual has
been made for costs of any alternative cleanup methodology which might be
imposed as a result of the litigation.
Employees
At December 31, 1998, Reunion Industries employed 844 full time employees,
of whom 834 were employed in the plastic products segment, six were employed in
agricultural operations and four were corporate personnel. Reunion Industries
also employs hourly employees in its agricultural operations, the number of
whom varies throughout the year.
In ORC's Rostone division, approximately 190 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 117 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.
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Properties
Manufacturing Properties
ORC's properties used in the plastic products and services 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 1/31/05 Manufacturing
Phoenix, NY 20,000 2.0 Owned* -- Manufacturing
Siler City, NC 130,000 8.3 Owned* -- Manufacturing and Administrative
Rostone Lafayette, IN 168,000 20.0 Owned* -- Manufacturing and Administrative
Clayton, NC 35,000 -- Leased 6/17/01 Manufacturing
DPL Mullingar, Ireland 72,000 5.9 Owned -- Manufacturing and Administrative
</TABLE>
- --------
* Subject to mortgages in connection with ORC's credit facility with The
CIT Group/Business Credit, Inc. (see "Reunion Industries, Inc. Notes to
the Consolidated Financial Statements--Note 8").
Reunion Industries believes that these facilities are suitable and adequate
for ORC's use.
Other Properties
For information concerning Reunion Industries' agricultural properties see
"--Business--Agricultural Operations." Reunion Industries maintains an office
facility on its vineyard property.
In connection with the sale of REC, Reunion Industries retained certain oil
and gas properties in Louisiana because of litigation concerning environmental
matters. As described in "--Business--Environmental Regulation," Reunion
Industries is in the process of environmental remediation of these properties.
Reunion Industries intends to sell these properties when the litigation is
resolved.
Reunion Industries holds title to or recordable interests in federal and
state leases totaling approximately 55,000 acres near Moab, Utah, known as Ten
Mile Potash. Sylvanite, a potash mineral, is the principal mineral of interest
and occurrence in the Ten Mile Potash property. To date, Ten Mile Potash has
not yielded any significant revenues from mining operations or any other
significant revenues, and Reunion Industries is pursuing the sale or farmout of
these interests.
Reunion Industries subleases, from Stanwich Partners, Inc. ("SPI"), a
related party (see "Certain Relationships and Related Transactions"),
approximately 1,500 square feet of office space in Stamford, Connecticut for
its corporate offices. Management believes the terms of this sublease are
comparable to those available from third parties.
Legal Proceedings
Certain litigation in which Reunion Industries is involved is described
below.
Reunion Industries 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 Reunion
Industries' subsidiary, REC. Bargo had agreed to pay Reunion Industries $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 Reunion
Industries and Bargo and had deposited $0.5 million with a contractual escrow
agent in accordance with the terms of the stock purchase
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<PAGE>
agreement. Reunion Industries 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. Reunion Industries also asserted claims against Bargo for breach of
contract and breach of duty of good faith and fair dealing, and sought damages
under these theories of liability. Bargo also filed suit against Reunion
Industries claiming that Reunion Industries, its investment bankers, and
certain individuals fraudulently misrepresented information and fraudulently
induced Bargo into signing the Stock Purchase Agreement. Bargo also asserted
claims for breach of contract and warranty, return of its escrow, and for
unspecified damages under these theories of liability. The cases were
consolidated in the 334th Judicial District Court of Harris County, Texas, and
the consolidated case was realigned with Reunion Industries as plaintiff.
On April 24, 1998, after a three week trial, a jury returned jury verdict
findings that Bargo had a right to terminate the stock purchase agreement with
Reunion Industries and that Reunion Industries fraudulently induced Bargo into
entering into the agreement and recommended that an award of $5.0 million in
punitive damages be assessed against Reunion Industries. In July 1998, the
court entered judgment affirming the $5.0 million jury verdict and awarding
approximately $3.0 million in attorneys' fees and costs. Reunion Industries
maintained at trial and continues to maintain that all requirements to closing
under the contract were met, and that Bargo was required to close the
transaction. Reunion Industries also maintains that no evidence sufficient to
support a jury finding of fraud or the related punitive damages finding was
presented at trial. Reunion Industries has filed a bond which suspends
execution on the judgement while Reunion Industries appeals. A formal notice of
appeal has been filed and Reunion Industries intends to file its appeal in
April 1999. Management believes, based on consultation with counsel, that it is
more likely than not that any judgment based on a finding of fraud, the award
of attorneys' fees based on a finding of fraud and punitive damages would be
overturned on appeal. If the judgment is not overturned on appeal, and the
proposed merger with Chatwins Group and related refinancing do not occur,
Reunion Industries would be obligated to seek alternative funding sources,
including a sale of assets.
As described above in "--Business--Environmental Regulation," the owners of
a portion of the property currently being remediated for environmental
contamination have filed suit to require additional procedures. Reunion
Industries is contesting the litigation.
Reunion Industries and its subsidiaries are the defendants in other lawsuits
and administrative proceedings which have arisen in the ordinary course of
business of Reunion Industries and its subsidiaries. Reunion Industries
believes that any material liability which can result from any of such lawsuits
or proceedings has been properly reserved for in Reunion Industries' financial
statements or is covered by indemnification in favor of Reunion Industries 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 Reunion Industries' consolidated financial position, results of
operations or cash flows.
Market for the Registrant's Common Equity and Related Stockholder Matters
Reunion Industries' common stock is traded in the over-the-counter market
and is listed on the NASDAQ Small-Cap Market under the symbol "RUNI". The
common stock is also listed on the Pacific Exchange under the symbol "RUN".
As of April 23, 1999, there were approximately [1,370] holders of record of
Reunion Industries' common stock with an aggregate of [3,900,065] shares
outstanding.
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The table below reflects the high and low sales prices on the NASDAQ Small-
Cap Market for the quarterly periods in the two years ended December 31, 1998.
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>
Quarter Ended High Low
------------- ------ ------
<S> <C> <C>
1998
March 31.................................................. $5.500 $4.750
June 30................................................... $7.625 $5.000
September 30.............................................. $6.125 $2.875
December 31............................................... $3.250 $2.406
1997
March 31.................................................. $5.000 $3.875
June 30................................................... $4.125 $3.125
September 30.............................................. $4.380 $3.813
December 31............................................... $5.250 $4.188
</TABLE>
No cash dividends have been declared or paid during the past three years
with respect to the common stock of Reunion Industries. The Board of Directors
of Reunion Industries currently follows a policy of retaining any earnings for
operations and for the expansion of the business of Reunion Industries. Cash
dividends are also limited by the availability of funds, including limitations
on dividends and other transfers to Reunion by ORC and Juliana contained in
ORC's lending agreements. See "Reunion Industries, Inc. Notes to Consolidated
Financial Statements--Note 8." Therefore, Reunion Industries anticipates that
it will not pay any cash dividends on Reunion Industries' common stock in the
foreseeable future.
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Selected Financial Data
The following table sets forth selected historical consolidated financial
data of Reunion Industries. We derived the consolidated income statement data
below and the consolidated balance sheet data below from financial statements
audited by PricewaterhouseCoopers LLP, independent accountants, whose report
on Reunion Industries contains an explanatory paragraph on going concern
matters. All data are reported in thousands, except for per-share data.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- -------- -------
(1) (2) (3) (4) (5)
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Operations Data
Continuing Operations:
Operating Revenue............. $ 97,318 $93,378 $60,305 $ 10,855 $ 1,619
======== ======= ======= ======== =======
Operating Income (Loss)....... 1,495 2,513 1,449 (3,016) (2,481)
Interest Expense.............. (3,221) (3,267) (2,402) (508) (269)
Provision for Bargo Judgment
and Related Costs............ (9,239) -- -- -- --
Equity in Writedown of Joint
Venture Development Costs.... -- (855) (1,290) -- --
Gain on Sale of Mineral
Properties................... -- -- -- -- 2,124
Other Income (Expense)........ (136) 714 425 (57) (34)
Income Tax Benefit (Expense).. 661 (86) (876) -- --
-------- ------- ------- -------- -------
Loss From Continuing
Operations..................... (10,440) (981) (2,694) (3,581) (660)
-------- ------- ------- -------- -------
Discontinued Operations:
Agriculture................... -- 710 (710) -- --
Oil and Gas................... (1,710) -- 1,122 (10,389) (3,495)
Drilling and Workover......... -- -- -- -- 65
-------- ------- ------- -------- -------
Income (Loss) From Discontinued
Operations..................... (1,710) 710 412 (10,389) 3,430
-------- ------- ------- -------- -------
Extraordinary Item.............. (233) -- -- -- --
-------- ------- ------- -------- -------
Net Loss........................ $(12,383) $ (271) $(2,282) $(13,970) $(4,090)
======== ======= ======= ======== =======
Income (Loss) Per Share-Basic:
Continuing Operations......... $ (2.69) $ (0.25) $ (0.70) $ (0.93) $ (0.17)
Discontinued Operations....... (0.44) 0.18 0.11 (2.72) (0.91)
Extraordinary Item............ (0.06) -- -- -- --
-------- ------- ------- -------- -------
Net Loss...................... $ (3.19) $ (0.07) $ (0.59) $ (3.65) $ (1.08)
======== ======= ======= ======== =======
Loss Per Share-Diluted.......... $ (3.19) $ (0.07) $ (0.59) $ (3.65) $ (1.08)
======== ======= ======= ======== =======
Balance Sheet Data
Total Assets.................... $ 74,874 $72,059 $75,176 $ 51,935 $51,639
Long-term Obligations........... $ 17,237 $12,654 $15,575 $ 7,947 $ 2,693
Stockholders' Equity............ $ 16,239 $28,317 $28,944 $ 31,254 $44,624
Weighted Average Common Shares
Outstanding.................... 3,881 3,855 3,855 3,832 3,794
Cash Dividends per Common
Share.......................... $ -0- $ -0- $ -0- $ -0- $ -0-
</TABLE>
- -------
(1) Includes Juliana as a consolidated subsidiary subsequent to the September
1998 purchase of joint venture partner's interest. See "--Business--
Agricultural Operations." Operating income includes a $9.2 million charge
to record entry of the judgment and related costs in Reunion Industries'
litigation with Bargo Energy Company. See "--Legal Proceedings." Net
income includes a $1.2 million charge for increase in a provision for
environmental remediation and a $0.5 million charge for a provision for
tax settlement, included in "--Discontinued Operations." See "--Business--
Environmental Regulation" and "--Management's Discussion and Analysis of
Financial Condition and Results of Operations--Contingencies and
Uncertainties."
(2) 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 "--Business--Agricultural
Operations," "--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Discontinued Operations" and "Reunion
Industries, Inc. Notes to the Consolidated Financial Statements--Notes 3
and 6."
(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 "Reunion
Industries, Inc. Notes to the Consolidated Financial Statements--Note 2."
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 "Reunion Industries, Inc. Notes to the Consolidated
Financial Statements--Notes 3 and 6."
(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 Reunion Industries' oil and gas properties and a $3.8
million charge for the expected loss on disposal of the oil and gas
operations. See "Reunion Industries, Inc. Notes to the Consolidated
Financial Statements--Notes 2 and 3."
(5) Includes a $3.2 million impairment charge against Reunion Industries' 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 Reunion Industries' proportionate share of
agricultural revenues and expenses.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Reunion Industries' principal operations are in the plastic products and
services industry through its wholly owned subsidiary ORC. Reunion Industries
is also engaged in wine grape agricultural operations in Napa County,
California.
In November 1995, Reunion Industries' Board of Directors resolved to sell
Reunion Industries' oil and gas assets and discontinue Reunion Industries' oil
and gas operations. During 1996, Reunion Industries sold substantially all of
its oil and gas assets, for a total price of approximately $11.4 million.
Reunion Industries recognized a net loss of $12.4 million in 1998 compared
to a net loss of $0.3 million in 1997 and a net loss of $2.3 million in 1996.
The following discussion of Results of Continuing Operations describes Reunion
Industries' continuing operations in plastic products and services and wine
grape agriculture separately from discontinued operations.
Results of Continuing Operations--1998 Compared to 1997
Plastic products and services. ORC revenues and operating income were $95.1
million and $5.0 million, respectively, for the year ended December 31, 1998.
This compares to 1997 revenues and operating income of $93.4 million and $4.3
million, respectively.
The increase in revenues is attributable to a 34% increase in DPL sales as a
result of new customer programs, offset by a 5% decrease in sales at U.S.
operations. Parts sales increased $0.7 million, or 0.6% to $89.0 million for
the year ended December 31, 1998 compared to $88.5 million for the prior year
period. Tooling sales increased $1.2 million, or 24.5% to $6.1 million for 1998
compared to $4.9 million for 1997. 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 depending on
when projects are completed. The 34% increase in DPL sales resulted from two
significant new projects, for which Reunion Industries added production
capacity. Although Reunion Industries continues to seek new customers and
projects, management does not expect that such sales growth will recur. ORC
backlog totaled $16.7 million at December 31, 1998 compared to backlog of $21.9
million at December 31, 1997. Backlog is down from 1997 as more major customers
move to just-in-time ordering and shorter delivery cycles and because of
customer deferrals of new programs.
Cost of sales totaled $80.9 million, or 85.1% of net sales, for the year
ended December 31, 1998 compared to $78.9 million, or 84.5% of net sales, for
the year ended December 31, 1997. Gross margins were $14.2 million or 14.9% of
net sales, in 1998 compared to $14.5 million, or 15.5% of net sales in 1997.
During 1997, ORC recorded a $1.0 million writedown of surplus equipment to
net realizable value. 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.
Selling, general and administrative expenses were $9.2 million in 1998, and
$9.2 million in 1997. Operating income was $5.0 million, or 5.3% of net sales
in 1998 compared to $4.3 million, or 4.6% of net sales in 1997.
Agriculture. Juliana had an operating loss of $0.1 million on revenues of
$2.2 million in 1998. Revenues and direct expenses from the 1998 harvest were
recognized in the fourth quarter, and these fourth quarter amounts are not
representative of a full year. Prior to October 1998, Reunion Industries
accounted for its wine grape agriculture operations on the equity method.
Corporate General and Administrative Expense. Corporate general and
administrative expenses, consisting primarily of executive and administrative
salaries and benefits, professional fees and other public
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company costs, totaled $2.1 million for the year ended December 31, 1998
compared to $1.8 million for the year ended December 31, 1997. The 1998 and
1997 amounts included approximately $0.6 million and $0.4 million,
respectively, in legal costs for Reunion Industries' Bargo litigation.
As a result of termination of the 1998 merger agreement with Chatwins Group
because of the inability to raise sufficient financing under then current
market conditions, Reunion Industries recorded a charge of $1.4 million in 1998
to write off accumulated legal, investment banking and other costs related to
the merger.
Other Income and Expense. Interest expense was $3.2 million in 1998 compared
to $3.3 million for the prior year. Reunion Industries also recorded a charge
of $9.2 million during 1998 to record entry of the judgment in Reunion
Industries' litigation with Bargo, accrual of interest on the judgment and
letter of credit and guarantee fees related to obtaining a supersedeas bond to
appeal the judgment.
Reunion Industries participated in the wine grape agriculture industry
through its equity investment in the Juliana Preserve joint venture in 1997 and
until September 1998. Reunion Industries recognized a loss of $0.4 million in
1998 and income of $0.3 million in 1997 from its equity interest in the
Preserve's results of operations. In addition, Reunion Industries recorded a
charge of $0.9 million in 1997 for its equity in the write off of development
costs by the joint venture.
Income Tax Expense. In August 1998, Reunion Industries reached a settlement
with the IRS on its appeal of the denial of Reunion Industries' request for
refund of Alternative Minimum Tax paid in 1990 and 1991. As a result of the
settlement, Reunion Industries received refunds totaling $0.7 million including
interest. Because of the uncertainty over realization of the refund, Reunion
Industries had recorded an allowance of $0.8 million in 1996 for the possible
denial of the refund claim with a corresponding charge to income tax expense.
As a result of the settlement, Reunion Industries recorded an income tax
benefit of $0.7 million in 1998.
Results of Continuing Operations--1997 Compared to 1996
Plastic products and services. ORC revenues and operating income 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.
Parts sales increased $35.5 million, or 67.0% to $88.5 million for the year
ended December 31, 1997 compared to $53.0 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. Additionally, in 1997, there was a higher
incidence of molding contracts where the tools were provided by the customer.
ORC 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.
During the second calendar quarter of 1997, a strike of Reunion Industries'
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.
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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 Reunion Industries 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.
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 $1.8 million for the year ended December 31, 1997 compared to $1.9
million for the year ended December 31, 1996. The 1997 amount included
approximately $0.4 million in legal costs for Reunion Industries' Bargo
litigation. The expenses for the year ended December 31, 1996 included
occupancy and office costs for both Reunion Industries' 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.
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
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.
Reunion Industries participated in the wine grape agriculture industry in
1997 and 1996 through its equity investment in the Preserve. Reunion Industries
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, Reunion Industries 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. Because of the uncertainty over realization of a refund
claimed for Alternative Minimum Taxes paid in 1990 and 1991, Reunion Industries
recorded an allowance of $0.8 million for the possible denial of the refund
claim with a corresponding charge to Income Tax Expense in 1996.
Discontinued Operations
Reunion Industries discontinued its U. S. oil and gas operations in 1995.
Reunion Industries recognized income from discontinued operations of $0.7
million in 1997 compared to income of $0.4 million in 1996. Reunion Industries
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.
As described below under "--Contingencies and Uncertainties," Reunion
Industries has recorded a provision of $0.5 million in connection with
settlement discussions for the California Franchise Tax Board audit of the
company's Franchise tax returns for 1991 through 1993.
Liquidity and Capital Resources
Summary of 1998 Activities
Cash and cash equivalents totaled $2.0 million at December 31, 1998. During
the year ended December 31, 1998, cash decreased $0.1 million, with $2.4
million provided by operations, $2.2 million used by investing activities and
$0.6 million provided by financing activities.
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Investing Activities. Capital expenditures were $3.3 million. Reunion
Industries paid $2.2 million to acquire its joint venture partner's interest in
the Preserve, and received $2.6 million from the sale of a portion of the
Preserve.
Financing Activities. Principal payments reduced long-term obligations by
$10.2 million in the year ended December 31, 1998. Proceeds from new term loan
borrowings totaled $7.1 million and debt issuance costs of $1.9 million were
paid. Net short term borrowings totaled $3.4 million.
Factors Affecting Future Liquidity
Because of various restrictions included in Reunion Industries' loan
arrangements, management must separately consider liquidity and financing for
corporate requirements, ORC and Juliana.
Corporate. Corporate expenses, including salaries and benefits, professional
fees and other public company costs, are expected to approximate $1.5 million
annually. Legal costs to appeal the Bargo litigation and the cost of
collateralizing the Bargo appeal bond will add to corporate requirements. In
addition, a significant portion of the $1.5 million accrued for environmental
remediation of the Louisiana properties, described in "--Business--
Environmental Regulation," is expected to be expended during the next twelve
months and a settlement payment for the California tax audit, described below
under "--Contingencies and Uncertainties," is expected to be made. Reunion
Industries' source of funds for these expenses, other than from additional
borrowings, are from cash balances and permitted payments by ORC. The Corporate
cash balance at December 31, 1998 was $0.01 million.
As described in "Reunion Industries, Inc. Consolidated Financial
Statements--Note 7," ORC closed a new credit facility with The CIT
Group/Business Credit, Inc. ("CITBC") in October 1998. This new credit facility
limits payments to Reunion by ORC. If certain levels of availability (as
defined in the loan agreements) are maintained, ORC is permitted to pay Reunion
monthly payments of interest, plus up to $0.1 million for management fees and
dividends on preferred stock, plus tax sharing payments of up to 50% of the tax
savings realized by ORC because of Reunion's NOLs. There can be no assurances
that ORC will be able to maintain the required levels of availability and be
permitted to make the management fee and tax sharing fee payments to Reunion.
In any event, the maximum amount of such payments is not expected to be
sufficient for Reunion Industries' corporate operating and debt service
requirements.
The new credit facility also provides a letter of credit guarantee to
provide credit support for a supersedeas bond in the Bargo litigation (see "--
Legal Proceedings"). In addition to the ORC assets, the facility is secured by
a guarantee by Mr. Bradley, a pledge of assets by Stanwich Financial Services
Corp., ("SFSC"), a related party (see "Certain Relationships and Related
Transactions") and a pledge of the stock of ORC and Juliana. Since October
1998, substantially all the amounts otherwise permitted to be paid by ORC have
been used to fund letter of credit and guarantee fees relating to the
supersedeas bond.
Without additional financing, management believes that Reunion Industries
will not have sufficient resources to meet its corporate expenses and legal and
environmental costs as they become due over the next twelve months. During
1998, Reunion Industries borrowed a total of $1.0 million from SFSC. These
borrowings bear interest at 15%, and were due to mature September 30, 1998.
SFSC has agreed to extend the maturity date to December 31, 1999 while Reunion
Industries seeks additional financing. There can be no assurances that such
financing will be arranged, or that SFSC will extend the maturity indefinitely
or lend additional funds.
As described below in "Possible Merger with Chatwins Group and Acquisitions
of King-Way and NAPTech," Reunion Industries has announced that it has
reinstituted merger discussions with Chatwins Group and has held financing
discussions with prospective lenders in connection with the proposed merger. If
such a merger and refinancing is completed, management believes that there will
be sufficient resources for Reunion Industries' requirements and for
reinvestment in a new business or businesses. There can be no assurances that
any of these transactions will be consummated.
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ORC. On October 19, 1998, ORC closed the new credit facility with CITBC.
This is a six-year senior secured credit facility including revolving credit
loans of up to $10.2 million and a term loan in the initial amount of $6.0
million for ORC. The proceeds were used to refinance ORC's debt with Congress
Financial Corporation and to provide working capital for ORC. Management
believes that ORC's cash flow from operations, together with this credit
facility and permitted levels of capital and operating leases, will be
sufficient for ORC's operating requirements, including capital expenditures and
debt service, over the next twelve months. At December 31, 1998 ORC had $1.2
million in revolving credit availability.
Juliana. In September 1998, Juliana completed the purchase of its joint
venture partner's 28.3% interest in the Juliana Preserve joint venture for
approximately $5.9 million. The purchase was funded from the proceeds of the
sale of three parcels for $2.7 million, and by a $3.7 million 4-month note to
the joint venture partner.
In January 1999, Juliana closed a $7.5 million loan with Equitable Life
Assurance Society of the United States ("Equitable"). The proceeds were used to
refinance Juliana's existing $2.0 million loan with Equitable, to repay the
$3.7 million 4-month note to the joint venture partner and for working capital.
Juliana plans to continue a limited wine grape development effort, which
management believes will enhance the value of the property. Management believes
the combination of farming revenues plus working capital provided by borrowings
will be sufficient to fund the agricultural operations over the next twelve
months.
Year 2000 Computer Compliance
Reunion Industries, like most companies, utilizes electronic technology
which includes computer hardware and software systems that process information
and perform calculations that are date-and time-dependent. Reunion Industries
is aware that the coming of the Year 2000 ("Y2K") poses pervasive and complex
problems in that virtually every computer operation (including manufacturing
equipment and other non-information systems equipment), unless it is Y2K
compliant, will be affected in some way by the rollover of the two-digit year
value from "99" to "00" and the inadvertent recognition by electronic
technology of "00" as the year 1900 rather than Y2K. Reunion Industries is also
aware that it may not only be negatively affected by the failure of its own
systems to be Y2K compliant, but may also be negatively affected by the Y2K
non-compliance of its vendors, customers, lenders and any other party with
which Reunion Industries transacts business.
Reunion Industries has completed its initial assessment of all of the
systems and software in place at all locations and has identified hardware
replacements and software upgrades necessary to achieve Y2K compliance. Because
Reunion Industries uses integrated accounting and manufacturing software
provided by third party vendors, it has avoided internal programming costs
associated with modifying code and data to handle dates past the year 2000. The
latest software releases provided by the respective third party vendors have
achieved Y2K certification from independent testing organizations. Reunion
Industries is in the process of upgrading all of its software to Y2K compliant
releases. Upgrading and testing is substantially complete at six of Reunion
Industries' seven manufacturing locations and at the headquarters location.
Reunion Industries expects to complete the remaining upgrades by the second
quarter of 1999. Significant customers and outside vendors such as suppliers,
banks and payroll services have been contacted and have provided assurances
that they either are or will be Y2K compliant by June 1999. Testing of Reunion
Industries' software and systems (including manufacturing equipment and other
non-information systems equipment) is expected to be completed during the
second quarter of 1999.
Because management expects to complete the upgrading of all of its software
early in 1999, Reunion Industries has not developed a Y2K contingency plan.
Management regularly monitors the status of the Y2K compliance process, and
will develop contingency plans if it appears that Reunion Industries will not
achieve full Y2K compliance.
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Reunion Industries has incurred and expects to continue to incur internal
staff and other costs as a result of modifying existing systems to be Y2K
compliant. Such costs will continue to be expensed as incurred and funded
through internally generated cash while costs to acquire new equipment and
software will be capitalized and depreciated over their useful lives. The
hardware replacements and software upgrades were principally planned to improve
operating controls and implementation was not significantly accelerated.
Management does not expect the incremental cost to Reunion Industries of
enterprise-wide Y2K compliance to be material to its operations.
Management recognizes that the failure of Reunion Industries or any party
with which Reunion Industries conducts business to be Y2K compliant in a timely
manner could have a material adverse impact on the operations of Reunion
Industries. If Reunion Industries' systems were to fail because they were not
Y2K compliant, Reunion Industries would incur significant costs and
inefficiencies. Manual systems for manufacturing and financial control would
have to be implemented and staffed. Significant customers might decide to cease
doing business with Reunion Industries. Disruptions in electric power or in the
delivery of materials could cause significant business interruptions.
Similarly, business interruptions at significant customers could result in
deferred or canceled orders.
The dates on which Reunion Industries believes Y2K compliance will be
completed are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved, or that there will not be a delay in, or increased costs associated
with, the implementation of Y2K compliance. Specific factors that might cause
differences between the estimates and actual results include, but are not
limited to, the availability and cost of personnel trained in these areas,
timely responses to and corrections by third-parties and suppliers, the ability
to implement interfaces between the new systems and the systems not being
replaced, and similar uncertainties. Due to the general uncertainty inherent in
the Y2K problem, resulting in part from the uncertainty of the Y2K readiness of
third-parties, the company cannot ensure its ability to resolve problems
associated with the Y2K issue that may affect its operations and business, or
expose it to third-party liability in a timely and cost-effective manner.
Possible Merger With Chatwins Group and Acquisitions of King-Way and NAPTech
On February 26, 1996, Reunion Industries announced that it had reinstituted
its merger discussions with Chatwins Group, which owns approximately 38% of
Reunion Industries' common stock. Reunion Industries has also had discussions
regarding possible acquisitions of King-Way and of NAPTech at the same time as
the Chatwins Group merger. King-Way and NAPTech are affiliates of Chatwins
Group and Reunion Industries. See "Certain Relationships and Related
Transactions." Reunion Industries has engaged legal and financial advisors in
connection with these transactions, and has held financing discussions with
prospective lenders. These transactions are subject to approval by Reunion
Industries' Board of Directors and a merger with Chatwins Group is subject to
approval by Reunion Industries' and Chatwins Group stockholders. If such
transactions are agreed to, and requisite approvals are obtained and other
conditions are satisfied, the consummation of the transactions could occur as
early as the second quarter of this year. There can be no assurances that these
transactions will be agreed to, or consummated.
Contingencies and Uncertainties
On April 24, 1998, a jury in state district court in Harris County, Texas
returned jury verdict findings that Bargo had a right to terminate a November
1995 stock purchase agreement with Reunion Industries and that Reunion
Industries fraudulently induced Bargo into entering into the agreement. The
November 1995 stock purchase agreement concerned the sale of Reunion
Industries' subsidiary, REC, which operated Reunion Industries' discontinued
oil and gas business. The jury recommended that an award of $5.0 million in
punitive damages be assessed against Reunion Industries. In July 1998, the
court entered judgment affirming the $5.0 million jury verdict and awarding
approximately $3.0 million in attorneys' fees and costs. Reunion Industries
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maintained at trial and continues to maintain that all requirements to closing
under the contract were met, and that Bargo was required to close the
transaction. Reunion Industries also maintains that no evidence sufficient to
support a jury finding of fraud or the related punitive damages finding was
presented at trial. Reunion Industries has filed a bond which suspends
execution on the judgement while Reunion Industries appeals. A formal notice of
appeal has been filed and Reunion Industries intends to file its appeal in
April 1999. Although management believes, based on consultation with counsel,
that it is more likely than not that the judgment will be overturned on appeal,
Reunion Industries has recorded an accrual for the amount of the judgment with
a charge to continuing operations in 1998. Interest on the judgment at 10% has
been accrued and will continue to accrue until the litigation is resolved.
In early 1996, the State of California Franchise Tax Board initiated an
audit of Reunion Industries' franchise tax returns for the years 1991, 1992 and
1993. In October 1996, Reunion Industries received a formal notice of
assessment from the taxing authority in the aggregate amount of $0.7 million
plus interest. Of this amount, $0.6 million results from the auditors
conclusion that income from gains on sales of certain Canadian oil and gas
assets in 1991 should be reclassified from nonbusiness to business income.
Reunion Industries believes its classification of such income was correct, and
appealed the assessment of tax. In 1996, Reunion Industries recorded a
provision for approximately $0.1 million for certain other proposed
adjustments. The appeal was denied, and Reunion Industries requested that the
case be considered for settlement. If Reunion Industries' positions prevail on
this issue, management believes that the amounts due would not exceed amounts
previously paid or provided for. However, in connection with the settlement
discussions, Reunion Industries accrued an additional $0.5 million in 1998,
with a corresponding charge to Discontinued Operations. The total accrual of
$0.6 million represents management's estimate of the minimum of the range of
possible settlement outcomes.
In connection with the sale of REC, Reunion Industries retained certain oil
and gas properties in Louisiana because of litigation concerning environmental
matters. Reunion Industries is in the process of environmental remediation
under a plan approved by the Louisiana Office of Conservation. Reunion
Industries has recorded an accrual for its proportionate share of the remaining
estimated costs to remediate the site based on plans and estimates developed by
the environmental consultants hired by Reunion Industries. During 1998 Reunion
Industries increased this accrual by a charge of $1.2 million to discontinued
operations, based on revised estimates of the remaining remediation costs. At
December 31, 1998, the balance accrued for these remediation costs is
approximately $1.5 million. Owners of a portion of the property have objected
to Reunion Industries' proposed cleanup methodology and have filed suit to
require additional procedures. Reunion Industries is contesting this
litigation, and believes its proposed methodology is well within accepted
industry practice for remediation efforts of a similar nature. No accrual has
been made for any costs of any alternative cleanup methodology which might be
imposed as a result of the litigation.
Quantitative and Qualitative Disclosures About Market Risk
In the operation of its business, Reunion Industries has market risk
exposures to foreign currency exchange rates, raw material prices and interest
rates. Each of these risks and Reunion Industries' strategies to manage the
exposure is discussed below.
Reunion Industries manufactures its products in the United States and
Ireland and sells products in those markets as well as in Europe. International
sales were 28% of Reunion Industries' sales in 1998 and 18% in 1997. Reunion
Industries' operating results could be affected by changes in foreign currency
exchange rates or weak economic conditions in Europe. Reunion Industries does
not actively hedge its foreign currency risk because the international
operations are self-financed and the translation exposure is not considered
material to Reunion Industries' financial condition, liquidity or results of
operations.
The principal raw materials used by Reunion Industries are thermoplastic
polymers. These materials are available from a number of suppliers. Prices for
these materials are affected by changes in market demand, and
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there can be no assurances that prices for these and other raw materials will
not increase in the future. Reunion Industries' contracts with its customer
generally provide that such price increases can be passed through to the
customers.
Reunion Industries' operating results are subject to risk from interest rate
fluctuations on debt which carries variable interest rates. The variable rate
debt was approximately $15 million at December 31, 1998, which is
representative of balances outstanding during the year. A 0.25% change in
interest rates would affect results of operations by approximately $0.04
million.
Consolidated Financial Statements
Reunion Industries' consolidated financial statements are set forth
beginning at Page F-1.
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INFORMATION ABOUT CHATWINS GROUP
Business
General
Chatwins Group, through its six manufacturing divisions, designs,
manufactures and markets a broad range of metal fabricated and machined
industrial parts and products, primarily for sale to original equipment
manufacturers in a variety of industries. Chatwins Group's principal fabricated
and machined products, and the divisions that produce them, include large,
seamless pressure vessels for highly pressurized gases produced by the CP
Industries division ("CPI"), high quality steel and aluminum grating produced
by the Klemp division ("Klemp"), industrial hydraulic and pneumatic cylinders
produced by the Hanna division ("Hanna"), industrial cranes and large mill
equipment produced by the Alliance Machine Company division ("Alliance"), cold-
rolled steel leaf springs produced by the Steelcraft division ("Steelcraft")
and high quality roll formed and structural storage racks produced by the Auto-
Lok division ("Auto-Lok"). Chatwins Group also has a small oil and gas division
("Europa").
Chatwins Group emphasizes internal development of products, enhancement of
manufacturing capabilities, market development and cost control. Although its
manufacturing divisions share common characteristics as basic metal fabrication
concerns, Chatwins Group believes that the variety of market niches served by
these divisions lessens the impact of adverse economic conditions on Chatwins
Group.
Strategy
Chatwins Group's strategy has been the establishment of large market share
positions in well established niche markets. Since 1989, Chatwins Group has
consummated nine such acquisitions. Additionally, Chatwins Group has undertaken
efforts to expand export and international sales by exploring the potential for
increased marketing of certain products in targeted foreign countries and joint
venturing with selected international partners.
Investments
Reunion Industries. On June 20, 1995, Chatwins Group acquired 1,450,000
shares, or approximately 38%, of the then issued and outstanding shares of
common stock of Reunion Industries, and purchased 75,000 warrants to purchase
shares of Reunion Industries common stock, both from unrelated parties.
The aggregate purchase price of the common stock consisted of $5.8 million
paid in cash and a $5.8 million promissory note ("Parkdale Note"). The
aggregate purchase of the warrants consisted of $0.3 million paid in cash and a
$0.2 million two-year promissory note ("Gesterkamp Note"). The Parkdale Note
was subsequently purchased by Mr. Bradley. The Gesterkamp Note was subsequently
purchased by Mr. Franklin Myers, a director of Reunion Industries. Both the
Parkdale Note and Gesterkamp Note have been fully repaid by Chatwins Group in
accordance with contractual terms.
Chatwins Group investment in Reunion Industries is being accounted for under
the equity method of accounting. Chatwins Group share of Reunion Industries'
operating results is included in the accompanying consolidated statement of
income for the years ended December 31, 1998, 1997 and 1996 as equity income
(loss) from operations of affiliate. See "Information About Chatwins Group--
Affiliate Litigation Provision" above. See also "Management's Discussion and
Analysis of Results of Operations", "Certain Relationships and Related
Transactions."
CGII. Chatwins Group owns 49% of CGI Investment Corp. ("CGII"), which owned
100% of the outstanding preferred stock and fully diluted common stock of
Rostone.
Chatwins Group made three loans to CGII; $1.5 million in December 1990,
$1.35 million in December 1993 and $0.3 million in February 1994. Over time,
Chatwins Group had provided reserves for a substantial
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portion of the principal on its notes receivable from CGII and at December 31,
1997, the net carrying value of Chatwins Group investment in CGII common stock
and net notes receivable was $0.6 million.
CGII's primary assets remaining after the merger of Rostone into Oneida in
February 1996 were two notes receivable, one of which was from Rostone, and a
minimal amount of cash, the sum of which totaled $0.7 million at December 31,
1997. During 1998, Chatwins Group and CGII agreed that CGII's liabilities
significantly exceeded its assets and it would not be able to repay its
obligations to Chatwins Group. As a result, Chatwins Group agreed to exchange
its notes receivable from CGII for CGII's note receivable from Rostone which,
plus accrued interest, totaled $0.5 million at December 31, 1998.
Klemp de Mexico. In 1993, Chatwins Group entered into a joint venture with a
Mexican company for the purpose of manufacturing, selling and distributing
metal bar grating in Mexico. This affiliate, Acervalco-Klemp, S.A. de C.V., was
49% owned by Chatwins Group. During May 1994, Chatwins Group increased its
ownership in Acervalco-Klemp, S.A. de C.V., to 85% and has consolidated the
results since such date. In January 1995, the subsidiary's name was changed to
Klemp de Mexico.
CFI-Klemp de Mexico--During 1996, Klemp de Mexico entered into a joint
venture agreement with Consolidated Fabricators, Inc., a Massachusetts company,
to form CFI-Klemp de Mexico ("CFI-Klemp"), a Mexican corporation. CFI-Klemp is
in the business of metal fabrications. As Klemp de Mexico has a 50.1% interest
in CFI-Klemp, CFI-Klemp is consolidated with Klemp de Mexico for financial
reporting purposes.
Shanghai Klemp. In December 1995, Chatwins Group entered into a joint
venture agreement with China Metallurgical Import & Export Shanghai Company
("CMIESC") and Wanggang Township Economic Development Corporation ("Wanggang")
to form Shanghai Klemp Metal Products Co. Ltd., ("Shanghai Klemp"). CMIESC is a
state-owned foreign trade enterprise which trades in steel and equipment used
in the manufacture of steel products. Wanggang is an independently owned,
industrial development corporation focusing on economic growth in the Pudong
New Area of Shanghai. As Chatwins Group has a 65% interest in Shanghai Klemp,
Shanghai Klemp is consolidated for financial reporting purposes.
Suzhou Grating Co. Ltd. In May 1998, Chatwins Group entered into a joint
venture agreement with Nantong Grating Composite Materials Co. Ltd. ("Nantong")
and American Grating, Inc. ("American Grating") to create a sino-foreign equity
joint venture known as Suzhou Grating Co., Ltd. ("Suzhou"). Nantong is an
independently owned manufacturing company organized under the laws of the PRC.
American Grating is a privately held U.S. corporation incorporated in the state
of California. Chatwins Group 10% investment in Suzhou is being accounted for
under the cost method.
CGI Sales. Chatwins Group also had a wholly-owned subsidiary, CGI Sales
Corporation ("CGI Sales"), which is a Barbados corporation that functions as
Chatwins Group's foreign sales corporation. In 1998, approximately $5.0 million
of Chatwins Group sales passed-through CGI Sales. CGI Sales was dissolved
during 1998.
Individual Operating Divisions
CPI. Founded in 1897, CPI, the former Christy Park division of USX
Corporation, specializes in manufacturing large, seamless pressure vessels for
the above ground storage and transportation of highly pressurized gases such as
natural gas, hydrogen, nitrogen, oxygen and helium. These pressure vessels are
provided to customers such as industrial gas producers and suppliers, the
alternative fueled vehicle compressed natural gas fuel industry, chemical and
petrochemical processing facilities, shipbuilders, NASA, public utilities and
gas transportation companies.
Klemp. Founded in 1901, Klemp is a geographically diversified manufacturer
of metal grating products. Klemp manufactures quality steel and aluminum bar
grating products in a variety of sizes, configurations and finishes, and also
custom fabricates bar grating products for specialized applications. Klemp
products are sold
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for use in many industrial applications where a combination of strength, light
weight, access and a free flow of
air, heat, water or light is desired. Its products are used in water and
wastewater treatment plants, railroad tank cars, petroleum storage facilities,
aircraft, mines, roads, bridge decks and general manufacturing facilities. For
financial reporting purposes, operations of Klemp de Mexico and Shanghai Klemp
are reported as part of the Klemp division.
Alliance. Founded in 1901, Alliance designs, engineers and manufactures
cranes used in a wide range of steel and aluminum mill applications and large
special purpose cranes used in marine and aerospace applications and heavy
industrial plants. Alliance also manufactures lighter duty cranes for various
industrial applications, coke oven machinery and other large steel-related
fabrications. In recent years, Alliance has expanded and diversified its
engineering and manufacturing capabilities to offer a variety of equipment and
related engineering, fabrication, maintenance and repair services.
Hanna. Founded in 1901, Hanna designs and manufactures a broad line of
hydraulic and pneumatic cylinders, actuators, accumulators and manifolds. These
products are used in a wide variety of industrial and mobile machinery and
equipment requiring the application of force in a controlled and repetitive
process. Hanna's specialty is custom cylinders in both small quantities
packaged by its distributors with valves, pumps and controls as complete fluid
power systems and large quantities sold directly to equipment manufacturers.
Steelcraft. Founded in 1972, Steelcraft manufactures and sells cold-rolled
steel leaf springs. Its principal customers are manufacturers of trailers for
boats, small utility vehicles and golf carts and makers of recreational vehicle
and agricultural trailers.
Europa. Chatwins Group was originally incorporated as Europa Petroleum, Inc.
in 1980. The Europa division continues Chatwins Group original oil and gas
business, holding interests in a small number of leases for oil and gas
properties, investing in low-risk gas exploration and managing a portfolio of
oil and gas participations.
Auto-Lok. Founded in 1946, Auto-Lok manufactures high quality roll formed
and structural steel fabricated storage racks for industrial and commercial
handling systems and general storage applications. In addition, Auto-Lok
participates on larger contracts in the sale of total material handling systems
through purchasing and reselling related components such as decking and carton
flow devices, and subcontracting of rack erection.
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The following represents net sales, EBITDA (as defined in Chatwins Group's
Indenture), and total assets by division and subsidiary at and for the years
ended December 31, 1998, 1997 and 1996 (in thousands, including notes hereto,
unless otherwise indicated):
<TABLE>
<CAPTION>
TOTAL
NET SALES EBITDA(1) ASSETS(2)
--------- --------- ---------
<S> <C> <C> <C>
AT AND FOR THE YEAR ENDED DECEMBER 31, 1998:
Alliance....................................... $ 41,982 $ 2,485 $ 18,111
Auto-Lok....................................... 25,794 1,775 10,645
CPI............................................ 28,284 6,003 20,117
Europa......................................... 105 62 1,106
Hanna.......................................... 34,458 5,714 17,544
Klemp.......................................... 57,003 2,627 32,439
Steelcraft..................................... 3,960 644 1,651
-------- ------- --------
Totals....................................... $191,586 $19,310 $101,613
======== ======= ========
AT AND FOR THE YEAR ENDED DECEMBER 31, 1997:
Alliance....................................... $ 43,791 $ 3,817 $ 14,872
Auto-Lok....................................... 26,524 899 10,054
CPI............................................ 28,171 5,882 17,071
Europa......................................... 135 29 1,326
Hanna.......................................... 33,420 4,721 15,916
Klemp.......................................... 52,501 2,952 29,545
Steelcraft..................................... 4,378 889 1,705
-------- ------- --------
Totals....................................... $188,920 $19,189 $ 90,489
======== ======= ========
AT AND FOR THE YEAR ENDED DECEMBER 31, 1996:
Alliance....................................... $ 28,091 $ 1,546 $ 12,662
Auto-Lok....................................... 16,864 (154) 7,860
CPI............................................ 25,107 5,377 16,236
Europa......................................... 148 94 1,433
Hanna.......................................... 29,617 3,127 15,972
Klemp.......................................... 49,643 4,012 25,115
Steelcraft..................................... 4,010 771 1,766
-------- ------- --------
Totals....................................... $153,480 $14,773 $ 81,044
======== ======= ========
</TABLE>
- --------
(1) Excludes Headquarters expenses in the years ended December 31, 1998 of
$2,007, December 31, 1997 of $2,398 and December 31, 1996 of $1,558. See
"--Selected Financial Data" for operating income and a definition of
EBITDA.
(2) Excludes Headquarters assets at December 31, 1998 of $15,753, at December
31, 1997 of $20,780 and December 31, 1996 of $20,286.
General Aspects Applicable to the Chatwins Group Divisions
Raw Materials. The major raw materials used by Chatwins Group in its
fabricated and machined products manufacturing divisions include steel hot-
rolled and cold-rolled bands, structural bars, stainless steel coils, welded
and seamless steel tubing and pipe, steel alloy bars, steel plates, brass
tubing and bars and aluminum extrusions, all of which are supplied by various
domestic sources. Prices for most of these raw materials used by Chatwins Group
remained relatively constant during 1998. There can be no assurance that prices
for these and other raw materials used by Chatwins Group will not increase in
the future.
Competition. Most of Chatwins Group's products are sold in highly
competitive markets both in the U.S. and internationally. Chatwins Group
competes with a significant number of companies of varying sizes,
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including divisions or subsidiaries of larger companies, on the basis of price,
service, quality and the ability to supply customers in a timely manner. A
number of Chatwins Group's competitors have financial and other resources that
are substantially greater than those of Chatwins Group. Competitive pressures
or other factors could cause Chatwins Group's products to lose market share or
result in significant price erosion which would have a material effect on
Chatwins Group's results of operations.
Export Sales. Chatwins Group's export sales for 1998 were approximately 6%
of total sales. Export sales were primarily made in four major areas during
1998--the Far East, Mexico and South America, the United Kingdom and Canada.
CPI accounted for approximately 4% of export sales during 1998, recording sales
in all four areas, but primarily in Taiwan and the United Kingdom. Alliance
represented almost all of the remainder, primarily in Mexico and Brazil. Hanna
also had a small amount of export sales, primarily to Canada. Export sales of
the remaining divisions were insignificant. Chatwins Group does not consider
the domestic sales of its foreign subsidiaries as export sales.
Backlog. Chatwins Group consolidated backlog at December 31, 1998 was
approximately $49.7 million and at December 31, 1997 was approximately $63.4
million. Except for Alliance, all backlog orders at December 31, 1998 are
expected to ship within a year. Due to the nature of its business, Alliance's
backlog, which represented 25% and 45% of consolidated backlog at December 31,
1998 and 1997, respectively, is expected to ship within two years.
Research and Development. Chatwins Group operates in relatively mature
markets and the majority of its research and development work is related to
improving the quality and performance of its existing products, meeting design
requirements and specifications of its customers that require customized
products and developing greater production efficiencies. To meet these
objectives, Chatwins Group has engineering departments at all of its major
manufacturing divisions.
Major Customers. During 1998, no one customer accounted for more than 10% of
the net sales of Chatwins Group. Individual divisions of Chatwins Group have
had customers in certain calendar years that have accounted for in excess of
10% of that division's net sales. This occurs principally at CPI, Alliance, the
Brooks operation of Hanna and Auto-Lok due to the large contract nature of
their businesses, and commonly occurs for different customers from one year to
the next.
Patents and Trademarks. Chatwins Group owns a number of patents and
trademarks that are registered in the United States Patent and Trademark Office
and internationally. Chatwins Group does not believe that any of its registered
trademarks or patents are material to Chatwins Group business or that such
business is dependent on any trademark or patent.
Marketing and Distribution. Chatwins Group markets and distributes its
products in a variety of ways including in-house marketing and sales personnel
at all of its divisions, domestic independent and manufacturer representatives,
domestic and international agents and North American networks of independent
distributors that specialize in a product of Chatwins Group's various
divisions.
Employees. As of December 31, 1998, Chatwins Group had a total of 1,297
people in manufacturing, sales and administrative positions. Chatwins Group
believes its relations with its employees are good. However, on May 1, 1998,
the employees of Chatwin Group's Klemp division in Chicago, Illinois
represented by the International Association of Bridge, Structural and
Ornamental Iron Workers went on strike citing differences over wage increases
and other benefits. Such employees had been working under a collective
bargaining agreement which expired on April 30, 1998. By a vote of the Union's
membership on May 19, 1998, a new contract was ratified and the strike ended on
May 22, 1998. The new contract expires on April 30, 2002.
During late 1998 and early 1999, Chatwins Group relocated its Klemp Chicago,
Illinois administrative and manufacturing operations to Libertyville, Illinois.
All employees of the Chicago facility were offered their existing positions at
the new location. A large percentage of the employees elected to continue
employment with Chatwins Group.
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A breakdown of Chatwins Group's work force by location and function at
December 31, 1998 follows.
<TABLE>
<CAPTION>
General and
Manufacturing Administrative
------------------ -----------------
Division Location Union Non-Union Union Non-Union Total
- -------- --------------------------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Alliance--.............. Alliance, OH 174(5) 60 26 260
Auto-Lok--.............. Acworth, GA 153 45 198
CPI--................... McKeesport, PA 90(1) 7 8(2) 26 131
Hanna--................. Chicago, IL 85 31 116
Milwaukee, WI 72 10 82
Hdqtrs.--............... Pittsburgh, PA 19 19
Klemp--................. Oak Brook, IL 12 12
Libertyville, IL 58(3) 4 24 86
Orem, UT 106 28 134
Dayton, TX 58 22 80
Liberty, MO 48(4) 5 18 71
Dallas, TX 11 3 14
Lerma, State of Mexico (KDM) 17 30 47
Steelcraft--............ Miami, OK 29 4 33
--- --- --- --- -----
Totals.................. 370 614 8 305 1,297
=== === === === =====
</TABLE>
- --------
(1) United Steelworkers of America--Contract expires May 31, 2001.
(2) United Steelworkers of America--Contract expires May 31, 2001.
(3) International Association of Bridge, Structural and Ornamental Iron
Workers--Contract expires April 30, 2002.
(4) International Union of Operating Engineers--Contract Expires December 8,
2001.
(5) United Steelworkers of America--Contract expires June 14, 1999.
Insurance. Chatwins Group maintains general liability, product liability,
property, workers' compensation, and other insurance in amounts and on terms
that it believes are customary for companies similarly situated.
Environmental. Since 1988, Chatwins Group has followed procedures and
maintained strict policies designed to protect the environmental welfare of
its employees and the communities surrounding its various locations.
As a part of refinancing efforts by Chatwins Group in 1990 and 1998,
environmental audits were performed at Chatwins Group's various locations by
independent environmental engineering companies. Recommendations contained in
those audits were implemented by Chatwins Group. Each facility is monitored as
part of Chatwins Group's internal environmental and hazardous materials
management program. Chatwins Group has also completed a compliance program for
polychlorinated biphenyls and to remove or encapsulate asbestos at all of its
facilities. A policy of seeking substitutes for hazardous materials has been
established and many potentially hazardous substances have been replaced by
environmentally safe items. Chatwins Group employees have been trained to work
properly with potentially hazardous substances and to read and understand
Material Safety Data Sheets.
As a result of these efforts, Chatwins Group believes that its business,
operations and facilities are being operated in substantial compliance with
applicable environmental and health and safety laws and regulations. In
addition, Chatwins Group is aware of no environmental claims that have been or
could be asserted against Chatwins Group, other than those claims that
Chatwins Group believes have been resolved or are the subject of
indemnification agreements with former owners of Chatwins Group's properties.
In September 1988, U.S. Metalsource Corp. (Metalsource), the owner of the
Ipsen facility prior to Chatwins Group, removed substantial quantities of
solvent contaminated soil from the Ipsen facility to a licensed landfill.
While almost all of the contaminated soil was removed, isolated areas could
not be removed
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due to building safety concerns. A residual groundwater contamination problem
remains. Alco Standard Corporation ("Alco"), the owner of the Ipsen facility
during the time when the vast majority of the contamination occurred, has
agreed to perform, pay for and assume direct responsibility and liability for,
and hold Chatwins Group harmless in respect of, the remediation of the
remaining contamination including an ongoing groundwater remediation plan which
has been approved by the Illinois Environmental Protection Agency. Concurrent
with its sale of the Ipsen assets, Chatwins Group assigned to the purchaser
Chatwins Group's rights to this agreement with Alco. Chatwins Group also
covenanted with the purchaser to complete or cause to be completed the
remediation of the remaining contamination if Alco should fail to honor its
agreement. As of December 31, 1998, Chatwins Group had not received notice that
Alco was not performing under the approved groundwater remediation plan.
Recent Developments
New Credit Facility. On October 30, 1998, Chatwins Group and NationsBank,
N.A. ("NationsBank"), a national banking association, executed a financing and
security agreement ("Financing Agreement") wherein NationsBank has provided
Chatwins Group with a revolving credit facility ("NationsBank Facility") of up
to a maximum principal amount of $40.0 million, including a letter of credit
facility of up to $5.0 million.
The NationsBank Facility includes a Special Availability Amount, as defined
in the Financing Agreement, of $6.0 million. The Special Availability Amount is
required to be reduced in $750,000 increments on each of February 1, May 1,
August 1 and November 1 in each of the years 1999 and 2000. Once reduced, the
Special Availability Amount may not be reborrowed. Availability under the
NationsBank Facility is subject to a borrowing base limitation calculated as
the aggregate of 85% of eligible accounts receivable plus the lesser of $15.0
million or the sum of 60% of finished goods and raw materials, 50% of supplies
and stores, a percentage, determined from time to time by NationsBank, of work-
in-process and the Special Availability Amount in effect at the time of the
calculation, all of the above as defined in the Financing Agreement. Interest
under the NationsBank Facility is determined by reference to various rates
including the NationsBank prime rate, the Federal Funds rate or LIBOR, each
plus an applicable margin. Chatwins Group may elect the rates upon notification
to NationsBank with applicable margins ranging from zero to 0.5% when using
either the NationsBank prime rate or the Federal Funds rate and from 2.0% to
2.75% when using LIBOR.
The NationsBank Facility is secured by a lien in favor of NationsBank on
Chatwins Group's accounts receivable, inventory and certain other property and
accounts to the extent necessary to permit foreclosure on the accounts
receivable and inventory. The Financing Agreement expires on October 31, 2001
and is renewable annually thereafter, subject to the approval of NationsBank,
but not beyond October 31, 2005.
Contemporaneously with the execution of the Financing Agreement on October
30, 1998, Chatwins Group borrowed a total of $28.9 million under the
NationsBank Facility, $28.1 million of which was used to repay, in total,
borrowings, interest and fees under its then existing revolving credit facility
("Congress Facility") with Congress Financial Corporation ("Congress") and $0.8
million of which was placed on deposit with Congress as cash collateral for
unexpired letters of credit. Such cash collateral will be returned to Chatwins
Group upon the expirations of the related letters of credit. Chatwins Group and
Congress agreed to terminate the Congress Facility upon execution of the
Financing Agreement. On November 2, 1998, Chatwins Group borrowed an additional
$3.25 million under the NationsBank Facility to fund its semiannual interest
payment on the 13% Senior Notes.
The NationsBank Facility includes various representations, warranties and
affirmative and negative covenants by Chatwins Group and provides NationsBank
with certain rights and remedies including, but not limited to, acceleration,
both in the event of default or subjectively, of all amounts borrowed under the
NationsBank Facility.
Exercise of Warrants. Pursuant to a Warrant Agreement dated as of May 1,
1993 (the "Warrant Agreement"), Chatwins Group issued 50,000 warrants, each of
which entitles the holder thereof to purchase
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one share of the common stock of Chatwins Group at an exercise price of $.01
per share. The warrants were issued in a transaction pursuant to which Chatwins
Group issued $50 million of 13% senior notes (Senior Notes). The warrants were
not exercisable except upon the occurrence of certain trigger events as defined
in the Warrant Agreement or, if no trigger event had occurred prior to May 3,
1998, upon Chatwins Group's failure to consummate a repurchase offer due to a
payment blockage, both as defined in the Warrant Agreement. No trigger event
had occurred through May 3, 1998 and a payment blockage existed on such date,
resulting in the warrants becoming exercisable as of May 3, 1998. Consistent
with the Warrant Agreement, Chatwins Group notified holders of the warrants of
the existence of a payment blockage within 30 days of such date. Due to the
then existing prospective merger with Reunion Industries, an affiliated company
in which Chatwins Group has an approximate 38% ownership and voting interest,
Chatwins Group simultaneously gave holders of the warrants a Bring Along Notice
(as defined in the Warrant Agreement) notifying them that their warrants would
lapse if not exercised within thirty days. The thirty-day period was
subsequently extended indefinitely when the then existing prospective merger
with Reunion Industries was delayed. The May 31, 1998 merger agreement with
Reunion Industries was terminated by mutual agreement. Through the date of this
proxy statement/ prospectus, 46,790 Warrants have been exercised at $.01 per
share resulting in the issuance of 46,790 shares of Chatwins Group common
stock. Remaining warrants which have not been exercised remain exercisable. See
"Information About Chatwins Group--Liquidity and Capital Resources."
Chatwins Group had previously notified its warrantholders that its
registration statement on Form S-1 filed with the SEC could not be used in
connection with any resale of its warrants or shares of its common stock
underlying the warrants. Any transactions in Chatwins Group warrants or common
stock into which the warrants are convertible continue to require compliance
with Rule 144A or another exemption from the registration requirements of the
Securities Act of 1933.
Defaults Under Indenture. In May of 1998, Chatwins Group executed a joint
venture agreement pursuant to which it contributed $100,000 to Suzhou Grating,
Ltd., a fiberglass reinforced plastic grating manufacturer in China. The
investment constitutes a default under the indenture dated as of May 1, 1993
(the "Indenture") pursuant to which Chatwins Group issued the Senior Notes.
In May of 1998, Mr. Bradley, Chairman of the Boards of both Chatwins Group
and Reunion Industries and stockholder of Chatwins Group, transferred all of
his shares of Chatwins Group common stock to the Charles E. Bradley, Sr. Family
Limited Partnership ("Bradley FLP") for estate planning purposes. The Bradley
FLP has granted voting control over such shares to Stanwich Partners, Inc.,
which in turn has granted voting control over such shares to Mr. John G. Poole,
a director and beneficial stockholder of Chatwins Group. Because Mr. Bradley no
longer has voting control over such shares of Chatwins Group common stock, a
breach has occurred under the Securities Pledge Agreement (as defined in the
Indenture). Because the Securities Pledge Agreement is cross-covenanted to the
Indenture, such breach created a default under the Indenture.
The Indenture provides that neither of the aforementioned defaults will
mature into an Event of Default (as defined in the Indenture) subject to the
remedies therein provided, including acceleration of the Senior Notes, until
State Street Bank and Trust Company, as successor trustee to the Indenture or
the holders of at least twenty-five percent (25%) of the Senior Notes notify
Chatwins Group of the default and the default remains unremedied for thirty
(30) days after said notice. As of the date of this proxy statement/prospectus,
Chatwins Group had not received notice from either the trustee or any Senior
Note holders. In the event notice is received, Chatwins Group currently has
agreements in place that it believes would remedy each such default within the
30 day remedy period. However, there can be no assurance that an Event of
Default will not result from these defaults.
Purchase Offer. In connection with the acquisition of the Reunion Industries
common stock, on June 20, 1995, Chatwins Group and the Trustee agreed to a
first supplemental indenture and waiver of covenants of the Indenture under
which the Senior Notes are issued. Pursuant to this supplemental indenture, the
Company agreed to offer to
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purchase $25.0 of million Senior Notes (representing 50% of the originally
issued principal amount of the Senior Notes) from Senior Notes holders on each
of June 1, 1999 and 2000 at an amount equal to 100% of the aggregate
outstanding principal amount thereof, plus unpaid interest to the purchase
date. Chatwins Group has classified the maximum potential principal amount of
the first purchase offer as current maturities of long-term debt in its
consolidated balance sheet at December 31, 1998 included herein. Chatwins Group
failure to fulfill its obligations under this purchase offer would constitute a
failure to pay principal under the Indenture and result in an Event of Default.
An Event of Default due to a failure to pay principal would, pursuant to the
Securities Pledge Agreement, result in a Realization Event causing the
immediate vesting in the Collateral Agent of the voting rights of approximately
43% of Chatwins Group common stock subject to the pledge under the Securities
Pledge Agreement, as well as the immediate vesting of all rights to receive
dividends and distributions with respect to the pledged shares of common stock.
In addition, upon an Event of Default, the Trustee or the holders of at least
25% of the Senior Notes may, by written notice to Chatwins Group, declare an
acceleration of the Senior Notes. In the event the possible merger with Reunion
occurs, Chatwins Group intends to redeem all of the Senior Notes. Because there
can be no assurances that the possible merger and refinancing transaction will
occur, or that they will occur before the June 1, 1999 repurchase date,
Chatwins Group has obtained a commitment from a national financial institution
that, pursuant to certain actions, it will fund Chatwins Group's obligation to
purchase Senior Notes, if any, on the June 1, 1999 purchase date should
Chatwins Group's then available liquidity be insufficient to do so. As of the
date of this report, no reasonable estimate exists as to the amount of Senior
Notes which Chatwins Group may be required to purchase, if any, on the June 1,
1999 offer date. Absent the refinancing contemplated by the possible merger
with Reunion Industries or the funding contemplated by the commitment, there
can be no assurances that a Realization Event or Event of Default will not
occur. See "--Possible Merger With Reunion and Reunion Acquisitions of King-Way
and NAPTech", "Liquidity and Capital Resources" and "Factors Potentially
Affecting Future Liquidity."
Chicago Plant Strike. On May 1, 1998, approximately 75 employees of Chatwins
Group's Klemp division in Chicago, IL represented by the International
Association of Bridge, Structural and Ornamental Iron Workers went on strike
citing differences over wage increases and other benefits. Such employees had
been working under a collective bargaining agreement which expired on April 30,
1998. By a vote of this union's membership on May 19, 1998, a new contract was
ratified and the strike ended on May 22, 1998. The new contract expires on
April 30, 2002. This strike adversely affected the second quarter of 1998
results of operations of Chatwins Group's Klemp division. See "Results of
Operations."
Affiliate Litigation Provision. As previously reported by Reunion
Industries, on April 24, 1998, a jury in state district court in Harris County,
Texas returned jury verdict findings against Reunion Industries related to a
November 1995 contract for the sale of all outstanding shares of capital stock
of Reunion Industries' wholly owned oil and gas subsidiary to Bargo Energy
Company ("Bargo"). The jury found that Bargo had a right to terminate the
November 1995 stock purchase agreement with Reunion Industries and that Reunion
fraudulently induced Bargo into entering into the agreement. In July 1998, the
court entered judgment affirming the $5.0 million punitive damages jury verdict
and awarded approximately $3.0 million in attorneys' fees and costs. Reunion
Industries maintained at trial and continues to maintain that all requirements
to closing under the contract were met, and that Bargo was required to close
the transaction. Reunion Industries' management continues to maintain that no
evidence sufficient to support a jury finding of fraud or related punitive
damages was presented at trial. Reunion Industries has filed a bond which
suspends execution on the judgment while it appeals. Reunion Industries has
filed a formal notice of appeal and intends to file its appeal as soon as
possible. However, Reunion Industries' management has informed Chatwins Group
that although it believes, based on consultation with counsel, that it is more
likely than not that the judgment will be overturned on appeal, Reunion
Industries has recorded an accrual of $8.8 million for the amount of the
judgment by a charge to its continuing operations for the second quarter of
1998 in accordance with generally accepted accounting principles. Chatwins
Group's results of operations for the second quarter of and year ended December
31, 1998 and the carrying value of Chatwins Group investment in Reunion common
stock on the equity method of accounting were adversely affected by this
action. Reunion Industries has indicated that, if the judgment is not
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overturned on appeal, and the possible merger with Chatwins Group and related
refinancing do not occur, Reunion Industries would be obligated to seek
alternative funding sources, possibly including a sale of assets. See
"Information About Chatwins Group--Management's Discussion of Financial
Condition and Results of Operations--Results of Operations."
King-Way. On November 3, 1997, Stanwich Acquisition Corporation acquired the
King-Way Material Handling Company business ("King-Way") from the Kingston-
Warren Corporation for a purchase price of $18.1 million. Stanwich Acquisition
is a privately-held company whose common stock is owned 42.5% by Mr. Bradley,
42.5% by Mr. Kimball J. Bradley (Senior Vice President and stockholder of
Chatwins Group and son of Mr. Bradley) and 15% by Mr. Richard L. Evans,
Executive Vice President, Chief Financial Officer and Secretary of Reunion
Industries. Similar to Auto-Lok, King-Way is in the business of producing
industrial and commercial storage racks and materials handling systems.
At the time King-Way was available for purchase, Chatwins Group's management
was desirous of acquiring King-Way as a strategic acquisition by its Auto-Lok
division as King-Way's computerized systems were thought to be an important
line extension to Auto-Lok's more traditional storage and materials handling
systems. Chatwins Group's was not, however, able to consummate the acquisition
because of restrictions under its existing financing documents. Mr. Bradley
therefore organized and capitalized Stanwich Acquisition to acquire and hold
King-Way until such time as it could be acquired by Chatwins Group.
Because King-Way had been operating as a division of Kingston-Warren
Corporation, it was necessary to establish King-Way's business in new
facilities with appropriate overhead support. Meanwhile, Auto-Lok possessed
surplus floor space, production workforce, administrative organization and
equipment that could be utilized to continue King-Way's operations.
Accordingly, Stanwich Acquisition and Auto-Lok entered into a service agreement
pursuant to which King-Way would utilize Auto-Lok's surplus capacity in
exchange for fees approximately equal to Auto-Lok's costs of providing the
surplus capacity plus a right of first negotiation to acquire King-Way from
Stanwich Acquisition. This right of first negotiation has since expired. The
integration of King-Way's business into Auto-Lok's facility took place
primarily during the second quarter of 1998. Through December 31, 1998, costs
totaling $1,298,631 have been charged to King-Way under this agreement. At
December 31, 1998, Chatwins Group had receivables totaling $780,000 from King-
Way. See "Certain Relationships and Related Transactions--King-Way Service
Agreement."
NAPTech. On August 25, 1998, NPS Acquisition Corp. ("NPSAC") acquired
NAPTech from the Shaw Group for a purchase price of $8.4 million. NPSAC is
wholly owned by Mr. Bradley. Like Chatwins Group's CPI division, NAPTech
manufactures steel seamless pressure vessels. At the time NAPTech was available
for purchase, Chatwins Group's management wanted to acquire it as a strategic
acquisition by its CPI division. Chatwins Group was not, however, able to
consummate the acquisition because of restrictions under its existing financing
documents. Mr. Bradley therefore organized and capitalized NPSAC to acquire and
hold NAPTech until such time as it could be acquired by Chatwins Group.
In August 1998, CPI and NPSAC entered into a services agreement pursuant to
which CPI would provide certain administrative services to NAPTech for cash
fees which approximate $29,000 per month. The NAPTech services agreement is for
one year and may be renewed annually upon agreement by both Chatwins Group and
NAPTech. On August 25, 1998 Chatwins Group purchased from NAPTech $1.0 million
of inventory usable by its CPI division in its normal course of business. At
December 31, 1998, Chatwins Group had receivables totaling $148,000 from
NAPTech.
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<PAGE>
Properties
Chatwins Group has a total of 89.7 acres and 1,776,705 square feet being
used for ongoing operations throughout the United States, China and Mexico.
Except Klemp's headquarters in Oak Brook, Illinois, CPI's sales office in
Beijing, China, Klemp de Mexico's sales offices as discussed below, and
Chatwins Group's corporate headquarters in Pittsburgh, Pennsylvania, which is
administrative, all locations are both manufacturing and administrative
facilities:
<TABLE>
<CAPTION>
Square Expiration
Division Location Feet Land Acres Title Date
- -------- -------- ------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
CPI........... McKeesport, PA 602,772 37.0 Owned --
Beijing, China 808 -- Leased 10/31/00
Klemp......... Oak Brook, IL 4,871 -- Leased 04/30/02
Libertyville, IL 149,200 -- Leased 12/31/13
Orem, UT 90,000 5.0 Owned --
Dayton, TX 41,250 7.8 Owned --
Dallas, TX 21,600 -- Leased 01/31/02
Liberty, MO 55,551 5.7 Owned --
Lerma, State of Mexico (KDM) 25,000 -- Leased 03/20/02
Alliance...... Alliance, OH 383,865 14.8 Owned --
Hanna......... Chicago, IL 85,283 2.7 Owned --
Milwaukee, WI 48,000 3.2 Owned --
Steelcraft.... Miami, OK 39,120 13.5 Owned --
Headquarters.. Pittsburgh, PA 6,485 -- Leased 08/31/01
Auto-Lok...... Acworth, GA 222,900 -- Leased 03/12/08
</TABLE>
In addition to the above facilities, Klemp de Mexico has sales offices
rented under informal arrangements throughout Mexico in the cities of
Coatzacoalcos, Guadalajara, Mexico City, Monterey, Tampico and Villahermosa.
Hanna's location in Milwaukee, Wisconsin includes two buildings; one of
approximately 41,000 square feet and the other of approximately 7,000 square
feet. During 1998, Chatwins Group undertook a project to expand the smaller
building by 20,000 square feet as the result of a sole-source supply agreement
for double welded hydraulic cylinders executed with one of Brooks' major
customers located in Horicon, Wisconsin. See "Information About Chatwins
Group--Individual Operating Divisions--Hanna."
In October 1998, Chatwins Group entered into a lease agreement for a
manufacturing and administrative facility located in Libertyville, Illinois
and, beginning in late 1998 and early 1999, relocated its Klemp Chicago,
Illinois manufacturing and administrative operations to Libertyville, Illinois.
The new facility has a total of 149,200 square feet of space and includes
options for more square footage, if needed. The sale of its Klemp Chicago,
Illinois facility is under a contract of sale which is scheduled to close in
the second quarter of 1999. The Atlanta location of Chatwins Group's Klemp
division was closed during 1998.
Chatwins Group believes that all of its facilities have been in operation
for a sufficient period of time to demonstrate their suitability for their
individual purposes. The production capacities of Chatwins Group's facilities,
subject to the completion of the expansion of Hanna's Milwaukee, Wisconsin
facility and relocation of Klemp's Chicago operations, both discussed above,
are believed by Chatwins Group to be sufficient for Chatwins Group's
anticipated future needs.
In addition to the property listed above, Chatwins Group owns 92.7 acres of
idle farm land adjacent to its former Ipsen facility, in Boone County,
Illinois, which were retained by Chatwins Group after the Ipsen sale.
105
<PAGE>
Legal Proceedings
In June 1993, the U.S. Customs Service ("Customs") made a demand on Chatwins
Group's former industrial rubber distribution division for $612,948.30 in
marking duties pursuant to 19 U.S.C. Sec. 1592. The duties are claimed on
importations of "unmarked" hose products from 1982 to 1986. Following Chatwins
Group's initial response raising various arguments in defense, including
expired statute of limitations. Customs responded in January 1997 by reducing
its demand to $370,968.00 and reiterating that demand in October 1997. Should
the claim not be resolved, Customs threatens suit in the International Court of
Claims. Chatwins Group continues to believe that, based on consultation with
counsel, there are facts which raise a number of procedural and substantive
defenses to this claim, which will be vigorously defended. There is no
applicable insurance coverage.
In addition to the aforementioned Customs claim, Chatwins Group is involved
in other various legal proceedings and product liability claims and believes
that none of these individually or in the aggregate will have a material effect
on the financial condition or results of operations of Chatwins Group.
106
<PAGE>
Selected Financial Data of Chatwins Group
SELECTED HISTORICAL FINANCIAL DATA
(in thousands, including notes hereto,
except for share and per share amounts and ratios)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings Data(1):
Net sales................... $191,586 $188,920 $153,480 $183,408 $154,710
Cost of sales............... 154,980 153,394 123,722 146,698 125,135
-------- -------- -------- -------- --------
Gross profit................ 36,606 35,526 29,758 36,710 29,575
Selling, general and
administrative expenses.... 23,217 22,283 19,899 21,169 19,653
Other (income) expense,
net........................ 629 436 275 407 (176)
Minority interests.......... (57) (141) -- -- --
-------- -------- -------- -------- --------
Operating profit............ 12,817 12,948 9,584 15,134 10,098
Interest expense, net(2).... 10,099 9,776 9,559 9,800 8,567
-------- -------- -------- -------- --------
Income before income taxes
from continuing
operations................. 2,718 3,172 25 5,334 1,531
Provision for income
taxes(3)................... 1,083 851 8 909 276
-------- -------- -------- -------- --------
Income from continuing
operations................. $ 1,635 $2,321 $ 17 $ 4,425 $ 1,255
======== ======== ======== ======== ========
Income (loss) from
continuing operations
applicable to common
stock(4)................... $ 1,179 $ 1,865 $ (439) $ 3,969 $805
======== ======== ======== ======== ========
Average equivalent common
shares outstanding(10)..... 292,887 292,887 292,887 292,887 293,242
======== ======== ======== ======== ========
Income (loss) from
continuing operations per
common share(10)........... $ 4.03 $ 6.37 $ (1.49) $ 13.55 $ 2.74
======== ======== ======== ======== ========
Ratio of earnings to fixed
charges.................... 1.25x 1.30x 1.00x 1.52x 1.16x
======== ======== ======== ======== ========
Operating and Other Data:
EBITDA(5)................... $ 17,303 $ 16,791 $ 13,215 $ 18,619 $ 12,546
======== ======== ======== ======== ========
Cash flow from (used in)
operating activities....... (3,094) 3,616 3,761 2,472 (1,432)
======== ======== ======== ======== ========
Cash flow from (used in)
investing activities....... (5,195) (5,044) (1,190) (6,866) (4,321)
======== ======== ======== ======== ========
Cash flow from (used in)
financing activities....... 7,896 1,806 (2,303) 4,725 5,271
======== ======== ======== ======== ========
Depreciation and
amortization(6)............ 4,486 3,843 3,631 3,974 3,900
======== ======== ======== ======== ========
Capital expenditures........ 5,095 5,044 4,704 4,852 5,085
======== ======== ======== ======== ========
Ratio of EBITDA to interest
expense(5)................. 1.84x 1.82x 1.48x 2.02x 1.54x
======== ======== ======== ======== ========
<CAPTION>
At December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital(9).......... $ 32,627 $ 28,280 $ 25,042 $ 24,786 $ 22,804
======== ======== ======== ======== ========
Total assets................ 117,366 111,269 101,330 106,290 94,491
======== ======== ======== ======== ========
Total long-term debt(8)..... 50,699 50,723 50,746 50,770 51,646
======== ======== ======== ======== ========
Redeemable preferred stock.. 8,482 8,026 7,570 7,114 6,658
======== ======== ======== ======== ========
Stockholders' equity(7)..... (9,948) (7,551) (9,354) (8,190) (11,608)
======== ======== ======== ======== ========
</TABLE>
107
<PAGE>
- --------
(1) Chatwins Group holds a minority voting interest in Reunion Industries
which it accounts for under the equity method. On September 14, 1995,
Chatwins Group sold Oneida to Reunion Industries. Such transaction was
treated as the disposal of a portion of a line of business with Oneida's
historical operating results and resulting gain on sale classified within
continuing operations through September 14, 1995.
(2) Includes amortization of debt issuance expenses of the following amounts
for the following years: 1998: $671; 1997: $550; 1996: $632; 1995: $564
and 1994: $444.
(3) See Note 17 to the consolidated financial statements of Chatwins Group for
the year ended December 31, 1998. Due primarily to the use of net
operating loss carryforwards, Chatwins Group's actual cash payments, net
of refunds, relating to state and federal income taxes for the years ended
December 31, 1994 through December 31, 1997 have been approximately $533,
$20, $53 and $205, respectively. In 1998, Chatwins Group had a net refund
of $139.
(4) In determining income (loss) from continuing operations applicable to
common stock, income from continuing operations is reduced by accretions
of dividends on preferred stock as follows: 1998: $456; 1997: $456; 1996:
$456; 1995: $456 and 1994: $450.
(5) EBITDA is calculated as follows:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income from continuing operations.... $ 2,718 $ 3,172 $ 25 $ 5,334 $ 1,531
Interest expense, net(2)............. 10,099 9,776 9,559 9,800 8,567
Depreciation and amortization(6)..... 4,486 3,843 3,631 3,974 3,900
Gain on sale of business............. -- -- -- (1,190) (1,452)
Loss on notes receivable............. -- -- -- 701 --
------- ------- ------- ------- -------
EBITDA............................. $17,303 $16,791 $13,215 $18,619 $12,546
======= ======= ======= ======= =======
</TABLE>
Chatwins Group has included EBITDA and the ratio of EBITDA to interest expense
in the Selected Historical Financial Data due to the close relationship of
these line items to Chatwins Group's financial covenants benefiting the Senior
Notes.
(6) Excludes amortization of debt issuance expenses. See footnote (2) above.
(7) Stockholders' equity has been reduced by accretions for redemption value
of and dividends on preferred stock of $14.5 million through 1998.
(8) Excludes borrowings under revolving credit facilities and includes current
maturities of Senior Notes.
(9) Represents current assets less current liabilities excluding borrowings
under revolving credit facilities and current maturities of Senior Notes.
(10) includes the dilutive effect of the Warrants.
Management's Discussion of Financial Condition and Results of Operations of
Chatwins Group
Results of Operations -- 1998 Compared to 1997
Net sales for 1998 totaled $191.6 million, compared to $188.9 million for
1997. Sales for 1998 increased $2.7 million, or 2%. The increase in sales was
primarily at Klemp and Hanna, partially offset by decreases or flat revenues at
the remaining divisions. Klemp's sales, including its international entities,
increased $4.5 million and Hanna's sales increased $1.0 million. Sales
decreased $1.8 million at Alliance, $0.7 million at Auto-Lok and $0.4 million
at Steelcraft. CPI reported flat revenues in 1998 compared to 1997. The
increase in sales at Klemp reflects an improving domestic market trend over the
softening in its markets which began in 1996 and continued through much of 1997
and the ramp-up in operations at Shanghai Klemp which had an increase in sales
of $1.8 million. Additionally, Klemp de Mexico's sales increased $1.0 million.
The increase in sales at Hanna in 1998 compared to 1997 occurred in the fourth
quarter of 1998 and was the result of a series of large shipments to one of
Hanna's largest customers. The decrease in sales at Alliance was primarily due
to a slight decrease in the level of material inputs to large projects during
1998 compared to 1997. Decreases at Auto-Lok and Steelcraft were general in
nature and management believes not indicative of adverse trends.
108
<PAGE>
Gross profit for 1998 was $36.6 million, a 3% increase compared to $35.5
million for 1997. Gross profit margin was 19.1% in 1998, compared to 18.8% in
1997. Gross profit during 1998 compared to 1997 improved $1.1 million at Hanna,
$0.8 million at Auto-Lok, $0.5 million at CPI and $0.3 million at Klemp, all of
which was at the foreign subsidiaries primarily due to increases in their
volumes. These gross profit improvements were partially offset by decreases of
$1.3 million at Alliance and $0.2 million at Steelcraft. Gross profit margin
was also up at Hanna, Auto-Lok and CPI, but down at Klemp, Alliance and
Steelcraft. The increase in gross profit and margin at Hanna was primarily due
to the efficiencies of increased volume and a shift in product mix towards its
industrial cylinder line, which has higher margin products than its mobile
cylinder line. Although Auto-Lok's overall volume decreased in 1998 compared to
1997, the increase in gross profit and margin at Auto-Lok was primarily due to
the efficiencies of a higher operating level at Auto-Lok's facility due to the
ability to absorb fixed and semi-variable overhead costs by the integration of
King-Way's operations. See "Information About Chatwins Group--Recent
Developments--King-Way." Although Klemp's overall domestic volume increased in
1998 compared to 1997, domestic gross profit and margin were down primarily due
to inefficiencies caused by the relocation during the fourth quarter of 1998 of
its Chicago operations to Libertyville, Illinois and the three week strike at
its Chicago plant and the resulting inability to absorb fixed costs. See
"Recent Developments--Chicago Plant Strike." CPI's profits and margin both
improved in 1998 compared to 1997 due to a higher margin product mix while
Alliance's profits and margin were negatively impacted by cost overruns on a
large project. The decrease in Steelcraft's profits and margin were directly
related to the decrease in volume in 1998 compared to 1997.
Selling, general and administrative ("SGA") expenses for 1998 were $23.2
million, compared to $22.3 million for 1997, an increase of $0.9 million. SGA
expenses as a percentage of sales increased to 12.1% for 1998 compared to 11.8%
in 1997. The increase in SGA and SGA as a percentage of sales occurred during
the first half of 1998 and was due to an overall increase in administrative
spending at certain significant divisions due to increased domestic and
international marketing efforts.
There was other expense in 1998 of $0.6 million, compared to other expense
of $0.4 million for 1997, a net increase of $0.2 million. Other than foreign
currency translation loss of $150,000 in 1998, there were no individually
significant or offsetting items in either 1998 or 1997. See "--Quantitative and
Qualitative Disclosures About Market Risk."
Minority interests of approximately $0.1 million in both 1998 and 1997
represent results during 1998 and 1997 allocated to the minority ownerships of
Chatwins Group's CFI-Klemp and Shanghai Klemp joint ventures. Minority
interests are calculated based on the percentage of minority ownership.
Interest expense, net, for 1998 was $10.1 million, compared to $9.8 million
for 1997, an increase of $0.3 million. In general, average borrowing levels
under Chatwins Group's revolving credit facilities increased during 1998 when
compared to 1997 as a result of an increase in net working capital (defined as
receivables and inventories less trade payables).
There was a tax provision of $1.1 million in 1998, compared to $0.9 million
in 1997, an increase of $0.2 million. The increase in the tax provision for
1998 compared to 1997 was primarily due to a $0.3 million reduction in the
valuation allowance for deferred tax assets during 1997 compared to no change
in the valuation allowance during 1998.
Chatwins Group's investment in Reunion Industries is being accounted for
under the equity method of accounting. Chatwins Group's results of operation
for 1998 and the carrying value of Chatwins Group's investment in Reunion
common stock on the equity method of accounting were adversely affected by
Reunion Industries' results of operation for 1998, which included an $8.8
million charge to continuing operations resulting from an adverse litigation
judgment entered against Reunion Industries (see "Information About Chatwins
Group--Recent Developments--Affiliate Litigation Provision") and a $1.7 million
charge to discontinued operations related to environmental remediation costs
for certain Louisiana oil and gas properties it owns. The equity losses from
continuing operations of affiliate of $2.7 million in 1998 and $0.2 million in
109
<PAGE>
1997 represent Chatwins Group's shares of Reunion Industries' results from
continuing operations for each period. The equity loss from discontinued
operations of affiliate of $0.4 million in 1998 and equity income from
discontinued operations of affiliate $0.2 million in 1997 represent Chatwins
Group's share of Reunion Industries' results from discontinued operations.
Results of Operations--1997 compared to 1996
Net sales for 1997 totaled $188.9 million, compared to $153.5 million for
1996, increasing $35.4 million, or 23%. Sales increased at all divisions of
Chatwins Group. Sales increased $15.7 million at Alliance, $9.6 million at
Auto-Lok, $3.8 million at Hanna, $3.1 million at CPI, $2.8 million at Klemp and
$0.4 million at Steelcraft. Included in Klemp's sales increase was $0.6 million
at Shanghai Klemp and $0.4 million at Klemp de Mexico. The increase in sales at
CPI was primarily due to an increase in orders from and shipments to one of
CPI's largest domestic customers. The increases at Auto-Lok and Hanna are
primarily due to a general increase in demand for their products, which has
resulted in higher levels of orders and shipments. The increase in sales at
Alliance is primarily due to a significant increase in orders associated with
the steel industry that began in the fourth quarter of 1996 and continued into
1997. The sales increase at Klemp was achieved in the fourth quarter of 1997
reflecting an improving market trend over the softening market that began in
1996.
Gross profit for 1997 was $35.5 million, compared to $29.8 million for 1996.
Gross profit for 1997 increased $5.8 million, or 19%. Gross profit margin was
18.8% in 1997, compared to 19.4% in 1996. Gross profit during 1997 compared to
1996 improved at all divisions of Chatwins Group except for Klemp. Excluding
Klemp, the increases in gross profit were due to higher volumes in 1997 while
Klemp's gross profit was negatively affected by competitive pricing pressures
in the markets it serves, primarily the Midwest, and non-cash charges to 1997
and 1996 earnings for provisions for losses on inventories. Gross profit margin
improved significantly at Hanna due to the efficiencies of increased volume and
cost savings programs and, except for Klemp, increased at Chatwins Group's
other divisions, all related to volume increases as well. Profit margin at
Klemp was negatively affected by competitive pricing pressures in the markets
it serves, primarily the Midwest, and the non-cash inventory charge discussed
above.
SGA expenses for 1997 were $22.3 million, compared to $19.9 million for
1996. However, SGA expenses as a percentage of sales decreased to 11.8% for
1997 compared to 13.0% in 1996. The decrease in SGA expenses as a percentage of
sales was primarily due to the 23% increase in sales while SGA expenses
increased only 12% as a result of the fixed and semi-variable nature of certain
expenses.
Other expense for 1997 was $0.4 million compared to $0.3 million in 1996.
There were no individually significant or offsetting items in either 1997 or
1996.
Minority interests of $0.1 million represent losses during 1997 allocated to
the minority ownerships of Chatwins Group's CFI-Klemp de Mexico and Shanghai
Klemp joint ventures. Minority interests are calculated based on the percentage
of minority ownership.
Interest expense, net, for 1997 was $9.8 million, compared to almost $9.6
million for 1996. A slightly higher level of interest expense under the
Congress Facility in 1997 compared to 1996 was offset by a lower level of
interest expense on related party indebtedness. The increase in interest
expense on Chatwins Group's revolving credit facility was due to a .25%
increase in the prime lending rate (as defined) and a higher level of average
borrowings. The decrease in interest expense on related party indebtedness was
due to the full repayments of the Parkdale Note and Gesterkamp Note during the
first half of 1997.
There was a tax provision of $0.9 million in 1997 compared to less than $0.1
million in 1996. The increase in the provision for income taxes was due to the
increase in pre-tax earnings, partially offset by the $360,000 reduction in the
valuation allowance for deferred tax assets.
Chatwins Group's investment in Reunion Industries is being accounted for
under the equity method of accounting.
110
<PAGE>
The equity losses from continuing operations of affiliate of $0.2 million in
1997 and $0.5 million in 1996 represent Chatwins Group's shares of Reunion
Industries' results from continuing operations for each period.
The equity income from discontinued operations of affiliate of $0.2 million
in 1997 and $0.1 million in 1996 represent Chatwins Group's shares of Reunion
Industries' results from discontinued operations.
The classification of Mexico as a highly-inflationary economy effective
January 1, 1997 pursuant to paragraph 11 of SFAS No. 52, "Foreign Currency
Translation" had an insignificant impact on Chatwins Group's results of
operations for 1997.
Liquidity and Capital Resources
General. Except for its foreign subsidiaries, Chatwins Group manages its
liquidity as a consolidated enterprise. The operating divisions of Chatwins
Group carry minimal cash balances. Cash generated from the divisions' operating
activities generally is used to repay borrowings under revolving credit
arrangements, as well as other uses (e.g. corporate headquarters expenses, debt
service, capital expenditures, etc.). Conversely, cash required for the
divisions' operating activities generally is provided from funds available
under the same revolving credit arrangements. Chatwins Group's foreign
subsidiaries are self-sustaining and operate almost exclusively within the
countries in which they are located. Their cash flows are devoted to and
obligations paid by their own operations. Chatwins Group does not provide funds
to the foreign operations nor does Chatwins Group guarantee any foreign
indebtedness.
Although Chatwins Group operates in relatively mature markets, it intends to
continue to invest in and grow its businesses through selected capital
expenditures as cash generation permits. Management believes that all required
principal and interest payments, as well as capital expenditures, will be met
by cash flows from operations and/or borrowings under the NationsBank Facility
or other financing or refinancing arrangements, if necessary.
On October 30, 1998, Chatwins Group and NationsBank executed the Financing
Agreement wherein NationsBank provided Chatwins Group with the NationsBank
Facility of up to a maximum principal amount of $40.0 million, including a
letter of credit facility of up to $5.0 million.
The NationsBank Facility includes a Special Availability Amount, as defined
in the Financing Agreement, of $6.0 million. The Special Availability Amount is
required to be reduced in $750,000 increments on each of February 1, May 1,
August 1 and November 1 in each of the years 1999 and 2000. Once reduced, the
Special Availability Amount may not be reborrowed. Availability under the
NationsBank Facility is subject to a borrowing base limitation calculated as
the aggregate of 85% of eligible accounts receivable plus the lesser of $15.0
million or the sum of 60% of finished goods and raw materials, 50% of supplies
and stores, a percentage, determined from time to time by NationsBank, of work-
in-process and the Special Availability Amount in effect at the time of the
calculation, all of the above as defined in the Financing Agreement. Interest
under the NationsBank Facility is determined by reference to various rates
including the NationsBank prime rate, the Federal Funds rate or LIBOR, each
plus an applicable margin. Chatwins Group may elect the rates upon notification
to NationsBank with applicable margins ranging from zero to 0.5% when using
either the NationsBank prime rate or the Federal Funds rate and from 2.0% to
2.75% when using LIBOR.
The NationsBank Facility is secured by a lien in favor of NationsBank on
Chatwins Group's accounts receivable, inventory and certain other property and
accounts to the extent necessary to permit foreclosure on the accounts
receivable and inventory. The Financing Agreement expires on October 31, 2001
and is renewable annually thereafter, subject to the approval of NationsBank,
but not beyond October 31, 2005.
Contemporaneously with the execution of the Financing Agreement on October
30, 1998, Chatwins Group borrowed a total of $28.9 million under the
NationsBank Facility, $28.1 million of which was used to repay, in
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<PAGE>
total, borrowings, interest and fees under the Congress Facility and $0.8
million of which was placed on deposit with Congress as cash collateral for
unexpired letters of credit. Such cash collateral will be returned to Chatwins
Group upon the expirations of the related letters of credit. Chatwins Group and
Congress agreed to terminate the Congress Facility upon execution of the
Financing Agreement. On November 2, 1998, Chatwins Group borrowed an additional
$3.25 million under the NationsBank Facility to fund its semiannual interest
payment on the Senior Notes.
The NationsBank Facility includes various representations, warranties and
affirmative and negative covenants by Chatwins Group and provides NationsBank
with certain rights and remedies in the event of any defaults including, but
not limited to, acceleration of all amounts borrowed under the NationsBank
Facility. Financial covenants in the NationsBank Facility include an adjusted
earnings before interest, taxes, depreciation and amortization ("NationsBank
EBITDA") to fixed charge coverage ratio and an indebtedness to cash flow ratio,
calculations of which are defined in the Financing Agreement. Generally all
amounts for calculation of the ratios are derived from domestic operations and
NationsBank EBITDA is adjusted for domestic capital expenditures. Beginning on
December 31, 1998, these covenants require Chatwins Group to maintain a rolling
twelve-month minimum adjusted NationsBank EBITDA to fixed charge coverage ratio
of 1.2:1 and a maximum indebtedness to cash flow ratio of 5.0:1. At December
31, 1998 such ratios were 1.3:1 and 4.9:1, respectively, and complied with the
Financing Agreement. Chatwins Group was also in compliance with all other
representations, warranties and covenants at December 31, 1998. Borrowings
outstanding under the NationsBank Facility at December 31, 1998 totaled $34.0
million and the weighted average rate for borrowing was 7.5%.
Prior to the NationsBank Facility Chatwins Group had the $28.0 million
Congress Facility. On April 28, 1998, the Congress Facility was amended to
provide a temporary increase in the maximum available credit to $30.0 million
from $28.0 million and a temporary $3.0 million overadvance availability. The
proceeds from this $3.0 million overadvance were used for various purposes,
including Chatwins Group's May 1, 1998 $3.25 million interest payment on its
Senior Notes. Additionally, as part of this amendment, the expiration date of
the Congress Facility was extended to August 31, 1998. On August 18, 1998, the
Congress Facility was further amended to extend the Maximum available credit
temporary increase period and further extend the expiration date of the
Congress Facility to October 31, 1998. Effective with the execution of the
Financing Agreement with NationsBank and the repayment of all borrowings,
interest and fees under the Congress Facility, effective October 30, 1998,
Chatwins Group and Congress agreed to terminate the Congress Facility.
Borrowings under the Congress Facility bore interest at an annual rate of
the Philadelphia National Bank Prime Rate plus 1.5% which, at the time of its
termination, was 10.0%. The facility also contained an unused line fee of 0.5%
and a $5,000 monthly servicing fee.
At December 31, 1998, Chatwins Group had net operating loss carryforwards
for tax return reporting purposes of approximately $5.8 million, of which $1.4
million expires in 2008, $1.2 million expires in 2011 and $3.2 million expires
in 2018. The availability of these carryforwards may be subject to limitations
imposed by the Internal Revenue Code. A U.S. federal corporate income tax
return examination has been completed for Chatwins Group's the Company's 1995
tax year. Chatwins Group believes adequate provisions for income taxes have
been recorded for all years.
SFAS 109 requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Chatwins Group periodically reviews
the adequacy of the valuation allowance as a result of changes in its
profitability and other factors. Based on reviews during 1997, Chatwins Group
reduced the valuation allowance by $0.3 million in 1997. The valuation
allowance was not changed during 1998.
Operating Activities. Operating activities used $3.1 million of cash during
1998, compared to cash provided of $3.6 million in 1997, a decrease of $6.7
million. Cash generated from earnings before depreciation,
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amortization and equity in net loss of affiliate was almost the same in 1998
and 1997. A decrease of $0.7 million in cash used during 1998 compared to 1997
as the result of changes in net working capital (defined as receivables,
inventories and trade payables for cash flow purposes) was more than offset by
a use of cash of $6.1 million from net changes in other assets and liabilities
in 1998 compared to cash used of $0.7 million in 1997. The increase in cash
used in 1998 from net changes in other assets and liabilities in 1998 was the
result of an increase in prepaid expenses and deferred taxes and reductions of
liabilities, primarily at Chatwins Group's headquarters.
Operating activities provided $3.6 million of cash during 1997, compared to
cash provided of $3.5 million in 1996, an increase of $0.1 million. An increase
in income before depreciation, amortization and provision for losses on
inventories of $2.6 million in 1997 compared to 1996 and a net increase in cash
provided of $2.7 million from changes in other assets and liabilities,
primarily from an increase in other current liabilities, were more than offset
by an increase of $5.2 million in cash used during 1997 compared to 1996 to
fund increases in net working capital (defined as receivables, inventories and
trade payables for cash flow purposes), primarily an increase in cash used of
$11.4 million to fund changes in receivables as a result of the increase in
sales volume only partially offset by an increase of $6.6 million in cash
provided from changes in trade payables. The increase in other current
liabilities is primarily due to increases in certain accruals at corporate
headquarters and an increase in customer deposits at Hanna related to a supply
agreement with one of its customers.
Investing Activities. Investing activities used $5.2 million of cash during
1998, compared to cash used of $5.0 million during 1997, an increase in cash
used of $0.2 million, primarily related to Chatwins Group's $0.1 million
investment in a fiberglass grating joint venture in China. See "Information
About Chatwins Group--General--Recent Developments--Defaults Under Indenture."
Capital expenditures of approximately $5.0 million in each of 1998 and 1997
were essentially equal.
Investing activities used over $5.0 million of cash during 1997, compared to
cash used of $1.2 million during 1996, an increase in cash used of $3.8
million. During 1996, Chatwins Group received $3.7 million in cash in repayment
of previous advances made to Oneida and made a $0.2 million investment in
Shanghai Klemp, none of which recurred in 1997. Additionally, there was a $0.3
million increase in capital expenditures, from $4.7 million in 1996 to over
$5.0 million during 1997.
Financing Activities. Financing activities during 1998 provided $7.9 million
in cash, compared to $1.8 million of cash provided during 1997, an increase in
cash provided of $6.1 million. This increase in cash provided is the result of
an increase of $7.9 million in the level of net borrowings under revolving
credit arrangements during 1998 compared to an increase of only $2.4 million in
1997. Additionally, repayments of related party indebtedness decreased $0.6
million. Borrowings, interest and fees under the Congress Facility were repaid
and the Congress Facility was terminated effective October 30, 1998. See
"Information About Chatwins Group--Recent Developments--New Credit Facility"
and "Liquidity and Capital Resources--General."
Financing activities during 1997 provided $1.8 million in cash, compared to
$2.3 million of cash used from financing activities during 1996, an increase in
cash provided of $4.1 million. This increase in cash provided is primarily the
result of an increase of $2.4 million in the level of net borrowings under the
Congress Facility during 1997 compared to an increase of only $0.5 million in
1996, as well as a decrease of $2.1 million in repayments to related parties,
from $2.7 million in 1996 to $0.6 million in 1997.
Factors Potentially Affecting Future Liquidity. Chatwins Group has $50
million of Senior Notes due May 3, 2003 outstanding at December 31, 1998. When
Chatwins Group acquired the 1,450,000 shares of Reunion Industries common stock
on June 20, 1995, it contemporaneously agreed with the Trustee to a first
supplemental indenture and waiver of covenants of the Indenture under which the
Senior notes are issued. Pursuant to this supplemental indenture and waiver of
covenants, Chatwins Group agreed to offer to purchase $25 million, or half, of
the outstanding Senior notes from Noteholders on each of June 1, 1999 and 2000
at par
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value plus unpaid interest to the purchase date. The full principal amount of
the first purchase offer is classified as current maturities of long-term debt
in Chatwins Group's consolidated balance sheet at December 31, 1998.
Chatwins Group's failure to fulfill its obligations under this purchase
offer would constitute a failure to pay principal under the Indenture and
result in an Event of Default. An Event of Default due to a failure to pay
principal would, pursuant to the Securities Pledge Agreement, result in a
Realization Event causing the immediate vesting in the Collateral Agent of the
voting rights of approximately 43% of the Chatwins Group's common stock subject
to the pledge under the Securities Pledge Agreement, as well as the immediate
vesting of all rights to receive dividends and distributions with respect to
the pledged shares of common stock. In addition, upon an Event of Default, the
Trustee or the holders of at least 25% of the Senior Notes may, by written
notice to Chatwins Group, declare an acceleration of the Senior Notes. In the
event the possible merger with Reunion Industries occurs, Chatwins Group
intends to redeem all of the Senior Notes. Because there can be no assurances
that the possible merger and refinancing will occur, or that they will occur
before the June 1, 1999 repurchase date, Chatwins Group has obtained a
commitment from a national financial institution that, pursuant to certain
actions, it will fund Chatwins Group's obligation to purchase Senior Notes, if
any, on the June 1, 1999 purchase date should Chatwins Group's then available
liquidity be insufficient to do so. As of the date of this report, no
reasonable estimate exists as to the amount of Senior Notes which Chatwins
Group may be required to purchase, if any, on the June 1, 1999 offer date.
Absent the refinancing contemplated by the possible merger with Reunion
Industries or the funding contemplated by the commitment, there can be no
assurances that a Realization Event or Event of Default will not occur.
The Year 2000
Chatwins Group like most companies, utilizes electronic technology which
includes computer hardware and software systems that process information and
perform calculations that are date- and time-dependent. Chatwins Group is aware
that the coming of Y2K poses pervasive and complex problems in that virtually
every computer operation (including manufacturing equipment and other non-
information systems equipment), unless it is Y2K compliant, will be affected in
some way by the rollover of the two-digit year value from "99" to "00" and the
inadvertent recognition by the electronic technology of "00" as the year 1900
rather than Y2K. Chatwins Group is also aware that it may not only be
negatively affected by the failure of its own systems to be Y2K compliant, but
may also be negatively affected by the Y2K non-compliance of its vendors,
customers, lenders and any other party with which Chatwins Group transacts
business.
In 1995, Chatwins Group undertook a project to invest in and install a time-
critical manufacturing and management information system at certain of its
significant divisions in an effort to save costs and improved information flow
by substantially improving all operational processes. Y2K compliant technology
is part of this system and Chatwins Group anticipates no material adverse
effects to its new operating systems from Y2K.
In addition to this new system, Chatwins Group has completed its assessment
of all other systems and software in place at all locations and has identified
hardware replacements and software upgrades necessary to achieve Y2K
compliance. The identified hardware replacements and software upgrades are
scheduled to be completed and tested by the end of 1999 and will be provided by
vendors whose hardware and software have achieved Y2K certification. The cost
of the identified hardware replacements and software upgrades are not expected
to be material and, absent the need to achieve Y2K compliance, would be a
normal part of Chatwins Group's ongoing program for maintaining up-to-date
information technology. Chatwins Group has incurred and expects to continue to
incur internal staff and other costs as a result of modifying existing systems
to be Y2K compliant. Such costs will continue to be expensed as incurred and
funded through internally generated cash while costs to acquire new equipment
and software will be capitalized and depreciated over their useful lives.
Management does not expect the incremental cost to Chatwins Group of
enterprise-wide Y2K compliance to be material to its operations.
In addition to internal Y2K compliance, Chatwins Group has surveyed all
significant vendors, customers, lenders and other outside parties with which it
transacts business in an effort to identify Y2K non-compliance by such parties.
Results indicate that those important parties with which Chatwins Group does
business either
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have already achieved Y2K readiness or will be Y2K compliant during 1999. The
most significant third parties with which Chatwins Group contracts for services
are its payroll services provider, its local bank of record and its revolving
credit lender, NationsBank. Chatwins Group has received certification that its
provider of payroll services is Y2K compliant. Regarding its bank and revolving
credit facility lender, Chatwins Group funds its day-to-day operations through
a series of wire transfers between its revolving credit facility lender and its
local bank of record. The wire transfers are initiated at Chatwins Group's
headquarters via dial-up phone line connections. Both Chatwins Group's local
bank of record and NationsBank have indicated publicly that they are Y2K
compliant. However, any disruption in phone service as a result of Y2K could
result in Chatwins Group's inability to fund its operations and have a
significant adverse impact on the financial position and results of operation
of Chatwins Group.
Management recognizes that the failure of Chatwins Group or any party with
which Chatwins Group conducts business to be Y2K compliant in a timely manner
could have a material adverse impact on the operations of Chatwins Group. If
Chatwins Group's systems or the systems of its significant vendors, customers,
lenders and other outside parties with which it transacts business were to fail
because they were not Y2K compliant, Chatwins Group would incur significant
costs and inefficiencies. Manual systems for manufacturing and financial
controls would have to be implemented and staffed. Significant customers might
decide to cease doing business with Chatwins Group. Disruptions in electrical
power, phone service and/or delivery of materials could cause significant
business interruptions. Similarly, business interruptions at significant
customers could result in deferred or canceled orders.
The dates on which Chatwins Group believes Y2K compliance will be completed
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantees that these estimates will be achieved, or that there will not
be delays in, or increased costs associated with, achieving enterprise-wide Y2K
compliance. Specific factors that might cause differences between the estimates
and actual results include, but are not limited to, the availability and cost
of personnel trained in these areas, timely responses to and corrections by
third-parties and suppliers, the ability to implement interfaces between the
new systems and the systems not being replaced, and similar uncertainties. Due
to general uncertainty inherent in the Y2K problem, resulting in part from the
uncertainty of the Y2K compliance of third-parties, Chatwins Group cannot
ensure its ability to resolve problems associated with the Y2K issue that may
affect its operations and business, or expose it to third-party liability in a
timely and cost-effective manner.
Quantitative and Qualitative Disclosures About Market Risk
In conducting business, Chatwins Group has market risk exposures to foreign
currency exchange rates, interest rates and raw material prices. See
"Information About Chatwins Group--General Aspects Applicable to the
Divisions."
Foreign Currency Exchange Rate Risk. Chatwins Group manufactures its
products in the United States (U.S.), Mexico and China. Of Chatwins Group's
$191.6 million of consolidated net sales for 1998, $184.5 million, or 96%, were
sales from the production of U.S. locations, $4.7 million, or 3%, were from
Chatwins Group's Mexican subsidiary, Klemp de Mexico, and $2.4 million, or 1%,
were from Chatwins Group's Chinese subsidiary, Shanghai Klemp. Products
manufactured in the U.S. are primarily sold in the U.S. However, of the $184.5
million of net sales from domestic locations, $12.0 million were export sales
to other countries. Amounts and locations of such sales are set forth in
"Information About Chatwins Group--General Aspects Applicable to the
Divisions."
Export sales to foreign countries from Chatwins Group's U.S. locations are
denominated in U.S. dollars, Chatwins Group's reporting currency. Accordingly,
transaction loss exposures due to fluctuations in the functional currencies of
the countries in which Chatwins Group's domestic locations export to, which
vary significantly from year to year, are minimal.
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Sales of Klemp de Mexico and Shanghai Klemp are almost entirely within the
countries in which they are located and are denominated in each location's
functional currency; the peso in Mexico and the renminbi (RMB) in China.
Accordingly, transaction loss exposure to Chatwins Group from fluctuations in
each location's functional currency are minimal.
Chatwins Group's exposure to foreign currency rate fluctuations arise from
the translation effects on Chatwins Group's investments in its international
subsidiaries from potential fluctuations in each subsidiary's functional
currency. At December 31, 1998, Chatwins Group had approximately $3.6 million
invested in Klemp de Mexico and approximately $1.9 million invested in Shanghai
Klemp.
Effective January 1, 1997, Mexico's economy was classified as highly
inflationary as defined in SFAS 52 due primarily to the substantial inflation
in Mexico over 1995 and 1996, which was approximately 60% and 30%,
respectively. During 1997, inflation in Mexico subsided substantially and the
peso devalued minimally; from 7.84 pesos/$1.00 at December 31, 1996 to 8.07
pesos/$1.00 at December 31, 1997. However, during 1998, even though inflation
remained relatively stable, the peso devalued approximately 25% against the
U.S. dollar; from 8.07 pesos/$1.00 at December 31, 1997 to almost 10.00
pesos/$1.00 at December 31, 1998. This devaluation of the peso had a
significant impact on Chatwins Group's investment in Klemp de Mexico, resulting
in translation losses charged to earnings during 1998 of $150,000 and an
increase in the cumulative translation adjustment account in equity of
$666,000. On a sensitivity basis, additional devaluations of the Peso, if any,
of the magnitude seen during 1998 can be expected to have a similar impact on
the future financial position and operating results of Chatwins Group.
Effective January 1, 1999, Mexico emerged from highly inflationary status. As
such, future fluctuations in the value of the peso against the U.S. dollar will
be recorded as adjustments to comprehensive earnings and the cumulative
translation adjustment account in equity.
Impacts on Chatwins Group due to foreign currency rate fluctuations in China
have been insignificant. Since establishing the joint venture in late 1995, the
RMB has remained stable at approximately 8.3 RMB/$1.00. However, fluctuations
in the RMB against the U.S. dollar could have a significant impact on the
financial position, operating results and comprehensive earnings of Chatwins
Group, primarily in the form of translation effects. On a sensitivity basis, a
10% devaluation in the value of the RMB at December 31, 1998 would be estimated
by Chatwins Group to have an approximate $200,000 negative impact on the
cumulative translation adjustment in equity.
Chatwins Group's foreign subsidiaries are self-sustaining and operate almost
exclusively within the countries they are located. Their cash flows are devoted
to and obligations paid by their own operations. Chatwins Group does not
provide day-to-day operating funds to the foreign operations nor does Chatwins
Group guarantee any foreign indebtedness.
Interest Rate Risk. Chatwins Group's exposure to interest rate risk arises
primarily from borrowing under the NationsBank Facility. Interest under the
NationsBank Facility is determined by reference to various rates including the
NationsBank prime rate, the Federal Funds rate or LIBOR, each plus an
applicable margin. Chatwins Group's may elect the rates upon notification to
NationsBank with applicable margins ranging from zero to 0.5% when using either
the NationsBank prime rate or the Federal Funds rate and from 2.0% to 2.75%
when using LIBOR. At December 31, 1998, the weighted average rate for borrowing
under the NationsBank Facility was 7.5% and borrowings outstanding totaled
$34.0 million. All else remaining equal, on a sensitivity basis a 100 basis-
point increase in the borrowing rate would be estimated by Chatwins Group to
have an approximate $340,000 increase in annual interest expense.
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OWNERSHIP INFORMATION
Reunion Industries
Beneficial ownership information for Reunion Industries as of [April 23,
1999] can be found elsewhere in the proxy statement/prospectus by looking at
"Proposal 2--Security Ownership of Certain Beneficial Owners and Management" on
page .
Chatwins Group
Security Ownership of Certain Beneficial Owners and Management
As of [April 23, 1999], Chatwins Group had (i) [289,677.4] shares of common
stock outstanding, (ii) [2,249.0] shares of Class D Series A Preferred Stock,
par value $.01 per share outstanding, (iii) 800.0 shares of Class D Series B
Preferred Stock, par value $.01 per share outstanding and (iv) 1,510.0 shares
of Class D Series C Preferred Stock, par value $.01 per share outstanding. On
May 3, 1993 Chatwins Group issued 50,000 Chatwins Group Warrants each
exercisable into one share of Chatwins Group's common stock at $0.01 per share.
These warrants became exercisable on June 2, 1998. As of [April 23, 1999],
46,790 Chatwins Group Warrants had been exercised and were each converted into
one share of Chatwins Group' common stock, and 3,210 Chatwins Group Warrants
remained outstanding and exercisable. The following table sets forth
information, as of [April 23, 1999], as to the beneficial and percentage of
ownership of each class of Chatwins Group's capital stock by (A) each person
owning beneficially more than five percent of the outstanding shares of each
class of Chatwins Group's outstanding capital stock, (B) each director and
named executive officer of Chatwins Group and (C) all directors and officers of
Chatwins Group as a group. Except as otherwise indicated in the notes to the
following table, each stockholder has sole voting and investment power with
respect to the shares shown to be beneficially owned by such stockholder.
<TABLE>
<CAPTION>
Preferred Stock--Class D
-------------------------------
Common Stock Series A Series B Series C
------------ -------- -------- --------
<S> <C> <C> <C> <C>
Charles E. Bradley,
Sr..................... 140,946.6(1)(2) 2,249.0(3) 800.0(3) 1,510.0(4)
c/o Stanwich Partners 48.3% 100.0% 100.0% 100.0%
(see below for address)
John G. Poole........... 195,003.6(1)(2)(5) 2,249.0(3) 800.0(3) 1,510.0(4)
c/o Stanwich Partners 67.3% 100.0% 100.0% 100.0%
(see below for address)
Stanwich Partners,
Inc.................... 138,946.6(2) -- -- --
One Stamford Landing 48.0% -- -- --
62 South Field Avenue
Stamford, CT 06902
Cede & Co............... 46,790.0 -- -- --
55 Water Street 16.2% -- -- --
New York, NY 10041
Kimball J. Bradley...... 24,000.0 -- -- --
c/o Stanwich Partners,
Inc. 8.3% -- -- --
(see above for address)
Joseph C. Lawyer........ 18,094.0 -- -- --
c/o Chatwins Group, Inc. 6.2% -- -- --
300 Weyman Plaza, Suite
340
Pittsburgh, PA 15236
Jack T. Croushore....... 4,065.4 -- -- --
c/o Chatwins Group, Inc. 1.4% -- -- --
(see above for address)
</TABLE>
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<TABLE>
<CAPTION>
Preferred Stock--Class D
---------------------------
Common Stock Series A Series B Series C
------------ -------- -------- --------
<S> <C> <C> <C> <C>
John M. Froehlich.................... 30.0 -- -- --
c/o Chatwins Group, Inc. -- -- -- --
(see above for address)
Alan S. Wippman...................... 25.0 -- -- --
c/o Chatwins Group, Inc. -- -- -- --
(see above for address)
All directors and officers as a
group............................... 243,193.0 2,249.0 800.0 1,510.0
83.3% 100.0% 100.0% 100.0%
</TABLE>
- --------
(1) Pursuant to the Securities Pledge Agreement, dated as of May 1, 1993 (the
"Securities Pledge Agreement"), Mr. Bradley, Sr. pledged 127,799 shares of
Chatwins Group common stock to the Collateral Agent (as defined therein)
for the benefit of the holders of the Senior Notes and Mr. Poole pledged
17,040 shares of Chatwins Group's common stock to secure the Chatwins
Group's obligations under the Indenture and the Senior Notes.
(2) Includes 138,946.6 shares held of record by the Bradley FLP established by
Mr. Bradley, Sr. in May 1998 for estate planning purposes and of which Mr.
Bradley, Sr. owns 1% as general partner and 55% as a limited partner. The
Bradley FLP has designated Stanwich Partners, Inc. to vote these shares,
and Stanwich Partners, Inc. in turn has designated Mr. Poole, who is one of
its officers, as the person to vote these shares on its behalf. Pursuant to
Rule 13d-3, Mr. Bradley, Sr. and the Bradley FLP may be deemed to be the
beneficial owner of these shares with shared dispositive power with respect
thereto, and Stanwich Partners, Inc. and Mr. Poole each may be deemed to be
the beneficial owner of these shares with voting power with respect
thereto. Because Mr. Bradley, Sr. no longer has voting control over such
shares of Chatwins Group common stock, a breach occurred under the
Securities Pledge Agreement. See "Information About Chatwins Group--
Business--Recent Developments--Defaults Under Indenture."
(3) Held of record by KSB Acquisition Corp., the former owner of the corporate
predecessor-in-interest to the Klemp and Steelcraft divisions of Chatwins
Group, of which Messrs. Bradley, Sr. and Poole are the sole executive
officers and directors. Pursuant to Rule 13d-3, Messrs. Bradley, Sr. and
Poole would be deemed to be the beneficial owners of these shares, with
shared voting and dispositive power with respect thereto.
(4) Held of record by Hanna Investment Corp., the former owner of the corporate
predecessor-in-interest to the Hanna division of Chatwins Group, of which
Messrs. Bradley, Sr. and Poole are the sole executive officers and Mr.
Poole is the sole director. Pursuant to Rule 13d-3, Messrs. Bradley, Sr.
and Poole would be deemed to be the beneficial owners of these shares, with
shared voting and dispositive power with respect thereto.
(5) Includes 44,599.2 shares held of record by John Grier Poole Family Limited
Partnership, established by Mr. Poole in 1995 for estate planning purposes,
and of which Mr. Poole owns 1% and is the sole general partner. Pursuant to
Rule 13d-3, Mr. Poole may be deemed to be the beneficial owner of these
shares, with sole voting and dispositive power with respect thereto. Also
includes 11,457.8 shares as to which Mr. Poole has voting rights, but not
dispositive rights. Pursuant to Rule 13d-3, Mr. Poole may be deemed to be
the beneficial owner of these shares, with sole voting power with respect
thereto.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AND
MATERIAL CONTACTS WITH THE COMPANY BEING ACQUIRED
In addition to the transactions set forth below, the discussion of the
merger to be voted upon at the annual meeting (see "The Merger Proposal") is
incorporated below by reference. The consummation of the merger will impact
most of the transactions and relationships discussed below (see, e.g., "The
Merger Proposal--Refinancing"). You are strongly encouraged to read the
discussion below in conjunction with the discussion of the merger in this proxy
statement/prospectus.
Historically, Reunion Industries and Chatwins Group have separately entered
into transactions with related parties. This section describes such prior
separate transactions and the merger.
Stock Ownership
Chatwins Group owns 1,450,000 shares, or approximately 38%, of Reunion
Industries' common stock, and a warrant to purchase 75,000 shares of Reunion
Industries' common stock (the "Chatwins Group Warrant").
The common stock of Chatwins Group is owned directly and indirectly by the
following individuals and entities in the following percentages: Mr. Charles E.
Bradley, Sr. owns approximately 48.3% (including (i) pledged shares in
connection with the Chatwins Group Indenture, (ii) shares held by the Charles
E. Bradley Sr. Family Limited Partnership ("FLP"), which has designated
Stanwich Partners, Inc., and in turn, Mr. Poole, to vote such shares, and (iii)
warrants); Mr. Poole is attributed to owning 67.3% of the common stock
(including (i) pledged shares in connection with the Chatwins Group Indenture,
(ii) shares held by FLP, which has designated Stanwich Partners, Inc., and in
turn, Mr. Poole, to vote such shares, and (iii) shares held of record by John
Grier Poole Family Limited Partnership; Mr. Kimball J. Bradley owns 8.3%; Mr.
Joseph C. Lawyer owns 6.2% (including warrants); and Jack T. Croushore owns
1.4%. The preferred stock of Chatwins Group is 100% beneficially owned by
Messrs. Bradley and Poole, and held of record by (i) KSB Acquisition Corp., the
former owner of the corporate predecessor-in-interest to the Klemp and
Steelcraft divisions of Chatwins Group, of which Messrs. Bradley and Poole are
the sole executive officers and directors and (ii) Hanna Investment Corp., the
former owner of the corporate predecessor-in-interest to the Hanna division of
Chatwins Group, of which Messrs. Bradley and Poole are the sole executive
officers and directors.
Stanwich Financial Services Corp. ("SFSC") owns 271,280 shares, or
approximately 7% of Reunion Industries' common stock. Mr. Charles E. Bradley,
Sr. is President and the indirect owner of 42.5% of SFSC's common stock; Mr.
Charles E. Bradley, Jr., a Director of Chatwins Group, is the indirect owner of
42.5% of SFSC common stock; Mr. Poole is the indirect owner of 7.5% of SFSC
common stock; and Richard L. Evans, Executive Vice President, Chief Financial
Officer and Secretary of the Company, is Vice President of SFSC.
The Merger
Pursuant to the merger agreement, Chatwins Group will merge with and into
Reunion Industries. The merger will be consummated on the earliest practicable
date after all of the conditions in the Merger Agreement have been waived or
satisfied, including the approval of Reunion Industries' and Chatwins Group's
stockholders. Reunion Industries and Chatwins Group expect the Closing Date to
be June 29, 1999, although there can be no assurance that the merger will be
consummated by that time. The merger will become effective immediately upon the
filing of a Certificate of Merger in accordance with the DGCL or on the date
specified therein.
At the effective time of the merger, the Chatwins Group common stock will be
converted into the right to receive 8,500,000 shares of Reunion Industries
common stock, plus up to an additional 500,000 shares of Reunion Industries
common stock if Chatwins Group and certain other business units achieve
specified performance levels in 1999, plus cash in lieu of fractional shares.
In addition, the Chatwins Group Preferred
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currently owned by Messrs. Bradley, Sr. and Poole will be converted into the
Reunion Industries Series A preferred stock. The shares of Reunion Industries
common stock currently owned by Chatwins Group, aggregating approximately 38%
of the issued and outstanding Reunion Industries common stock, as well as a
warrant to purchase an additional 75,000 shares of Reunion Industries common
stock owned by Chatwins Group will be retired in connection with the merger.
Following the merger, Reunion Industries will have approximately 10,950,000
million shares of common stock issued, of which Chatwins Group's stockholders
will own approximately 78%. (See "The Merger")
Chatwins Group Acquisition of Reunion Industries
On June 20, 1995, Chatwins Group acquired 1,450,000 shares, or approximately
38%, of Reunion Industries' common stock (the "Purchased Shares") from Parkdale
Holdings Corporation, N.V. ("Parkdale"), who, prior to the transaction owned
approximately 45% of Reunion Industries (the "Reunion Industries Acquisition").
As part of the purchase price paid by Chatwins Group to Parkdale in the
Reunion Industries Acquisition, Chatwins Group issued a $5.8 million promissory
note to Parkdale, bearing interest at 10% per annum and originally due on
September 18, 1995 (the "Parkdale Note"). The Parkdale Note was guaranteed by
Mr. Bradley, Sr. and secured by a pledge of 100% of the stock of Chatwins
Holdings, Inc., at that time, a Delaware corporation and wholly-owned
subsidiary of Chatwins Group ("CHI"). Mr. Bradley, Sr. purchased the Parkdale
Note from Parkdale on September 14, 1995 for approximately $5.95 million.
Chatwins Group paid Mr. Bradley approximately $3.11 million in 1995, $2.62
million in 1996 and $.48 million in 1997 on the Parkdale Note, including
interest, which is now paid in full.
At the time of the Reunion Industries Acquisition, Chatwins Group issued a
promissory note to F. Dean Gesterkamp in the original principal amount of
$200,000 (the "Gesterkamp Note"), bearing interest at 10% per annum, as part of
the purchase price for a warrant to purchase 75,000 shares of Reunion
Industries' common stock. Subsequent to its issuance, the balance of the
Gesterkamp Note was purchased by Mr. Franklin Myers, a Director of Reunion
Industries. On each of January 6, 1996 and 1997 and June 6, 1996 and 1997,
Chatwins Group paid $50,000, plus interest to Mr. Myers on the Gesterkamp Note,
which is now paid in full.
Reunion Industries' 1995 Acquisition of Oneida from Chatwins Group
On September 14, 1995, Reunion Industries purchased from Chatwins Holdings,
Inc., a wholly-owned subsidiary of Chatwins Group, all of the issued and
outstanding common and preferred stock of Oneida (the "Oneida Acquisition") for
approximately $3.1 million, which was paid to Chatwins Group. These proceeds
were applied by Chatwins Group to repay part of the Parkdale Note, at that time
still outstanding and held by Mr. Bradley, Sr. In addition, pursuant to the
stock purchase agreement between Reunion Industries and Chatwins Group, Oneida
paid to Chatwins Group $1.55 million in 1995 and $3.66 million in 1996, in full
repayment, including interest, of Oneida's indebtedness to Chatwins Group,
which had totaled $4.93 million.
The financial terms of the Oneida Acquisition 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 Reunion Industries and Chatwins Group at the
time with Messrs. Bradley, Sr. and Cassidy, then directors of both Chatwins
Group and Reunion Industries, abstaining. Both Reunion Industries and Chatwins
Group received fairness opinions in connection with the Oneida Acquisition.
Chatwins Group had previously purchased Oneida on March 31, 1994 for $251.00
from (i) Oneida Products Corp. ("OPC"), a wholly-owned subsidiary of Oneida
Products Acquisition Corp. ("OPAC"), (ii) Stanwich Partners and (iii) Stanwich
Oil & Gas, Inc. ("SOG"), entities with which Messrs. Bradley, Sr. and/or Poole
are affiliated.
Rostone/Oneida Merger and Related Transactions
Loans to CGI Investment Corp. In April 1990, Chatwins Group acquired a 49%
interest in CGI Investment Corp. (CGII), a company controlled by Stanwich
Partners. Mr. Bradley, Sr., Mr. Poole and Mr.
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<PAGE>
Evans are officers, directors and/or stockholders of Stanwich Partners. Since
April 1990, Chatwins Group has made loans to CGII of $1.5 million, $1.35
million and $299,000. None of the principal or accrued interest thereon has
been repaid under these obligations. Over time, Chatwins Group had provided
reserves for a substantial portion of the principal on its notes receivable
from CGII and at December 31, 1997, the net carrying value of Chatwins Group's
investment in CGII common stock and net notes receivable was $0.6 million.
CGII's primary assets were two notes receivable from affiliates of Chatwins
Group, and a minimal amount of cash, the sum of which totaled $0.7 million at
December 31, 1997. During 1998, CGII was declared insolvent and Chatwins Group
exchanged its notes receivable from CGII for one of CGII's notes receivable
from an affiliate which, plus accrued interest, totaled $0.5 million. The
difference was provided for currently.
Additionally, Rostone is indebted to CGII pursuant to a $250,000 promissory
note dated May 21, 1993. The note had an outstanding balance of $477,000
(principal and accrued interest) on December 31, 1998, and is subordinated to
the prior payment of indebtedness owing by ORC to CITBC, except that if certain
conditions 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. As of December 31, 1998, $177,000 had
been spent on these remediation costs and an additional $220,000 had been
accrued.
Rostone/Oneida Merger. On February 2, 1996, Rostone was merged into Oneida,
a wholly-owned subsidiary of Reunion Industries (the "Rostone/Oneida Merger"),
pursuant to a Merger Agreement (the "Rostone/Oneida Agreement") dated as of
December 22, 1995. Oneida, as the surviving corporation, changed its name to
Oneida Rostone Corp. ("ORC"). In the Rostone/Oneida Merger, ORC acquired 100%
of the preferred and common stock of Rostone from CGII. Prior to the
Rostone/Oneida Merger, certain officers of Oneida were also serving as officers
of Rostone and CGII. The terms of the Rostone/Oneida Merger were approved by
the unanimous vote of the directors of Reunion Industries, including by all
disinterested directors.
ORC paid the stockholders of Rostone $503.00 in 1996. Although the
Rostone/Oneida Agreement provided that the purchase price would also include
payments by ORC up to $2.0 million in each of 1997 and 1998 based on Rostone's
achievement of specific earnings levels for the prior calendar years, no such
payments were made since Rostone failed to achieve the specified earnings
levels.
Bradley/Bir Transaction. Mr. Bradley purchased 50% of the approximately
$2.03 million amount owed by Rostone to Mr. Allan C. Bir, a third party
creditor. As a result of this transaction, Mr. Bradley, Sr. and the creditor
each held a note from ORC in the amount of approximately $1.02 million bearing
interest at 11% per annum which is subordinated to the prior payment of
indebtedness owing by ORC to CITBC, except that if certain conditions are met,
regularly scheduled payments of interest are paid when due.
ORC Loan Facilities. ORC's loan Facility with CITBC (the "CITBC Credit
Facility") provides for a guarantee of a letter of credit supporting a
supersedeas bond filed in connection with the Reunion Industries' litigation
with Bargo in the amount of $9.675 million, a $10.2 million revolving credit
loan and a $6 million term loan. As additional collateral for the letter of
credit guarantee, Reunion Industries pledged the stock of its subsidiaries ORC
and Juliana, SFSC pledged certain collateral, and Mr. Bradley, Sr. guaranteed
the obligations of ORC and Reunion under the CITBC Credit Facility. Mr.
Bradley, Sr. receives a credit support fee from the Reunion Industries in an
aggregate amount equal to 3% per annum of the amount guaranteed, payable
monthly. Mr. Bradley, Sr.'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 CITBC, except that if certain conditions are met, the monthly
installments may be paid when due. The SFSC pledge and Mr. Bradley, Sr.'s
guarantee will terminate upon the termination of the CITBC guarantee of the
letter of credit supporting the supersedeas bond.
Under ORC's previous loan facility with Congress Financial Corporation
("Congress"), Mr. Bradley, Sr. received a credit support fee from ORC in an
aggregate amount equal to 1% per annum of the amount
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<PAGE>
guaranteed, payable monthly. The amount guaranteed was subject to a cap of $4
million, which declined over time. Mr. Bradley, Sr. also indemnified Congress
against potential liabilities arising from certain environmental exposures. All
of Mr. Bradley, Sr.'s obligations to Congress were released upon termination of
the Congress Loan Facility in October 1998.
In connection with ORC's acquisition of the assets and business of Quality
Molded Products ("QMP") on November 18, 1996, Mr. Bradley, Sr. guaranteed the
amounts, if any, borrowed under this overformula line for a credit support fee
of 1% per annum. Congress extended a $1.0 million temporary overformula line.
The overformula line expired February 14, 1997.
DPL Acquisition by ORC. 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, Sr. is the President, acting Chief Financial Officer,
a director and a stockholder of TEC, and beneficial owner of approximately 14%
of TEC's outstanding common stock.
Prior to the DPL acquisition, DPL was indebted to SOG pursuant to a $250,000
10% loan agreement dated June 14, 1995. Mr. Bradley, Sr. and Mr. Poole are
officers, directors and the principal stockholders of SOG. On December 16,
1996, Reunion Industries purchased the indebtedness of DPL from SOG for
$249,430, representing the outstanding balance of principal and interest that
DPL owed to SOG at that date.
Other Reunion Industries and ORC Affiliate Transactions
In November 1995, Mr. Bradley Sr. loaned Reunion Industries $1.35 million
evidenced by two notes, each bearing interest from November 1, 1995 at a rate
of 10% per annum and each due and payable on September 14, 1997. These notes
were repaid in full in May 1996 from the proceeds of the sale of Reunion
Industries' oil and gas assets.
Beginning in 1997, ORC entered into leases for machinery and equipment with
CPS Leasing, Inc. ("CPSL"), a subsidiary of Consumer Portfolio Services, Inc.
("CPS"). Mr. Bradley, Sr. and Mr. Poole are directors and 19% and 2%
stockholders, respectively, of CPS. Mr. Bradley, Jr. is the Chief Executive
Officer of CPS and a director of Chatwins Group. The leases are for terms of
five to seven years, with aggregate future minimum rental commitments of
$937,000 as of December 31, 1998. Reunion Industries believes that the terms of
these leases are comparable to those available from third parties.
In May 1997, Reunion Industries loaned $1.5 million to SST Acquisition
Corp., a company in which Mr. Bradley, Sr. and Mr. Poole are 50% stockholders.
The loan was repaid after three days with interest at 9% plus a $15,000
transaction fee.
Beginning in August 1998, the Company has borrowed $1.1 million in funds for
corporate working capital from SFSC in the form of a $500,000 Promissory Note
and a $600,000 Credit Line Note. The debt bears interest at 15% and was
originally scheduled to mature September 30, 1998. SFSC has agreed to extend
the maturity to December 31, 1999 while the Company seeks an alternative source
of funds. Currently, the Company owes $350,000 on these notes.
Reunion Industries subleases from Stanwich Partners approximately 1,500
square feet of office space in Stamford, Connecticut for its corporate offices.
Management believes that the terms of this sublease are comparable to those
available from third parties.
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Under the arrangements described above, the Reunion Industries consolidated
financial statements include the following amounts and balances:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Rent Expense:
CPS Leasing............................................. $167 $64 --
SPI..................................................... 32 32 23
Chatwins and Mr. Bradley................................ -- -- 42
Travel Expense:
Butler.................................................. 73 -- --
Interest Expense:
Mr. Bradley............................................. 112 112 178
CGII.................................................... 38 38 37
SFSC.................................................... 25 -- --
Chatwins................................................ -- -- 199
SOG..................................................... -- -- 2
Guarantee fees: Mr. Bradley............................. 190 41 55
</TABLE>
<TABLE>
<CAPTION>
As of
December 31,
-------------
1998 1997
------ ------
<S> <C> <C>
Current liabilities:
SFSC: short-term debt .................................. $1,015 $ --
CGII: interest.......................................... 109 72
SFSC: interest.......................................... 25 --
Butler: travel.......................................... 18 --
Mr. Bradley: fees....................................... -- 28
Long term debt-related parties:
Mr. Bradley............................................. 1,017 1,017
CGII.................................................... 368 368
CPS Leasing............................................. -- 157
Other liabilities: fees payable to Mr. Bradley............ 123 123
</TABLE>
<TABLE>
<CAPTION>
As of
December
31,
---------
1998 1997
---- ----
<S> <C> <C>
Future minimum rental commitments under noncancellable
operating leases: CPS Leasing .............................. $937 $706
</TABLE>
ORC manufacturers component parts for King-Way. Sales to King-Way in 1998
were $299,000, and were at margins equivalent to those earned on sales to third
party customers at comparable volumes.
Other Chatwins Group Transactions
Chatwins Group/Stanwich Partners Consulting Agreement. Pursuant to a
Consulting Agreement dated and effective as of March 31, 1993, as amended (the
"Consulting Agreement"), Chatwins Group retains Stanwich Partners to render
financial planning and reporting consulting services. The Consulting Agreement
expires on March 31, 2003 unless terminated earlier by Stanwich Partners on 30
days' notice. The Consulting Agreement provides for the payment of an annual
consulting fee to Stanwich Partners of $300,000, and the reimbursement of any
reasonable and necessary out-of-pocket expenses incurred by Stanwich Partners
in connection with its performance under the Consulting Agreement.
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<PAGE>
Consulting fees of $300,000 in each of 1996, 1997 and 1998 were expensed by
Chatwins Group to Stanwich Partners in accordance with the Consulting
Agreement.
Chatwins Group Loans to Robinson Incorporated. Chatwins Group had
outstanding loans to Robinson Incorporated ("Robinson"), an oil and gas company
operating in Oklahoma controlled by Mr. Bradley, Sr., Mr. Poole, Mr. Lawyer and
Jack T. Croushore, Vice President of Chatwins Group. The aggregate amount of
such loans and the largest principal amount outstanding under such loans in
1995 was $800,000. In December 1995, Chatwins Group agreed to settle in full
the two notes receivable from Robinson for the cash payment of $58,000 plus a
warrant to purchase up to 50% of the common stock of Robinson at any time in
the future. As a result of this agreement, Chatwins Group recognized a $701,000
loss on the settlement of these notes. On December 29, 1997 Reunion Industries
purchased the Robinson warrant for $22,676 in cash, and Reunion Industries
still holds the warrant. During 1998, Chatwins Group's Europa division sold its
interest in a West Virginia well to and collected other fees from Robinson for
a total of $100,000 in cash.
Chatwins Group Stockholder Notes. In January 1988, Mr. Bradley, Sr., Mr.
Poole and two former stockholders of Chatwins Group subscribed for Chatwins
Group preferred stock in consideration of their payment of an aggregate of
$57,500 in cash and their personal interest free demand notes, dated January
15, 1988, payable to Chatwins Group in the aggregate principal amount of
approximately $1.01 million (the "Chatwins Group Stockholder Notes"). The class
of preferred stock acquired by them was converted into common stock of Chatwins
Group in connection with the May 1988 merger that combined most of Chatwins
Group's business lines as divisions of Chatwins Group. At the time the Chatwins
Group Stockholder Notes were executed, Chatwins Group and Messrs. Bradley, Sr.
and Poole and such other former stockholders had an unwritten understanding
that payment on the Chatwins Group Stockholder Notes would not be demanded
until such time as Chatwins Group was sold or funds for the repayment of the
Chatwins Group Stockholder Notes were distributed to them as dividends on their
shares of Chatwins Group common stock.
In September 1993, Chatwins Group purchased all the shares of Chatwins Group
common stock owned by the obligors of the Chatwins Group Stockholders Notes
other than Messrs. Bradley, Sr. and Poole. In connection with Chatwins Group's
purchase of such shares, Messrs. Bradley, Sr. and Poole assumed the obligations
of such former stockholders under their respective Chatwins Group Stockholder
Notes. The amount outstanding at December 31, 1998 under (i) Mr. Bradley, Sr.'s
Chatwins Group Stockholder Note was $643,166, (ii) Mr. Poole's Chatwins Group
Stockholder Note was $206,704, and (iii) the two other Chatwins Group
Stockholder Notes assumed by Messrs. Bradley and Poole was $150,874.
In connection with the merger, Reunion Industries will succeed to Chatwins
Group's rights with respect to the Chatwins Group Stockholder Notes with the
issuance of the new stockholder notes, which will bear interest at a rate of
10% per annum and be repaid from and to the extent dividends on or redemptions
of the Reunion Industries Series A preferred stock are paid.
CPS Leasing, Inc. During 1997 and 1998, Chatwins Group entered into thirteen
operating lease agreements with CPSL. During 1997 and 1998, Chatwins Group made
lease payments totaling $39,112 and $209,989 to CPSL.
King-Way Services Agreement. The Auto-Lok division of Chatwins Group and
King-Way entered into a Services Agreement as of April 1, 1998 pursuant to
which King-Way would utilize Auto-Lok's surplus capacity in consideration for
cash fees approximately equal to Auto-Lok's costs of providing the surplus
capacity plus a right of first negotiation to acquire King-Way from Stanwich
Acquisition. While this right of first negotiation has expired, the Services
Agreement is effective for a period of one year and may be renewed annually
upon the mutual consent of Chatwins Group and Stanwich Acquisition no later
than 60 days prior to the end of the original term or any renewal thereof. The
Services Agreement has been renewed through April 1, 2000.
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<PAGE>
Agreements with NAPTech Pressure Systems Corporation. The CP Industries
division of Chatwins Group ("CPI") and NAPTech entered into a services
agreement as of August 26, 1998 (the "NAPTech Services Agreement") pursuant to
which CPI would provide certain administrative services to NAPTech for cash
fees which will approximate $29,000 per month. NAPTech is wholly owned by Mr.
Bradley and manufactures steel seamless pressure vessels. The NAPTech Services
Agreement is effective for a period of one year and may be renewed annually
upon the mutual consent of Chatwins Group and NAPTech no later than 60 days
prior to the end of the original term or any renewal thereof. On August 25,
1998 Chatwins Group purchased from NAPTech $1.0 million of inventory usable by
CPI in its normal course of business.
Certain Other Agreements
Reunion Industries obtains its property, casualty and product and general
liability insurance coverage through a joint arrangement with Chatwins Group,
and Reunion Industries and Chatwins Group shared the costs in proportion to the
coverages.
Beginning February 1998, both Reunion Industries and Chatwins Group entered
into arrangements for flying services with Butler Air, Inc. ("Butler"). Mr.
Bradley is a director of Butler and the owner of 65% of Stanwich Aviation
Company, Inc., of which Butler is a wholly-owned subsidiary. Butler provides
charter flight services for certain business travel Reunion Industries officers
and employees at rates which Reunion Industries believes are comparable to
those available from third parties. Reunion Industries and Chatwins Group pay
monthly minimums each of $5,000, which are credited against services as used.
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<PAGE>
PROPOSAL 2
THE ELECTION OF DIRECTORS
At the annual meeting, the stockholders of Reunion Industries will be asked
to vote for the election of six directors to the Board of Directors of Reunion
Industries. The candidates proposed by management for election at the annual
meeting, listed in the table set forth in "Nominees" below, are Thomas N.
Amonett, Charles E. Bradley, Sr., Thomas L. Cassidy, W.R. Clerihue, Franklin
Myers, and John G. Poole. If elected, these candidates would comprise the
entire Board of Directors of Reunion Industries, and would hold office until
their successors are duly elected and qualified at the next annual meeting of
stockholders of Reunion Industries or until they earlier die, resign or are
removed from office in accordance with applicable law. The persons listed as
"Nominees" in the table below comprise the entire Board of Directors of Reunion
Industries as of the date of this proxy statement/prospectus.
Nominees
Each of the six persons standing for election at the annual meeting
currently is a director of Reunion Industries. There are no arrangements or
understandings between any nominee for director and any other person pursuant
to which such person was selected as nominee.
<TABLE>
<CAPTION>
Principal Position Director
Name with the Company Age Since
---- ------------------------- --- --------
<S> <C> <C> <C>
Thomas N. Amonett..................... Director 55 1992
Charles E. Bradley, Sr................ Director, President & CEO 69 1995
Thomas L. Cassidy..................... Director 70 1995
W. R. Clerihue........................ Director 75 1996
Franklin Myers........................ Director 46 1995
John G. Poole......................... Director 56 1996
</TABLE>
Thomas N. Amonett has served as a Director of Reunion Industries since July
1, 1992 and served as the President and Chief Executive Officer of Reunion
Industries from July 1, 1992 until October 26, 1995. Mr. Amonett also served as
the President of the Reunion Industries Energy Company, then a wholly-owned
subsidiary of Reunion Industries 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
Reunion Industries, 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 serves as a Director of Petro Corp Incorporated, a Houston-based
oil and gas company, and ITEQ, Inc., a provider of manufactured equipment,
engineered systems and services used in the processing, treatment, storage and
movement of gases and liquids.
Charles E. Bradley, Sr. became a Director of Reunion Industries on June 20,
1995 and was appointed President and Chief Executive Officer of Reunion
Industries on October 26, 1995. Mr. Bradley was a co-founder of Stanwich
Partners in 1982 and has served as its President since that time. Stanwich
Partners is a private investment company. Mr. Bradley has been a Director of
Chatwins Group since 1986 and Chairman of the Board of Chatwins Group since
1988. 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 Energy 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 Inc., an inactive company, and President, acting Chief
Financial Officer and a Director of Texon Energy Corporation, an inactive
company. Mr. Bradley is the father of Kimball J. Bradley.
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<PAGE>
Thomas L. Cassidy became a Director of Reunion Industries 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 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. Mr. Cassidy was a director of Chatwins Group from March 1993 to June
1997.
W. R. Clerihue became a Director of Reunion Industries in December 1996. Mr.
Clerihue has been Chairman of the Board of Directors of Spartech Corporation
since October 1991.
Franklin Myers served as a Director of Reunion Industries from July 1, 1992
until June 20, 1995, when he resigned contemporaneously with the sale of
1,450,000 shares of Reunion Industries' common stock by Parkdale Holdings
Corporation N.V. ("Parkdale") to Chatwins Group. Mr. Myers was reappointed as a
Director of Reunion Industries 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 Reunion Industries 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 Group
since 1988, and is also a director of DBI, CPS and Sanitas, Inc.
Board and Committee Activity
During 1998, the Board convened on eight regularly or specially scheduled
occasions. The Compensation Committee of the Board held two meetings in 1998
and the Audit Committee held one meeting. Each of the present directors of
Reunion Industries attended all of the meetings of the Board and of each
committee on which he served during his respective tenure in 1998, except that
Mr. Myers was absent from two Board meetings.
Reunion Industries' operations are managed under the broad supervision and
direction of the Board of Directors, which has the ultimate responsibility for
the establishment and implementation of Reunion Industries' general operating
philosophy, objectives, goals and policies. Pursuant to delegated authority,
certain Board functions may be discharged by one or more standing committees of
the Board. The Compensation Committee, which is comprised of Messrs. Amonett,
Cassidy (Chairman) and Clerihue, is responsible for the formulation and
adoption of all executive compensation, benefit and insurance programs, subject
to full Board approval where legally required or in those instances where the
underlying benefit philosophy might be at variance with preexisting Board
policies. The Compensation Committee also supervises the administration of all
executive compensation and benefit programs, including the establishment of any
specific criteria against which all annual performance based benefits are to be
measured. The Audit Committee, comprised of Messrs. Amonett, Clerihue and Myers
(Chairman), assists the Board in assuring that the accounting and reporting
practices of Reunion Industries are in accordance with all applicable
requirements. The Audit Committee reviews with Reunion Industries' independent
auditors the scope of the proposed audit work and meets with the auditors to
discuss matters pertaining to the audit and any other matter which the
Committee or the auditors may wish to discuss. In addition, the Audit Committee
would recommend the appointment of new independent auditors to the Board of
Directors if future circumstances were to indicate that such action was
desirable. The Board of Directors does not maintain executive or nominating
committees. Stockholders who may wish to suggest individuals for possible
future consideration for Board positions should direct recommendations to the
Board of Directors at Reunion Industries' principal offices.
Director Compensation
Directors not otherwise compensated by Reunion Industries 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
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<PAGE>
directors during 1998 for service in all Board capacities aggregated $111,000.
Directors are reimbursed for the actual cost of any travel expenses incurred.
Additionally, non-employee directors of Reunion Industries are eligible for
awards under the 1998 Stock Option Plan of Reunion Industries. On February 13,
1998, the Board of Directors granted options to purchase 15,000 shares of
common stock to each of Mr. Amonett, Mr. Cassidy, Mr. Clerihue, Mr. Myers and
Mr. Poole. The options are exercisable for ten years from the date of grant for
an exercise price of $5 1/16 and vested immediately.
Security Ownership of Certain Beneficial Owners and Management
As of March 19, 1999, Reunion Industries had outstanding 3,900,065 shares of
common stock. The following table sets forth information regarding the
beneficial ownership of Reunion Industries' common stock at March 19, 1999, by
(i) each stockholder known to the Company to own 5% or more of the Company's
common stock, (ii) each director of Reunion Industries, (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 Reunion Industries' common stock
shown as owned by him.
<TABLE>
<CAPTION>
Amount and Percent
Name (and Address Nature of
of 5% of Beneficial Owners) of Ownership Class
--------------------------- ------------ -------
<S> <C> <C>
Chatwins Group, Inc................................... 1,525,000(1) 38.4%
300 Weyman Plaza, Suite 340
Pittsburgh, PA 15236
Bradley Family Limited Partnership.................... 1,525,000(2) 38.4%
c/o Stanwich Partners, Inc.
62 Southfield Avenue
One Stamford Landing
Stamford, CT 06902
Stanwich Partners, Inc................................ 1,525,000(2) 38.4%
62 Southfield Avenue
One Stamford Landing
Stamford, CT 06902
Stanwich Financial Services Corp...................... 271,280(3) 7.0%
c/o Stanwich Partners, Inc.
62 Southfield Avenue
One Stamford Landing
Stamford, CT 06902
Thomas N. Amonett..................................... 49,000(4) 1.3%
Charles E. Bradley, Sr................................ 1,538,800(5) 38.6%
Thomas L. Cassidy..................................... 30,000(4) 0.8%
W. R. Clerihue........................................ 20,000(4) 0.5%
Franklin Myers........................................ 118,710(4) 3.0%
John G. Poole......................................... 1,540,000(2,4) 38.6%
Richard L. Evans...................................... 63,000(6) 1.6%
David N. Harrington................................... 0 0.0%
All current directors and executive officers as a
group (8 individuals)................................ 1,834,510(7) 44.5%
</TABLE>
- --------
(1) Includes 75,000 shares that may be purchased pursuant to currently
exercisable warrants, with respect to which Chatwins Group has dispositive
power only.
(2) Includes all shares of common stock shown as beneficially owned by Chatwins
Group. The Bradley FLP, established by Mr. Bradley in May 1998 for estate
planning purposes and of which Mr. Bradley owns 1%
128
<PAGE>
as general partner and 55% as a limited partner. The Bradley FLP has
designated Stanwich Partners, Inc. ("SPI") to vote these shares and SPI in
turn has designated Mr. Poole, who is one of its officers, as the person to
vote these shares on its behalf. Pursuant to Rule 13d-3, the Bradley FLP
may be deemed to be the beneficial owner of these shares with shared
dispositive power with respect thereto, and SPI and Mr. Poole may be deemed
to be the beneficial owner of these shares with voting power with respect
thereto.
(3) Acquired by Stanwich Financial Services from Parkdale Holdings Corporation
N.V. pursuant to a settlement agreement with respect to loans secured by
these shares. On January 28, 1999, Reunion Industries Board of Directors
resolved to permit this transaction notwithstanding the Transfer
Restrictions in Reunion Industries' Articles of Incorporation after
determining that, based on the facts presently in existence, the
transaction will not jeopardize Reunion Industries' full utilization of
its tax benefits.
(4) Includes options to purchase 15,000 shares of common stock.
(5) Includes all shares of common stock shown as beneficially owned by
Chatwins Group. Mr. Bradley is Chairman of the Board of Chatwins Group as
well as the beneficial owner of more than 50% of the issued and
outstanding shares of Chatwins Group and may, under Rule 13d-3, be deemed
beneficial owner of all shares of Reunion Industries common stock
beneficially owned by Chatwins Group. Mr. Bradley disclaims such
beneficial ownership. Includes currently exercisable options to purchase
13,800 shares of common stock.
(6) Includes currently exercisable options to purchase 54,535 shares of common
stock.
(7) Includes currently exercisable warrants and options to purchase an
aggregate of 218,335 shares of common stock.
Executive Officers of Reunion Industries
The following table sets forth the names and ages of all executive officers
of the Company and its principal subsidiary and their positions and offices
with the Company:
<TABLE>
<CAPTION>
Name Position Age
- ---- -------- ---
<S> <C> <C>
Charles E. Bradley,
Sr..................... Director, President and Chief Executive Officer 69
Richard L. Evans........ Executive Vice President, Chief Financial Officer and Secretary 46
David N. Harrington..... President and Chief Executive Officer, ORC 58
</TABLE>
The business experience of Mr. Bradley is described above in the section
entitled "Nominees--Charles E. Bradley, Sr."
Richard L. 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.
David N. Harrington has served as Chief Executive 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.
129
<PAGE>
Executive Compensation and Other Information
The following table reflects all forms of compensation for services to
Reunion Industries for the years ended December 31, 1998, 1997 and 1996, of
those individuals who were at December 31, 1998 (i) the chief executive officer
and (ii) the other named executives officers:
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term
-------------------------------------- Compensation
Other Annual Stock Options All Other
Name and Principal Position Year Salary Bonus(1) Compensation(2) (Shares) Compensation(3)
- --------------------------- ---- -------- -------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Charles E. Bradley,
Sr..................... 1998 $150,000 $ 0 $ 0 75,000 $ 0
President and Chief
Executive 1997 100,000 0 0 0 300
Officer 1996 100,000 0 0 0 312
Richard L. Evans........ 1998 $165,000 $15,000 $ 0 20,000 $7,411
Executive Vice
President, 1997 150,000 75,000 0 0 4,662
CFO and Secretary 1996 135,000 30,000 0 50,000 4,352
David N. Harrington..... 1998 $255,000 $ 0 $52,000 0 $3,064
President and Chief
Executive 1997 259,904 51,000 52,000 0 2,614
Officer, ORC 1996 240,000 48,000 52,000 0 2,297
</TABLE>
- --------
(1) Amounts shown for bonuses are amounts earned for the period shown, although
such bonuses are generally paid in the subsequent year.
(2) Includes automobile allowance, and certain deferred compensation.
(3) Contributions under nondiscriminatory defined contribution plan and certain
health insurance plans of Reunion Industries and/or its subsidiaries.
Reunion Industries maintains a voluntary employee retirement plan under
which employees of Reunion Industries and its subsidiaries may contribute
up to 18% of their pre-tax earnings, with Reunion Industries making
matching contributions of 25% of each employee's contribution, not to
exceed 4% of each participant's pre-tax earnings.
Option Grants In Last Fiscal Year
The following table sets forth information with respect to the options to
purchase shares of common stock granted under all stock option plans to the
named executive officers in the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
Potential Realizable
Value At Assumed
Annual Rates of
Number of Stock Price
Securities Percent of Total Appreciation for
Underlying Options/SARs Option Term
Options/ Granted to Exercise or Base Expiration --------------------
Name SARs Granted Employees in FY Price ($/Share) Date 5%($) 20%($)
---- ------------ ---------------- ---------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Charles E. Bradley...... 75,000 44% $7.21875 05/19/2003 $ 86,768 $ 252,273
Richard L. Evans........ 20,000 12% $5.0625 02/13/2003 $ 27,975 $ 61,814
</TABLE>
Option Exercises In Last Fiscal Year and Year-End Values
The following table sets forth information with respect to the exercise of
options during the year ended December 31, 1998 and 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, 1998:
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at in-the-Money Options at
Number of December 31, 1998 December 31, 1998(1)
Shares Acquired ------------------------- -------------------------
Name On Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles E. Bradley...... -0- -0- 13,800 61,200(2) -0- -0-
Richard L. Evans........ 7,465 $4,199 46,535 16,000(3) -0- -0-
</TABLE>
130
<PAGE>
- --------
(1) None of the outstanding options were in-the-money at December 31, 1998. In
addition to the options granted in 1998 to Mr. Bradley and Mr. Evans, Mr.
Evans has exercisable options for 42,535 shares at $4.4375 per share. The
closing sales price of the common stock on NASDAQ Small-Cap Market on
December 31, 1998 was $2.75.
(2) These options become exercisable in annual 13,800 share increments on May
19,1999 through May 19, 2002 and 6,000 shares on January 2, 2003.
(3) These options become exercisable in 8,000 share increments on February 13,
1999 and February 13, 2000.
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 Reunion Industries' 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 15 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 1998 (included in the executive compensation table) covered by
the Oneida Pension Plan is $160,000 and he currently has twelve 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
131
<PAGE>
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. The Harrington
Employment Agreement expired by its terms on December 31, 1997, but has been
extended by oral agreement at the same salary as in 1997.
Compensation Committee Report
The Compensation Committee of the Board of Directors has furnished the
following report on executive compensation for 1998:
The Board of Directors pursues a philosophy of seeking to improve Reunion
Industries' performance and to maximize stockholder value by, among other
things, relating executive compensation and stock-based benefits to Reunion
Industries' performance. In general, executive financial rewards may be
segregated into the following significant components: base compensation, bonus,
and stock option and other benefit plans.
Base compensation for senior executives is intended to be competitive with
that paid in comparably situated companies, but with a reasonable degree of
financial security and flexibility afforded to those individuals who are
regarded by the Board of Directors as acceptably discharging the levels and
types of responsibility implicit in the various senior executive positions.
While the committee's principal concern is with establishing compensation
programs and setting executive compensation at levels which are somewhat
reflective of those prevailing in the molded plastics industry for similar
executive positions, no comparability studies were conducted for executive
salaries to be paid in 1998.
Under the supervision of the Compensation Committee, annual bonuses reflect
a policy of requiring a specified level of Reunion Industries performance for
the year before any bonuses are earned by senior executives, with bonuses for
achieving higher levels of performance directly related to the level achieved.
In setting performance criteria, the Committee will consider the total
compensation payable or potentially available to the chief executive and other
executives officers. While the development of any business necessarily involves
numerous factors, the board's primary emphasis will be on encouraging
management to increase Reunion Industries' net assets and cash flow, and in
certain instances, rationalization of certain Reunion Industries businesses or
assets. Mr. Harrington did not receive an award for 1998 from Reunion
Industries' ORC subsidiary based upon ORC's failure to attain specific earnings
objectives in 1998. The $15,000 bonus awarded to Mr. Evans was at the
discretion of the Board, based upon his performance in managing the
acquisitions, divestitures, financial and administrative activities of Reunion
Industries.
The Board of Directors is of the view that properly designed and
administered long-term, stock-based incentives for senior executives closely
align the executives' economic interests with those of stockholders and provide
a direct and continuing focus upon the goal of constantly striving to maximize
stockholder value. The Compensation Committee intends, with any necessary
concurrence of the Board of Directors, to continue to consider alternate forms
of stock-based incentives with a view to achieving the maximum possible
performance based benefit to all senior executives at the least possible cost
and the greatest attainable economic efficiency to Reunion Industries, with
such benefits designed as nearly as practicable to directly align the economic
interests of professional managers with those of Reunion Industries'
stockholders.
Pursuant to applicable rules of the SEC, as of March 19, 1999 members of the
Compensation Committee are deemed to own beneficially an aggregate of 54,000
shares, or 1.4% of the Company's outstanding common stock. See "Ownership
Information--Reunion Industries--Security Ownership of Certain Beneficial
Owners and Management".
132
<PAGE>
Compensation Committee Interlocks and Insider Participation
See "Election of Directors--Nominees--Thomas N. Amonett" above.
See "Election of Directors--Nominees--Thomas L. Cassidy" above, "Ownership
Information--Reunion Industries--Security Ownership of Certain Beneficial
Owners and Management", and "Certain Relationships and Related Transactions"
for a discussion of Mr. Cassidy's relationship to Chatwins Group and Mr.
Cassidy's and Chatwins' relationship to Reunion Industries.
The Compensation Committee
Thomas L. Cassidy, Chairman
Thomas N. Amonett
W.R. Clerihue
133
<PAGE>
Common Stock Performance Graph
The following graph illustrates the yearly percentage change in the
cumulative total stockholder return on Reunion Industries' common stock,
compared with the cumulative total return on (i) the Standard & Poor's 500
Stock Index, and (ii) a "Peer Group" Index (the "Peer Group") for the five
years ended December 31, 1998./1/:
Five Year Total Return
[Graph Appears Here]
<TABLE>
<CAPTION>
Fiscal Year Ending
---------------------------------------
Company 1993 1994 1995 1996 1997 1998
------- ---- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Reunion Industries, Inc................. 100 83.33 83.33 66.67 86.46 45.83
Peer Group.............................. 100 84.55 97.70 103.08 133.67 195.18
Broad Index............................. 100 101.32 139.40 171.41 228.59 293.92
</TABLE>
- --------
1 Tabular data assumes that the value of the investment in Reunion Industries'
common stock and each index was $100 at January 1, 1994 and that all
dividends, if any, were reinvested.
2 Standard & Poor's 500 Total Return Index provided by Media General Financial
Services, Inc.
3 Total Return Index provided by Media General Financial Services, Inc. for
the Peer Group of seven companies selected by Reunion Industries. Calnetics
Corp. and Sun Coast Industries, Inc., used previously in this Peer Group by
Reunion Industries, have since then been acquired, are no longer publicly
traded, and hence have been omitted. The Peer Group is made up of the
following:
Advanced Technical Products Rotonics Manufacturing
Essef Corp. Summa Industries
Glassmaster Co. Triple S Plastics Inc.
Myers Industries Inc.
134
<PAGE>
Compliance With Section 16(A) of Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended requires
Reunion Industries' directors and officers and person own won beneficially more
than 10% of the common stock of Reunion Industries to file with the Securities
and Exchange Commission and the National Association of Securities Dealers
initial reports of beneficial ownership and reports of changes in beneficial
ownership of the common stock of Reunion Industries. Directors, officers and
person owning more than 10% of the common stock of Reunion Industries are
required to furnish Reunion Industries with copies of all such reports. Mr.
Evans failed to timely file Form 4 in March 1998 regarding the exercise of
options and Form 5 for the fiscal year ending December 31, 1998. Mr. Myers
failed to timely file Form 4 in June 1998 regarding the exercise of warrants
and Form 5 for the fiscal year ending December 31, 1998. Messrs. Amonett,
Bradley, Cassidy, Clerihue and Poole failed to timely file Form 5 for the
fiscal year ending December 31, 1998. All individuals have subsequently filed
the required forms.
Deadline For Stockholder Proposals
Proposals of stockholders of Reunion Industries intended to be presented at
the 2000 annual meeting of stockholders must be received by the Secretary of
Reunion Industries at One Stamford Landing, 62 Southfield Avenue, Stamford,
Connecticut 06902, by . If such proposals are in compliance with all of the
requirements of Rule 14a-8 under the Exchange Act, they will be included in the
proxy statement and set forth on this form of proxy issued for the next annual
meeting of stockholders.
If a stockholder intends to present a proposal at the 2000 annual meeting of
stockholders without seeking to include the proposal in Reunion Industries'
proxy statement, management proxies will be entitled to use the discretionary
voting authority that will be contained in the proxies for the 2000 annual
meeting of stockholders to vote on the stockholder's proposal at the 2000
annual meeting of stockholders, unless prior notice of the proposal is given to
Reunion Industries no later than , 2000. If the stockholder fails to do so,
Reunion Industries' management proxies for the 2000 annual meeting of
stockholders will be entitled to use their discretionary voting authority on
that proposal, without any discussion of the mater in Reunion Industries' proxy
materials.
Copies of Reunion Industries' Annual Report on Form 10-K (excluding
exhibits) for the fiscal year ended December 31, 1998, as filed with the
Securities and Exchange Commission, will be furnished free of charge, upon
written request, to stockholders who have not previously received a copy from
Reunion Industries. In addition, Reunion Industries will furnish any exhibit to
its Annual Report on Form 10-K upon payment of a fee limited to Reunion
Industries' reasonable expenses in furnishing such exhibit upon written
request. Written requests may be directed to Richard L. Evans, Secretary,
Reunion Industries, Inc., 62 Southfield Avenue, One Stamford Landing, Stamford,
Connecticut 06902.
EXPERTS
The consolidated financial statements of (i) Reunion Industries as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998, and (ii) Chatwins Group as of December 31, 1998 and 1997 and
for each of the three years in the period ended December 31, 1998 included in
this proxy statement/prospectus have been so included in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants, given on their
authority as experts in auditing and accounting.
135
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reunion Industries, Inc.
Report of Independent Certified Public Accountants......................... F-2
Consolidated Balance Sheet................................................. F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Cash Flows...................................... F-5
Consolidated Statements of Stockholders' Equity............................ F-6
Notes to Consolidated Financial Statements................................. F-7
Chatwins Group, Inc.
Report of Independent Certified Public Accountants......................... F-35
Consolidated Balance Sheet................................................. F-36
Consolidated Statement of Income and Comprehensive Income.................. F-37
Consolidated Statement of Cash Flows....................................... F-38
Notes to Consolidated Financial Statements................................. F-39
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Shareholders of Reunion Industries, Inc.
In our opinion, 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 (the "Company") at December 31,
1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, 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. 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 provide a reasonable basis for the
opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the cash
flows historically generated by the Company may not be sufficient to enable it
to meet its obligations when they come due, which raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to this matter are also discussed in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
New York, New York
March 17, 1999
F-2
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
December 31,
-----------------
ASSETS 1998 1997
------ -------- -------
<S> <C> <C>
Current Assets
Cash and Cash Equivalents................................. $ 2,009 $ 2,085
Accounts Receivable, Less Allowance for Doubtful Accounts
of $360 and $375, respectively........................... 12,389 12,284
Inventories............................................... 7,104 7,570
Customer Tooling-in-process............................... 897 1,773
Other Current Assets...................................... 803 495
-------- -------
Total Current Assets.................................... 23,202 24,207
-------- -------
Property, Plant and Equipment--Net.......................... 41,353 35,293
-------- -------
Other Assets
Goodwill, net of Accumulated Amortization of $2,170 and
$1,481, respectively..................................... 8,371 9,060
Investment in Joint Venture............................... -- 1,622
Debt Issuance Costs....................................... 1,088 344
Assets Held for Sale...................................... 376 369
Other..................................................... 484 1,164
-------- -------
10,319 12,559
-------- -------
$ 74,874 $72,059
======== =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities
Current Portion of Long-term Debt......................... $ 11,155 $11,568
Short Term Debt--Related Parties.......................... 1,015 --
Accounts Payable.......................................... 8,684 9,328
Advances From Customers................................... 1,249 2,484
Accrued Bargo Judgment.................................... 8,425 --
Accrued Salaries, Vacation and Benefits................... 1,688 1,940
Accrued Environmental Costs............................... 1,723 983
Other Current Liabilities................................. 2,180 1,731
-------- -------
Total Current Liabilities............................... 36,119 28,034
Long-Term Debt.............................................. 15,245 11,112
Long-Term Debt--Related Parties............................. 1,385 1,542
Other Liabilities........................................... 3,279 2,914
-------- -------
Total Liabilities....................................... 56,028 43,602
-------- -------
Redeemable Preferred Stock of Consolidated Subsidiary....... 607 --
Minority Interests.......................................... 2,000 140
Commitments and Contingencies (Note 15)
Shareholders' Equity
Common Stock ($.01 par value; 20,000 authorized; 3,900 and
3,855 issued and outstanding, respectively).............. 39 38
Additional Paid-in Capital................................ 29,332 29,242
Retained Earnings (Since January 1, 1989)................. (12,961) (578)
Foreign Currency Translation Adjustments.................. (171) (385)
-------- -------
Total Shareholders' Equity.............................. 16,239 28,317
-------- -------
$74,874 $72,059
======== =======
</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,
--------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Operating Revenue
Plastic Products and Services.................... $ 95,064 $93,378 $60,305
Agriculture ..................................... 2,254 -- --
-------- ------- -------
$ 97,318 $93,378 $60,305
Operating Costs and Expenses
Plastic Products and Services--Cost of Sales..... 80,861 78,871 50,664
Agriculture--Cost of Sales....................... 2,227 -- --
Writedown of Excess Equipment.................... -- 958 --
Selling, General and Administrative.............. 11,373 11,036 8,192
Provision for Merger and Refinancing Costs....... 1,362 -- --
-------- ------- -------
95,823 90,865 58,856
-------- ------- -------
Operating Income .................................. 1,495 2,513 1,449
-------- ------- -------
Other Income and (Expense)
Interest Expense................................. (3,221) (3,267) (2,402)
Provision for Bargo Judgment and Related Costs... (9,239) -- --
Equity In Income (Loss) of The Juliana Preserve.. (388) 330 (266)
Equity In Writedown of The Juliana Preserve Real
Estate Development Costs........................ -- (855) (1,290)
Other, Including Interest Income................. 252 384 691
-------- ------- -------
(12,596) (3,408) (3,267)
-------- ------- -------
Loss From Continuing Operations Before Income
Taxes............................................. (11,101) (895) (1,818)
Income Tax Benefit (Expense)..................... 661 (86) (876)
-------- ------- -------
Loss From Continuing Operations.................... (10,440) (981) (2,694)
-------- ------- -------
Income (Loss) From Discontinued Operations
Disposal of Oil and Gas Operations............... (1,710) -- 1,122
Disposal of Agriculture Operations............... -- 710 (710)
-------- ------- -------
(1,710) 710 412
-------- ------- -------
Extraordinary item--loss on early extinguishment of
debt ............................................. (233) -- --
-------- ------- -------
Net Loss........................................... (12,383) (271) (2,282)
Foreign Currency Translation Adjustment............ 214 (356) (29)
-------- ------- -------
Comprehensive Loss................................. $(12,169) $ (627) $(2,311)
======== ======= =======
Earnings per share--Basic and Diluted
Loss from Continuing Operations.................. $ (2.69) $ (0.25) (0.70)
Income (Loss) from Discontinued Operations....... (0.44) 0.18 0.11
Extraordinary Item............................... (0.06) -- --
-------- ------- -------
Net Loss......................................... $ (3.19) $ (0.07) $ (0.59)
======== ======= =======
Weighted Average Number of Common Shares
Outstanding
Basic and Diluted................................ 3,881 3,855 3,855
======== ======= =======
</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
---------------------------
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Loss........................................ $(12,383) $ (271) $ (2,282)
Adjustments to Reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities:
Depreciation, Depletion and Amortization....... 3,634 3,062 1,694
Goodwill Amortization.......................... 689 706 591
Debt issuance costs amortization............... 1,157 -- --
Bargo Judgment Provision....................... 8,425 -- --
Provision for Environmental Remediation........ 1,200 -- --
Provision for Tax Audit Settlement............. 510 -- --
Impairment of Assets........................... -- 958 --
(Gain) Loss on Disposal of Discontinued
Operations.................................... -- (710) 710
Equity In Income of Joint Venture, Before
Depreciation.................................. (22) (640) (39)
Write Off Of Joint Venture Costs............... -- 855 1,290
Allowance for possible denial of AMT refund
claim......................................... -- -- 750
-------- ------- --------
3,210 3,960 2,714
Changes in Assets and Liabilities, net of
effects from acquisitions:
(Increase) Decrease in Accounts Receivable..... (16) 113 120
(Increase) Decrease in Inventories............. 503 (310) (29)
Increase (Decrease) in Accounts Payable........ (718) 530 (1,113)
Other.......................................... (604) (258) (449)
-------- ------- --------
Net Cash Provided by (Used in) Operating
Activities....................................... 2,375 4,035 1,243
-------- ------- --------
Cash Flows From Investing Activities:
Sale of Property, Plant and Equipment........... 2,560 -- 2,046
Purchase of Joint Venture Interest.............. (2,178) -- --
Other Capital Expenditures...................... (3,113) (3,868) (985)
Acquisition of businesses, net of cash
acquired....................................... -- -- (5,384)
Sale of Discontinued Operations................. -- 2,200 8,998
Other........................................... 512 141 25
-------- ------- --------
Net Cash Used in Investing Activities............. (2,219) (1,527) 4,700
-------- ------- --------
Cash Flows From Financing Activities:
Debt issuance costs............................. (1,901) -- (786)
Proceeds from Issuance of Debt.................. 7,102 2,746 10,509
Repayments of Debt.............................. (10,208) (3,889) (18,698)
Increase (Decrease) in Short Term Borrowings.... 3,439 (702) 3,910
Proceeds from issuance of subsidiary preferred
stock.......................................... 586 -- --
Proceeds of capital grants...................... 300 -- --
Proceeds From Exercise of Common Stock Options
and Warrants................................... 91 -- --
-------- ------- --------
Net Cash Used in Financing Activities............. (591) (1,845) (5,065)
-------- ------- --------
Effect of Exchange Rate on Cash................... 359 15 --
-------- ------- --------
Increase (Decrease) in Cash and Cash Equivalents.. (76) 678 878
Cash and Cash Equivalents at Beginning of Period.. 2,085 1,407 529
-------- ------- --------
Cash and Cash Equivalents at End of Period........ $ 2,009 $ 2,085 $ 1,407
======== ======= ========
</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,
-----------------------------------------------
1998 1997 1996
-------------- -------------- ---------------
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 3,855 $ 38 4,112 $ 40
Retirement of Treasury
Shares...................... -- -- (257) (2)
Exercise of Stock Options and
Warrants.................... 45 1 -- -- --
----- ------- ----- ------- ----- -------
Ending Balance............... 3,900 39 3,855 38 3,855 38
Additional Paid-in Capital
Beginning Balance............ 29,242 29,242 31,037
Retirement of Treasury
Shares...................... -- -- (1,795)
Exercise of Stock Options and
Warrants.................... 90 --
------- ------- -------
Ending Balance............... 29,332 29,242 29,242
------- ------- -------
Retained Earnings
Beginning Balance............ (578) (307) 1,975
Net Loss..................... (12,383) (271) (2,282)
------- ------- -------
Ending Balance............... (12,961) (578) (307)
------- ------- -------
Less Treasury Shares
Beginning Balance............ (257) (1,798)
Retirement of Treasury
Shares...................... 257 1,798
Ending Balance............... -- --
----- -------
Foreign Currency Translation
Adjustments
Beginning Balance............ (385) (29) --
Current Year Adjustments..... 214 (356) (29)
------- ------- -------
Ending Balance............... (171) (385) (29)
------- ------- -------
Total Shareholders' Equity..... 3,900 $16,239 3,855 $28,317 3,855 $28,944
===== ======= ===== ======= ===== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(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, to Reunion Resources Company. 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. The Company through its wholly owned
subsidiary, Juliana Vineyards ("Juliana"), is also engaged in wine grape
agricultural operations in Napa County, California. 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.
On February 26, 1999, the company announced that it had commenced
discussions with a third party to sell ORC. The Company also announced that it
has reinstituted merger discussions with Chatwins Group, Inc. ("Chatwins," a
related party--see Note 13) and has held financing discussions with prospective
lenders in connection with the proposed merger. The discussions with the third
party to sell ORC have subsequently been terminated. The Company has now
decided to suspend its plans for the sale of ORC in light of the ongoing
discussions regarding the possible merger with Chatwins and the related
refinancings. The Company has also had discussions regarding possible
acquisitions of Stanwich Acquisition Corp., doing business as King-Way Material
Handling Company ("King-Way") and of NPS Acquisition Corp., doing business as
NAPTech ("NAPTech"), at the same time as the Chatwins merger. King-Way and
NAPTech are affiliates of Chatwins and the Company (see Note 13).
Going Concern Considerations
The accompanying consolidated financial statements have been prepared on a
going concern basis which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business. The
Company has incurred losses in each of the last five years, including a loss of
$12,383 in the year ended December 31, 1998. Corporate expenses, including
salaries and benefits, professional fees and other public company costs, are
expected to approximate $1,500 annually. Legal costs to appeal the Bargo
litigation (see Note 15) and the cost of collateralizing the Bargo appeal bond
will add to corporate requirements. In addition, a significant portion of the
$1,503 accrued for environmental remediation of the Louisiana properties (see
Note 15) is expected to be expended during the next twelve months, and a
settlement payment for the California tax audit (see Note 15) is expected to be
made.
As described in Note 8, ORC closed a new credit facility with The CIT
Group/Business Credit, Inc. in October 1998. This new credit facility limits
payments to Reunion by ORC and Juliana. The new credit facility also provides a
letter of credit guarantee to provide credit support for a supersedeas bond in
the Bargo litigation. Since October 1998, substantially all the amounts
otherwise permitted to be paid by ORC to Reunion have been used to fund letter
of credit and guarantee fees relating to the supersedeas bond.
Without additional financing, management believes that the Company will not
have sufficient resources to meet its corporate expenses and legal and
environmental costs as they become due over the next twelve months. During
1998, the Company borrowed a total of $1,015 from Stanwich Financial Services
Corp., ("SFSC"), a related party--see Note 13. These borrowings bear interest
at 15%, and were due to mature September 30, 1998. SFSC has agreed to extend
the maturity date to December 31, 1999 while the Company seeks additional
financing. There can be no assurances that such financing will be arranged, or
that SFSC will extend the maturity indefinitely or lend additional funds. If
the Company is unable to arrange additional financing, it may be necessary to
sell one or more of the Company's businesses.
F-7
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
As described above, the Company has announced that it has had merger
discussions with Chatwins, King-Way and NAPTech and has held financing
discussions with prospective lenders. If such transactions are completed,
management believes that there will be sufficient resources for the Company's
requirements. There can be no assurances that any of these transactions can be
consummated.
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. As described in Note 6, Juliana purchased the
interest of its joint venture partner in the Juliana Preserve in September 1998
and, accordingly, the agricultural operations are included on a consolidated
basis subsequent to that date. Prior to September 1998, the Company accounted
for the agricultural operations on the equity method.
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
amounts payable in connection with certain litigation and environmental
remediation (see Note 15) and 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.
Revenues for wine grape sales are recognized when grapes are delivered to
customers.
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.
Restricted cash balances aggregating $177 and $134 at December 31, 1998 and
1997, respectively, have been included in Other Assets based on the nature of
the underlying obligation collateralized. Such balances relate to regulatory
operating deposits and other contractual obligations.
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.
F-8
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
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.
Gains or losses are recognized when property and equipment is sold or otherwise
disposed of. Depreciation of property, plant and equipment is provided on the
straight-line method over their expected useful lives:
<TABLE>
<S> <C>
Plastic Products and Services:
Machinery and equipment ................................. 3 to 12 years
Buildings and improvements............................... 15 to 40 years
Land improvements........................................ 10 to 30 years
Agricultural Operations:
Land improvements........................................ 20 to 45 years
Equipment................................................ 5 to 45 years
</TABLE>
Long-Lived Assets and Impairment
Goodwill recorded as a result of business acquisitions is being amortized
using the straight-line method over 15 years. The Company reviews long-lived
assets, including goodwill, 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 towards the cost of new buildings and equipment. Capital grants for
purchased assets are recorded as deferred credits on the balance sheet and
amortized to income over the useful lives of the related assets. Capital grants
for leased assets reduce 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.
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 results of operations but are
accumulated as a separate component of shareholders' equity. Gains and losses
from foreign currency transactions are included in results 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
F-9
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
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 15).
Income Taxes
The Company provides deferred income taxes for all temporary differences
between financial and income tax reporting using the liability method. Deferred
taxes are determined based on the estimated future tax effect of differences
between the financial statement and tax bases of assets and liabilities given
the provisions of enacted tax laws. A valuation allowance is recorded for net
deferred tax assets if it is more likely than not that such assets will not be
realized. The Company has significant net operating loss and investment tax
credit carryforwards for tax purposes, a portion of which may expire unutilized
(see Note 12).
Earnings Per Share
Basic earnings per share is computed based on the weighted average number of
common shares outstanding during the period. Diluted earnings per share gives
effect to all dilutive potential common shares outstanding during this period.
Potential common shares include shares issuable upon exercise of the Company's
stock options and warrants (see Note 11).
Potential common shares relating to options and warrants to purchase common
stock aggregating 335,785, 215,750 and 215,750, respectively, were not included
in the weighted average number of shares for the years ended December 31, 1998,
1997 and 1996 because their effect would have been anti-dilutive.
Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued the following
accounting pronouncement which the company will be required to adopt in future
periods:
FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging
Activities" requires that derivative instruments such as options, forward
contracts and swaps be recorded as assets and liabilities at fair value and
provides guidance for recognition of changes in fair value depending on the
reason for holding the derivative. The Company does not presently have
significant transactions involving derivative instruments, but may do so in the
future. The Company is required to adopt Statement No. 133 for the first
quarter of 2000 and may adopt it earlier.
Supplemental Cash Flow Information
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest during the periods.............. $3,208 $3,093 $2,024
Cash paid for income taxes during the periods.......... 105 285 156
Supplemental disclosure of non-cash investing and
financing activities:
Assets acquired through capital leases................. 572 254 478
Debt issued to seller for acquisition of joint venture
interests............................................. 3,700 -- --
Debt issued to seller for acquisition of businesses.... -- -- 1,775
</TABLE>
Reclassifications
Certain amounts in prior period statements have been reclassified to conform
with current year presentation.
F-10
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
2. BUSINESS ACQUISITIONS
Rostone
On February 2, 1996, the Company acquired (the "Rostone Acquisition")
Rostone Corporation ("Rostone") which was merged with and into the Company's
subsidiary, Oneida Molded Plastics Corp. The surviving corporation changed its
name to ORC. The Company paid $1 to the stockholders of Rostone in 1996.
Although the merger agreement provided for additional payments of up to $2,000
in each of 1997 and 1998, no additional payments were made because Rostone did
not achieve specified levels of earnings before interest and taxes. In
addition, the Company incurred approximately $435 in acquisition related costs.
Based on Rostone's earnings for 1996 and 1997, the Company did 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 Enterprise
Ireland, 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
F-11
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
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.
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>
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 2004, whichever is earlier.
Until fully vested, any manager's shares revert to the Company upon termination
of employment. 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, 1998,
management was provisionally vested in 40% of their 15% ownership and deferred
compensation of $413 had been accrued.
In April 1998, DPL issued 410,000 shares of redeemable preferred stock for
IR(Pounds)410,000 to Enterprise Ireland in connection with the receipt of
capital grants. Dividends of 3% are payable annually in arrears and the
preferred stock is scheduled to be redeemed in three equal installments in
2002, 2003 and 2004.
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 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.
F-12
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
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.
Pro Forma Results
The following unaudited pro forma results of operations for 1996 have been
prepared assuming the acquisitions of Rostone, DPL and QMP had occurred as of
January 1, 1996. These pro forma results are not necessarily indicative of the
results of future operations or of results that would have occurred had the
acquisitions been consummated as of that date.
<TABLE>
<CAPTION>
(Unaudited)
1996
-----------
<S> <C>
Revenues...................................................... $85,282
Loss From Continuing Operations............................... (2,865)
Net Loss...................................................... $(2,453)
Loss per Share--Basic and Diluted............................. $ (.64)
</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
substantially completed the disposal of its discontinued oil and gas
operations.
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
F-13
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
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 15).
Revenues from the discontinued oil and gas operations were $2,137 for 1996
through the date of sale of REC.
As described in Note 15, the company recorded a provision of $1,200 in 1998
in connection with environmental remediation of certain retained oil and gas
properties, and a provision of $510 in 1998 in connection with settlement
discussions for the California Franchise Tax Board audit of the Company's
Franchise tax returns for 1991 through 1993.
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. As a
result, the company reclassified the agricultural operations to continuing
operations in 1997 and reversed the $710 estimated loss on disposal recognized
in 1996. See Note 6 for a description of the agricultural operations.
4. INVENTORIES
Inventories at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Raw materials............................................... $3,308 $3,461
Work-in-process............................................. 962 1,440
Finished goods.............................................. 2,834 2,669
------ ------
Total..................................................... $7,104 $7,570
====== ======
</TABLE>
F-14
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Plastic Products and Services:
Machinery and equipment............................... $20,881 $18,171
Buildings and improvements............................ 7,108 6,763
Land and improvements................................. 559 563
------- -------
28,548 25,497
Accumulated depreciation.............................. (5,139) (2,119)
------- -------
Net................................................. 23,409 23,378
Agricultural Operations:
Land and improvements................................. 19,243 13,230
Equipment............................................. 1,549 793
------- -------
20,792 14,023
Accumulated depreciation.............................. (2,848) (2,108)
------- -------
Net................................................. 17,944 11,915
------- -------
Total property, plant and equipment, net................ $41,353 $35,293
======= =======
</TABLE>
Machinery and equipment includes assets acquired under capital leases which
have a net book value of $1,360 at December 31, 1998.
6. INVESTMENT IN THE JULIANA PRESERVE
The Company's wine grape agricultural operations consist of approximately
3,800 acres, of which approximately 1,200 acres are suitable for wine grape
production and of which approximately 325 acres are currently in production.
This property is located in Napa County, California within the boundaries of
the Napa Valley American Viticultural Area.
From October 1994 to September 1998, Juliana conducted its agricultural
operations through the Preserve, a joint venture organized as a California
general partnership. Juliana had a 71.7% interest in the net income and net
assets of the joint venture, but had a 50% voting interest in matters
concerning the operation, development and disposition of the joint venture
assets. In September 1998, Juliana purchased the interest of its joint venture
partner for $5,878, including closing costs. The purchase was funded from the
proceeds of the sale of three parcels for $2,700 and by a $3,700 4-month note
to the joint venture partner. Substantially all of the purchase price was
allocated to property and equipment.
In August 1997, the Preserve sold approximately 500 acres, including
approximately 300 plantable acres, to a Napa Valley winery. The proceeds were
used to repay joint venture debt. In September 1998, Juliana sold approximately
400 acres, including approximately 250 plantable acres, to an Australian
winery. The proceeds were used for the acquisition of the joint venture
partner's interests.
Also during 1998, Juliana formed the Juliana Mutual Water Company ("JMWC")
to own and operate the water storage and transmission system for the entire
property originally owned by the Preserve. Ownership of JMWC is generally in
proportion to plantable acres as specified in the JMWC bylaws. Ownership
interests attributable to the other property owners are shown as minority
interests in the December 31, 1998 Consolidated Balance Sheet.
F-15
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
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 15, 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 $238 at December
31, 1998.
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, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
CITBC Revolver........................................... $ 8,543 $ --
CITBC Term Loan.......................................... 6,000 --
Congress Revolver........................................ -- 6,514
Congress Term Loan....................................... -- 6,843
Other ORC Debt........................................... 5,704 7,168
Juliana Debt............................................. 6,092 2,155
Related Party Debt....................................... 2,461 1,542
------- -------
Total Debt............................................. $28,800 $24,222
======= =======
Current Portion of Long-Term Debt........................ $11,155 $11,568
Short-Term Debt-Related Parties.......................... 1,015 --
Long-Term Debt........................................... 15,245 11,112
Long-Term Debt-Related Parties........................... 1,385 1,542
------- -------
Total Debt............................................. $28,800 $24,222
======= =======
</TABLE>
CITBC Credit Facility
On October 19, 1998, ORC closed a financing under a Loan and Security
Agreement (the "Loan Agreement") with the CIT Group/Business Credit, Inc.
("CITBC"). The agreement provides a six-year senior secured credit facility
including revolving credit loans of up to $10,200 and a term loan in the
initial amount of $6,000 for ORC (the "CITBC Credit Facility"). The proceeds
were used to refinance ORC'S debt with Congress Financial Corporation
("Congress") and to provide working capital for ORC. The CITBC Credit Facility
also provides a letter of credit used to collateralize the bond for the
Company's appeal of the judgment in favor of Bargo Energy Company (See Note
15).
The initial borrowing under the CITBC Credit Facility totaled $15,196 of
which $13,941 was used to repay the debt with Congress and $1,255 was paid for
fees and other loan costs. CITBC received fees totaling $1,100.
Future borrowings under the revolving credit loans are subject to a
collateral availability formula based on 85% of eligible accounts receivable
and 60% of eligible raw materials and finished goods inventories, as such terms
are defined in the agreement. At December 31, 1998, ORC had $1,202 of revolving
credit availability.
F-16
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
The term loan is repayable in quarterly installments of $250 beginning December
31, 1998. Interest is payable monthly at 0.25% above the Chase Manhattan Bank
Rate for revolving loans (8.00% at December 31, 1998) and at 0.50% above the
Chase Manhattan Bank Rate for the term loan (8.25% at December 31, 1998). The
Loan Agreement also requires the maintenance of certain minimum earnings and
ratio of earnings to interest expense, limits annual capital expenditures, and
limits amounts payable to Reunion.
The CITBC Credit Facility is secured by liens on substantially all of ORC's
assets and by guarantees of (i) ORC's subsidiary DPL Acquisition Corp., which
indirectly owns 95.47% of DPL, (ii) Reunion, and (iii) Mr. Bradley, President,
Chief Executive Officer and a director of the Company. The Company's guarantee
is secured by (i) a pledge of the stock of ORC, (ii) 10% of the stock of the
Company's subsidiary, Juliana Vineyards (subsequently increased to 100%
following the refinancing of Juliana's debt in January 1999), and (iii) a cash
deposit of $438. Mr. Bradley's guarantee is secured by a pledge by SFSC (a
related party--see Note 13) of $6,000 of Partially Convertible Subordinated 9%
Notes of Consumer Portfolio Services, Inc.
Congress Credit Facility
The revolving credit and term loan facility (the "Congress Credit Facility")
with Congress was secured by substantially all of ORC's domestic receivables,
inventory, equipment, real property and general intangibles. The maximum credit
available under the Congress Credit Facility, subject to the availability of
collateral, was $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 Congress Credit Facility was terminated in connection with entering into
the CITBC Credit Facility. The Company paid a $200 early termination fee and
wrote off $33 of unamortized debt issuance costs. This loss of $233 on
termination is reported as an Extraordinary Item.
Other ORC Debt
Other ORC debt includes a $1,183 three-year 10% unsecured note issued in
connection with the DPL Acquisition (see Note 2); a $1,017 11% note payable to
a creditor of Rostone, payable in quarterly installments subject to a
subordination agreement with Congress; $826 of variable-rate term loans from
DPL's bank, payable in monthly installments over twenty years; a $1,482 tax
qualified Irish business expansion loan bearing interest at 1% and payable in
2002; and $1,196 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 3.8% to 16.4% at December 31,
1998.
Juliana Debt
Notes payable to an insurance company consist of three notes with an
aggregate balance of $1,997 at December 31, 1998, bearing interest at 8.0% to
8.25% and collateralized by certain Juliana land parcels. As described in Note
6, Juliana issued a $3,700 four-month bridge note, bearing interest at prime
rate plus 2% (9.75% at December 31, 1998), to the former joint venture partner
for the purchase of the joint venture interests in September 1998. On January
26, 1999, the insurance company notes and the bridge note were repaid from the
proceeds of a $7,500, 15 year loan from the insurance company, bearing interest
at 7.15%. Accordingly, the total of $5,697 is classified as long-term debt in
the December 31, 1998 Consolidated Balance Sheet.
At December 31, 1998, $395 was outstanding under a $1,500 crop loan with a
bank, bearing interest at prime rate plus 1.25% (9.0% at December 31, 1998).
The loan is collateralized by certain wine grape sales contracts.
F-17
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
Related Party Debt (See Note 13)
Beginning in August 1998, the Company has borrowed funds for corporate
working capital from SFSC. These borrowings bear interest at 15% and were due
to mature September 30, 1998. SFSC has agreed to extend the maturity date to
December 31, 1999. The balance at December 31, 1998 was $1,015.
To facilitate the Rostone Acquisition and closing of the Congress Credit
Facility. Mr. Bradley purchased 50% of a $2,034 balance owed to a Rostone
creditor. As a result of this transaction, Mr. Bradley holds a note from ORC in
the amount of $1,017 bearing interest at 11% per annum and subordinated to
CITBC indebtedness except that if certain conditions are met, regularly
scheduled payments of interest may be paid when due.
ORC is indebted to CGII for $368 pursuant to a promissory note dated May 21,
1993 bearing interest at 15%. The note is subordinated to the prior payment of
CITBC 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 15).
Beginning in 1997, ORC has entered into capital leases for machinery and
equipment with CPS Leasing, Inc. ("CPS Leasing"), a subsidiary of Consumer
Portfolio Services, Inc. ("CPS"). The leases are for terms of five to seven
years, with a present value of future minimum lease payments of $61 as of
December 31, 1998. The Company believes that the terms of these leases are
comparable to those available from third parties.
Maturities
The aggregate amounts of debt maturities are as follows:
<TABLE>
<S> <C>
1999.............................................................. $12,170
2000.............................................................. 2,225
2001.............................................................. 1,347
2002.............................................................. 2,806
2003.............................................................. 1,322
Thereafter........................................................ 8,930
-------
Total........................................................... $28,800
=======
</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.
F-18
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
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 change in the benefit obligation for the
Oneida Plan for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Benefit obligation at beginning of year.................... $2,263 $1,795
Service cost............................................. 93 156
Interest cost............................................ 168 151
Actuarial loss........................................... 403 161
------ ------
Benefit obligation at end of year.......................... $2,927 $2,263
====== ======
</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 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 change in the benefit obligation for the
DPL Plan for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Benefit obligation at beginning of year....................... $662 $593
Service cost................................................ 64 57
Interest cost............................................... 36 31
Actuarial gain ............................................. (19) (19)
---- ----
Benefit obligation at end of year............................. $743 $662
==== ====
</TABLE>
The following table sets forth the changes in plan assets and the funded
status of the plans based on the most recent actuarial valuations, which were
December 31, 1998, and September 30, 1997 for the Oneida Plan and December 31,
1998 and 1997 for the DPL Plan:
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
Oneida Plan DPL Plan Oneida Plan DPL Plan
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Plan assets at fair value, beginning
of year............................ $1,959 $ 799 $1,620 $ 652
Actual return on plan assets........ 242 167 288 126
Employer contribution............... 85 121 95 61
Benefits paid....................... (89) -- (44) (40)
------ ------ ------ -----
Plan assets at fair value, end of
year............................... $2,197 $1,087 $1,959 $ 799
====== ====== ====== =====
Funded status of plans.............. $ 730 $ (344) $ 304 $(137)
Unrecognized net gain (loss)........ (204) 395 205 247
------ ------ ------ -----
Accrued pension cost................ $ 526 $ 51 $ 509 $ 110
====== ====== ====== =====
</TABLE>
F-19
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
The following table sets forth the actuarial assumptions used to develop the
net periodic pension costs for the periods presented:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount Rate:
Oneida Plan........................................... 7.0% 7.5% 8.5%
DPL Plan.............................................. 8.0% 8.0% 8.0%
Expected rate of return on plan assets:
Oneida Plan........................................... 9.0% 9.0% 9.0%
DPL Plan.............................................. 9.0% 9.0% 9.0%
Assumed compensation rate increase:
Oneida Plan........................................... 4.0% 4.0% 4.0%
DPL Plan.............................................. 6.0% 6.0% 6.0%
</TABLE>
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, 1998 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 following table sets forth the change in the benefit obligation and the
funded status of the health care benefits for the years ended December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Benefit obligation at beginning of year................... $1,621 $1,510
Service cost............................................ 43 52
Interest cost........................................... 94 109
Benefit payments........................................ (46) (50)
Amortization of gain.................................... (303) --
------ ------
Benefit obligation at end of year......................... 1,409 1,621
Unrecognized net gain..................................... 141 73
------ ------
Postretirement benefit liability.......................... $1,550 $1,694
====== ======
</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 31,1998 and postretirement benefit cost for 1998
by $152 and $15, respectively. The discount rate used to estimate the
accumulated postretirement benefit obligation was 6.5% at December 31, 1998 and
1997.
F-20
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
Health care benefits are funded as claims are paid. In 1998, 1997 and 1996,
Rostone's cash payments for such benefits were approximately $46, $50 and $64,
respectively.
Postemployment Benefits
Other than unemployment compensation benefits required by law, the Company
does not provide postemployment benefits to former or inactive employees.
10. SHAREHOLDERS' EQUITY
Name Change and Reincorporation
On April 19, 1996, Reunion Resources Company merged with and into its
wholly-owned subsidiary, RII, pursuant to a merger agreement dated November 14,
1995. The Company's Certificate of Incorporation authorizes the issuance of
20,000,000 shares of common stock, par value $.01 per share, and 10,000,000
shares of "blank check" preferred stock, par value $.01 per share, and includes
certain capital stock transfer restrictions (the "Transfer Restrictions") which
are designed to prevent any person or group of persons from becoming a 5%
shareholder of the Company and to prevent an increase in the percentage stock
ownership of any existing person or group of persons that constitutes a 5%
shareholder by prohibiting and voiding any transfer or agreement to transfer
stock to the extent that it would cause the transferee to hold such a
prohibited ownership percentage. The Transfer Restrictions are intended to help
assure that the Company's substantial net operating loss carryforwards will
continue to be available to offset future taxable income by decreasing the
likelihood of an "ownership change" for federal income tax purposes.
Additional Paid-in Capital
Paid-in capital was increased $90 in 1998 from the exercise of stock options
(see Note 11). In 1996 paid-in capital was reduced $1,795, the cost of 257
shares of treasury stock retired.
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 and Juliana contained in ORC's lending agreements (see Note
8).
11. STOCK OPTIONS AND WARRANTS
At December 31, 1998, the Company has three 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.
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:
F-21
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------ --------
<S> <C> <C> <C> <C>
Net Loss.......................... As reported $(12,383) $ (271) $(12,282)
Pro forma $(12,667) $ (302) $ (2,327)
Basic and Diluted
Net Loss per Share.............. As reported $ (3.19) $(0.07) $ (0.59)
Pro forma $ (3.26) $(0.08) $ (0.60)
</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: dividend yield of 0 percent for all years; expected volatility of
25% in 1998 and 60% in 1996, risk-free interest rates of 5.5% to 5.7% in 1998
and 5.1% in 1996 and expected lives of 5 and 10 years in 1998 and 3 years in
1996. 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.
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.
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 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 were fully
vested in July 1998, and are exercisable until July 1999. In February 1998, the
Company granted 20,000 options at an exercise price of $5.0625 to Richard L.
Evans, the Company's Executive Vice President, Chief Financial Officer and
Secretary, and in May 1998, the Company granted 75,000 options at an exercise
price of $7.21875 to Mr. Bradley. The options vest in installments through
F-22
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
February 2000 and are exercisable until February 2003 for Mr. Evans and vest in
installments through January 2003 and are exercisable until May 2003 for Mr.
Bradley.
1998 Option Plan
On August 4, 1998, the Company's stockholders ratified the adoption by the
Board of Directors, on June 1, 1998, of the 1998 Stock Option Plan (the "1998
Option Plan"). The Compensation Committee of the Board of Directors is
authorized to grant incentive options and nonqualified options covering up to
600,000 shares of the Company's common stock to officers and other key
employees. On February 13, 1998, the Board of Directors, on recommendation by
the Compensation Committee, had conditionally granted options to purchase
15,000 shares of the Company's common stock to each of the five non-employee
Directors (excluding Mr. Bradley), subject to adoption of the plan by the Board
and ratification by the stockholders. The options have an exercise price of
$5.0625, vested immediately and are exercisable until February 2008.
A summary of the status of the Company's stock options and warrants as of
December 31, 1998, 1997 and 1996 and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ----------------- ------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 215,750 $2.47 215,750 $2.47 255,750 $3.23
Granted................. 170,000 $6.01 -- $ -- 55,000 $4.44
Exercised............... (44,965) $2.04 -- $ -- $ --
Forfeited/Expired....... (5,000) $4.44 -- $ -- (95,000) $5.63
Outstanding at end of
year................... 335,785 $4.29 215,750 $2.47 215,750 $2.47
Options exercisable at
year-end............... 258,585 $3.55 193,750 $2.24 160,750 $1.97
Weighted-average fair
value of options
granted during the
year;
Exercise price equal
to market price
on date of grant..... $2.37 $ -- $1.48
Exercise price greater
than market price on
date of grant........ $1.94 $ -- $ --
</TABLE>
The following table summarizes information about stock options and warrants
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Remaining Number Number
Contractual Outstanding Exercisable
Exercise Price Life at 12/31/98 at 12/31/98
- -------------- ----------- ----------- -----------
<S> <C> <C> <C>
$1.562...................................... 6 mos. 112,500 112,500
$4.44....................................... 6 mos. 42,535 42,535
$5.00....................................... .5 mo. 10,750 10,750
$5.0625..................................... 4 yrs. 20,000 4,000
$5.0625..................................... 9 yrs. 75,000 75,000
$7.21875.................................... 4.5 yrs. 75,000 13,800
------- -------
335,785 258,585
</TABLE>
F-23
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
12. TAXES ON INCOME
The components of the Company's income tax (benefit) expense are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Current
Federal...................................................... $(676) $-- $750
State........................................................ 15 86 126
Foreign...................................................... -- -- --
----- --- ----
(661) 86 876
Deferred..................................................... -- -- --
----- --- ----
$(661) $86 $876
===== === ====
</TABLE>
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.
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 the Company's 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 audited this refund request and issued a formal IRS agent's
report denying the refund claim, and asserting an additional tax deficiency for
1993. The Company appealed the case to the IRS appeals division. Because of the
uncertainty over realization of the refund, the Company recorded an allowance
of $750 for the possible denial of the AMT refund with a corresponding charge
to income tax expense in 1996. In August 1998, the Company reached a settlement
with the IRS on its appeal. As a result of the settlement, the Company received
refunds totaling $676 including interest and recorded an income tax benefit of
$676 in the quarter ended September 30, 1998.
As part of the settlement, the IRS also confirmed the amounts of the
Company's net operating loss carryforwards ("NOLs") as of December 1993. Based
on the amounts confirmed, the Company's NOLs as of December 31, 1998 expire as
follows:
<TABLE>
<S> <C>
1999............................................................ $ 44,100
2000............................................................ 87,300
2001............................................................ 27,900
2002............................................................ 22,000
2003............................................................ 4,100
2004-2008....................................................... 59,800
2009-2018....................................................... 12,900
--------
$258,100
========
</TABLE>
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 was 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, 1998
Significant components of the Company's deferred tax position at December
31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Excess tax depreciation and bases differences of
assets........................................... $ (1,645) $ (1,359)
Other............................................. (210) (31)
-------- --------
Total deferred tax liabilities.................. (1,855) (1,390)
-------- --------
Deferred tax assets:
NOL and ITC carryforwards......................... 89,121 74,806
Bases differences of assets and liabilities....... 2,487 2,584
Provision for Bargo judgment...................... 2,865 --
Other............................................. 1,684 1,378
-------- --------
Total deferred tax assets....................... 96,157 78,768
-------- --------
Net deferred tax assets............................. 94,302 77,378
Valuation allowance................................. (94,302) (77,378)
-------- --------
$ --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 increased $16,924 in 1998 (primarily due to
adjustments of the NOL carryforwards in connection with the IRS settlement),
decreased $449 in 1997 and increased $1,388 in 1996.
13. RELATED PARTY TRANSACTIONS
Chatwins and Affiliates
Chatwins owns 1,450,000 shares, or approximately 38%, of the Company's
common stock, and a warrant to purchase 75,000 shares of the Company's common
stock (the "Chatwins Warrant").
Charles E. Bradley, Sr., President, Chief Executive Officer and a director
of the Company, 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, is a director and shareholder of Chatwins and
Thomas L. Cassidy, a director of the Company, was a director of Chatwins until
June 1997.
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 debt owed by Oneida to Chatwins. 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 Company's oil and
gas assets.
On February 2, 1996, the Rostone Acquisition was consummated pursuant to a
Merger Agreement (the "Rostone/Oneida Agreement") and Oneida, as the surviving
corporation, changed its name to ORC. The
F-25
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
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. 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.
ORC is indebted to CGII pursuant to a $250,000 promissory note dated May 21,
1993. The note had an outstanding balance of $477 (principal and accrued
interest) on December 31, 1998, and is subordinated to the prior payment of
indebtedness owing by ORC to CITBC except that if certain conditions 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.
To facilitate the closing of the Congress Credit Facility, 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 Congress Credit Facility subject to a cap of $4 million, which cap
declines over time to $2 million. Mr. Bradley received a credit support fee
from ORC and in an aggregate amount equal to 1% per annum of the amount
guaranteed, payable monthly. 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. All of Mr. Bradley's obligations to
Congress were released upon termination of the Congress Credit Facility in
October 1998.
To facilitate the closing of the CITBC Credit Facility, Mr. Bradley
guaranteed the obligations of ORC and RII under the CITBC Credit Facility. Mr.
Bradley will receive a credit support fee from the Company in an aggregate
amount equal to 3% 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
CITBC, except that if certain conditions are met, the monthly installments may
be paid when due.
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. This indebtedness was restated to provide for quarterly amortization over
a two year period with interest at 10% per annum (increasing to 11% in certain
circumstances) payable quarterly subject, however, to a subordination agreement
with Congress. 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 11% per
annum which is
F-26
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
now subordinated to the prior payment of indebtedness owing by ORC to CITBC,
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 the 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.
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.
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 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.
Beginning in February 1998, the Company entered into an arrangement for
flying services with Butler Air, Inc. ("Butler"). Mr. Bradley is a director of
Butler and the owner of 65% of Stanwich Aviation Company, Inc., of which Butler
is a wholly owned subsidiary. Butler provides charter flight services for
certain business travel by Company officers and employees at rates which the
Company believes are comparable to those available from third parites. The
Company pays a monthly minimum of $5, which is credited against services as
used.
Beginning in August 1998, the Company has borrowed funds for corporate
working capital from SFSC. Mr. Bradley, Mr. Poole and Mr. Evans are officers,
directors and/or shareholders of SFSC. The debt bears interest at 15% and was
originally scheduled to mature September 30, 1998. SFSC has agreed to extend
the maturity to December 31, 1999 while the Company seeks an alternative source
of funds.
F-27
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
Under the arrangements described above, the consolidated financial statements
include the following amounts and balances:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Rent Expense:
CPS Leasing............................................. $167 $64 --
SPI..................................................... 32 32 23
Chatwins and Mr. Bradley................................ -- -- 42
Travel Expense:
Butler.................................................. 73 -- --
Interest Expense:
Mr. Bradley............................................. 112 112 178
CGII.................................................... 38 38 37
SFSC.................................................... 25 -- --
Chatwins................................................ -- -- 199
SOG..................................................... -- -- 2
Guarantee fees: Mr. Bradley............................. 190 41 55
</TABLE>
<TABLE>
<CAPTION>
As of
December 31,
-------------
1998 1997
------ ------
<S> <C> <C>
Current liabilities:
SFSC: short-term debt .................................. $1,015 $ --
CGII: interest.......................................... 109 72
SFSC: interest.......................................... 25 --
Butler: travel.......................................... 18 --
Mr. Bradley: fees....................................... -- 28
Long term debt-related parties:
Mr. Bradley............................................. 1,017 1,017
CGII.................................................... 368 368
CPS Leasing............................................. -- 157
Other liabilities: fees payable to Mr. Bradley............ 123 123
</TABLE>
<TABLE>
<CAPTION>
As of
December
31,
---------
1998 1997
---- ----
<S> <C> <C>
Future minimum rental commitments under noncancellable
operating leases: CPS Leasing ................................ $937 $706
</TABLE>
ORC manufactures component parts for King-Way. Mr. Bradley and Mr. Evans are
officers and directors of King-Way and own 42.5% and 15%, respectively, of
King-Way's common stock. Sales to King-Way in 1998 were $299, and were at
margins equivalent to those earned on sales to third party customers at
comparable volumes.
The Company obtains its property, casualty and general liability insurance
coverage, as well as health care coverage for corporate and Juliana employees,
through a joint arrangement with Chatwins. The Company and Chatwins share the
costs in proportion to coverages.
F-28
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
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, approvals 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 also had
discussions regarding possible acquisitions of King-Way and of NAPTech at the
same time as the Chatwins merger. NAPTech is owned by Mr. Bradley. If King-Way
and NAPTech were acquired, they would be combined with divisions of Chatwins
operating in similar businesses. The Company has engaged legal and financial
advisors in connection with these transactions and has held financing
discussions with prospective lenders. If such transactions are agreed to, and
requisite approvals are obtained and other conditions are satisfied, the
consummation of the transactions could occur as early as the second quarter of
this year. There can be no assurances that these transactions will be agreed
to, approved or consummated.
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 1998 and 1997, payments totaling $89 and
$61, respectively, were received.
14. SEGMENT INFORMATION
The Company operates in two business segments, which are identified based
on products and services.
The Company, through its wholly owned subsidiary ORC, manufactures high
volume, precision plastic products and provides engineered plastics services.
ORC's Oneida division, and its DPL subsidiary, design and produce injection
molded parts and provide 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 compounds and molds thermoset
polyester resins.
The Company, through its subsidiary Juliana, is engaged in wine grape
vineyard development and the growing and harvesting of wine grapes for the
premium table wine market.
F-29
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
The following tables present information about the results of operations and
financial position of the Company's business segments:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Revenues
Plastic products and services................... $ 95,064 $93,378 $60,305
Agriculture..................................... 2,254 -- --
-------- ------- -------
$ 97,318 $93,378 $60,305
======== ======= =======
United States................................... $ 70,196 $77,031 $59,117
International (principally Ireland)............. 27,122 16,347 1,188
-------- ------- -------
$ 97,318 $93,378 $60,305
======== ======= =======
Income before interest, taxes, depreciation and
amoritzation (EBITDA)
Plastic products and services................... $ 9,034 $ 7,926 $ 4,144
Agriculture..................................... 118 (219) (1,535)
Corporate and other............................. (12,706) (1,567) (1,713)
-------- ------- -------
$ (3,554) 6,140 896
======== ======= =======
Depreciation and amortization
Plastic products and services................... $ 3,775 $ 3,457 $ 1,758
Agriculture..................................... 547 306 308
Corporate and other............................. 4 5 4
-------- ------- -------
$ 4,326 $ 3,768 $ 2,070
======== ======= =======
Income before interest and taxes (EBIT)
Plastic products and services................... $ 5,259 $ 4,469 $ 4,144
Agriculture..................................... (429) (525) (1,843)
Corporate and other............................. (12,710) (1,572) (1,717)
-------- ------- -------
(7,880) 2,372 584
Interest expense.................................. (3,221) (3,267) (2,402)
-------- ------- -------
Income from continuing operations before income
taxes............................................ $(11,101) $ (895) $(1,818)
======== ======= =======
Capital Expenditures
Plastic products and services................... $ 3,113 $ 3,868 $ 985
Agriculture..................................... -- -- --
Corporate and other............................. -- -- --
-------- ------- -------
$ 3,113 $ 3,868 $ 985
======== ======= =======
</TABLE>
F-30
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
As of December
31,
----------------
1998 1997
-------- -------
<S> <C> <C>
Total Assets
Plastic products and services........................ $ 54,638 $55,269
Agriculture.......................................... 19,058 14,027
Corporate and other.................................. 1,178 2,764
-------- -------
$ 74,874 $72,060
======== =======
Property Plant and Equipment--Net
United States........................................ $ 34,036 $29,194
International (principally Ireland).................. 7,317 6,099
-------- -------
$ 41,353 $35,293
======== =======
</TABLE>
ORC had sales to a single customer which represented approximately 11% of
ORC's sales during 1998 and which represented approximately 11% of ORC's
accounts receivable at December 31, 1998. Accounts receivable at December 31,
1998 include no significant geographic concentrations of credit risk. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral.
15. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
On April 24, 1998, a jury in the state district court in Harris County,
Texas returned jury verdict findings that Bargo Energy Company ("Bargo") had a
right to terminate a November 1995 stock purchase agreement with the Company
and that the Company fraudulently induced Bargo into entering into the
agreement. The November 1995 stock purchase agreement concerned the sale of the
Company's subsidiary, REC, which operated the Company's discontinued oil and
gas business. The jury recommended that an award of $5,000 in punitive damages
be assessed against the Company. In July 1998, the court entered judgment
affirming the $5,000 jury verdict and awarding approximately $3,000 in
attorneys' fees and costs. The Company maintained at trial and continues to
maintain that all requirements to closing under the contract were met, and that
Bargo was required to close the transaction. The Company also maintains that no
evidence sufficient to support a jury finding of fraud or the related punitive
damages finding was presented at trial. The Company has filed a bond which
suspends execution on the judgment while the Company appeals. A formal notice
of appeal has been filed and the Company intends to file its appeal in April
1999. Although management believes, based on consultation with counsel, that it
is more likely than not that the judgment will be overturned on appeal, the
Company has recorded an accrual for the amount of the judgment with a charge to
continuing operations in 1998. Interest on the judgment at 10% has been accrued
and will continue to accrue until the litigation is resolved.
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.
F-31
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
Environmental Compliance
Various U.S. federal, state and local laws and regulations including,
without limitation, laws and regulations concerning the containment and
disposal of hazardous waste, oil field waste and other waste materials, the use
of storage tanks, the use of insecticides and fungicides and the use of
underground injection wells directly or indirectly affect the Company's
operations. In addition, environmental laws and regulations typically impose
"strict liability" upon the Company for certain environmental damages.
Accordingly, in some situations, the Company could be liable for clean up costs
even if the situation resulted from previous conduct of the Company that was
lawful at the time or from improper conduct of, or conditions caused by,
previous property owners, lessees or other persons not associated with the
Company or events outside the control of the Company. Such clean up costs or
costs associated with changes in environmental laws and regulations could be
substantial and could have a materially adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
The Company's plastic products and service business routinely uses chemicals
and solvents, 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. The
Company's former 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.
Except as described in the following paragraphs, the Company believes it is
currently in material compliance with existing environmental protection laws
and regulations and is not involved in any significant remediation activities
or administrative or judicial proceedings arising under federal, state or local
environmental protection laws and regulations. In addition to management
personnel who are responsible for monitoring environmental compliance and
arranging for remedial actions that may be required, the Company has also
employed outside consultants from time to time to advise and assist the
Company's environmental compliance efforts. Except as described in the
following paragraphs, the Company has not recorded any accruals for
environmental costs.
In February 1996, 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 expended $175 and has accrued an
additional $220 based on current estimates of remediation costs. Certain of
these costs are recoverable from CGII. (See Notes 8 and 13).
In connection with the sale of REC, the Company retained certain oil and gas
properties in Louisiana because of litigation concerning environmental matters.
The Company is in the process of environmental remediation under a plan
approved by the Louisiana Office of Conservation. The Company has recorded an
accrual for its proportionate share of the remaining estimated costs to
remediate the site based on plans and estimates developed by the environmental
consultants hired by the Company. During 1998 the Company increased this
accrual by a charge of $1,200 to discontinued operations, based on revised
estimates of the remaining remediation costs. At December 31, 1998, the balance
accrued for these remediation costs was $1,503. Owners of a portion of the
property have objected to the Company's proposed cleanup methodology and have
filed suit to require additional procedures. The Company is contesting this
litigation, and believes its proposed methodology is well within accepted
industry practice for remediation efforts of a similar nature. No accrual has
been made for costs of any alternative cleanup methodology which might be
imposed as a result of the litigation.
F-32
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
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 oil and gas assets in 1991 should be reclassified from
nonbusiness to business income. The Company believes its classification of such
income was correct, and appealed the assessment of tax. In 1996, the Company
recorded a provision of $85 for certain other adjustments proposed. The appeal
was denied, and the Company requested that the case be considered for
settlement. If the Company's positions prevail on this issue, management
believes that the amounts due would not exceed amounts previously paid or
provided for. However, in connection with the settlement discussions, the
Company accrued an additional $510 in 1998, with a corresponding charge to
Discontinued Operations. The total accrual of $595 represents management's
estimate of the minimum of the range of possible settlement outcomes.
Operating Leases
At December 31, 1998, the Company's minimum rental commitments under
noncancellable operating leases for buildings and equipment are as follows:
<TABLE>
<S> <C>
1999.............................................................. $ 893
2000.............................................................. 872
2001.............................................................. 783
2002.............................................................. 683
2003.............................................................. 453
Thereafter........................................................ 413
------
Total........................................................... $4,097
======
</TABLE>
Total rental expenses were $684, $702 and $305 in 1998, 1997 and 1996,
respectively.
16. 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 $377 were
issued by individuals in private transactions with the Company. One note, for
$198, bears interest at a variable rate and is payable in monthly installments
through March 2000. The other notes, totaling $179, 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 54% of the Company's long term debt has
variable rates of interest and 37% bears interest at fixed rates approximating
current market rates. Accordingly, management estimates that the carrying
amounts approximate the fair value, approximately $26,339 at December 31, 1998
and $22,680 at December 31,1997.
F-33
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1998
Approximately 9% ($2,461) 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. Of this amount, $1,385 bears interest
at 10%, matures February 1999, is subject to subordination to the Company's
CITBC Credit Facility, and is subject to prepayment under certain
circumstances; $1,015 bears interest at 15% and matures December 1999 (see Note
8).
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Results of operations by quarter for the years ended December 31, 1998 and
1997 are set forth in the following tables:
<TABLE>
<CAPTION>
1998 Quarter Ended
-----------------------------------
March 31 June 30 Sept 30 Dec 31
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Operating Revenue......................... $26,368 $ 24,704 $22,957 $23,289
Less Operating Costs and Expenses......... 25,308 24,361 23,588 22,566
------- -------- ------- -------
Operating Income (Loss)................. 1,060 343 (631) 723
------- -------- ------- -------
Income (Loss) from continuing operations.. 274 (9,330) (962) (422)
Loss from discontinued operations......... -- (1,200) -- (510)
Extraordinary Item........................ -- -- -- (233)
------- -------- ------- -------
Net Income (Loss)......................... $ 274 $(10,530) $ (962) $(1,165)
======= ======== ======= =======
Net Income (Loss) Per Share--Basic and
Diluted.................................. $ 0.07 $ (2.72) $ (0.25) $ (0.30)
======= ======== ======= =======
Significant items included in continuing
operations which might affect
comparability are as follows:
Provision for Bargo judgment............ -- (8,825) -- (414)
Provision for merger and refinancing
costs.................................. -- -- (1,362) --
</TABLE>
<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 ................................... $ 0.07 $ (0.11) $ 0.04 $ (0.07)
======= ======= ======= =======
Significant items included in continuing
operations which might affect
comparability are as follows:
Writedown of excess equipment............... -- -- -- (958)
Writedown of joint venture development
costs....................................... -- -- -- (855)
</TABLE>
F-34
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of
Chatwins Group, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income and comprehensive income and of cash flows,
present fairly, in all material respects, the financial position of Chatwins
Group, Inc. and its subsidiaries (Chatwins Group) at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of Chatwins Group's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with 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 provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
March 26, 1999
F-35
<PAGE>
CHATWINS GROUP, INC.
FINANCIAL STATEMENTS AND NOTES
CHATWINS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
At December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS:
Cash and equivalents....................................... $ 341 $ 734
Receivables, net........................................... 38,340 34,246
Inventories (note 3)....................................... 20,746 16,964
Other current assets....................................... 4,734 4,687
-------- --------
Total current assets................................... 64,161 56,631
Property, plant and equipment, net (note 4)................ 32,371 31,380
Investments (note 5)....................................... 6,807 11,413
Due from related parties (note 14)......................... 1,403 600
Goodwill, net (note 1)..................................... 4,505 4,764
Other assets, net (note 6)................................. 8,119 6,481
-------- --------
Total assets............................................. $117,366 $111,269
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Revolving credit facility (note 8)......................... $ 34,005 $ 26,061
Current maturities of debt (notes 2 and 9)................. 25,766 700
Trade payables............................................. 20,444 16,239
Other current liabilities (note 7)......................... 10,286 11,412
-------- --------
Total current liabilities.............................. 90,501 54,412
Long-term debt (notes 2 and 9)............................. 25,737 50,723
Other liabilities.......................................... 1,612 4,416
-------- --------
Total liabilities...................................... 117,850 109,551
-------- --------
Commitments and contingent liabilities (note 18)........... -- --
Minority interests (note 10)............................... 968 1,033
Redeemable preferred stock (note 11)....................... 8,482 8,026
Warrant value (note 9)..................................... 14 210
Stockholders' equity (note 12):
Common stock (400,000 shares authorized, 289,677 and
242,887 shares outstanding)............................. 3 3
Capital in excess of par value........................... 1,860 1,664
Treasury stock........................................... (500) (500)
Notes receivable from stockholders....................... (1,001) (1,001)
Accumulated other comprehensive income (losses).......... (1,354) (688)
Accumulated deficit...................................... (8,956) (7,029)
-------- --------
Total stockholders' equity............................. (9,948) (7,551)
-------- --------
Total liabilities and stockholders' equity............. $117,366 $111,269
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE>
CHATWINS GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales....................................... $191,586 $188,920 $153,480
Cost of sales................................... 154,980 153,394 123,722
-------- -------- --------
Gross profit.................................. 36,606 35,526 29,758
Selling, general and administrative............. 23,217 22,283 19,899
Other (income) expense, net..................... 629 436 275
Minority interests.............................. (57) (141) --
-------- -------- --------
Operating profit.............................. 12,817 12,948 9,584
Interest expense, net........................... 10,099 9,776 9,559
-------- -------- --------
Income before income taxes and equity income
(loss) from affiliate.......................... 2,718 3,172 25
Provision for income taxes...................... 1,083 851 8
-------- -------- --------
Income before equity income (loss) from
affiliate...................................... 1,635 2,321 17
Equity loss from continuing operations of
affiliate...................................... (2,677) (224) (549)
Equity income (loss) from discontinued
operations of affiliate........................ (429) 162 93
-------- -------- --------
Net income (loss)............................. (1,471) 2,259 (439)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment....... (666) -- (269)
-------- -------- --------
Comprehensive income (loss)................... $ (2,137) $ 2,259 $ (708)
======== ======== ========
Income (loss) applicable to common stock...... $ (1,927) $ 1,803 $ (895)
======== ======== ========
Earnings per common share--basic (note 13):
Before equity income (loss) from affiliate.... $ 4.45 $ 7.68 $ (1.80)
Continuing operations of affiliate............ (10.10) (0.92) (2.26)
Discontinued operations of affiliate.......... (1.62) 0.66 0.38
-------- -------- --------
Earnings (loss) per common share--basic....... $ (7.27) $ 7.42 $ (3.68)
======== ======== ========
Average equivalent shares outstanding--basic.. 265,088 242,887 242,887
======== ======== ========
Earnings per common share--diluted (note 13):
Before equity income (loss) from affiliate.... $ 4.03 $ 6.37 $ (1.80)
Continuing operations of affiliate............ (9.14) (0.77) (2.26)
Discontinued operations of affiliate.......... (1.47) 0.56 0.38
-------- -------- --------
Earnings (loss) per common share--diluted..... $ (6.58) $ 6.16 $ (3.68)
======== ======== ========
Average equivalent shares outstanding--
diluted...................................... 292,887 292,887 242,887
======== ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-37
<PAGE>
CHATWINS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)............................ $ (1,471) $ 2,259 $ (439)
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation................................ 3,922 3,438 3,279
Amortization................................ 1,235 955 984
Provision for losses on inventories......... -- 158 338
Equity in net loss of affiliate............. 3,106 62 456
Changes in assets and liabilities:
Decrease (increase) in receivables......... (4,094) (7,841) 3,553
Decrease (increase) in inventories......... (3,782) (97) 381
Decrease (increase) in other current
assets.................................... (47) (343) 909
Increase (decrease) in trade payables and
other current liabilities................. 3,079 5,909 (3,612)
Net change in other assets and
liabilities............................... (5,042) (884) (2,357)
--------- --------- ---------
Cash provided by (used in) operating
activities.................................. (3,094) 3,616 3,492
--------- --------- ---------
Cash flow from investing activities:
Capital expenditures......................... (5,095) (5,044) (4,704)
Investment in joint venture.................. (100) -- (150)
Receipts from related parties................ -- -- 3,664
--------- --------- ---------
Cash used in investing activities............ (5,195) (5,044) (1,190)
--------- --------- ---------
Cash flow from financing activities:
Repayments of debt........................... (48) (47) (48)
Repayments to related parties................ -- (579) (2,737)
Revolving credit facilities borrowings....... 191,281 180,115 159,449
Revolving credit facilities repayments....... (183,337) (177,683) (158,967)
--------- --------- ---------
Cash provided by (used in) financing
activities.................................. 7,896 1,806 (2,303)
--------- --------- ---------
Net increase (decrease) in cash and
equivalents................................. (393) 378 (1)
Cash and equivalents, beginning of year...... 734 356 357
--------- --------- ---------
Cash and equivalents, end of year............ $ 341 $ 734 $ 356
========= ========= =========
Supplemental cash flow information:
Interest paid.............................. $ 9,211 $ 9,226 $ 8,938
========= ========= =========
Income taxes paid (refunded)............... $ (139) $ 205 $ 53
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Chatwins Group, Inc., is composed of six divisions and two foreign
subsidiaries that design, manufacture and market metal products and an oil and
gas division. Chatwins Group's principal products include large, seamless
pressure vessels for highly pressurized gases; high quality steel and aluminum
grating; industrial hydraulic and pneumatic cylinders; high quality, roll-
formed and structural storage racks; industrial cranes; large mill equipment;
and cold-rolled steel leaf springs. Chatwins Group's metals manufacturing
divisions accounted for substantially all of Chatwins Group's net sales in 1998
and 1997. See note 19.
Principles of Consolidation
The consolidated financial statements include the accounts of Chatwins Group
and its majority- and wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated.
Investments in other companies over which Chatwins Group does not have
control, less than a 50% equity interest, and in which Chatwins Group has the
ability to exercise significant influence over operating or financial policies
are accounted for by the equity method. See note 5.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that
affect the reported amounts of assets, liabilities, revenues, expenses, and
disclosures of contingencies during the reporting period, which in the normal
course of business are subsequently adjusted to actual results.
Cash and Equivalents
Cash and equivalents consist of demand deposit accounts and other cash
equivalents with maturities of 3 months or less.
Accounts Receivable
Accounts receivable are net of $715,000 and $734,000 in allowance for
doubtful accounts at December 31, 1998 and 1997, respectively. Chatwins Group
has no concentration of credit risks and generally does not require collateral
or other security from its customers.
Inventories
Inventories are stated at the lower of cost or market, with cost being
determined on the "last-in, first-out" (LIFO) method of inventory valuation for
approximately 81% and 78% of total inventories at December 31, 1998 and 1997,
respectively, and on the "first-in, first-out" (FIFO) method for the remaining
inventories. See note 3.
Other Current Assets
Other current assets are primarily comprised of current deferred taxes, net
assets, and prepaid expenses. See note 17.
F-39
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property, Plant and Equipment
Properties for the manufacturing businesses are stated at cost and
depreciated over their estimated useful lives using the straight-line method
for financial statement purposes. Estimated useful lives in years for
depreciation are as follows: 25 to 40 for buildings and improvements; 7 to 12
for machinery and equipment; 5 to 8 for computer systems; 7 to 10 for furniture
and fixtures. Additions, betterments and replacements are capitalized, while
expenditures for repairs and maintenance are charged to income. As units of
property are sold or retired, the related cost and accumulated depreciation are
removed from the accounts, and any resulting gain or loss is recognized in
income.
Oil and gas properties are accounted for by the full-cost method whereby all
exploration and development costs are capitalized. Depreciation and depletion
are provided based on a unit-of-production method. Dispositions of properties
are treated as reductions of the cost pool and no gain or loss is recognized
subject to certain limitations.
Goodwill
The excess of the purchase consideration over the fair value of the assets
acquired is being amortized generally over 20 years using the straight-line
method. Accumulated amortization of goodwill at December 31, 1998 and 1997, is
$1,987,000 and $1,710,000, respectively.
Other Assets
Other assets primarily include capitalized debt issuance costs on presently
outstanding debt, which are being amortized ratably to interest expense over
the term of the related debt agreements and the cash surrender value of life
insurance policies. See note 6.
Revenue Recognition
Sales are recorded primarily as products are shipped and services are
rendered. The percentage-of-completion method of accounting is used at one
division for orders with long cycle times. Under this method, income is
recognized as work on contracts progresses. The percentage of work completed is
determined principally by comparing the accumulated costs to date with
management's current estimate of costs at contract completion. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance. At the time when current estimates indicate a loss,
Chatwins Group provides currently for the total amount of the estimated loss.
The following long-term contract amounts are included in accounts receivable
at December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
At December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Uncompleted contract costs over related billings......... $10,556 $ 6,820
Uncompleted contract billings over related costs......... (5,297) (3,499)
------- -------
$ 5,259 $ 3,321
======= =======
</TABLE>
Foreign Currency Translation
At December 31, 1998 and 1997, Chatwins Group had two majority-owned,
consolidated foreign subsidiaries; Klemp de Mexico S.A de C.V (Klemp de Mexico)
and Shanghai Klemp Metal Products Co., Ltd. (Shanghai Klemp). Prior to 1997,
the financial statements of Klemp de Mexico were measured using the
F-40
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mexican peso. Effective January 1, 1997, Mexico was deemed to be a highly
inflationary economy and the functional currency for the financial statements
of Klemp de Mexico changed from the Mexican peso to the U.S. dollar. Effective
January 1, 1999, Mexico emerged from highly inflationary status. Therefore, the
functional currency for Klemp de Mexico's financial statements returned to the
peso. The devaluation of the peso during 1998 had a negative impact on the
financial position, results of operations and comprehensive earnings of
Chatwins Group. See notes 10 and 12.
Shanghai Klemp's financial statements are measured using the Chinese
Renminbi (RMB). Therefore, its assets and liabilities are translated at the
exchange rate in effect at the end of a period. Income statement amounts are
translated at the average rate of exchange prevailing during each month in the
reporting period. Translation adjustments arising from differences in exchange
rates from period to period are included in accumulated other comprehensive
income (loss). Transaction gains and losses resulting from foreign currency
transactions, if any, are included in income currently. See notes 10 and 12.
Earnings Per Share
Basic earnings per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted
earnings per common share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding plus all dilutive
potential common shares outstanding during the period. The Warrants (see notes
9 and 13) are dilutive common shares under the treasury stock method, which
assumes they are exercised at the beginning of the period.
Fair Market Value Disclosure
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
About Fair Value of Financial Instruments," requires disclosure of the fair
value of certain items, including debt and investments. Chatwins Group believes
that the amounts disclosed for such amounts in the consolidated balance sheet
do not differ significantly from fair value as defined in SFAS 107. The
carrying value of cash and cash equivalents approximates fair value because of
the short maturity of those instruments. The carrying value of amounts due from
related parties and other investments (see note 5), insofar as it was practical
to determine, was deemed to approximate fair value based on current market
conditions, as well as the relationship of the parties. The carrying value of
debt approximates fair value based on Chatwins Group's incremental borrowing
rate. The carrying value of redeemable preferred stock approximates fair value
based on the accretion of such amounts to liquidation value. The carrying value
of the warrants is based on estimates received from outside investment bankers
regarding the overall value of Chatwins Group at the time of the issuance of
the $50 million principal amount of 13% Senior Notes due 2003 (Senior Notes)
(see note 9).
NOTE 2: FACTORS POTENTIALLY AFFECTING FUTURE LIQUIDITY
Senior Note Purchase Offer
Chatwins Group has $50 million of Senior Notes due May 3, 2003 outstanding
at December 31, 1998. When Chatwins Group acquired the Reunion common stock on
June 20, 1995, it agreed with the Trustee of the Senior Notes to a first
supplemental indenture pursuant to which Chatwins Group issued the Senior Notes
(Indenture). Pursuant to this supplemental indenture, Chatwins Group agreed to
offer to purchase $25 million, or half, of the outstanding Senior Notes from
Noteholders on each of June 1, 1999 and 2000 at par value plus unpaid interest
to the purchase date. The full principal amount of the first purchase offer is
classified as current maturities of long-term debt in Chatwins Group's
consolidated balance sheet at December 31, 1998. Chatwins Group's failure to
fulfill its obligations under this purchase offer would constitute a failure to
pay principal
F-41
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
under the Indenture and result in an Event of Default. An Event of Default due
to a failure to pay principal would, pursuant to the Securities Pledge
Agreement, result in a Realization Event resulting in the immediate vesting in
the Collateral Agent of the voting rights of the approximately 43% of Reunion
Industries' common stock and rights to dividends and distributions in respect
of the Pledged Collateral securing its obligations under the Senior Notes. In
addition, upon an Event of Default, the Trustee or the holders of at least 25%
of the Senior Notes may, by written notice to Reunion Industries, declare an
acceleration of the Senior Notes. Reunion Industries currently has a commitment
from a national financial institution that, pursuant to certain actions by
Reunion Industries and its majority shareholder, it will fund Reunion
Industries' obligation to purchase Senior Notes, if any, on the June 1, 1999
purchase date should Reunion Industries' then available liquidity be
insufficient to do so. As of the date of this report, no reasonable estimate
exists as to the amount of Senior Notes which Reunion Industries may be
required to purchase, if any, on the June 1, 1999 offer date. However, there
can be no assurances that a Realization Event or Event of Default will not
occur. See notes 5 and 9.
Defaults Under Indenture
In May of 1998, Chatwins Group executed a joint venture agreement with two
other non-affiliated companies, one U.S. and one Chinese, pursuant to which
Chatwins Group contributed $100,000 for a 10% equity interest in Suzhou Grating
Co., Ltd., a Chinese manufacturing company. See note 5. This investment
constitutes a default under the Indenture.
In May of 1998, Charles E. Bradley, Sr., Chairman of the Board then the
majority shareholder of Chatwins Group (Mr. Bradley), transferred all of his
shares of Chatwins Group's common stock to the Charles E. Bradley, Sr. Family
Limited Partnership (Bradley FLP) for estate planning purposes. The Bradley FLP
has granted voting control over such shares to SPI, which in turn has granted
voting control over such shares to Mr. John G. Poole, a director of Chatwins
Group and current majority beneficial shareholder of Chatwins Group (Mr.
Poole). Because Mr. Bradley no longer has voting control over such shares of
Chatwins Group's common stock, a breach has occurred under the Securities
Pledge Agreement (as defined in the Indenture). Because the Indenture is cross-
covenanted to the Securities Pledge Agreement, such breach creates a default
under the Indenture.
The Indenture provides that neither of the aforementioned defaults will
mature into an Event of Default, as defined in the Indenture, subject to the
remedies therein provided, including acceleration of the Senior Notes, until
the Trustee under the Indenture or the holders of at least 25% or more of the
Senior Notes notify Chatwins Group of the default and the default remains
unremedied for thirty (30) days after such notice. As of the date of this
report, Chatwins Group had not received notice from either the Trustee or any
Senior Note holders. Chatwins Group does not expect that either of these two
defaults will mature into an Event of Default. In the event notice is received,
Chatwins Group currently has agreements in place that it believes would remedy
each default within the 30 day remedy period should it become necessary.
However, there can be no assurances that an Event of Default will not result
from the defaults.
F-42
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 3: INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
At December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Raw material............................................. $ 8,228 $ 7,679
Work-in-process.......................................... 6,018 5,678
Finished goods........................................... 7,374 4,501
------- -------
Gross inventories...................................... 21,620 17,858
Less: LIFO reserves...................................... (874) (894)
------- -------
Inventories............................................ $20,746 $16,964
======= =======
</TABLE>
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following (in thousands):
<TABLE>
<CAPTION>
At December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Land................................................... $ 2,091 $ 2,091
Oil and gas properties................................. 1,601 1,686
Buildings and improvements............................. 12,948 13,223
Machinery and equipment................................ 33,124 29,442
Computer systems....................................... 5,013 4,714
Furniture and fixtures................................. 1,552 1,386
Construction-in-progress............................... 2,855 1,884
-------- --------
Property, plant and equipment........................ 59,184 54,426
Less: Accumulated depreciation and depletion........... (26,813) (23,046)
-------- --------
Property, plant and equipment, net................... $ 32,371 $ 31,380
======== ========
</TABLE>
NOTE 5: INVESTMENTS
Investments are comprised of the following (in thousands):
<TABLE>
<CAPTION>
At December 31,
----------------
1998 1997
------- --------
<S> <C> <C>
Reunion common stock..................................... $ 6,224 $ 10,930
Warrants to purchase Reunion common stock................ 483 483
Investment in Suzhou..................................... 100 --
------- --------
Investments............................................ $ 6,807 $ 11,413
======= ========
</TABLE>
Reunion Industries, Inc.
On June 20, 1995, Chatwins Group acquired 1,450,000 shares, or approximately
38%, of the then issued and outstanding shares of common stock of Reunion
Industries, Inc. (Reunion Industries). Reunion Industries is primarily engaged
in the manufacture of high volume, precision plastics products, providing
engineered plastics services and compounding and molding thermoset polyester
resins. Reunion Industries also has real estate development and wine grape
agricultural operations in Napa County, California. However, Reunion Industries
recently announced its decision to exit the plastics industry and redeploy its
assets through the acquisition of manufacturing companies.
F-43
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Chatwins Group's investment in Reunion Industries is being accounted for
under the equity method of accounting. Chatwins Group's share of Reunion
Industries' operating results for 1998, 1997 and 1996 is included in the
accompanying consolidated statement of income and other comprehensive income as
equity income (loss) from operations of affiliate. As previously reported by
Reunion Industries, on April 24, 1998, a jury in state district court in Harris
County, Texas returned jury verdict findings against Reunion Industries related
to a November 1995 contract for the sale of all outstanding shares of capital
stock of Reunion Industries' wholly owned oil and gas subsidiary to Bargo. The
jury found that Bargo had a right to terminate the November 1995 stock purchase
agreement with Reunion Industries and that Reunion Industries fraudulently
induced Bargo into entering into the agreement. In July 1998, the court entered
judgement affirming the $5.0 million punitive damages jury verdict and awarded
approximately $3.0 million in attorneys' fees and costs. Reunion Industries
maintained at trial and continues to maintain that all requirements to closing
under the contract were met, and that Bargo was required to close the
transaction. Reunion Industries' management continues to maintain that no
evidence sufficient to support a jury finding of fraud or related punitive
damages was presented at trial. Reunion Industries has filed a bond which
suspends execution on the judgment while it appeals. Reunion Industries has
filed a formal notice of appeal and intends to file its appeal as soon as
possible. However, although Reunion Industries' management believes, based on
consultation with counsel, that it is more likely than not that the judgment
will be overturned on appeal, Reunion Industries recorded an accrual of $8.8
million for the amount of the judgment by a charge to its continuing operations
for the second quarter of 1998 in accordance with generally accepted accounting
principles. Chatwins Group's results of operations for the second quarter of
and year ended December 31, 1998 and the carrying value of Chatwins Group's
investment in Reunion Industries' common stock on the equity method of
accounting were adversely affected by this action. In addition, according to
Reunion Industries' financial advisor, its Bargo legal liability is a deduction
of $8.8 million to Reunion Industries' equity value. Reunion Industries has
indicated that, if the judgment is not overturned on appeal, Reunion Industries
would be obligated to seek alternative funding sources, possibly including a
sale of assets.
Certain summarized financial information related to Reunion Industries for
the years ended December 31, 1998 and 1997 is set forth below (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Current assets......................................... $ 23,202 $24,207
======== =======
Other assets........................................... $ 51,672 $47,852
======== =======
Current liabilities.................................... $ 36,119 $28,034
======== =======
Other liabilities...................................... $ 19,909 $15,568
======== =======
Shareholders' equity................................... $ 16,239 $28,317
======== =======
Net sales.............................................. $ 97,318 $93,378
======== =======
Operating income....................................... $ 1,495 $ 2,513
======== =======
Loss from continuing operations........................ $(10,440) $ (981)
======== =======
Income (loss) from discontinued operations............. $ (1,710) $ 710
======== =======
Net loss............................................... $(12,383) $ (271)
======== =======
</TABLE>
Suzhou Grating Co. Ltd.
In May 1998, Chatwins Group entered into a joint venture agreement with
Nantong Grating Composite Materials Co. Ltd. (Nantong) and American Grating,
Inc. (American Grating) to create a sino-foreign equity
F-44
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
joint venture known as Suzhou Grating Co., Ltd. (Suzhou). Nantong is an
independently owned manufacturing company organized under the laws of the PRC.
American Grating is a privately held U.S. corporation incorporated in the state
of California. Chatwins Group's 10% investment in Suzhou is accounted for under
the cost method. This investment constitutes a default under the Indenture. See
note 2.
NOTE 6: OTHER ASSETS
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
At December 31,
---------------
1998 1997
------- -------
<S> <C> <C>
Deferred financing costs (net of accumulated
amortization of $2,067 and $2,324)..................... $ 2,525 $ 2,043
Cash surrender value of life insurance policies......... 2,381 1,975
Other................................................... 3,213 2,463
------- -------
Total other assets.................................... $ 8,119 $ 6,481
======= =======
</TABLE>
NOTE 7: OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
At December 31,
---------------
1998 1997
------- -------
<S> <C> <C>
Accrued wages and benefits................................ $ 3,438 $ 4,186
Accrued pension costs (note 15)........................... 295 322
Accrued postretirement benefits (note 15)................. 1,021 971
Accrued interest.......................................... 1,306 1,089
Other..................................................... 4,226 4,844
------- -------
Total other current liabilities......................... $10,286 $11,412
======= =======
</TABLE>
NOTE 8: REVOLVING CREDIT FACILITY
On October 30, 1998, Chatwins Group and NationsBank, N.A. (NationsBank), a
national banking association, executed a financing and security agreement
(Financing Agreement) wherein NationsBank has provided Chatwins Group with a
revolving credit facility (NationsBank Facility) of up to a maximum principal
amount of $40.0 million, including a letter of credit facility of up to $5.0
million.
The NationsBank Facility includes a Special Availability Amount, as defined
in the Financing Agreement, of $6.0 million. The Special Availability Amount is
required to be reduced in $750,000 increments on each of February 1, May 1,
August 1 and November 1 in each of the years 1999 and 2000. Once reduced, the
Special Availability Amount may not be reborrowed. Availability under the
NationsBank Facility is subject to a borrowing base limitation calculated as
the aggregate of 85% of eligible accounts receivable plus the lesser of $15.0
million or the sum of 60% of finished goods and raw materials, 50% of supplies
and stores, a percentage, determined from time to time by NationsBank, of work-
in-process and the Special Availability Amount in effect at the time of the
calculation, all of the above as defined in the Financing Agreement. Interest
under the NationsBank Facility is determined by reference to various rates
including the NationsBank prime rate, the Federal Funds rate or LIBOR, each
plus an applicable margin. Chatwins Group may elect the rates upon notification
to NationsBank with applicable margins ranging from zero to 0.5% when using
either the NationsBank prime rate or the Federal Funds rate and from 2.0% to
2.75% when using LIBOR.
The NationsBank Facility is secured by a lien in favor of NationsBank on
Chatwins Group's accounts receivable, inventory and certain other property and
accounts to the extent necessary to permit foreclosure on
F-45
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the accounts receivable and inventory. The Financing Agreement expires on
October 31, 2001 and is renewable annually thereafter, subject to the approval
of NationsBank, but not beyond October 31, 2005.
Contemporaneously with the execution of the Financing Agreement on October
30, 1998, Chatwins Group borrowed a total of $28.9 million under the
NationsBank Facility, $28.1 million of which was used to repay, in total,
borrowings, interest and fees under Chatwins Group's then existing revolving
credit facility (Congress Facility) with Congress Financial Corporation
(Congress) and $0.8 million of which was placed on deposit with Congress as
cash collateral for unexpired letters of credit. Such cash collateral will be
returned to Chatwins Group upon the expirations of the related letters of
credit. Chatwins Group and Congress agreed to terminate the Congress Facility
upon execution of the Financing Agreement. On November 2, 1998, Chatwins Group
borrowed an additional $3.25 million under the NationsBank Facility to fund its
semiannual interest payment on the Senior Notes. See notes 2 and 9.
The NationsBank Facility includes various representations, warranties and
affirmative and negative covenants by Chatwins Group and provides NationsBank
with certain rights and remedies in the event of any defaults including, but
not limited to, acceleration, both in the event of default or subjectively, of
all amounts borrowed under the NationsBank Facility. Financial covenants in the
NationsBank Facility include an adjusted earnings before interest, taxes,
depreciation and amortization excluding amortization of deferred financing
costs (NationsBank EBITDA) to fixed charge coverage ratio and an indebtedness
to cash flow ratio, calculations of which are defined in the Financing
Agreement. Generally all amounts for calculation of the ratios are derived from
domestic operations and NationsBank EBITDA is adjusted for domestic capital
expenditures. Beginning on December 31, 1998, these covenants require Chatwins
Group to maintain a rolling twelve-month minimum adjusted NationsBank EBITDA to
fixed charge coverage ratio of 1.2:1 and a maximum indebtedness to cash flow
ratio of 5.0:1. At December 31, 1998 such ratios were 1.3:1 and 4.9:1,
respectively, and complied with the Financing Agreement. Chatwins Group was
also in compliance with all other representations, warranties and covenants at
December 31, 1998. Borrowings outstanding under the NationsBank Facility at
December 31, 1998 totaled $34.0 million and the weighted average rate for
borrowing was 7.5%. Borrowings under the Congress Facility bore interest at an
annual rate of the Philadelphia National Bank Prime Rate plus 1.5% which, at
the time of its termination, was 10.0%.
For 1998, the blended effective rate for combined average outstanding
borrowings of $28.2 million under both the Congress Facility and the
NationsBank Facility was 10.1%. For 1997, the effective rate for average
outstanding borrowings of $24.4 million under the Congress Facility was 10.7%.
NOTE 9: LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
At December 31,
-----------------
1998 1997
-------- -------
<S> <C> <C>
13% Senior Notes due May 1, 2003 (net of unamortized
discount of $76 and $100)(1).......................... $ 49,924 $49,900
Note payable due May 1, 2001(2)........................ 680 680
Other.................................................. 899 843
-------- -------
Total long-term debt................................. 51,503 51,423
Current maturities..................................... (25,766) (700)
-------- -------
Total long-term debt, less current maturities........ $ 25,737 $50,723
======== =======
</TABLE>
- --------
(1) In May 1993, Chatwins Group issued the Senior Notes and 50,000 warrants
(Warrants) to purchase 50,000 shares of Chatwins Group's common stock. The
Senior Notes bear interest at 13% per year. Interest is
F-46
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
payable semiannually in arrears on May 1 and November 1 of each year. The
Senior Notes mature on May 1, 2003 and are redeemable at the option of
Chatwins Group in whole or in part at any time on or after May 1, 1998.
Chatwins Group is required to redeem $12.5 million principal amount of the
Senior Notes on each of May 1, 2000, May 1, 2001 and May 1, 2002, at face
value plus accrued interest. Chatwins Group is required to offer to
purchase $25 million of the Senior Notes on each of June 1, 1999 and June
1, 2000 at face value plus accrued interest. See note 2. The maximum
potential principal amount of the June 1, 1999 purchase offer is classified
as current maturities of long term debt in Chatwins Group's consolidated
balance sheet at December 31, 1998. The Senior Notes rank senior in right
of payment to all current and future subordinated indebtedness and pari
passu in right of payment to all current and future senior indebtedness of
Chatwins Group, subject, however, to NationsBank's security interests in
certain assets of Chatwins Group under the NationsBank Facility. See note
8. The Senior Notes are secured by a pledge of approximately 43% of the
outstanding common stock of Chatwins Group. At December 31, 1998, an
aggregate of $4,140,000 of Senior Notes were held by various executive
officers and directors of Chatwins Group, which were purchased in open
market transactions.
Each Warrant entitles the holder to purchase one share of the common
stock of Chatwins Group at an exercise price of $.01 per share. The
Warrants were not exercisable except upon the occurrence of certain trigger
events as defined in the warrant agreement or, if no trigger event had
occurred prior to May 3, 1998, upon Chatwins Group's failure to consummate
a repurchase offer due to a payment blockage, both as defined in the
warrant agreement. No trigger event had occurred through May 3, 1998 and a
payment blockage existed on such date, resulting in the Warrants becoming
exercisable as of May 3, 1998. Consistent with the warrant agreement,
Chatwins Group notified holders of the Warrants of the existence of a
payment blockage and that the Warrants were exercisable. As of December 31,
1998, 46,790 Warrants had been exercised resulting in the issuance of
46,790 shares of Chatwins Group's common stock. As of the date of this
report, remaining Warrants which have not been exercised remain
exercisable. See note 12.
(2) Note payable due May 1, 2001 represents a loan agreement related to an
industrial development revenue bond issue by Orem City, Utah. Interest is
payable quarterly at 62% of the prevailing prime rate. During 1998, the
effective interest rate under this note payable was 5.2%.
Aggregate maturities of long-term debt for the next five years are as
follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------------------------
Total 1999 2000 2001 2002 2003
------- ------- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
$51,503 $25,766 $25,010 $727 $-- $--
======= ======= ======= ==== ==== ====
</TABLE>
NOTE 10: FOREIGN CURRENCIES, INTERNATIONAL SUBSIDIARIES AND MINORITY INTERESTS
Foreign Currencies
Export sales to foreign countries from Chatwins Group's U.S. locations are
denominated in U.S. dollars, Chatwins Group's reporting currency. Accordingly,
transaction loss exposures due to fluctuations in the functional currencies of
the countries to which Chatwins Group's domestic locations export, which vary
significantly from year to year, are minimal.
Sales of Klemp de Mexico and Shanghai Klemp are almost entirely within the
countries in which they are located and are denominated in each location's
functional currency; the peso in Mexico and the renminbi
F-47
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(RMB) in China. Accordingly, transaction loss exposure to Chatwins Group from
fluctuations in each location's functional currency are minimal.
International Subsidiaries and Minority Interests
At December 31, 1998, Chatwins Group had approximately $3.6 million invested
in Klemp de Mexico and approximately $1.9 million invested in Shanghai Klemp.
Chatwins Group considers its investments in these international subsidiaries to
be long-term in nature. Chatwins Group's foreign subsidiaries are self-
sustaining and operate almost exclusively within the countries they are
located. Their cash flows are devoted to and obligations paid by their own
operations. Chatwins Group does not provide day-to-day operating funds to the
foreign operations nor does Chatwins Group guarantee any foreign indebtedness.
Klemp de Mexico
Chatwins Group's Mexican grating subsidiary, Klemp de Mexico, is owned 85%
by Chatwins Group and 15% by Mr. Kimball J. Bradley, Senior Vive President and
shareholder of Chatwins Group and son of Mr. Bradley. During 1996, Klemp de
Mexico, entered into a joint venture agreement with Consolidated Fabricators,
Inc., a Massachusetts company, to form CFI-Klemp de Mexico (CFI-Klemp), a
Mexican corporation. CFI-Klemp is in the business of metal fabrications. As
Klemp de Mexico has a 50.1% interest in CFI-Klemp, CFI-Klemp is consolidated
with Klemp de Mexico for financial reporting purposes. Their joint venture
partner's 49.9% interest is included in minority interest in Chatwins Group's
consolidated balance sheet at December 31, 1998 and 1997.
Total sales related to Klemp de Mexico included in Chatwins Group's
consolidated statement of income for the years ended December 31, 1998, 1997
and 1996, were $4.7 million, $3.7 million and $3 million, respectively. Klemp
de Mexico's sales for 1998, 1997 and 1996 included $1.7 million, $1.2 million
and $0.7 million, respectively, related to CFI-Klemp. Klemp de Mexico had
losses before taxes for the years ended December 31, 1998, 1997 and 1996 of
approximately $0.2 million, $0.4 million and $0.1 million, respectively.
Included in Klemp de Mexico's 1998 and 1997 results were $6,000 and $51,000,
respectively, of losses before taxes related to CFI-Klemp. CFI-Klemp had no
income or loss for 1996. During 1998 and 1997, losses allocated to the minority
interest were $6,000 and $51,000, respectively.
Effective January 1, 1997, Mexico's economy was classified as highly
inflationary as defined in SFAS 52 due primarily to the substantial inflation
in Mexico over 1995 and 1996, which was approximately 60% and 30%,
respectively. During 1997, inflation in Mexico subsided substantially and the
peso devalued minimally; from 7.84 pesos/$1.00 at December 31, 1996 to 8.07
pesos/$1.00 at December 31, 1997. However, during 1998, even though inflation
remained relatively stable, the peso devalued almost 25% against the U.S.
dollar; from 8.07 pesos/$1.00 at December 31, 1997 to almost 10.00 pesos/$1.00
at December 31, 1998. This devaluation of the peso had a negative impact on
Chatwins Group's investment in Klemp de Mexico, resulting in translation losses
charged to earnings during 1998 of $150,000 and an increase in the cumulative
translation adjustment account in accumulated other comprehensive losses in
equity of $666,000. On a sensitivity basis, additional devaluations of the
peso, if any, of the magnitude seen during 1998 can be expected to have a
similar impact on the future financial position and operating results,
including comprehensive earnings, of Chatwins Group. At December 31, 1998, 1997
and 1996, accumulated other comprehensive losses shown as a separate component
of stockholders' equity totaled $1,354,000, $688,000 and $688,000,
respectively. Effective January 1, 1999, Mexico emerged from highly
inflationary status. As such, future fluctuations in the value of the peso
against the U.S. dollar will be recorded as adjustments to comprehensive
earnings and the cumulative translation adjustment account in equity.
F-48
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Shanghai Klemp
Chatwins Group's 65% interest in Shanghai Klemp is consolidated for
financial reporting purposes. The joint venture partners' interests are
included in minority interest in Chatwins Group's consolidated balance sheet at
December 31, 1998 and 1997. During 1998 and 1997, Shanghai Klemp had sales of
$2.4 million and $0.7 million, respectively, and losses before taxes of $95,000
and $167,000, respectively. Production began in late December 1996 and its
results were insignificant. During 1998 and 1997, losses allocated to the
minority interests were $51,000 and $90,000, respectively.
Impacts on Chatwins Group due to foreign currency rate fluctuations in China
have been insignificant. Since establishing the joint venture, the RMB has
remained stable at approximately 8.3 RMB/$1.00. However, fluctuations in the
RMB against the U.S. dollar could have a significant impact on the financial
position, operating results and comprehensive earnings of Chatwins Group,
primarily in the form of translation effects. On a sensitivity basis, a 10%
devaluation in the value of the RMB at December 31, 1998 would be estimated by
Chatwins Group to have an approximate $200,000 negative impact on the
cumulative translation adjustment in equity.
NOTE 11: REDEEMABLE PREFERRED STOCK
Chatwins Group has one class of preferred stock, which has a par value of
$.01 per share and contains redemption privileges and obligations. The Class D,
Series A and B preferred stock is held of record by KSB Acquisition Corp., the
former owner of the corporate predecessor-in-interest to the Klemp and
Steelcraft divisions of Chatwins Group, of which Messrs. Bradley and Poole are
the sole executive officers and directors. The Class D, Series C preferred
stock is held of record by Hanna Investment Corp., the former owner of the
corporate predecessor-in-interest to the Hanna division of Chatwins Group, of
which Messrs. Bradley and Poole are the sole executive officers and Mr. Poole
is the sole director. The outstanding preferred stock activity consisted of (in
thousands):
<TABLE>
<CAPTION>
Class D
--------------------------
Series A Series B Series C Total
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Balance at January 1, 1996................... $3,691 $1,411 $2,012 $7,114
Accretions................................... 225 80 151 456
------ ------ ------ ------
Balance at December 31, 1996................. 3,916 1,491 2,163 7,570
Accretions................................... 225 80 151 456
------ ------ ------ ------
Balance at December 31, 1997................. 4,141 1,571 2,314 8,026
Accretions................................... 225 80 151 456
------ ------ ------ ------
Balance at December 31, 1998................. $4,366 $1,651 $2,465 $8,482
====== ====== ====== ======
</TABLE>
The Class D preferred stock is entitled to receive preferential and
cumulative dividends at an annual rate of $100 per share. In liquidation, Class
D preferred stock is entitled to a preference in the amount of $1,000 per share
plus an amount equal to the dividends accumulated but unpaid to the date of
final payment or dissolution and is not entitled to vote, except as may be
required by law. Chatwins Group has the option to redeem any or all of the
shares of Class D preferred stock, and the holders have the option to require
Chatwins Group to redeem all (but not less than all) of the shares, unless
restricted by law or Chatwins Group's financing agreements. Both the Indenture
and the NationsBank Financing Agreement restrict Chatwins Group from preferred
stock redemptions. The redemption price is $1,000 per share plus an amount
equal to the dividends accumulated but unpaid on the date of the redemption.
F-49
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The authorized, issued and outstanding preferred stock at December 31, 1998,
1997 and 1996 consisted of 2,249 shares of Class D, Series A; 800 shares of
Class D, Series B; and 1,510 shares of Class D, Series C.
Chatwins Group is not permitted to reissue any shares of its preferred stock
that have been redeemed, and all such shares redeemed shall cease to be a part
of the authorized shares of Chatwins Group. Additionally, the covenants in the
Indenture place restrictions on dividend payments and redemptions of shares.
Such payments and redemptions are limited to approximately 50% of net income,
as defined, from the issuance date of the Senior Notes, provided that Chatwins
Group meets an interest coverage ratio (as defined) of at least 2 to 1 for the
four full fiscal quarters immediately preceding any proposed payments prior to
May 1, 1996, a ratio of 2.25 to 1 for proposed payments from May 1, 1996, to
May 1, 1999, and a ratio of 2.5 to 1 for proposed payments thereafter. Chatwins
Group's interest coverage ratio for 1998 was 1.84 to 1.
Redeemable preferred stocks are being accreted by a charge against retained
earnings for the accumulated but unpaid dividends on such stock. At December
31, 1998 and 1997, dividends in arrears were $3,923,000 and $3,467,000,
respectively.
NOTE 12: STOCKHOLDERS' EQUITY
In September 1993, 38,412 shares of common stock were acquired by Chatwins
Group from two stockholders for $500,000. In February 1994, Chatwins Group
acquired 2,697 shares of its common stock from one stockholder of Chatwins
Group for $.01 per share. Such reacquired stock is being held as treasury
stock.
The majority of Chatwins Group's stock is beneficially owned by the two
principals of Stanwich Partners, Inc. (SPI), a company engaged in consulting
services within the field of financial planning and reporting. Such principals
have pledged approximately 43% of the total outstanding shares of Chatwins
Group to the Senior Notes collateral agent for the benefit of the holders of
the Senior Notes.
F-50
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following represents all activity in stockholders' equity for the 3-year
period ended December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Par value of common stock, January 1 and
December 31.................................... $ 3 $ 3 $ 3
======= ======= =======
Treasury stock, January 1 and December 31....... $ (500) $ (500) $ (500)
======= ======= =======
Capital in excess of par value, January 1....... $ 1,664 $ 1,664 $ 1,664
Warrant exercises (note 9)...................... 196 -- --
------- ------- -------
Capital in excess of par value, December 31... $ 1,860 $ 1,664 $ 1,664
======= ======= =======
Stockholder notes receivable, January 1 and
December 31.................................... $(1,001) $(1,001) $(1,001)
======= ======= =======
Accumulated deficit, January 1.................. $(7,029) $(8,832) $(7,937)
Net income (loss)............................... (1,471) 2,259 (439)
Preferred stock accretions (note 11)............ (456) (456) (456)
------- ------- -------
Accumulated deficit, December 31.............. $(8,956) $(7,029) $(8,832)
======= ======= =======
Accumulated other comprehensive loss, January
1.............................................. $ (688) $ (688) $ (419)
Foreign currency translation adjustment (note
10)............................................ (666) -- (269)
------- ------- -------
Accumulated other comprehensive loss, December
31........................................... $(1,354) $ (688) $ (688)
======= ======= =======
Total stockholders' equity, January 1........... $(7,551) $(9,354) $(8,190)
Warrant exercises............................... 196 -- --
Net income (loss)............................... (1,471) 2,259 (439)
Preferred stock accretions...................... (456) (456) (456)
Foreign currency translation adjustment......... (666) -- (269)
------- ------- -------
Total stockholders' equity, December 31....... $(9,948) $(7,551) $(9,354)
======= ======= =======
</TABLE>
F-51
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13: EARNINGS PER COMMON SHARE
The computations of basic and diluted earnings per common share (EPS) for
the years ended December 31, 1998, 1997 and 1996 are as follows (in thousands,
except share and per share amounts):
<TABLE>
<CAPTION>
Income Shares EPS
------- ------- ------
<S> <C> <C> <C>
Year ended December 31, 1998:
Net loss.......................................... $(1,471)
Less: Preferred stock dividend accretions......... (456)
-------
Income available to common stockholders, shares
outstanding and basic EPS........................ (1,927) 265,088 $(7.27)
======
Dilutive effect of Warrants....................... 27,799
------- -------
Income available to common stockholders, shares
outstanding and diluted EPS...................... $(1,927) 292,887 $(6.58)
======= ======= ======
Year ended December 31, 1997:
Net income........................................ $ 2,259
Less: Preferred stock dividend accretions......... (456)
-------
Income available to common stockholders, shares
outstanding and basic EPS........................ 1,803 242,887 $ 7.42
======
Dilutive effect of Warrants....................... 50,000
------- -------
Income available to common stockholders, shares
outstanding and diluted EPS...................... $ 1,803 292,887 $ 6.16
======= ======= ======
Year ended December 31, 1996:
Net loss.......................................... $ (439)
Less: Preferred stock dividend accretions......... (456)
-------
Income available to common stockholders, shares
outstanding and basic and diluted EPS............ $ (895) 242,887 $(3.68)
======= ======= ======
</TABLE>
For 1996, assumed exercise of the Warrants has an anti-dilutive effect on
per-share income from continuing operations. Therefore, basic and diluted EPS
are the same for 1996. For a discussion of the Warrants and preferred stock
dividend accretions, see notes 9 and 12, respectively.
NOTE 14: OTHER RELATED-PARTY TRANSACTIONS
SPI Consulting Agreement
Chatwins Group has maintained various consulting agreements with SPI under
which $300,000 was recorded as expense during each of the years ended December
31, 1998, 1997 and 1996, respectively. Messrs. Bradley and Poole are the
principals of SPI. The consulting agreement was to expire on March 31, 1998,
but has been extended for an additional five-year period to expire on March 31,
2003 unless terminated by SPI with 30 days' notice. Under the consulting
agreement, Chatwins Group retains SPI to render consulting services in the
field of financial planning and reporting. Annual payments are permitted on
this agreement as long as Chatwins Group meets an interest coverage ratio of at
least 1.5 to 1 for the prior 4 full fiscal quarters. All amounts owed to SPI
from Chatwins Group have been paid in full at December 31, 1998 and 1997.
F-52
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
King-Way Service Agreement
On November 3, 1997, Stanwich Acquisition Corporation (SAC) acquired King-
Way Material Handling (King-Way) from the Kingston-Warren Corporation for a
purchase price of $18.1 million. SAC is a privately-held company whose common
stock is owned 42.5% by Mr. Bradley, 42.5% by Mr. K.J. Bradley and 15% by Mr.
Evans. Similar to Auto-Lok, King-Way is in the business of producing industrial
and commercial storage racks and materials handling systems.
SAC and Auto-Lok entered into a service agreement pursuant to which King-Way
would utilize Auto-Lok's surplus capacity in exchange for fees approximately
equal to Auto-Lok's costs of providing the surplus capacity plus a right of
first negotiation to acquire King-Way from SAC. This right of first negotiation
has since expired. The integration of King-Way's business into Auto-Lok's
facility took place primarily during the second quarter of 1998. Through
December 31, 1998, costs totaling $1,298,631 had been charged to King-Way under
this agreement. At December 31, 1998, Chatwins Group had receivables totaling
$780,000 from King-Way.
NAPTech Services Agreement
On August 25, 1998, NPSAC acquired NAPTech from the Shaw Group for a
purchase price of $8.4 million. NPSAC is wholly owned by Mr. Bradley. Like
Chatwins Group's CPI division, NAPTech manufactures steel seamless pressure
vessels.
In August 1998, the CPI division of Chatwins Group and NPS Acquisition Corp.
(NPSAC), doing business as NAPTech Pressure Systems (NAPTech), entered into a
services agreement pursuant to which CPI would provide certain administrative
services to NAPTech for cash fees which approximate $29,000 per month. The
NAPTech services agreement is for one year and may be renewed annually upon
agreement by both Chatwins Group and NAPTech. On August 25, 1998 Chatwins Group
purchased from NAPTech $1.0 million of inventory usable by its CPI division in
its normal course of business. At December 31, 1998, Chatwins Group had
receivables totaling $148,000 from NAPTech.
CPS Leasing
During 1997 and 1998, Chatwins Group entered into thirteen operating lease
agreements with CPS Leasing, Inc. (CPSL), a company owned 80% by Consumer
Portfolio Services and 20% by Charles E. Bradley Jr., President of Consumer
Portfolio Services, a director of Chatwins Group and son of Charles E. Bradley
Sr., Chairman of the Board, Director and a beneficial shareholder of Chatwins
Group. During 1997 and 1998, Chatwins Group made lease payments totaling
$39,112 and $209,989, respectively, to CPSL.
CGI Investment Corp.
In April 1990, Chatwins Group acquired a 49% interest in CGI Investment
Corp. (CGII), a company controlled by SPI. The principals of SPI are also the
majority beneficial owners of Chatwins Group. Since April 1990, Chatwins Group
has made loans to CGII of $1.5 million, $1.35 million and $299,000. None of the
principal or accrued interest thereon has been repaid under these obligations.
Over time, Chatwins Group had provided reserves for a substantial portion of
the principal on its notes receivable from CGII and at December 31, 1997, the
net carrying value of Chatwins Group's investment in CGII common stock and net
notes receivable was $0.6 million.
CGII's primary assets were two notes receivable from affiliates of Chatwins
Group, and a minimal amount of cash, the sum of which totaled $0.7 million at
December 31, 1997. During 1998, Chatwins Group and CGII agreed that CGII's
liabilities significantly exceeded its assets and it would not be able to repay
its obligations to Chatwins Group. As a result, Chatwins Group agreed to
exchange its notes receivable from CGII for one of CGII's notes receivable from
affiliate which, plus accrued interest, totaled $0.5 million. The difference
was provided for currently.
F-53
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Robinson Incorporated
During 1998, Chatwins Group's Europa division sold its interest in a West
Virginia well to and collected other fees from Robinson Incorporated (Robinson)
for a total of $100,000 in cash. Robinson is an oil and gas company operating
in Oklahoma and is controlled by several members of Chatwins Group's executive
management and board of directors.
NOTE 15: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Pension Plans
Chatwins Group has various retirement plans that cover substantially all of
its employees. Included in these plans is one noncontributory, defined benefit
plan, benefits under which are based solely on continuous years of service and
are not affected by changes in compensation rates.
Chatwins Group's funding policy provides that payments to the pension trusts
be at least equal to the minimum funding requirements of the Employee
Retirement Income Security Act of 1974. Assets of the plan are invested
principally in fixed income and equity securities. Chatwins Group participates
in a separate multiemployer defined benefit pension plan covering certain
employees at one division and has defined contribution plans covering most of
its other employees. Chatwins Group's policy with respect to these plans is to
fund the amounts accrued.
Other Postretirement Plans
Chatwins Group maintains various postretirement healthcare and life
insurance benefit plans for certain active and retired employees. Covered
active and retired employees include those of one operating division of
Chatwins Group and, pursuant to a November 1997 plan amendment which became
effective January 1, 1998, employees of Chatwins Group's Corporate Executive
Payroll (as defined in the plan document).
Eligible active and retired employees of the one operating division for
which postretirement benefits are provided include both union and nonunion
employees. Healthcare benefits for both union and nonunion retirees are
provided for the most part through comprehensive major medical and other health
benefit provisions subject to various retiree cost-sharing features. The
majority of employees eligible for healthcare benefits upon retirement are
former employees of USX Corporation (USX). A significant portion of
postretirement healthcare earned by such employees prior to 1987 is the
responsibility of USX. Life insurance benefits provided to eligible union
retirees are based on fixed amounts negotiated in labor agreements. Life
insurance benefits provided to eligible nonunion retirees are based on the
employee's annual base salary at retirement subject to a maximum benefit.
Postretirement healthcare benefits for eligible active and retired (none as
of December 31, 1998) employees of Chatwins Group's Corporate Executive Payroll
are paid for by Chatwins Group and subject to various retiree cost-sharing
features. Postretirement healthcare benefits for Corporate Executive Payroll
employees terminate when the retiree becomes Medicare eligible. Postretirement
life insurance benefits for eligible active and retired (none as of December
31, 1998) employees of Chatwins Group's Corporate Payroll are paid for by
Chatwins Group and are based on the employee's annual base salary at
retirement. Except for certain life insurance benefits paid from reserves held
by insurance carriers, benefits have not been funded. Contributions to the
plans by Chatwins Group equal benefits paid.
The Financial Accounting Standards Board issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" in February 1998.
The new standard does not change the measurement or recognition of costs for
pension or other postretirement plans but, rather, standardizes
F-54
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
disclosures and eliminates those that are no longer useful. The following table
sets forth the changes in the benefit obligations and plan assets for the years
ended December 31, 1998 and 1997 and the funded status at December 31, 1998 and
1997 of Chatwins Group's pension and other postretirement benefit plans (in
thousands):
<TABLE>
<CAPTION>
Pension Other Postretirement
-------------- ----------------------
1998 1997 1998 1997
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation, beginning...... $2,002 $1,800 $ 919 $ 1,345
Service cost....................... 108 96 28 45
Interest cost...................... 128 120 65 105
Plan amendment..................... -- -- -- (54)
Actuarial loss (gain).............. 14 96 (29) (480)
Benefits paid...................... (118) (110) (39) (42)
------ ------ ---------- ----------
Benefit obligation, ending....... $2,134 $2,002 $ 944 $ 919
====== ====== ========== ==========
Change in plan assets:
Fair value, beginning.............. $1,365 $1,104 $ -- $ --
Actual return...................... 80 221 -- --
Company contribution............... 165 150 39 42
Benefits paid...................... (118) (110) (39) (42)
------ ------ ---------- ----------
Fair value, ending............... $1,492 $1,365 $ -- $ --
====== ====== ========== ==========
Funded status:
Net obligation, ending............. $ 642 $ 637 $ 944 $ 919
Unrecognized costs:
Prior service costs................ (69) (76) 8 --
Net (loss) gain.................... (229) (178) 705 738
Transition obligation.............. (49) (61) (636) (686)
------ ------ ---------- ----------
Accrued benefit cost............. $ 295 $ 322 $ 1,021 $ 971
====== ====== ========== ==========
</TABLE>
F-55
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net periodic pension and other postretirement benefits costs for the
following years ended December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
Pension Other Postretirement
---------------------- -------------------------
1998 1997 1996 1998 1997 1996
------ ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
Benefits earned during
year................... $ 108 $ 96 $ 93 $ 28 $ 45 $ 54
Interest cost........... 128 120 107 65 105 90
Amortization of:
Prior service cost.... 8 7 2 -- -- --
Unrecognized net loss
(gain)............... -- 3 7 (52) (10) (10)
Unrecognized net
obligation........... 12 12 12 50 49 53
Expected return on
plan assets.......... (118) (93) (79) -- -- --
------ ------ ------ ------ ------- -------
Defined benefit pension
and total other
postretirement benefits
costs.................. 138 145 142 $ 91 $ 189 $ 187
====== ======= =======
Defined contribution
plan cost.............. 1,039 1,038 1,104
Multiemployer plan
cost................... 43 19 17
------ ------ ------
Net periodic pension
costs................ $1,220 $1,202 $1,263
====== ====== ======
</TABLE>
Assumptions used to develop the pension cost and projected benefit
obligation for the defined benefit pension plan for the following years ended
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate (net periodic pension costs)................. 6.75% 7.0% 7.0%
==== ==== ===
Discount rate (projected benefit obligations).............. 6.75% 6.75% 7.0%
==== ==== ===
Expected rate of return on plan assets..................... 8.25% 8.0% 8.0%
==== ==== ===
</TABLE>
For the calculation of the net periodic pension costs to be recorded in
1999, the expected rate of return on plan assets was held at 8.25%.
Assumptions used to develop the net periodic postretirement benefit costs
and accumulated postretirement benefit obligations for the following years
ended December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate (postretirement benefit cost)............... 6.75% 8.0% 8.0%
==== === ===
Discount rate (postretirement benefit obligation)......... 6.75% 7.5% 8.0%
==== === ===
Healthcare cost trend rate (postretirement benefit cost).. 3.0% 8.0% 8.0%
==== === ===
Healthcare cost trend rate (postretirement benefit
obligation).............................................. 3.0% 3.0% 8.0%
==== === ===
Rate of compensation increase............................. 2.0% 2.0% 2.0%
==== === ===
</TABLE>
USX administers the postretirement healthcare plans for the eligible
employees of the operating division of Chatwins Group previously owned by USX
and bills Chatwins Group for its share of the postretirement costs related to
Chatwins Group's retirees covered by the plans. During 1997, Chatwins Group's
actuary reviewed
F-56
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
several years of rates charged to Chatwins Group by USX for retiree medical
coverage and, as a result, elected to reduce the applicable healthcare cost
trend rate for all years subsequent to 1997 to 3%. This reduction in healthcare
cost trend rate resulted in a reduction in Chatwins Group's accumulated
postretirement benefit obligation and an increase in the unrecognized net gain
from December 31, 1996 to December 31, 1997 and a reduction in the net periodic
postretirement benefit cost for 1998. A one percentage point increase in the
assumed healthcare cost trend rate would increase the benefit obligation at
December 31, 1998 by approximately $104,000, increase projected 1999 net
periodic cost by approximately $26,000 and increase the total of the service
and interest cost components by approximately $14,000. Conversely, a one
percentage point decrease in the assumed healthcare cost trend rate would
result in approximate decreases in each by $86,000, $21,000 and $11,000,
respectively.
NOTE 16: LEASES
Minimum rental commitments under all noncancellable operating leases in
effect at December 31, 1998, were as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------------
Total 1999 2000 2001 2002 2003 After 2003
------- ------ ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
$13,073 $2,613 $2,280 $1,964 $1,281 $1,070 $3,865
======= ====== ====== ====== ====== ====== ======
</TABLE>
Operating lease rental expense for the years ended December 31, 1998, 1997
and 1996, amounted to $2,685,000, $2,290,000 and $1,407,000, respectively.
NOTE 17: INCOME TAXES
The tax provision comprises the following amounts (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997 1996
--------- ------- -------
<S> <C> <C> <C>
Current:
Federal....................................... $ -- $ 91 $ 16
State and local............................... -- 48 9
--------- ------- -------
Total....................................... -- 139 25
--------- ------- -------
Deferred:
Federal....................................... 1,083 712 (17)
--------- ------- -------
Total....................................... 1,083 712 (17)
--------- ------- -------
Total tax provision......................... $ 1,083 $ 851 $ 8
========= ======= =======
</TABLE>
F-57
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Chatwins Group's effective income tax rate, reflected in the accompanying
consolidated statement of income, differs from the statutory rate due to the
following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Computed amount at statutory rate (34%)........ $ 924 $ 1,078 $ 9
Net change in valuation allowance.............. -- (360) --
State and local income taxes................... -- 48 9
Goodwill....................................... 49 25 51
Foreign sales corporation dividends............ (20) (59) (52)
Other--net..................................... 130 119 (9)
-------- -------- ------
Total tax provision.......................... $ 1,083 $ 851 $ 8
======== ======== ======
</TABLE>
Components of consolidated income taxes consist of the following (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997 1996
--------- ------- -------
<S> <C> <C> <C>
Income from continuing operations........... $ 1,083 $ 851 $ 8
Equity loss from continuing operations of
affiliate.................................. (1,379) (149) (366)
Equity income (loss) from discontinued
operations of affiliate.................... (221) 108 63
--------- ------- -------
Total consolidated tax provision
(benefit)................................ $ (517) $ 810 $ (295)
========= ======= =======
</TABLE>
Temporary differences and carryforwards that gave rise to significant
portions of deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
At December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Depreciation............................................ $(3,210) $(3,503)
Inventory basis differences............................. (1,285) (389)
Other................................................... (1,217) (1,131)
------- -------
Deferred tax liabilities.............................. (5,712) (5,023)
------- -------
Loss carryforwards (NOLs)............................... 4,589 1,262
Book reserves........................................... 2,070 3,835
Deferred compensation................................... 196 408
Tax credit carryforwards................................ 759 720
Unicap adjustments...................................... 235 240
Other................................................... 316 494
------- -------
Deferred tax assets..................................... 8,165 6,959
Less: Valuation allowance............................... (640) (640)
------- -------
Deferred tax assets, net................................ 7,525 6,319
------- -------
Deferred taxes, net asset............................... $ 1,813 $ 1,296
======= =======
</TABLE>
SFAS 109 requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Chatwins Group periodically reviews
F-58
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the adequacy of the valuation allowance as a result of changes in its
profitability and other factors. Based on its 1997 review, Chatwins Group
reduced the valuation allowance by $360,000 in 1997. Based on rates in effect
at December 31, 1998 and after consideration of the valuation allowance,
approximately $4.5 million of future taxable income is required prior to
expiration of Chatwins Group's NOL and credit carryforwards for full
realization of net deferred tax assets. Chatwins Group believes that its future
taxable income will be sufficient for full realization of the deferred tax
assets.
At December 31, 1998, Chatwins Group had net operating loss carryforwards
for tax return reporting purposes of approximately $5.8 million, of which $1.4
million expires in 2008, $1.2 million expires in 2011 and $3.2 million expires
in 2018. The availability of these carryforwards may be subject to limitations
imposed by the Internal Revenue Code.
The current and noncurrent classifications of the deferred tax balances are
as follows (in thousands):
<TABLE>
<CAPTION>
At December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Current:
Deferred tax assets.................................... $ 2,966 $ 4,754
Deferred tax liabilities............................... (1,285) (400)
Less: Valuation allowance.............................. (232) (460)
------- -------
Current deferred taxes, net asset.................... 1,449 3,894
------- -------
Noncurrent:
Deferred tax assets.................................... 5,199 2,205
Deferred tax liabilities............................... (4,427) (4,623)
Less: Valuation allowance.............................. (408) (180)
------- -------
Noncurrent deferred taxes, net asset (liability)......... 364 (2,598)
------- -------
Deferred taxes, net asset................................ $ 1,813 $ 1,296
======= =======
</TABLE>
At December 31, 1998, the consolidated balance sheet included deferred tax
assets of $1.4 million and $0.4 million in other current assets and other
assets, respectively. At December 31, 1997, the consolidated balance sheet
included deferred tax assets of $3.9 million in other current assets and
deferred tax liabilities of $2.6 million in other liabilities.
A U.S. federal corporate income tax return examination has been completed
for Chatwins Group's 1995 tax year. Chatwins Group believes adequate provisions
for income taxes have been recorded for all years.
NOTE 18: COMMITMENTS AND CONTINGENT LIABILITIES
In June 1993, the U.S. Customs Service (Customs) made a demand on Chatwins
Group's Industrial rubber distribution division for $612,948.30 in marking
duties pursuant to 19 U.S.C. Sec. 1592. The duties are claimed on importations
of "unmarked" hose products from 1982 to 1986. Following Chatwins Group's
initial response raising various arguments in defense, including expired
statute of limitations, Customs responded in January 1997 by reducing its
demand to $370,968.00 and reiterating that demand in October 1997. Chatwins
Group restated its position and continues to decline payment of the claim.
Should the claim not be resolved, Customs threatens suit in the International
Courts of Claims. Chatwins Group continues to believe, based on consultation
with counsel, that there are facts which raise a number of procedural and
substantive defenses to this claim, which will be vigorously defended. There is
no applicable insurance coverage.
F-59
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Chatwins Group is involved in various litigation matters in the ordinary
course of business. In the opinion of management, settlement of these and other
contingent matters will not have any material effect on Chatwins Group's
financial position, results of operations or liquidity. Chatwins Group does not
have any adverse commitments at December 31, 1998.
NOTE 19: SEGMENT DISCLOSURES AND RELATED INFORMATION
Chatwins Group considers its separately identifiable divisions to be its
reportable segments pursuant to the management approach. The following
represents a description of each division.
Alliance--Alliance, located in Alliance, Ohio, designs, engineers and
manufactures cranes used in a wide range of steel and aluminum mill
applications and large special purpose cranes used in marine and aerospace
applications and heavy industrial plants. Alliance also manufactures lighter
duty cranes for various industrial applications, coke oven machinery and other
large steel-related fabrications. In recent years, Alliance has expanded and
diversified its engineering and manufacturing capabilities to offer a variety
of equipment and related engineering, fabrication, maintenance and repair
services.
Auto-Lok--Auto-Lok, located in Atlanta, Georgia, manufactures high quality
roll formed and structural steel fabricated storage racks for industrial and
commercial handling systems and general storage applications. In addition,
Auto-Lok participates on larger contracts in the sale of total material
handling systems through purchasing and reselling related components such as
decking and carton flow devices, and subcontracting of rack erection.
CPI--CPI, located in McKeesport, Pennsylvania, specializes in manufacturing
large, seamless pressure vessels for the above ground storage and
transportation of highly pressurized gases such as natural gas, hydrogen,
nitrogen, oxygen and helium. These pressure vessels are provided to customers
such as industrial gas producers and suppliers, the alternative fueled vehicle
compressed natural gas fuel industry, chemical and petrochemical processing
facilities, shipbuilders, NASA, public utilities and gas transportation
companies.
Hanna--Hanna, with locations in Chicago, Illinois and Milwaukee, Wisconsin,
designs and manufactures a broad line of hydraulic and pneumatic cylinders,
actuators, accumulators and manifolds. These products are used in a wide
variety of industrial and mobile machinery and equipment requiring the
application of force in a controlled and repetitive process. Hanna's specialty
is custom cylinders in both small quantities packaged by its distributors with
valves, pumps and controls as complete fluid power systems and large quantities
sold directly to equipment manufacturers.
Klemp--Klemp, a multi-location division, is a highly diversified
manufacturer of metal grating products. Klemp manufactures quality steel and
aluminum bar grating products in a variety of sizes, configurations and
finishes, and also custom fabricates bar grating products for specialized
applications. Klemp products are sold for use in many industrial applications
where a combination of strength, light weight, access and a free flow of air,
heat, water or light is desired. Its products are used in water and wastewater
treatment plants, railroad tank cars, petroleum storage facilities, aircraft,
mines, roads, bridge decks and general manufacturing facilities. Klemp's
manufacturing and fabrication facilities are located in Libertyville, Illinois
(recently relocated from Chicago, Illinois), Orem, Utah, Liberty, Missouri,
Dallas, Texas, Dayton, Texas and Pittsburgh, Pennsylvania. Results of Klemp de
Mexico and Shanghai Klemp are reported as part of the Klemp operating segment.
See note 10.
F-60
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Steelcraft--Steelcraft, located in Miami, Oklahoma, manufactures and sells
cold-rolled steel leaf springs. Its principal customers are manufacturers of
trailers for boats, small utility vehicles and golf carts and makers of
recreational vehicles and agricultural trailers.
Chatwins Group manufactures its products in the United States (U.S.), Mexico
and China. Of Chatwins Group's $191.6 million of consolidated net sales for
1998, $184.5 million (96%) were sales from the production of U.S. locations,
$4.7 million (3%) were from Klemp de Mexico and $2.4 million (1%) were from
Shanghai Klemp. Products manufactured in the U.S. are primarily sold throughout
the U.S.; usually within the major geographic region of the country where the
production facility is located. However, of the $184.5 million of net sales
from domestic locations, $12.0 million were export sales to other countries
($5.3 million to the Far East; $3.5 million to Latin and South America; $1.8
million to the U.K.; and $1.4 million to Canada).
During 1998, no customer accounted for more than 10% of the net sales of
Chatwins Group. Individual divisions of Chatwins Group have had customers in
certain calendar years that have accounted for in excess of 10% of that
division's net sales. This occurs principally at CPI, Alliance, the Brooks
operation of Hanna and Auto-Lok due to the large contract nature of their
businesses, and commonly occurs for different customers from one year to the
next.
F-61
<PAGE>
CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following represents the disaggregation of financial data at and for the
years ended December 31, 1998, 1997 and 1996 (in thousands except for related
notes):
<TABLE>
<CAPTION>
Total Capital
Net Sales EBITDA(1) Assets(2) Spending
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Alliance............................. $ 41,982 $ 2,485 $ 18,111 $ 232
Auto-Lok............................. 25,794 1,775 10,645 400
CPI.................................. 28,284 6,003 20,117 1,421
Hanna................................ 34,458 5,714 17,544 214
Klemp................................ 57,003 2,627 32,439 2,731
Steelcraft........................... 3,960 644 1,651 10
Europa............................... 105 62 1,106 15
Headquarters......................... -- (2,007) 15,753 72
-------- ------- -------- ------
Totals............................. $191,586 17,303 $117,366 $5,095
======== ======== ======
Depreciation and amortization........ (5,157)
Interest expense(3).................. (9,428)
-------
Income before income taxes......... $ 2,718
=======
Year ended December 31, 1997:
Alliance............................. $ 43,791 $ 3,817 $ 14,872 $ 265
Auto-Lok............................. 26,524 899 10,054 716
CPI.................................. 28,171 5,882 17,071 1,446
Hanna................................ 33,420 4,721 15,916 229
Klemp................................ 52,501 2,952 29,545 2,350
Steelcraft........................... 4,378 889 1,705 14
Europa............................... 135 29 1,326 --
Headquarters......................... 135 (2,398) 20.780 24
-------- ------- -------- ------
Totals............................. $188,920 16,791 $111,269 $5,044
======== ======== ======
Depreciation and amortization........ (4,393)
Interest expense(3).................. (9,226)
-------
Income before income taxes......... $ 3,172
=======
Year ended December 31, 1996:
Alliance............................. $ 28,091 $ 1,546 $ 12,662 $ 326
Auto-Lok............................. 16,864 (154) 7,860 525
CPI.................................. 25,107 5,377 16,236 1,493
Hanna................................ 29,617 3,127 15,972 391
Klemp................................ 49,643 4,012 25,115 1,653
Steelcraft........................... 4,010 771 1,766 45
Europa............................... 148 94 1,433 100
Headquarters......................... -- (1,558) 20,286 171
-------- ------- -------- ------
Totals............................. $153,480 13,215 $101,330 $4,704
======== ======== ======
Depreciation and amortization........ (4,263)
Interest expense(3).................. (8,927)
-------
Income before income taxes......... $ 25
=======
</TABLE>
- --------
(1) EBITDA is presented as it is the primary measurement used by management in
assessing segment performance.
(2) Headquarters total assets at December 31, 1998, 1997 and 1996 are primarily
comprised of deferred tax assets and Chatwins Group's investment in Reunion
common stock. See note 5.
(3) Excludes amortization of debt issuance expenses of $671,000, $550,000 and
$632,000 for the years ended December 31, 1998 and 1997, respectively.
F-62
<PAGE>
Annex A
MERGER AGREEMENT
MERGER AGREEMENT, dated as of March 30, 1999, by and between Reunion
Industries, Inc., a Delaware corporation ("Reunion"), and Chatwins Group, Inc. a
Delaware corporation ("Chatwins").
W I T N E S S E T H:
WHEREAS, Reunion desires to acquire Chatwins, and Chatwins desires that
Reunion acquire Chatwins, all on the terms and conditions set forth in this
Agreement;
WHEREAS, it is the intention of the parties that the Merger (as defined
below) shall: (i) be accounted for by the "purchase method" under generally
accepted accounting principles ("GAAP"); (ii) qualify as a tax free
reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended (the "Code"), and that this Agreement shall qualify as a "plan of
reorganization" within the meaning of Section 368 of the Code; and (iii) qualify
as a tax free exchange of stock under Section 354 of the Code;
WHEREAS, the Boards of Directors of Chatwins and Reunion have approved and
adopted this Agreement and have authorized the execution hereof; and
WHEREAS, the shareholders of Chatwins and the shareholders of Reunion shall
vote for or against the adoption of this Agreement at meetings thereof to be
called as promptly as possible following the execution of this Agreement (or by
written consent).
NOW, THEREFORE, in consideration of the mutual benefits to be derived from
this Agreement and the representations, warranties, conditions and promises
hereinafter contained, the parties to this Agreement hereby agree as follows:
THE MERGER
The Merger.
At the Effective Time (as defined in Section 1.1(b)), Chatwins shall be merged
with and into Reunion (the "Merger"), in accordance with the General Corporation
Law of the State of Delaware (the "Delaware GCL"), whereupon the separate
existence of Chatwins shall cease and Reunion shall be the surviving
corporation.
As soon as practicable after satisfaction or waiver of all conditions to the
Merger, Chatwins and Reunion will file a certificate of merger (which shall be
in form and substance reasonably satisfactory to the parties hereto) with the
Secretary of State of the State of Delaware (the "Secretary of State") in
accordance with Section 251(c) of the Delaware GCL and make all other filings or
recordings required by the Delaware GCL in connection with the Merger. The
Merger shall become effective on such date as the certificate of merger is duly
filed with the Secretary of State or at such later date as is specified in the
certificate of merger (the "Effective Time").
From and after the Effective Time, Reunion shall possess all the rights,
privileges, powers and franchises and be subject to all of the restrictions,
disabilities, liabilities and duties of Chatwins as provided in the Delaware
GCL.
Conversion of Shares. By virtue of the Merger and without any action on the part
of Reunion or Chatwins:
The aggregate number of shares of the common stock of Chatwins, par value $.01
per share, issued and outstanding immediately prior to the Effective Time (the
"Chatwins Common Stock") shall be automatically converted into the right to
receive the following consideration in the manner and at the time described
below:
at the Effective Time, 8,500,000 fully paid and nonassessable shares of common
stock of Reunion, par value $.01 per share ("Reunion Common Stock"); and
A-1
<PAGE>
up to 500,000 shares of Reunion Common Stock (the "Additional Shares") to be
issued within 30 days after the filing by Reunion of its Annual Report on Form
10K for the year ending December 31, 1999 (the "Filing Date") as follows:
(x) 200,000 shares of Reunion Common Stock if EBITDA (as defined in clause (z)
below) earned by the Chatwins Divisions (as defined in clause (z) below)
during the year ending December 31, 1999 ("1999 EBITDA") is at least
$27,911,000; plus
(y) . 3 shares of Reunion Common Stock for each dollar of 1999 EBITDA in
excess of $27,911,000 up to and including $28,911,001.
(z) For purposes of this Agreement, "EBITDA" shall mean the earnings before
interest, taxes, depreciation and amortization of the Chatwins Divisions,
determined in accordance with GAAP applied on a consistent basis, without,
however, any allocations related to headquarters overhead or expense, as
audited by PriceWaterhouseCoopers, LLP, and the "Chatwins Divisions" shall
mean the operating divisions of Chatwins known as "CPI", "Klemp",
"Alliance", "Hanna", "Steelcraft" and "AutoLok", the Kingway material
handling business of Stanwich Acquisition Corp. ("SAC"), which will be
merged into Reunion and operated within the AutoLok division and the
Naptech business of NPS Acquisition Corp. ("NPS"), which will be merged
into Reunion and operated within the CPI division.
(iii) the Reunion Common Stock to be issued in accordance with this Section
1.2(a) shall be allocated among the holders of the Chatwins Common Stock
pro rata based upon their percentage ownership of the Chatwins Common
Stock at the Effective Time.
(b)(i) The aggregate number of shares of Class D, Series A Preferred Stock
of Chatwins, par value $.01 per share (the "Series A Preferred"), Class D,
Series B Preferred Stock of Chatwins, par value $.01 per share, (the "Series B
Preferred"), and Class D, Series C Preferred Stock of Chatwins, par value $.01
per share (the "Series C Preferred"), issued and outstanding immediately prior
to the Effective Time shall be automatically converted into the right to receive
preferred stock of Reunion (the "Series A Reunion Preferred") with an initial
redemption value (the "Initial Redemption Value") equal to the aggregate
redemption price of such Chatwins preferred stock on the Closing Date (as
defined in Section 1.4) determined as provided in Chatwins's Restated
Certificate of Incorporation. The Series A Reunion Preferred will be redeemable
when no shares of Series B Preferred Stock of Reunion (the "Series B Reunion
Preferred") to be issued in connection with the merger of SAC into Reunion are
outstanding at any time at the option of Reunion at a redemption value (the
"Total Redemption Value") equal to the Initial Redemption Value plus all accrued
but unpaid preferred dividends. The Series A Reunion Preferred will accrue a
cumulative dividend equal to 10% of the Initial Redemption Value per annum,
which will accrue from the Effective Time (the "Series A Preferred Dividend").
The Series A Preferred Dividend will be junior in right of payment to dividends
on the Series B Reunion Preferred, will be payable as and when the Board of
Directors of Reunion determines and will be senior in right of payment to
dividends on shares of Reunion Common Stock. The Series A Reunion Preferred
will not be voting, except as required by law, and will not have any right of
conversion into the Reunion Common Stock or any other securities of Reunion.
Upon a liquidation of Reunion, the holders of the Series A Reunion Preferred
will be entitled to be paid, out of the assets of Reunion available for payment
to the holders of Reunion's capital stock, an amount equal to the Total
Redemption Value on the date of payment. In the event of a liquidation of
Reunion no payments will be made and no assets will be distributed to the
holders of the Reunion Common Stock or any other class of capital stock of
Reunion,
A-2
<PAGE>
including the Series B Reunion Preferred, until the holders of the Series A
Reunion Preferred shall have been paid the Total Redemption Value. The Series A
Reunion Preferred will have such other preferences, privileges, restrictions and
rights as are determined by the Board of Directors of Reunion prior to the
Effective Time.
The Series A Reunion Preferred shall be allocated among the holders of the
Series A Preferred, Series B Preferred and Series C Preferred in accordance with
such holders' applicable Redemption Percentages at the Effective Time. For these
purposes, a particular holder's "Redemption Percentage" shall mean the fraction
(expressed as a percentage) obtained by dividing (y) the aggregate Initial
Redemption Value of the Series A Preferred, Series B Preferred and Series C
Preferred held by such holder immediately prior to the Effective Time by (z) the
aggregate Initial Redemption Value of the shares of Series A Preferred, Series B
Preferred and Series C Preferred issued and outstanding immediately prior to the
Effective Time.
All shares of Chatwins Common Stock, Series A Preferred, Series B Preferred and
Series C Preferred (collectively, the "Chatwins Capital Stock") shall
automatically be cancelled and retired and shall cease to exist and each holder
of a certificate representing any such Chatwins Capital Stock (a "Certificate")
shall cease to have any rights with respect thereto, except the right to receive
consideration (the "Merger Consideration") consisting of the number of shares of
Reunion Common Stock or Series A Reunion Preferred specified herein, together
with any cash in lieu of fractional shares of Reunion Common Stock to be paid
pursuant to Section 1.3(c), upon the surrender of such Certificate in accordance
with Section 1.3(a), without interest.
All shares of Chatwins Capital Stock held by Chatwins as treasury shares shall
be cancelled and retired and shall cease to exist and no shares of Reunion
Common Stock or Series A Reunion Preferred shall be issuable in respect thereof.
Chatwins agrees that the 1,450,000 shares of Reunion Common Stock and the
warrant to purchase an additional 75,000 shares of Reunion Common Stock owned by
Chatwins as of the date hereof shall be retired by Reunion, and Chatwins shall
thereupon cease to have any rights with respect thereto, including any right of
exchange in connection with the Merger.
Surrender of Certificates; Payment of Merger Consideration.
Surrender of Certificates. At or after the Closing (as defined in Section 1.4),
upon presentation by the holder thereof, duly endorsed, each Certificate shall
be cancelled and exchanged and, simultaneously with such cancellation and
exchange, (i) in respect of Chatwins Common Stock a new certificate shall be
issued representing the number of shares of Reunion Common Stock into which the
Chatwins Common Stock formerly held by such shareholder shall have been
converted in the Merger in accordance with Section 1.2 (a)(i) hereof, together
with a check payable to such shareholder representing any payment of cash in
lieu of fractional shares determined in accordance with Section 1.3(c) hereof
and (ii) in respect of Series A Preferred, Series B Preferred and Series C
Preferred, a new certificate shall be issued representing the number of shares
of Series A Reunion Preferred determined in accordance with the applicable
Redemption Percentages. Within 30 days following the Filing Date, a certificate
shall be issued representing Additional Shares, if any, into which the Chatwins
Common Stock formerly held by such shareholder shall have been converted in the
Merger in accordance with Section 1.2(a)(ii) hereof, together with a check
payable to such shareholder representing any payment of cash in lieu of
fractional shares determined in accordance with Section 1.3(c) hereof. All of
the shares of Reunion Common Stock and Series A Reunion Preferred issued in the
Merger shall be duly authorized, validly issued, fully paid and nonassessable
and, at the time of issuance, shall be free
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and clear of all liens, claims, encumbrances, security interests and rights of
redemption (together, "Liens").
No Further Ownership Rights in Chatwins Capital Stock. The Merger Consideration
issued upon the surrender for exchange of Certificates in accordance with the
terms of this Agreement (including any cash paid pursuant to Section 1.3(c))
shall be deemed to have been issued (or paid, as the case may be) in full
satisfaction of all rights pertaining to the Chatwins Capital Stock represented
thereby. From and after the Closing, the stock transfer books of Chatwins shall
be closed and there shall be no further registration of transfers on the stock
transfer books of Chatwins or Reunion of the Chatwins Capital Stock which was
outstanding immediately prior to the Effective Time. If, after the Closing,
Certificates are presented to Reunion for any reason, they shall be cancelled
and exchanged as provided in this Agreement.
No Fractional Shares. No certificate or scrip representing fractional shares of
Reunion Common Stock will be issued in the Merger upon the surrender for
exchange of Certificates, and such fractional share interests will not entitle
the owner thereof to vote or to any rights of a stockholder of Reunion. In lieu
of any such fractional shares, each holder of Chatwins Common Stock, who would
otherwise have been entitled to a fraction of a share of Reunion Common Stock in
exchange for Certificates pursuant to this Agreement shall receive from Reunion
a cash payment in lieu of such fractional share equal to the product of the
market price of Reunion Common Stock at the close of business on the Closing
Date and the fractional share interest to which such holder would otherwise be
entitled.
Closing. The closing of the transactions contemplated by this Agreement (the
"Closing") will take place at the offices of Buchanan Ingersoll Professional
Corporation, One Oxford Centre, 301 Grant Street, 20th Floor, Pittsburgh,
Pennsylvania 15219 at 10:00 a.m. on June 29, 1999, or at such other place or
time as the parties may mutually agree (the "Closing Date").
Further Assurances. At the Closing and thereafter, each party hereto will
execute such further documents and instruments and take such further actions as
may reasonably be requested by one or more of the others to consummate the
Merger, to vest Reunion with full title to all assets, properties, rights,
approvals, immunities and franchises of Chatwins and to effect the other
purposes of this Agreement.
THE SURVIVING CORPORATION
Certificate of Incorporation. The Certificate of Incorporation of Reunion in
effect at the Effective Time shall be the Certificate of Incorporation of the
surviving corporation until amended in accordance with applicable law.
By-Laws. The By-laws of Reunion in effect at the Effective Time shall be the
By-laws of the surviving corporation until amended in accordance with applicable
law.
Officers. The persons listed on Schedule 2.3 shall serve in the offices shown
opposite their names on Schedule 2.3 at the Effective Time and shall continue in
the same offices on behalf of the surviving corporation until their resignation
or removal in accordance with the By-laws.
Directors. The Directors of Reunion serving on the Reunion Board of Directors
at the Effective Time shall continue to serve as members of the Board of
Directors of the surviving corporation until their resignation or until their
successors are duly elected and qualified. In addition, at the first meeting of
the Board of Directors occurring after the Effective Time, the total number of
persons serving on the Board of Directors shall be increased by two and two
additional persons nominated by Chatwins shall be appointed by the Board of
Directors of Reunion to fill the vacancies, effective at such meeting of the
Board, thereby created.
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REPRESENTATIONS AND WARRANTIES OF CHATWINS
Chatwins hereby represents and warrants to Reunion on the date hereof and
as of the Effective Time as follows (it being understood that for purposes of
this Section 3, Chatwins shall include each of its subsidiaries):
Chatwins' Organization and Good Standing. Chatwins is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has all corporate power and authority to own, lease and operate
its properties and to carry on its business as now conducted. Chatwins is duly
qualified to do business and in good standing in each jurisdiction where the
character of property owned or leased by it or the nature of its activities
makes such qualification necessary except for those jurisdictions where the
failure to be so qualified would not, individually or in the aggregate, have a
Chatwins Material Adverse Effect. As used herein, a "Chatwins Material Adverse
Effect" means a material adverse effect on the condition (financial or
otherwise), business, assets or results of operations of Chatwins or on the
ability of Chatwins to consummate the transactions contemplated by this
Agreement.
Power and Authority; Execution and Delivery. Chatwins has all requisite
corporate power and authority to execute, deliver and perform its obligations
under this Agreement. Except for shareholder approval as required by the
Delaware GCL, the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly approved and
authorized by all requisite corporate action of Chatwins. Except for such
shareholder approval and the filing of a certificate of merger in accordance
with Section 1.1(b), no further corporate actions or approvals on the part of
Chatwins are required under applicable law for the consummation of the Merger.
This Agreement has been duly executed and delivered by Chatwins and, subject
only to the approval of its shareholders in accordance with the Delaware GCL,
constitutes the legal, valid and binding obligation of Chatwins, enforceable
against it in accordance with its terms except to the extent that enforceability
may be limited by applicable bankruptcy, insolvency, or similar laws affecting
the enforcement of creditors' rights generally and subject to general principles
of equity (regardless of whether enforcement is sought in a court of law or
equity).
Capitalization and Voting Rights.
The authorized capital of Chatwins consists entirely of the following, the
rights, privileges and preferences of which are as stated in the Certificate of
Incorporation of Chatwins:
3,000 shares of Series A Preferred, of which 2,249 shares are issued and
outstanding as of the date hereof;
800 shares of Series B Preferred, of which 800 shares are issued and outstanding
as of the date hereof;
2,500 shares of Series C Preferred, of which 1,510 shares are issued and
outstanding as of the date hereof; and
400,000 shares of Chatwins Common Stock, of which 289,677.4 shares are issued
and outstanding and 41,109 shares are held by Chatwins as treasury shares.
Except as set forth on Schedule 3.3, Chatwins has no outstanding subscriptions,
options, warrants, calls or other agreements or commitments by which Chatwins is
bound in respect of the capital stock of Chatwins, whether issued or unissued,
and no outstanding rights or securities convertible into or exchangeable for any
such capital stock, and Chatwins is not a party or subject to any agreement or
understanding, and to Chatwins's knowledge, there is no agreement or
understanding between any persons and/or entities, which affects or relates to
the voting or
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giving of written consents with respect to any security of Chatwins. All shares
of Class A, B, C and E Preferred Stock authorized to be issued by the
Certificate of Incorporation of Chatwins have been retired, and no shares
thereof or rights with respect thereto are outstanding.
Subsidiaries. Except as set forth in Schedule 3.4, Chatwins does not own or
control, directly or indirectly, any interest in any other corporation,
association or other business entity.
Valid Issuance of Preferred and Common Stock. Except as set forth on Schedule
3.5, the outstanding shares of Chatwins Capital Stock are duly and validly
authorized and issued, fully paid and nonassessable.
Reports and Financial Statements. Chatwins has previously furnished to Reunion
a true and complete copy of its Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 (the "Chatwins 10-K") substantially in the form to be
filed with the Securities and Exchange Commission ("SEC") and Current Reports on
Form 8K as filed with the SEC since December 31, 1998. Chatwins will provide
Reunion with a true and complete copy of each Quarterly Report on Form 10Q
promptly after filing such report with the SEC. As of their respective dates,
the Chatwins 10-K, Quarterly Reports on Form 10Q and Current Reports on Form 8K
referred to above did not, and will not, when filed, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements included in the Chatwins 10K have been
prepared in accordance with GAAP applied on a consistent basis (except as may be
indicated therein or in the notes thereto) and fairly present the consolidated
financial position of Chatwins and its subsidiaries as of December 31, 1998 and
the consolidated results of operations and changes in cash flow of Chatwins and
its subsidiaries for the period then ended.
Changes. Except as set forth on Schedule 3.7 or in the Chatwins 10-K, since
December 31, 1998, there has not been:
any adverse change in the assets, condition (financial or otherwise), affairs,
business, operations, properties, or liabilities of Chatwins from that reflected
in the balance sheet as at December 31, 1998, referred to in Section 3.6 above,
except for changes in the ordinary course of business which do not constitute,
either individually or in the aggregate, a Chatwins Material Adverse Effect;
any material change in the liabilities or obligations of Chatwins, contingent or
otherwise, whether due or to become due, whether by way of guaranty,
endorsement, indemnity, warranty or otherwise, except for the incurrence of
current liabilities in the ordinary course of business, none of which has had a
Chatwins Material Adverse Effect;
any damage, destruction or loss, whether or not covered by insurance, materially
and adversely affecting the properties, operations or business of Chatwins;
any waiver by Chatwins of a valuable right or of a material debt owed to it;
any loans made by Chatwins other than advances of expenses made in the ordinary
course of business;
any declaration or payment of any dividend or other distribution of the assets
of Chatwins or any direct or indirect redemption, purchase or acquisition of any
securities of Chatwins;
any incurrence of indebtedness for money borrowed or any other liabilities
individually in excess of $50,000 or, in the case of indebtedness and/or
liabilities individually less than $50,000, in excess of $100,000 in the
aggregate;
any sale, exchange or other disposition of any of Chatwins's assets, other than
in the ordinary course of business;
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to the best of Chatwins's knowledge, any other event or condition of any
character which could reasonably be expected to result in a Chatwins Material
Adverse Effect;
any increase in compensation of any of its existing officers, or the rate of pay
of its employees as a group, except as part of regular compensation increases in
the ordinary course of business;
any resignation or termination of employment of any officer or key employee of
Chatwins; or
any agreements to do or enter into any of the foregoing.
Governmental Approvals and Filings. Except as set forth in Schedule 3.8 and for
the filing of a certificate of merger in accordance with the Delaware GCL, no
approval, authorization, consent, license, clearance or order of, declaration or
notification to, or filing, registration or compliance with, any governmental or
regulatory authority, is required in order to permit Chatwins to enter into this
Agreement or to consummate the transactions contemplated herein.
Litigation. Except as set forth in the Chatwins 10-K, (i) there is no action,
suit, proceeding or investigation pending or, to Chatwins's knowledge, currently
threatened in writing against Chatwins or its property, assets or business which
might reasonably be expected to result, either individually or in the aggregate,
in a Chatwins Material Adverse Effect, including without limitation, actions
pending or threatened involving the prior employment of any of Chatwins's
employees, their use in connection with Chatwins's business of any information
or techniques allegedly proprietary to any of their former employers, or their
obligations under any agreements with prior employers; and (ii) Chatwins is not
a party or subject to the provisions of any order, writ, injunction, award,
judgment or decree of any court, arbitration panel or government agency or
instrumentality.
Patents and Trademarks. Chatwins has sufficient title and ownership of all
patents, trademarks, service marks, trade names, copyrights, trade secrets,
information, proprietary rights and processes necessary for its business as now
conducted and without any conflict with or infringement of the rights of others
which could reasonably be expected to result in a Chatwins Material Adverse
Effect. Schedule 3.10 contains a complete list of patents and patent
applications owned by Chatwins. Except as set forth in Schedule 3.10, there are
no outstanding options, licenses or agreements of any kind relating to the
foregoing, nor is Chatwins bound by or a party to any options, licenses or
agreements of any kind with respect to the patents, trademarks, service marks,
trade names, copyrights, trade secrets, licenses, information, proprietary
rights and processes owned by any other person or entity. Chatwins has not
received any communications or claims alleging that Chatwins has violated or, by
conducting its business as currently conducted, would violate any of the
patents, trademarks, service marks, trade names, copyrights, trade secrets,
licenses, information, proprietary rights and processes of any other person or
entity. Chatwins is not aware that any of its employees is obligated under any
contract (including licenses, covenants or commitments of any nature) or other
agreement, or subject to any judgment, decree or order of any court of
administrative agency, that would interfere with the use of such employee's best
efforts to promote the interests of Chatwins or that would conflict with
Chatwins's business as proposed to be conducted. Neither the execution and
delivery of this Agreement nor the carrying on of Chatwins's business by the
employees of Chatwins will, to Chatwins's knowledge, conflict with or result in
a breach of the terms, conditions or provisions of or constitute a default under
any contract, covenant or instrument under which any of such employees is now
obligated.
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No Conflict. Except as set forth on Schedule 3.11, neither the execution,
delivery and performance of this Agreement by Chatwins, nor the consummation by
Chatwins of the transactions contemplated hereby will (i) conflict with, or
result in a breach of any of the terms, conditions or provisions of the
Certificate of Incorporation or By-laws of Chatwins, (ii) conflict with, result
in a breach or violation of, give rise to a default under or result in the
acceleration of performance under any mortgage, lease, agreement, note, bond,
indenture, guarantee or any statute, regulation, ordinance, writ, injunction,
order, judgment or decree to which Chatwins may be subject, which conflict,
breach, default, violation or acceleration could reasonably be expected to have
a Chatwins Material Adverse Effect, or (iii) give rise to an imposition of any
Lien of any nature whatsoever upon any of the assets of Chatwins.
Agreements.
Except as set forth in Schedule 3.12, there are no agreements, understandings or
transactions between Chatwins and any of its officers or directors or any
affiliate thereof.
Except as set forth in Schedule 3.12, there are no agreements, understanding or
transactions to which Chatwins is a party or by which it is bound which
(i) involve obligations (contingent or otherwise) of, or payments to, Chatwins
in excess of $500,000 other than in the ordinary course of business, (ii) are
material to the conduct and operations of Chatwins's business or properties
(including, without limitation, the license of any patent, copyright, trade
secret or other proprietary rights to or from Chatwins), (iii) restrict or
adversely affect the development, manufacture or distribution of Chatwins's
products or services, (iv) involve any written employment or consulting
arrangement between Chatwins and any person, or (v) involve any material oral
employment or consulting arrangement between Chatwins and any person.
Title to Property and Assets. Except as set forth on Schedule 3.13, Chatwins
has good title to its property and assets free and clear of all Liens, except
such Liens which do not materially impair Chatwins's ownership or use of such
property or assets. With respect to the property and assets it leases, Chatwins
is in substantial compliance with such leases and, to its knowledge, holds a
valid leasehold interest free of any Liens. All of Chatwins's properties and
assets are, in all material respects, in good operating condition, subject to
normal wear and tear.
Labor Agreements and Actions; Employee Benefits. Except as set forth on
Schedule 3.14, Chatwins is not bound by or subject to (and none of its assets or
properties is bound by or subject to) any written or oral, express or implied,
contract, commitment or arrangement with any labor union, and within the last
two (2) years no labor union has requested or, to the knowledge of Chatwins, has
sought to represent any of the employees, representatives, or agents of
Chatwins; there is no strike or other labor dispute involving Chatwins pending
or, to the knowledge of Chatwins, threatened, which could reasonably be expected
to have a Chatwins Material Adverse Effect, nor is Chatwins aware of any labor
organization activity involving its employees. Except as noted in Schedule 3.14
hereto, Chatwins does not have any employee benefit plans presently in force
with respect to profit-sharing or pensions.
Tax Matters. Chatwins (i) has timely filed all tax returns that are required to
have been filed by it with all appropriate governmental agencies (and all such
returns are true and correct and fairly reflect in all material respects its
operations for tax purposes); and (ii) has timely paid all taxes owed or
assessed against it (other than taxes the validity of which are being contested
in good faith by appropriate proceedings). The assessment of any additional
taxes for periods for which returns have been filed is not expected to exceed
the reserves therefor reflected in the Chatwins's publicly-filed financial
statements and, to Chatwins's knowledge, there are no material unresolved
questions or claims concerning Chatwins's tax liability. Chatwins 1995 federal
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corporate income tax return was audited by the Internal Revenue Service and all
additional tax and interest assessed as a result of such audit has been paid and
all required state tax filings as a result thereof have been made. Except as
provided in the preceding sentence, Chatwins's federal income tax returns have
not been reviewed or audited by any taxing authority. There is no pending
dispute with any taxing authority relating to any of said returns which, if
determined adversely to Chatwins, would result in the assertion by any taxing
authority of any valid material tax deficiency.
Minute Books. The minute books of Chatwins contain a complete and accurate
record of all meetings of directors and stockholders since the date of
incorporation and all actions by written consent.
Purchase Method. To the best knowledge of Chatwins, neither Chatwins nor any of
its affiliates has taken or agreed to take any action inconsistent with
Reunion's accounting for the Merger under the "purchase method".
Disclosure. Neither this Agreement nor any document or information furnished to
Reunion by Chatwins pursuant to this Agreement contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statements of Chatwins contained herein or therein not misleading.
S-4 Registration Statement. At the time the Registration Statement (as defined
in Section 9.8) becomes effective and at the Effective Time, the Registration
Statement and the Proxy Statement/Prospectus included therein, to the extent
that material is prepared or furnished by Chatwins for inclusion therein, and
the Chatwins SEC filings incorporated by reference therein, will not contain any
statement which, at the time and in light of the circumstances under which it is
made, is false or misleading with respect to any material fact, or shall omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading, or necessary to correct any
statement which has become false or misleading with respect to the transactions
contemplated hereby and will comply in all material respects with the
requirements of the Securities Act of 1933 (the "Securities Act") and the rules
and regulations thereunder (provided that no representation or warranty is made
with respect to the information not prepared or furnished by Chatwins
specifically for use therein or not contained in Chatwins SEC filings
incorporated by reference therein).
Broker's or Finder's Fees. Except as set forth in Schedule 3.20, neither
Chatwins nor any of its affiliates has authorized any person to act as broker,
finder, banker, consultant, intermediary or in any other similar capacity which
would entitle such person to any investment banking, brokerage, finder's or
similar fee from Chatwins in connection with the transactions contemplated by
this Agreement.
Permits, Licenses, Authorizations; Compliance with Laws. Chatwins has all
licenses, franchises, certificates of occupancy, permits and other governmental
authorizations which are material and necessary to conduct its business, and
Chatwins is not in violation in any material respect of any such license,
franchise, certificate of occupancy, permit or other governmental authorization,
or any statute, law, ordinance, rule regulation, judgment, order or decree
applicable to it or any of its properties.
REPRESENTATIONS AND WARRANTIES OF REUNION
Reunion represents and warrants to Chatwins as of the date hereof and as at
the Effective Time as follows (it being understood that for purposes of this
Section 4, Reunion shall include each of its subsidiaries):
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Organization and Good Standing. Reunion is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware
and has all corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. Reunion is duly
qualified to do business and in good standing in each jurisdiction where the
character of property owned or leased by it or the nature of its activities
makes such qualification necessary, except for those jurisdictions where the
failure to be so qualified would not, individually or in the aggregate, have a
Reunion Material Adverse Effect. As used herein, the term "Reunion Material
Adverse Effect" means a material adverse effect on the condition (financial or
otherwise), business, assets or results of operations of Reunion and its
subsidiaries, taken as a whole, or on the ability of Reunion to consummate the
transactions contemplated by this Agreement.
Power and Authority; Execution and Delivery. Reunion has all requisite
corporate power and authority to execute, deliver and perform its obligations
under this Agreement. Except for shareholder approval as required by the
Delaware GCL, the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been duly approved and
authorized by all requisite corporate action of Reunion. Except for such
shareholder approval and the filing of a certificate of merger in accordance
with Section 1.1(b), no further corporate actions or approvals on the part of
Reunion are required under applicable law for the consummation of the Merger.
This Agreement has been duly executed and delivered by Reunion and, subject only
to the approval of its shareholders in accordance with the Delaware GCL,
constitutes the legal, valid and binding obligation of Reunion, enforceable
against Reunion in accordance with its terms except to the extent that
enforceability may be limited by applicable bankruptcy, insolvency, or similar
laws affecting the enforcement of creditors' rights generally and subject to
general principles of equity (regardless of whether enforcement is sought in a
court of law or equity).
Governmental Approvals and Filings. Except as set forth in Schedule 4.3, and
for the filing of a certificate of merger in accordance with the Delaware GCL,
no approval, authorization, consent, license, clearance or order of, declaration
or notification to, or filing, registration or compliance with, any governmental
or regulatory authority, is required in order to permit Reunion to enter into
this Agreement or to consummate the transactions contemplated herein.
No Conflict. Except as set forth in Schedule 4.4, neither the execution,
delivery and performance of this Agreement by Reunion, nor the consummation by
Reunion of the transactions contemplated hereby will (i) conflict with, or
result in a breach of any of the terms, conditions or provisions of the
Certificate of Incorporation or By-laws of Reunion, (ii) conflict with, result
in a breach or violation of, give rise to a default under or result in the
acceleration of performance under any mortgage, lease, agreement, note, bond,
indenture, guarantees or any statute, regulation, ordinance, writ, injunction,
order, judgment or decree to which Reunion may be subject, which conflict,
breach, default, violation or acceleration would have a Reunion Material Adverse
Effect, or (iii) give rise to an imposition of any Lien, charge, security
interest or encumbrance of any nature whatsoever upon any of the assets of
Reunion.
Merger Consideration. When issued, the shares of Reunion Common Stock and
Series A Reunion Preferred to be issued in the Merger will be duly authorized,
validly issued, fully-paid and nonassessable and free and clear of all Liens and
preemptive rights. The certificates or instruments representing such shares
will be in due and proper form.
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Reports and Financial Statements. Reunion has previously furnished to Chatwins
a true and complete copy of its Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 (the "Reunion 10-K") substantially in the form to be
filed with the SEC and Current Reports on Form 8K as filed with the SEC since
December 31, 1998. Reunion will provide Chatwins with a true and complete copy
of each Quarterly Report on Form 10Q promptly after filing such report with the
SEC. As of their respective dates, the Reunion 10-K, Quarterly Reports on Form
10Q and Current Reports on Form 8K referred to above, did not, and will not,
when filed, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited consolidated financial statements included in the
Reunion 10K have been prepared in accordance with GAAP applied on a consistent
basis (except as may be indicated therein or in the notes thereto) and fairly
present the consolidated financial position of Reunion and its subsidiaries as
of December 31, 1998 and the consolidated results of operations and changes in
cash flow of Reunion and its subsidiaries for the period then ended.
Absence of Material Adverse Change. Except as set forth on Schedule 4.7 or the
Renuion 10-K, since December 31, 1998 there has not been any Reunion Material
Adverse Effect.
Capitalization of Reunion. Reunion's authorized capital stock consists of (i)
20,000,000 shares of Reunion Common Stock of which 3,900,065 are outstanding on
the date hereof, and (ii) 10,000,000 shares of preferred stock, par value $.01
per share, none of which are outstanding on the date hereof. All of the issued
and outstanding shares of capital stock of Reunion are duly authorized and
validly issued, fully-paid and nonassessable.
Certificates of Incorporation and By-laws.
Reunion has delivered to Chatwins copies of its Certificate of Incorporation and
all amendments thereto, which copies are complete and correct. Reunion is not
in default under, or in violation of, any provisions of its Certificate of
Incorporation. Reunion's Certificate of Incorporation has not been amended
since December 31, 1998 and, except as contemplated by this Agreement or in
connection with the Acquisitions (as defined in Section 6.2(c)), no action has
been taken for the purpose of effecting any amendment thereto.
Reunion has delivered to Chatwins copies of its By-laws and all amendments
thereto, which copies are complete and correct. Reunion is not in default
under, or in violation of, any provision of its By-laws. Reunion's By-laws have
not been amended since the date of certification thereof and no action has been
taken for the purpose of effecting any amendment thereto.
Legal Proceedings. Except as set forth in the Reunion 10-K, (i) there are no
suits, actions, claims, proceedings (including, without limitation, arbitration
or administrative proceedings) or investigations pending or to the knowledge of
Reunion threatened in writing against Reunion or its property, assets or
business which could reasonably be expected, individually or in the aggregate,
to have a Reunion Material Adverse Effect; and (ii) Reunion is not a party or
subject to the provisions of any judgment, order, injunction, decree or award of
any court, arbitration panel or government agency or instrumentality.
Purchase Method. To the best knowledge of Reunion, neither Reunion nor any of
its affiliates has taken or agreed to take any action inconsistent with the
accounting treatment of the Merger under the "purchase method".
Disclosure. Neither this Agreement nor any document or information furnished to
Chatwins by Reunion pursuant to this Agreement contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statements of Reunion contained herein or therein not misleading.
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S-4 Registration Statement. At the time the Registration Statement becomes
effective and at the Effective Time, the Registration Statement and the Proxy
Statement/Prospectus included therein and the Reunion SEC filings incorporated
by reference therein, will not contain any statement which, at the time and in
light of the circumstances under which it is made, is false or misleading with
respect to any material fact, or shall omit to state any material fact required
to be stated therein or necessary in order to make the statements therein not
misleading, or necessary to correct any statement which has become false or
misleading with respect to the transactions contemplated hereby and will comply
in all material respects with the requirements of the Securities Act and the
rules and regulations thereunder (provided that no representation or warranty is
made with respect to the information prepared or furnished by Chatwins to
Reunion specifically for use therein or contained in Chatwins SEC filings
incorporated by reference therein).
Broker's or Finder's Fees. Except for Legg Mason Wood Walker, Inc. and Robert
Gray, neither Reunion nor any of its affiliates has authorized any person to act
as broker, finder, banker, consultant, intermediary or in any other similar
capacity which would entitle such person to any investment banking, brokerage,
finder's or similar fee from Reunion in connection with the transactions
contemplated by this Agreement.
Permits, Licenses, Authorizations; Compliance with Laws. Reunion has all
licenses, franchises, certificates of occupancy, permits and other governmental
authorizations which are material and necessary to conduct its business, and
Reunion is not in violation in any material respect of any such license,
franchise, certificate of occupancy, permit or other governmental authorization,
or any statute, law, ordinance, rule regulation, judgment, order or decree
applicable to it or any of its properties.
COVENANTS OF CHATWINS
Chatwins covenants and agrees that:
Regular Course of Business. Except as otherwise consented to in writing by
Reunion, prior to the Closing Chatwins will carry on its businesses only in the
ordinary course and substantially in accordance with past practices, and
Chatwins will use commercially reasonable efforts to preserve its present
business organization intact and keep available the services of its present
executive officers.
Restricted Activities and Transactions. Except as otherwise consented to in
writing by Reunion or contemplated by this Agreement or as resulting from the
consummation of the transactions contemplated by this Agreement, prior to the
Closing Chatwins will not:
amend its Certificate of Incorporation or By-laws;
except in the ordinary course of business and substantially in accordance with
past practices, (i) borrow or agree to borrow any funds or mortgage or pledge
any of its assets, tangible or intangible, (ii) voluntarily incur, assume or
become subject to, whether directly or by way of guarantee or otherwise, any
material obligation or liability (absolute or contingent), (iii) cancel or agree
to cancel any material debts or claims, or (iv) lease, sell, transfer or
encumber, agree to lease, sell, transfer or encumber, or grant or agree to grant
any preferential rights to lease or acquire, any of its assets, property or
rights;
except as set forth on the Schedules hereto, (i) grant any increase in
compensation or benefits, or (ii) make, pay or accrue any bonuses, pension,
profit sharing or similar payment to any director, officer or employee of
Chatwins other than payment of 1998 performance bonuses accrued as of December
31, 1998;
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acquire control or ownership of any other corporation, association, joint
venture, partnership, business trust or other business entity, or acquire
control or ownership of all or a substantial portion of the assets of any of the
foregoing, or merge, consolidate or otherwise combine with any other corporation
or enter into any agreement providing for any of the foregoing;
except as set forth on the Schedules hereto or in the ordinary course of
business consistent with past practice, hire any additional professional
personnel or make any change in the responsibilities or office of any officer of
Chatwins;
except as set forth on the Schedules hereto or in the ordinary course of
business consistent with past practice, enter into any material contract or
agreement or materially modify any existing material agreement;
declare, set aside, make or pay any dividend or other distribution with respect
to its capital stock, or retire or redeem any of such capital stock, or take any
action which would have an effect equivalent to any of the foregoing; or
agree or commit to do any of the foregoing.
Approval of Shareholders.
Chatwins shall through its Board of Directors duly call, give notice of, convene
and hold a meeting of its shareholders (or solicit the written consent thereof)
for the purpose of voting on (i) the adoption and approval of this Agreement and
(ii) the waiver of all rights available to such shareholders to demand appraisal
of their shares of Chatwins Common Stock under the Delaware GCL, as soon as
reasonably practicable after the date hereof.
Chatwins will provide its shareholders with, or give its shareholders access to,
all material information about the transactions contemplated by this Agreement.
The written information provided to the Chatwins shareholders will be, when so
provided, true and accurate in all material respects, and such information will
not, when so provided, contain any untrue statement of a material fact or omit
to state a material fact with respect to such written information. Copies of
all written information delivered or to be delivered to the shareholders shall
be offered for review and approval to Reunion prior to its delivery to the
Chatwins shareholders.
Consents, Approvals and Filings. Chatwins will use its best efforts to obtain
on or before the Closing all necessary approvals, authorizations, registrations,
consents, licenses, clearances or orders of governmental and regulatory
authorities referred to in Section 3.8.
Access to Books, Records and Other Information. Chatwins will afford to Reunion
and its accountants, attorneys and agents such information as Reunion may
reasonably request (including such copies of documents as Reunion may reasonably
request) and reasonable access to the books and records of Chatwins.
COVENANTS OF REUNION
Reunion covenants and agrees that:
Regular Course of Business. Except as otherwise consented to in writing by
Chatwins, prior to the Closing, Reunion will carry on its businesses only in the
ordinary course and substantially in accordance with past practices, and will
use commercially reasonable efforts to preserve its present business
organization intact and keep available the services of its present executive
officers.
Restricted Activities and Transactions. Except as otherwise consented to in
writing by Chatwins or contemplated by this Agreement or as resulting from the
consummation of the transactions contemplated by this Agreement, prior to the
Closing Reunion will not:
amend its Certificate of Incorporation or By-laws except in connection with the
Acquisitions (as defined in Section 6.2(c));
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except in the ordinary course of business and substantially in accordance with
past practices, (i) borrow or agree to borrow any funds or mortgage or pledge
any of its assets, tangible or intangible, (ii) voluntarily incur, assume or
become subject to, whether directly or by way of guarantee or otherwise, any
material obligation or liability (absolute or contingent), (iii) cancel or agree
to cancel any material debts or claims, or (iv) lease, sell, transfer or
encumber, agree to lease, sell, transfer or encumber, or grant or agree to grant
any preferential rights to lease or acquire, any of its assets, property or
rights;
acquire control or ownership of any other corporation, association, joint
venture, partnership, business trust or other business entity, or acquire
control or ownership of all or a substantial portion of the assets of any of the
foregoing, or merge, consolidate or otherwise combine with any other corporation
or enter into any agreement providing for any of the foregoing; provided that
Reunion, or one of its subsidiaries, may enter into a merger or other
acquisition agreement with each of SAC and NPS (collectively, the
"Acquisitions").
issue or sell any shares of its capital stock or other equity interests or issue
or award any options, warrants or other rights with respect to its capital stock
or other equity interests, except in connection with the Acquisitions; or
agree or commit to do any of the foregoing.
Approval of Shareholders.
Reunion shall through its Board of Directors duly call, give notice of, convene
and hold a meeting of its shareholders for the purpose of voting on the adoption
and approval of this Agreement as soon as reasonably practicable after the date
hereof.
Reunion will provide its shareholders with, or give its shareholders access to,
all material information about the transactions contemplated by this Agreement.
The written information provided to the Reunion shareholders will be, when so
provided, true and accurate in all material respects, and such information will
not, when so provided, contain any untrue statement of a material fact or omit
to state a material fact with respect to such written information.
Consents, Approvals and Filings. Reunion will use its best efforts to obtain on
or before the Closing all necessary approvals, authorizations, registrations,
consents, licenses, clearances or orders of governmental and regulatory
authorities referred to in Section 4.3.
Access to Books, Records and Other Information. Reunion will afford to Chatwins
and its accountants, attorneys and agents such information as Chatwins may
reasonably request (including such copies of documents as Chatwins may
reasonably request) and reasonable access to its books and records.
MUTUAL COVENANTS
Payment of Expenses. Except for the fees, costs and expenses charged in
connection with any refinancing of Reunion to be consummated in connection with
the Merger, which shall be paid one-half by Reunion and one-half by Chatwins,
and except as otherwise specifically provided elsewhere herein, each party to
this Agreement shall be responsible for its own costs and expenses incurred in
connection with the transactions contemplated by this Agreement, and in
particular, Reunion shall be responsible for the fees and expenses of Legg Mason
Wood Walker, Incorporated. All expenses incurred in connection with the
Registration Statement shall be borne by Reunion.
Public Announcements. Reunion and Chatwins shall to the maximum extent feasible
advise and confer with each other prior to the issuance of any reports, public
statements or releases pertaining to this Agreement or any transaction
contemplated hereby.
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Public Disclosure. None of the information supplied by Reunion and Chatwins for
inclusion or incorporation by reference in the Registration Statement (as
defined below) at the time the Registration Statement is filed with the SEC and
the time such document becomes effective under the Securities Act, will contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading.
Refinancing. Reunion and Chatwins shall, and shall cause their respective
affiliates, agents and employees to, cooperate and expend all efforts reasonably
necessary to consummate on the Closing Date the currently contemplated
refinancing of the outstanding indebtedness of Reunion and Chatwins through
lenders reasonably acceptable to Chatwins and Reunion, and any refinancing in
lieu or supplemental thereof.
No Shop. From the date hereof until the Effective Time, except in connection
with the Acquisitions, and as otherwise required to comply with applicable law,
Reunion and Chatwins shall not and shall not permit any officer, director or
other agent of Reunion or Chatwins, directly or indirectly, to take any action
to seek, initiate, negotiate or encourage or enter into or participate in any
discussions regarding, any offer from any third party to acquire any shares of
capital stock or other equity interest of such third party, or to sell to such
third party any shares of capital stock or other equity interest of Reunion or
Chatwins, to merge or consolidate with Reunion or Chatwins, or to otherwise
acquire any significant portion of the assets of Reunion or Chatwins or to
acquire any significant portion of the assets of such third party.
CONDITIONS TO OBLIGATIONS OF REUNION
The obligation of Reunion to consummate the transactions contemplated by
this Agreement shall be subject to the fulfillment, on or prior to the Closing,
of the following conditions:
Representations and Warranties True at the Closing. The representations and
warranties of Chatwins contained in this Agreement shall be true and correct in
all material respects, except to the extent such representations were made as of
a specific date other than the date hereof.
Performance of Covenants. Chatwins shall have performed in all material
respects all covenants required to be performed by it under this Agreement prior
to the Closing.
Opinion of Counsel. Chatwins shall have delivered to Reunion an opinion, dated
the Closing Date and addressed to Reunion, of Richards & O'Neil, LLP in form and
substance reasonably satisfactory to Reunion and its counsel.
Shareholder Approvals. This Agreement shall have been adopted by the requisite
vote of the shareholders of Reunion and of Chatwins under the Delaware GCL; and
holders of no more than 5% of Chatwins Common Stock shall have exercised their
rights of appraisal under the Delaware GCL, provided that the Board of Directors
of Reunion may elect to proceed with the Merger in the event that more than 5%
of holders of Chatwins Common Stock exercise such rights of appraisal.
Other Approvals and Consents. All required approvals and authorizations of
governmental and regulatory authorities, including those listed on Schedule 3.8
and Schedule 4.3, shall have been obtained.
No Governmental or Other Proceeding. No order of any court or administrative
agency of competent jurisdiction shall be in effect which restrains or prohibits
any transaction contemplated hereby or which would limit or otherwise affect in
any material respect the Merger.
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No Material Adverse Change. There shall not have been since the date hereof any
occurrence which could reasonably be expected to have a Chatwins Material
Adverse Effect.
Certificate of Chatwins. Chatwins shall have furnished Reunion with a
Certificate of Chatwins signed by its principal executive officer to the effect
that the representations and warranties of Chatwins contained in this Agreement
are true and correct in all material respects at and as of the Closing Date as
though such representations and warranties were made on such date (except as to
representations and warranties which are expressly limited to a state of facts
existing at a time prior to the Closing Date) and that Chatwins has performed or
complied in all material respects with all terms, covenants and provisions of
this Agreement required to be performed or complied with by it prior to or at
the Closing.
Certificate of Merger. Chatwins shall have executed and delivered to Reunion
the certificate of merger to be filed with the Secretary of State in connection
with the Merger.
Fairness Opinion. Reunion's Board of Directors shall have received the opinion
of Legg Mason Wood Walker, Inc., in a form reasonably satisfactory to the Board,
that the consideration to be paid for Chatwins pursuant to this Agreement is
fair to Reunion and its stockholders, other than Chatwins, from a financial
point of view.
Refinancing; Chatwins Warrants. Reunion shall have an enforceable agreement or
agreements with one or more lenders, to consummate and/or continue one or more
credit facilities, the proceeds of which will be sufficient to redeem the
$50,000,000 principal amount Senior Notes of Chatwins due 2003 (the "Senior
Notes") and to provide adequate working capital resources to Reunion after
giving effect to the Merger, and all conditions precedent to the amendment
and/or funding of such credit facilities shall have been satisfied other than
the consummation of the Merger. Chatwins shall have issued the requisite "bring
along notice" to its warrantholders and all Chatwins warrants shall have been
exercised or terminated.
CONDITIONS TO OBLIGATIONS OF CHATWINS
The obligations of Chatwins to consummate the transactions contemplated by
this Agreement shall be subject to the fulfillment, on or prior to the Closing,
of the following conditions:
Representations and Warranties True at the Closing Date. The representations
and warranties of Reunion contained in this Agreement shall be true and correct
in all material respects, except for representations and warranties which were
made as of a specified date other than the date hereof.
Performance of Covenants. Reunion shall have performed in all material respects
all covenants required to be performed by it under this Agreement prior to the
Closing.
Opinion of Counsel. Reunion shall have delivered to Chatwins an opinion, dated
the Closing Date and addressed to Chatwins, of Buchanan Ingersoll Professional
Corporation, in form and substance reasonably satisfactory to Chatwins and its
counsel.
Shareholder Approvals. This Agreement shall have been adopted by the requisite
vote of the shareholders of Reunion and of Chatwins under the Delaware GCL and
holders of no more than 5% of Chatwins Common Stock shall have exercised their
rights of appraisal under the Delaware GCL; provided that the Board of Directors
of Chatwins may elect to proceed with the Merger in the event that more than 5%
of holders of Chatwins Common Stock exercise such rights of appraisal.
Other Approvals and Consents. All required approvals and authorizations of
governmental and regulatory authorities, including those listed on Schedule 3.8
and Schedule 4.3, shall have been obtained.
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No Governmental or Other Proceeding. No order of any court or administrative
agency of competent jurisdiction shall be in effect which restrains or prohibits
any transaction contemplated hereby or which would limit or otherwise affect in
any material respect the Merger.
Certificate of Reunion. Reunion shall have furnished Chatwins with a
Certificate of Reunion signed by its respective President or any Vice President
to the effect that, except for changes thereto agreed to in writing by Chatwins,
the representations and warranties of Reunion contained in this Agreement are
true and correct in all material respects at and as of the Closing Date as
though such representations and warranties were made on such date (except as to
representations and warranties which are expressly limited to a state of facts
existing at a time prior to the Closing) and that Reunion has performed or
complied in all material respects with all terms, covenants and provisions of
this Agreement required to be performed or complied with by it prior to or at
the Closing.
Registration. Reunion shall have filed with the SEC the Registration Statement
and the Registration Statement shall be effective in accordance with Section
8(a) of the Securities Act of 1933, as amended (the "Securities Act"). For the
purposes of this Agreement, "Registration Statement" shall mean the registration
statement on Form S-4 of Reunion covering the shares of Reunion Common Stock to
be issued to the Chatwins's shareholders upon conversion of the Chatwins Common
Stock in connection with the Merger, including a proxy statement/prospectus,
amendments and supplements to such Registration Statement, including post-
effective amendments, all exhibits and all material incorporated by reference in
such Registration Statement. Reunion shall have complied in all material
respects with all "Blue Sky" obligations applicable to the transactions
contemplated by this Agreement and by the Registration Statement.
Listing. Reunion shall have taken such actions as are necessary to cause the
shares registered by the Registration Statement to be listed on the Pacific
Exchange and the NASDAQ Small-Cap Market.
Certificate of Merger. Reunion shall have executed and delivered to Chatwins
the certificate of merger to be filed with the Secretary of State in connection
with the Merger.
No Material Adverse Change. There shall not have been since the date hereof any
occurrence which could reasonably be expected to have a Reunion Material Adverse
Effect.
Refinancing. Reunion shall have an enforceable agreement or agreements with one
or more lenders, to consummate and/or continue one or more credit facilities,
the proceeds of which will be sufficient, to redeem the Senior Notes and to
provide adequate working capital resources to Reunion after giving effect to the
Merger, and all conditions precedent to the amendment and/or funding of such
credit facilities shall have been satisfied other than the consummation of the
Merger.
Reunion Preferred. The Board of Directors of Reunion shall have approved and
Reunion shall have filed with the Secretary of the State and delivered to
Chatwins a Certificate of Designations with respect to the Series A Reunion
Preferred having the terms described in Section 1.2(b) hereof.
TERMINATION
Termination. This Agreement may be terminated (i) by the mutual consent of
Reunion and Chatwins; (ii) by Reunion or Chatwins at any time after 120 days
after the date hereof if for any reason the Merger shall not by such date have
been consummated and such failure to consummate the Merger is not caused by a
breach of this Agreement by the terminating party;
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(iii) by Reunion if there has been a misrepresentation or breach on the part of
Chatwins in the representations, warranties and covenants of Chatwins set forth
herein which, if curable, has not been cured within 10 days of notice thereof by
Reunion and which breach, if not cured, would cause a failure of the conditions
set forth in Section 8.1 or 8.2; (iv) by Chatwins if there has been a
misrepresentation or breach on the part of Reunion in the representations,
warranties and covenants of Reunion set forth herein which, if curable, has not
been cured within 10 days of notice thereof by Chatwins and which breach, if not
cured, would cause a failure of the conditions set forth in Section 9.1 or 9.2;
and (v) by Reunion or Chatwins if any court or administrative agency of
competent jurisdiction shall have issued an order which restrains or prohibits
any transaction contemplated hereby or which would limit or otherwise affect in
any material respect the Merger and such order shall have become final and
nonappealable.
Effect of Termination. If this Agreement is validly terminated by Reunion or
Chatwins pursuant to Section 10.1, this Agreement will forthwith become null and
void and there will be no liability or obligation on the part of Reunion or
Chatwins (or any of their respective subsidiaries, representatives or
affiliates), except (i) that the provisions of Sections 7.1 and 7.2 will
continue to apply following any such termination and (ii) that nothing contained
herein shall relieve any party hereto from liability for breach of its
representations, warranties, covenants or agreements contained in this
Agreement.
Termination After Shareholder Vote. At any time prior to the Effective Time
this Agreement may be terminated by the Board of Directors of Reunion or
Chatwins pursuant to Section 10.1 hereof notwithstanding the prior approval of
this Agreement and the Merger by their respective stockholders.
INDEMNIFICATION
Indemnification.
Reunion shall indemnify and hold harmless Chatwins, each of its directors and
officers, and each person or entity, if any, who controls Chatwins within the
meaning of the Securities Act against all losses, claims, damages or
liabilities, joint or several, to which Chatwins or any such director, officer
or controlling person may become subject (i) which arise out of or are caused by
any breach by Reunion of any representation or warranty of Reunion contained in
this Agreement or any related agreement, (ii) which arise out of or are caused
by any breach or other failure to perform any covenant, agreement or other
obligation of Reunion contained in this Agreement or any related agreement, or
(iii) under the Securities Act insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading; and Reunion shall
reimburse Chatwins or any such director, officer or controlling person for any
reasonable legal or other expenses in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that
Reunion shall not be required to indemnify and hold harmless or reimburse
Chatwins to the extent that any such loss, claim, damage, liability or expense
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission in any document made in reliance upon and in
conformity with written information furnished to Reunion by or on behalf of
Chatwins for use in the preparation of such documents.
Chatwins shall indemnify and hold harmless Reunion, each of its directors and
officers, and each
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person or entity, if any, who controls Reunion within the meaning of the
Securities Act, against all losses, claims, damages or liabilities to which
Reunion or any such director or officer or controlling person may become subject
(i) which arise out of or are caused by any breach by Chatwins of any
representation or warranty of Chatwins contained in this Agreement or any
related agreement, (ii) which arise out of or are caused by any breach or other
failure to perform any covenant, agreement or other obligation of Chatwins
contained in this Agreement or any related agreement, or (iii) under the
Securities Act insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case only to the extent that such
untrue statement or alleged untrue statement or omission was made in reliance
upon and in conformity with written information furnished to Reunion by or on
behalf of Chatwins; and Chatwins shall reimburse Reunion for any reasonable
legal or other expenses reasonably incurred by Reunion or any such director or
officer or controlling person in connection with investigating or defending any
such loss, claim, damage, liability or action.
Promptly after receipt by a party who is, under paragraphs (a) or (b) of this
Section 11.1 an indemnified party, of notice of the commencement of any action
with respect to which indemnification may be sought under this Section 11.1,
such indemnified party shall notify the indemnifying party. Such notice shall
be a condition precedent to any liability of the indemnifying party for
indemnification contained in this Section 11.1; provided, however, that the
rights of the indemnified party to indemnification or compensation hereunder
will only be affected by its failure to give prompt notice to the indemnifying
party of the commencement of such action if and to the extent that such failure
prejudices the indemnifying party in the defense of such action. In case any
such action is being brought against any indemnified party and it notifies an
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to assume and control the defense of the action at its expense and if
the indemnifying party gives notice to such indemnified party of its election to
assume and control the defense, the indemnifying party will not be liable to
such indemnified party for any legal expenses subsequently incurred by the
indemnified party in connection with the defense or investigation of the action,
so long as and to the extent that the indemnifying party continues to diligently
defend the indemnified party.
No action for indemnity under this Article XI may be brought or maintained by
either party after the Effective Time.
MISCELLANEOUS PROVISIONS
Notices, Etc. All notices, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been duly given, when
delivered in person, telegraphed, or when mailed by certified or registered
mail, postage prepaid, or when given by telex or facsimile transmission
(promptly confirmed in writing), as follows:
If to Chatwins:
Chatwins Group, Inc.
300 Weyman Plaza, Suite 340
Pittsburgh, Pennsylvania 15236
Telephone: 412-885-5501
Facsimile: 412-885-5512
Attention: President
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with copies to:
Richards & O'Neil, LLP
885 Third Avenue
New York, New York 10022-4873
Telephone: 212-207-1200
Facsimile: 212-750-9022
Attention: Brian D. Beglin, Esq.
If to Reunion:
Reunion Industries, Inc.
One Stamford Landing, 62 Southfield Avenue
Stamford, Connecticut 06902
Telephone: 203-324-8858
Facsimile: 203-967-3923
Attention: President
with copies to:
Buchanan Ingersoll Professional Corporation
One Oxford Centre
301 Grant Street, 20th Floor
Pittsburgh, PA 15219
Telephone: (412) 562-8800
Facsimile (412) 562-1041
Attention: Herbert B. Conner, Esq.
or such other person as the person entitled to notice shall designate in
writing, such writing to be delivered to the other parties hereto in the manner
provided in this Section 12.1.
Survival of Representations and Warranties. The representations and warranties
contained herein and in any certificate delivered pursuant hereto shall not
survive the Closing Date and the consummation of any or all of the transactions
contemplated hereby.
Entire Agreement; Amendment. This Agreement (including the various Schedules
hereto) sets forth the entire agreement and understanding of the parties in
respect of the transactions contemplated hereby and supersedes all prior
agreements, arrangements and understandings relating to the subject matter
hereof. This Agreement may be amended or modified only by a written instrument
executed by Reunion and Chatwins. The Boards of Directors of Chatwins and
Reunion may amend this Merger Agreement at any time prior to the time that this
Merger Agreement (or a certificate in lieu thereof) filed with the Secretary of
State becomes effective in accordance with Section 103 of the Delaware GCL,
provided that an amendment made subsequent to the adoption of this Merger
Agreement by the stockholders of Chatwins or Reunion may not (1) alter or change
the amount or kind of shares, securities, cash, property and/or rights to be
received in exchange for or on conversion of all or any of the shares of any
class or series thereof, (2) alter or change any term of the certificate of
incorporation of Reunion to be effected by the Merger, or (3) alter or change
any of the terms and conditions of this Merger
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Agreement if such alteration or change would adversely affect the holders of any
class or series of capital stock of Reunion or Chatwins.
Individual Provisions. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future law, and if the
rights or obligations of any party hereto under this Agreement will not be
materially and adversely affected thereby, (i) such provision will be fully
severable, (ii) this Agreement will be construed and enforced as if such
illegal, invalid and unenforceable provision had never comprised a part hereof,
(iii) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the legal, invalid or unenforceable
provision, and (iv) there will be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible.
General. This Agreement: (i) shall be governed by and construed and enforced in
accordance with the laws of the State of Delaware, without giving effect to the
choice of law principles thereof; (ii) shall inure to the benefit of the parties
hereto and their heirs, personal representatives, successors and permitted
assigns, nothing in this Agreement, expressed or implied, being intended to
confer upon any other person any rights or remedies hereunder; (iii) may not be
assigned by a party without the prior written consent of the other parties; and
(iv) may be executed in two or more counterparts, each of which shall be deemed
an original but all of which together shall constitute one and the same
instrument. The Section, Schedule and other headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
the day and year first above written.
REUNION INDUSTRIES, INC.
By: /s/ Richard L. Evans
_______________________________
Richard L. Evans
Executive Vice President
CHATWINS GROUP, INC.
By: /s/ Charles E. Bradley, Sr.
_______________________________
Charles E. Bradley, Sr.
Chairman
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Annex B
March 30, 1999
The Board of Directors
Reunion Industries, Inc.
62 Southfield Avenue
One Stamford Landing
Stamford, CT 06902
Members of the Board:
Reunion Industries, Inc. ("Reunion") and Chatwins Group, Inc. ("Chatwins")
have entered into a Merger Agreement dated as of March 30, 1999 (the
"Agreement"). The Agreement provides, among other things, for the merger of
Chatwins with and into Reunion (the "Merger"). You have requested our opinion
(the "Opinion") as to the fairness, from a financial point of view, to Reunion
and its stockholders, other than Chatwins, of the consideration to be paid for
Chatwins pursuant to the Agreement.
Pursuant to the Agreement, the shareholders of Chatwins would receive
8,500,000 newly issued shares of Reunion Common Stock plus an additional
500,000 contingent shares based on satisfaction of certain 1999 performance
goals. The 8,500,000 shares would represent approximately 69% of the
outstanding shares of Reunion. Simultaneous with the Merger, shares of Reunion
and warrants exercisable for Reunion shares currently owned by Chatwins would
be retired, resulting in the present shareholders of Chatwins owning
approximately 78% of the outstanding common stock of Reunion after the Merger.
The outstanding Preferred Stock of Chatwins would be converted into Preferred
Stock of Reunion. The net debt of Chatwins will be repaid or refinanced by
Reunion upon the Merger. The terms and conditions of the Merger are more fully
set forth in the Agreement.
Legg Mason has acted as the financial advisor to the Board of Directors of
Reunion in connection with the Board's analysis of the financial terms of the
Merger and in connection with the Board's analyses of certain related
transactions and has received a fee for these services. In addition, Legg Mason
will receive a separate fee for providing this Opinion and certain related
opinions.
In arriving at our Opinion set forth below, we have, among other things: (i)
reviewed the Merger Agreement; (ii) reviewed certain publicly available audited
and unaudited financial statements of Reunion and Chatwins and certain other
publicly available information of Reunion and Chatwins; (iii) reviewed certain
internal information, primarily financial in nature, concerning Reunion and
Chatwins prepared by their respective managements; (iv) discussed the past and
current operations and financial condition and prospects of Reunion with the
senior management of Reunion; (v) discussed the past and current operations and
financial condition and prospects of Chatwins with the senior management of
Chatwins; (vi) reviewed forecast financial statements of Reunion prepared and
furnished to us by the senior management of Reunion; (vii) reviewed forecast
financial statements of Chatwins prepared and furnished to us by the senior
management of Chatwins; (viii) held meetings and discussions with certain
officers and employees of Reunion and Chatwins, concerning the operations,
financial condition and future prospects of the combined company; (ix) reviewed
certain publicly available financial and stock market data relating to selected
public companies that we considered relevant to our inquiry; (x) considered the
pro forma financial effects of the Merger on Reunion; and, (xi) conducted such
other financial studies, analyses and investigations and considered such other
information as we deemed necessary or appropriate.
We are not expressing an opinion as to the price or trading range at which
shares of Reunion Common Stock may trade following the Merger.
In connection with our review, we have assumed and relied upon the accuracy
and completeness of all financial and other information supplied to us by
Reunion and Chatwins, and all publicly available information,
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and we have not independently verified such information. We also have relied
upon the managements of Reunion and Chatwins as to the reasonableness and
achievability of the financial projections (and the assumptions and bases
therein) provided to us for Reunion and Chatwins, respectively, and we have
assumed that such projections have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of management
as to the future operating performance of each respective entity, including
without limitation, the tax benefits available to the combined company as well
as to Reunion on a stand alone basis. Neither Reunion nor Chatwins publicly
discloses internal management projections of the type provided to Legg Mason
in connection with Legg Mason's review of the Merger. Such projections were
not prepared with the expectation of public disclosure. The projections were
based on numerous variables and assumptions that are inherently uncertain,
including without limitation, factors related to general economic and
competitive conditions. Accordingly, actual results could vary significantly
from those set forth in such projections.
We have not been requested to make, and we have not made, an independent
appraisal or evaluation of the assets, properties, facilities or liabilities
of either Reunion or Chatwins and, with the exception of certain appraisals
relating to the Juliana Preserve, we have not been furnished with any such
appraisals or evaluations. Estimates of values of companies and assets do not
purport to be appraisals or necessarily reflect the prices at which companies
and assets may actually be sold. Because such estimates are inherently subject
to uncertainty, Legg Mason assumes no responsibility for their accuracy.
Our Opinion is necessarily based on share prices and economic and other
conditions and circumstances as in effect on, and the information made
available to us as of March 26, 1999. In arriving at our Opinion, we were not
authorized to solicit, and did not solicit, third party indications of
interest from any party with respect to an acquisition of Reunion, its assets,
or any part thereof. We have assumed that the Merger and related transactions
described above will be consummated on the terms and conditions described in
the Agreement, without any waiver of material terms or conditions by Reunion
or Chatwins, and that obtaining any necessary regulatory approvals or
satisfying any other conditions for consummation of the Merger will not have
an adverse effect on the combined company.
It is understood that this letter is directed to Reunion's Board of
Directors and the Opinion expressed herein is provided for the use of the
Board in its evaluation of the proposed Merger. This letter does not
constitute a recommendation of the Merger over any other alternative
transaction which may be available to Reunion and does not address the
underlying business decision of the Board of Directors of Reunion to proceed
with or effect the Merger. In addition, this Opinion does not constitute a
recommendation to any stockholder of Reunion as to how such stockholder should
vote at the stockholder's meeting to be held in connection with the Merger.
This letter is not to be quoted or referred to, in whole or in part, in any
registration statement, prospectus or proxy statement, or in any other
document used in connection with the offering or sale of securities, nor shall
this letter be used for any other purposes, without the prior written consent
of Legg Mason Wood Walker, Incorporated, provided that this Opinion may be
included in its entirety in any filing made by Reunion with the Securities and
Exchange Commission with respect to the Merger and the transactions related
thereto.
Based upon and subject to the foregoing, we are of the opinion that, as of
March 26, 1999, the consideration to be paid for Chatwins pursuant to the
Agreement is fair to Reunion and its stockholders, other than Chatwins, from a
financial point of view.
Very truly yours,
LEGG MASON WOOD WALKER, INCORPORATED
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Annex C
DELAWARE CODE ANNOTATED
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER OR CONSOLIDATION
Copyright (C) 1975-1998 by The State of Delaware. All rights reserved.
Current through End of 1998 Reg. Sess.
(S) 262 Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d)
of this section with respect to such shares, who continuously holds
such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who
has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to (S) 228 of this title shall be entitled
to an appraisal by the Court of Chancery of the fair value of the
stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the
word "stockholder" means a holder of record of stock in a stock
corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by
those words and also membership or membership interest of a member of a
nonstock corporation; and the words "depository receipt" mean a receipt
or other instrument issued by a depository representing an interest in
one or more shares, or fractions thereof, solely of stock of a
corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or
consolidation to be effected pursuant to (S) 251 (other than a merger
effected pursuant to (S) 251(g) of this title), (S) 252, (S) 254,
(S) 257, (S) 258, (S) 263 or (S) 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock,
which stock, or depository receipts in respect thereof, at the
record date fixed to determine the stockholders entitled to receive
notice of and to vote at the meeting of stockholders to act upon
the agreement of merger or consolidation, were either (i) listed on
a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or (ii) held of record by
more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the
surviving corporation as provided in subsection (f) of (S) 251 of
this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class
or series of stock of a constituent corporation if the holders
thereof are required by the terms of an agreement of merger or
consolidation pursuant to (S)(S) 251, 252, 254, 257, 258, 263 and
264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts
in respect thereof) or depository receipts at the effective date
of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market
system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or held of
record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of
this paragraph; or
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d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c.
of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned
by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the
subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares
of any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or
substantially all of the assets of the corporation. If the certificate
of incorporation contains such a provision, the procedures of this
section, including those set forth in subsections (d) and (e) of this
section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at
a meeting of stockholders, the corporation, not less than 20 days
prior to the meeting, shall notify each of its stockholders who was
such on the record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsection (b) or
(c) hereof that appraisal rights are available for any or all of
the shares of the constituent corporations, and shall include in
such notice a copy of this section. Each stockholder electing to
demand the appraisal of such stockholder's shares shall deliver to
the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such stockholder's
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such
stockholder's shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder
electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date
of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted
in favor of or consented to the merger or consolidation of the date
that the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228 or
(S) 253 of this title, each consitutent corporation, either before
the effective date of the merger or consolidation or within ten
days thereafter, shall notify each of the holders of any class or
series of stock of such constitutent corporation who are entitled
to appraisal rights of the approval of the merger or consolidation
and that appraisal rights are available for any or all shares of
such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that,
if the notice is given on or after the effective date of the merger
or consolidation, such notice shall be given by the surviving or
resulting corporation to all such holders of any class or series of
stock of a constituent corporation that are entitled to appraisal
rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation.
Any stockholder entitled to appraisal rights may, within 20 days
after the date of mailing of such notice, demand in writing from
the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of such
holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such
constitutent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the
holders of any class or series of stock of such constitutent
corporation that are entitled to appraisal rights of the effective
date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a
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second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice,
such second notice need only be sent to each stockholder who is
entitled to appraisal rights and who has demanded appraisal of such
holder's shares in accordance with this subsection. An affidavit of
the secretary or assistant secretary or of the transfer agent of the
corporation that is required to give either notice that such notice
has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining
the stockholders entitled to receive either notice, each
constitutent corporation may fix, in advance, a record date that
shall be not more than 10 days prior to the date the notice is
given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall
be such effective date. If no record date is fixed and the notice is
given prior to the effective date, the record date shall be the
close of business on the day next preceding the day on which the
notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any
stockholder who has complied with subsections (a) and (d) hereof and
who is otherwise entitled to appraisal rights, may file a petition in
the Court of Chancery demanding a determination of the value of the
stock of all such stockholders. Notwithstanding the foregoing, at any
time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon
the merger or consolidation. Within 120 days after the effective date
of the merger or consolidation, any stockholder who has complied with
the requirements of subsections (a) and (d) hereof, upon written
request, shall be entitled to receive from the corporation surviving
the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger
or consolidation and with respect to which demands for appraisal have
been received and the aggregate number of holders of such shares. Such
written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is
received by the surviving or resulting corporation or within 10 days
after expiration of the period for delivery of demands for appraisal
under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified
list containing the names and addresses of all stockholders who have
demanded payment for their shares and with whom agreements as to the
value of their shares have not been reached by the surviving or
resulting corporation. If the petition shall be filed by the surviving
or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the
Court, shall give notice of the time and place fixed for the hearing of
such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a
newspaper of general circulation published in the City of Wilmington,
Delaware or such publication as the Court deems advisable. The forms of
the notices by mail and by publication shall be approved by the Court,
and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders
who have demanded an appraisal for their shares and who hold stock
represented by certificates to submit their certificates of stock to
the Register in Chancery for notation thereon of the pendency of the
appraisal proceedings; and if any stockholder fails to comply with such
direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or
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expectation of the merger or consolidation, together with a fair rate of
interest, if any, to be paid upon the amount determined to be the fair
value. In determining such fair value, the Court shall take into account
all relevant factors. In determining the fair rate of interest, the
Court may consider all relevant factors, including the rate of interest
which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by
the surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its
discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of
the stockholder entitled to an appraisal. Any stockholder whose name
appears on the list filed by the surviving or resulting corporation
pursuant to subsection (f) of this section and who has submitted such
stockholder's certificates of stock to the Register in Chancery, if such
is required, may participate fully in all proceedings until it is
finally determined that such stockholder is not entitled to appraisal
rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be
simple or compound, as the Court may direct. Payment shall be so made
to each such stockholder, in the case of holders of uncertificated
stock forthwith, and the case of holders of shares represented by
certificates upon the surrender to the corporation of the certificates
representing such stock. The Court's decree may be enforced as other
decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or of
any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a portion
of the expenses incurred by any stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable
attorney's fees and the fees and expenses of experts, to be charged pro
rata against the value of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on
the stock (except dividends or other distributions payable to
stockholders of record at a date which is prior to the effective date
of the merger or consolidation); provided, however, that if no petition
for an appraisal shall be filed within the time provided in subsection
(e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger
or consolidation, either within 60 days after the effective date of the
merger or consolidation as provided in subsection (e) of this section
or thereafter with the written approval of the corporation, then the
right of such stockholder to an appraisal shall cease. Notwithstanding
the foregoing, no appraisal proceeding in the Court of Chancery shall
be dismissed as to any stockholder without the approval of the Court,
and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had
they assented to the merger or consolidation shall have the status of
authorized and unissued shares of the surviving or resulting
corporation.
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PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Reunion Industries' Certificate of Incorporation and Bylaws provide that
present and former directors of Reunion Industries, or persons serving at the
request of the corporation, shall be indemnified and held harmless by the
corporation to the fullest extent authorized by the Delaware General
Corporation Law against all losses, liabilities, and expenses incurred in
connection with any threatened, pending, or completed action suit or proceeding
instituted against such person by virtue of his or her position as a director
of the corporation or person serving at the request of the corporation.
Generally, Delaware General Corporation Law Section 145 permits such
indemnification where the party seeking indemnification acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, or, in the case of any criminal action or
proceeding, where such person had no reasonable cause to believe his conduct
was unlawful. A similar standard of care is applicable in the case of
derivative actions except that in such cases indemnification only extends to
expenses (including attorneys' fees) incurred in connection with defense or
settlement of such an action and then, where the person is adjudged to be
liable to the corporation, only if and to the extent that the Court of Chancery
of the State of Delaware or the court in which such action was brought
determines that such person is fairly and reasonably entitled to such indemnity
and then only for such expenses as the court shall deem proper.
Section 145 further provides that where a director, officer, employee or
agent of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding he shall be indemnified against
expenses, including attorneys' fees, incurred in connection therewith.
Reunion Industries maintains insurance policies under which directors and
officers are insured, within the limits and subject to the limitations of the
policies, against expenses in connection with the defense of actions, suits or
proceedings, and certain liabilities that might be imposed as a result of such
actions, suits or proceedings, to which they are parties by reason of being or
having been directors or officers of Reunion Industries.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
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 (Registration No. 33-64325).
2.2
--Merger Agreement, dated as of March 30, 1999, between Reunion
Industries, Inc. and Chatwins Group, Inc. Incorporated by reference
from Annex A to the proxy statement/prospectus which is part of this
Registration Statement (schedules are omitted; Reunion Industries,
Inc. agrees to furnish copies of such schedules to the Commission
upon request).
2.3
--Merger Agreement, dated as of March 30, 1999, between Reunion
Industries, Inc., Stanwich Acquisition Corp. and the stockholders
named therein.
3.1
--Certificate of Incorporation of Reunion Industries, Inc.
Incorporated by reference to Exhibit 3.1 to Registration Statement on
Form S-4 (Registration No. 33-64325).
3.2
--Bylaws of Reunion Industries, Inc. Incorporated by reference to
Exhibit 3.2 to Registration Statement on Form S-4 (Registration 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).
5.1
--Opinion of Buchanan Ingersoll Professional Corporation re: validity
of shares.
8.1
--Opinion of Finn Dixon and Herling LLP re: transfer restrictions.
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8.2
--Opinion of Finn Dixon and Herling LLP re: tax consequences
10.1
--Buttes Gas & Oil Co. 1992 Nonqualified Stock Option Plan.
Incorporated by reference to Exhibit 10.35 to Reunion Industries'
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 Reunion Industries' 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 Reunion Industries' 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 Reunion Industries' 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 Reunion Industries' Annual Report on Form 10-K for the year ended
December 31, 1993.
10.6
--The 1998 Stock Option Plan of Reunion Industries, Inc. Incorporated
by reference to Exhibit 2.2 to Registration Statement on Form S-4
(No. 333-56153).
10.7
--Form of Stock Option Agreement for options issued pursuant to the
1998 Stock Option Plan of Reunion Industries, Inc. Incorporated by
reference to Exhibit 10.7 to Reunion Industries' Annual Report on
Form 10-K for the year ended December 31, 1998.
10.8
--Loan and Security Agreement dated as of October 16, 1998 among
Oneida Rostone Corp., Reunion Industries, Inc. and DPL Acquisition
Corp. and The CIT Group/Business Credit, Inc. Incorporated by
reference to Exhibit 10.1 to Reunion Industries' Current Report on
Form 8- K dated October 19, 1998.
10.9
--Amendment No. 1 to Loan and Security Agreement dated as of December
31, 1998 modifying original Loan and Security Agreement dated as of
October 16, 1998 among Oneida Rostone Corp., Reunion Industries, Inc.
and DPL Acquisition Corp. and The CIT Group/Business Credit, Inc.
Incorporated by reference to Exhibit 10.9 to Reunion Industries'
Annual Report on Form 10-K for the year ended December 31, 1998.
10.10
--Stock Purchase Agreement, dated April 2, 1996, between Tribo
Petroleum Corporation and Reunion Resources Company. Incorporated by
reference to Exhibit 2.1 to Reunion Industries' Current Report on
Form 8-K dated April 2, 1996.
10.11
--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 Reunion Industries' Current Report on
Form 8-K dated May 24, 1996.
10.12
--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
Reunion Industries' Current Report on Form 8-K dated May 24, 1996.
10.13
--Guaranty, dated May 24, 1996, made by Tribo Petroleum Corporation in
favor of Reunion Industries, Inc. Incorporated by reference to
Exhibit 2.4 to Reunion Industries' Current Report on Form 8-K dated
May 24, 1996.
10.14
--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 Reunion Industries'
Current Report on Form 8-K dated October 17, 1996.
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10.15
--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 Reunion Industries' Current Report on
Form 8-K dated October 17, 1996.
10.16
--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 Reunion Industries'
Current Report on Form 8-K dated November 18, 1996.
11.1
--Computation of Earnings Per Share. Incorporated by reference to
Exhibit 11.1 to Reunion Industries' Annual Report on Form 10-K for
the year ended December 31, 1998.
21.1
--List of Subsidiaries of Reunion Industries. Incorporated by
reference to Exhibit 21.1 to Reunion Industries' Annual Report on
Form 10-K for the years ended December 31, 1998.
23.1
--Consent of Independent Public Accountants for Reunion Industries,
Inc.--PricewaterhouseCoopers LLP.
23.2
--Consent of Independent Public Accountants for Chatwins Group, Inc.--
PricewaterhouseCoopers LLP.
23.3
--Consent of Legg Mason Wood Walker, Incorporated.
23.4
--Consent of Finn Dixon and Herling LLP (included as part of Exhibits
8.1 and 8.2).
23.5
--Consent of Buchanan Ingersoll Professional Corporation (included as
part of Exhibit 5.1).
24.1
--Power of Attorney (included on signature page of Pre-Effective
Amendment No. 1 to the Registration Statement).
99.1
--Opinion of Legg Mason Wood Walker, Incorporated. Incorporated by
reference from Annex B to the proxy statement/prospectus which is
part of this Registration Statement.
99.2
--Form of proxy card for the annual meeting of the stockholders of
Reunion Industries, Inc.
(b) Financial Statement Schedules
None required.
Item 22. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
II-3
<PAGE>
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offer.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Securities Act of 1933 and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Post-Effective Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Stamford, State of Connecticut on the 31st day of
March, 1999.
REUNION INDUSTRIES, INC.
/s/ Richard L. Evans
By: _________________________________
Richard L. Evans
Executive Vice President,
Chief Financial Officer, and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated as of this 31st day of March, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
President and Chief
______________________________________ Executive Officer
Charles E. Bradley, Sr. (principal executive
officer)
Director
______________________________________
Thomas N. Amonett
Director
______________________________________
Thomas L. Cassidy
/s/ Richard L.
Evans
___________________
Director Richard L. Evans,
______________________________________ for himself and as
W.R. Clerihue attorney-in-fact
for each director,
on March 31, 1999
Director
______________________________________
Franklin Myers
Director
______________________________________
John G. Poole
Executive Vice President,
______________________________________ Chief Financial Officer,
</TABLE> Richard L. Evans and Secretary
(principal financial
officer)
II-5
<PAGE>
INDEX TO EXHIBITS
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).
2.2
--Merger Agreement, dated as of March 30, 1999, between Reunion
Industries, Inc. and Chatwins Group, Inc. Incorporated by reference
from Annex A to the proxy statement/prospectus which is part of this
Registration Statement (schedules are omitted; Reunion Industries,
Inc. agrees to furnish copies of such schedules to the Commission
upon request).
2.3
--Merger Agreement, dated as of March 30, 1999, between Reunion
Industries, Inc., Stanwich Acquisition Corp. and the stockholders
named therein.
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).
5.1
--Opinion of Buchanan Ingersoll Professional Corporation re: validity
of shares.
8.1
--Opinion of Finn Dixon and Herling LLP re: transfer restrictions.
8.2
--Opinion of Finn Dixon and Herling LLP re: tax consequences.
10.1
--Buttes Gas & Oil Co. 1992 Nonqualified Stock Option Plan.
Incorporated by reference to Exhibit 10.35 to Reunion Industries'
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 Reunion Industries' 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 Reunion Industries'
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 Reunion Industries' 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 Reunion Industries' Annual Report on Form 10-K for the year ended
December 31, 1993.
10.6
--The 1998 Stock Option Plan of Reunion Industries, Inc. Incorporated
by reference to Exhibit 2.2 to Registration Statement on Form S-4
(No. 333-56153).
10.7
--Form of Stock Option Agreement for options issued pursuant to the
1998 Stock Option Plan of Reunion Industries, Inc. Incorporated by
reference to Exhibit 10.7 to Reunion Industries' Annual Report on
Form 10-K for the year ended December 31, 1998.
10.8
--Loan and Security Agreement dated as of October 16, 1998 among
Oneida Rostone Corp., Reunion Industries, Inc. and DPL Acquisition
Corp. and The CIT Group/Business Credit, Inc. Incorporated by
reference to Exhibit 10.1 to Reunion Industries' Current Report on
Form 8-K dated October 19, 1998.
II-6
<PAGE>
10.9
--Amendment No. 1 to Loan and Security Agreement dated as of December
31, 1998 modifying original Loan and Security Agreement dated as of
October 16, 1998 among Oneida Rostone Corp., Reunion Industries, Inc.
and DPL Acquisition Corp. and The CIT Group/Business Credit, Inc.
Incorporated by reference to Exhibit 10.9 to Reunion Industries'
Annual Report on Form 10-K for the year ended December 31, 1998.
10.10
--Stock Purchase Agreement, dated April 2, 1996, between Tribo
Petroleum Corporation and Reunion Resources Company. Incorporated by
reference to Exhibit 2.1 to Reunion Industries' Current Report on
Form 8-K dated April 2, 1996.
10.11
--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 Reunion Industries' Current Report on
Form 8-K dated May 24, 1996.
10.12
--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 Reunion Industries' Current Report on Form 8-K dated May 24,
1996.
10.13
--Guaranty, dated May 24, 1996, made by Tribo Petroleum Corporation in
favor of Reunion Industries, Inc. Incorporated by reference to
Exhibit 2.4 to Reunion Industries' Current Report on Form 8-K dated
May 24, 1996.
10.14
--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 Reunion Industries'
Current Report on Form 8-K dated October 17, 1996.
10.15
--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 Reunion Industries' Current Report on
Form 8-K dated October 17, 1996.
10.16
--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 Reunion Industries'
Current Report on Form 8-K dated November 18, 1996.
11.1
--Computation of Earnings Per Share. Incorporated by reference to
Exhibit 11.1 to Reunion Industries Annual Report on Form 10-K for the
year ended December 31, 1998.
21.1
--List of Subsidiaries of Reunion Industries. Incorporated by
reference to Exhibit 21.1 to Reunion Industries' Annual Report on
Form 10-K for the year ended December 31, 1998.
23.1
--Consent of Independent Public Accountants for Reunion Industries,
Inc.--PricewaterhouseCoopers LLP.
23.2
--Consent of Independent Public Accountants for Chatwins Group, Inc.--
PricewaterhouseCoopers LLP.
23.3
--Consent of Legg Mason Wood Walker, Incorporated.
23.4
--Consent of Finn Dixon and Herling LLP (included as part of Exhibits
8.1 and 8.2)
23.5
--Consent of Buchanan Ingersoll Professional Corporation (included as
part of Exhibit 5.1)
24.1
--Power of Attorney (included on signature page of Post-Effective
Amendment No. 1 to the Registration Statement.)
99.1
--Opinion of Legg Mason Wood Walker, Incorporated. Incorporated by
reference from Annex B to the proxy statement/prospectus which is
part of this Registration Statement.
99.2
--Form of proxy card for the annual meeting of the stockholders of
Reunion Industries, Inc.
II-7
<PAGE>
Exhibit 2.3
MERGER AGREEMENT
MERGER AGREEMENT, dated as of March 30, 1999, among (i) Reunion Industries,
Inc., a Delaware corporation ("Reunion"), (ii) Stanwich Acquisition Corp. (d/b/a
King-Way Material Handling Company), a Delaware corporation ("SAC"), and (iii)
Kimball J. Bradley, Richard L. Evans, Charles E. Bradley, Sr. and Stanwich
Financial Services Corp. ("SFSC"), a Rhode Island corporation (collectively, the
"SAC Shareholders").
W I T N E S S E T H:
-------------------
WHEREAS, Reunion desires to acquire SAC and SAC desires that Reunion
acquire SAC, all on the terms and conditions set forth in this Agreement;
WHEREAS, it is the intention of the parties that the Merger (as defined
below) shall: qualify as a tax free reorganization under Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"), and that this Agreement
shall qualify as a "plan of reorganization" within the meaning of Section 368 of
the Code; and
WHEREAS, the Boards of Directors of SAC and Reunion, at meetings of each of
such Boards of Directors (or by unanimous written consent), have approved and
adopted this Agreement and have authorized the execution hereof.
NOW, THEREFORE, in consideration of the mutual benefits to be derived from
this Agreement and the representations, warranties, conditions and promises
hereinafter contained, the parties to this Agreement hereby agree as follows:
ARTICLE 1
THE MERGER
----------
1.1 The Merger.
-----------
(a) At the Effective Time (as defined in Section 1.1(b)), SAC shall be
merged with and into Reunion (the "Merger"), in accordance with the General
Corporation Law of the State of Delaware (the "Delaware GCL"), whereupon the
separate existence of SAC shall cease and Reunion shall be the surviving
corporation.
(b) As soon as practicable after satisfaction or waiver of all conditions
to the Merger, SAC and Reunion will file a certificate of merger substantially
in the form of Exhibit A hereto (the "Certificate of Merger") with the Secretary
of State of the State of Delaware (the "Secretary of State") in accordance with
Section 251(c) of the Delaware GCL and make all other filings or recordings
required by the Delaware GCL in connection with the Merger. The Merger shall
become effective on such date as the Certificate of Merger is duly filed with
the Secretary of State or at such later date as is specified in the Certificate
of Merger (the "Effective Time").
1
<PAGE>
(c) From and after the Effective Time, Reunion shall possess all the
rights, privileges, powers and franchises and be subject to all of the
restrictions, disabilities, liabilities and duties of SAC as provided in the
Delaware GCL.
1.2. Conversion of Shares. At the Effective Time, by virtue of the Merger
---------------------
and without any action on the part of Reunion or SAC:
(a) The aggregate number of shares of the common stock of SAC, par value
$.01 per share, issued and outstanding immediately prior to the Effective Time
(the "SAC Common Stock") shall be automatically converted into the right to
receive $100,000.
(b) The aggregate number of shares of Preferred Stock of SAC, par value
$.01 per share (the "SAC Preferred Stock"), issued and outstanding immediately
prior to the Effective Time, if any, shall be automatically converted into the
right to receive preferred stock of Reunion (the "Series B Reunion Preferred")
with an aggregate initial redemption value of $5,000,000 (the "Series B Initial
Redemption Value"). The Series B Reunion Preferred will be redeemable at any
time at the option of Reunion at the Series B Total Redemption Value (as defined
below). The Series B Reunion Preferred will accrue a cumulative dividend equal
to 15% of the Series B Initial Redemption Value per annum from November 3, 1997
(the "Series B Preferred Dividend"). The Series B Preferred Dividend will be
payable as and when the Board of Directors of Reunion determines and shall be
senior in right of payment to all other classes of capital stock of Reunion. The
Series B Reunion Preferred will not be voting, except as required by law, and
will not have any right of conversion into the Reunion Common Stock or any other
securities of Reunion. Upon a liquidation of Reunion, the holders of the Series
B Reunion Preferred will be entitled to be paid, out of the assets of Reunion
available for payment to the holders of Reunion's capital stock, an aggregate
amount equal to the Series B Initial Redemption Value plus an amount equal to
all accrued but unpaid dividends thereon (the "Series B Total Redemption Value")
to the date of final payment after the holders of shares of Series A Preferred
Stock of Reunion (the "Series A Reunion Preferred") to be issued in connection
with the merger of Chatwins Group, Inc. ("Chatwins") into Reunion shall have
been paid in full all amounts due and payable to them upon a liquidation of
Reunion as provided in the Certificate of Designations of the Series A Reunion
Preferred. In the event of a liquidation of Reunion no payments will be made and
no assets will be distributed to the holders of the Reunion Common Stock until
the holders of the Series B Reunion Preferred shall have been paid the Series B
Total Redemption Value. The Series B Reunion Preferred will have such other
preferences, privileges, restrictions and rights as are determined by the Board
of Directors of Reunion prior to the Effective Time.
(c) All shares of SAC Common Stock and SAC Preferred Stock (collectively,
the "SAC Capital Stock") shall automatically be cancelled and retired and shall
cease to exist and each holder of a certificate representing any such SAC
Capital Stock (a "Certificate") shall cease to have any rights with respect
thereto, except the right to receive consideration (the "Merger Consideration")
consisting of cash and the number of shares of Series B Reunion Preferred
specified herein, upon the surrender of such Certificate in accordance with
Section 1.3(a), without interest.
2
<PAGE>
1.3. Surrender of Certificates; Payment of Merger Consideration.
-----------------------------------------------------------
(a) Surrender of Certificates. At or after the Closing (as defined in
--------------------------
Section 1.4), upon presentation by the holder thereof to Reunion, duly endorsed,
each Certificate shall be cancelled and exchanged and, simultaneously with such
cancellation and exchange, (i) in respect of SAC Common Stock a check payable to
such shareholder representing $100 per share of SAC Common Stock formerly held
by such shareholder, which is the amount of cash into which the SAC Common Stock
formerly held by such shareholder shall have been converted in the Merger in
accordance with Section 1.2 hereof, and (ii) in respect of SAC Preferred Stock,
one share of Series B Reunion Preferred shall be issued by Reunion in exchange
for each share of SAC Preferred Stock formerly held by such shareholder in
accordance with Section 1.2 hereof. All of the shares of Series B Reunion
Preferred issued in the Merger shall be duly authorized, validly issued, fully
paid and nonassessable and, at the time of issuance, shall be free and clear of
all liens, claims, encumbrances, security interests and rights of redemption
(together, "Liens").
(b) No Further Ownership Rights in SAC Capital Stock. The Merger
-------------------------------------------------
Consideration issued upon the surrender for exchange of Certificates in
accordance with the terms of this Agreement (including cash paid pursuant to
Section 1.2) shall be deemed to have been issued (or paid, as the case may be)
at the Closing in full satisfaction of all rights pertaining to the SAC Capital
Stock represented thereby. From and after the Closing, the stock transfer books
of SAC shall be closed and there shall be no further registration of transfers
on the stock transfer books of SAC or Reunion of the SAC Capital Stock which was
outstanding immediately prior to the Effective Time. If, after the Closing,
Certificates are presented to Reunion for any reason, they shall be cancelled
and exchanged as provided in this Agreement.
1.4. Closing. The closing of the transactions contemplated by this
--------
Agreement (the "Closing") will take place at the offices of Buchanan Ingersoll
Professional Corporation, One Oxford Centre, 301 Grant Street, 20th Floor,
Pittsburgh, Pennsylvania 15219 at 10:00 a.m. on June 29, 1999, or at such other
place or time as the parties may mutually agree (the "Closing Date").
1.5. Further Assurances. At the Closing and thereafter, each party hereto
-------------------
will execute such further documents and instruments and take such further
actions as may reasonably be requested by one or more of the others to
consummate the Merger, to vest Reunion with full title to all assets,
properties, rights, approvals, immunities and franchises of SAC and to effect
the other purposes of this Agreement.
ARTICLE II
THE SURVIVING CORPORATION
-------------------------
2.1. Certificate of Incorporation. The Certificate of Incorporation of
-----------------------------
Reunion, as such Certificate of Incorporation shall be amended as set forth in
the Certificate of Merger, shall be the Certificate of Incorporation of the
surviving corporation until amended in accordance with applicable law.
3
<PAGE>
2.2. By-Laws. The By-laws of Reunion in effect at the Effective Time shall
--------
be the By-laws of the surviving corporation until amended in accordance with
applicable law.
2.3. Officers. The officers of Reunion in office at the Effective Time
---------
shall continue in the same offices on behalf of the surviving corporation until
their resignation or removal in accordance with the By-laws.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SAC
-------------------------------------
SAC hereby represents and warrants to Reunion on the date hereof and as of
the Effective Time as follows:
3.1. Organization and Good Standing. SAC is a corporation duly
-------------------------------
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has all corporate power and authority to own, lease and operate
its properties and to carry on its business as now conducted. SAC is duly
qualified to do business and in good standing in each jurisdiction where the
character of property owned or leased by it or the nature of its activities
makes such qualification necessary except for those jurisdictions where the
failure to be so qualified would not, individually or in the aggregate, have a
SAC Material Adverse Effect. As used herein, a "SAC Material Adverse Effect"
means a material adverse effect on the condition (financial or otherwise),
business, assets or results of operations of SAC or on the ability of SAC to
consummate the transactions contemplated by this Agreement.
3.2. Power and Authority; Execution and Delivery. SAC has all requisite
--------------------------------------------
corporate power and authority to execute, deliver and perform its obligations
under this Agreement. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby have been duly
approved and authorized by all requisite corporate action of SAC. Except for the
filing of the Certificate of Merger in accordance with Section 1.1(b), no
further corporate actions or approvals on the part of SAC are required under
applicable law for the consummation of the Merger. This Agreement has been duly
executed and delivered by SAC and constitutes the legal, valid and binding
obligation of SAC, enforceable against it in accordance with its terms except to
the extent that enforceability may be limited by applicable bankruptcy,
insolvency, or similar laws affecting the enforcement of creditors' rights
generally and subject to general principles of equity (regardless of whether
enforcement is sought in a court of law or equity).
3.3. Capitalization and Voting Rights. The authorized capital of SAC
---------------------------------
consists entirely of the following, the rights, privileges and preferences of
which are as stated in the Certificate of Incorporation of SAC:
(i) 10,000 shares of Preferred Stock, of which 5,000 shares are
issued and outstanding as of the date hereof; and
4
<PAGE>
(ii) 2,000 shares of SAC Common Stock, of which 1,000 shares are
issued and outstanding and no shares are held by SAC as treasury shares.
(iii) Except as set forth on Schedule 3.3, SAC has no outstanding
subscriptions, options, warrants, calls or other agreements or commitments by
which SAC is bound in respect of the capital stock of SAC, whether issued or
unissued, and no outstanding rights or securities convertible into or
exchangeable for any such capital stock, and SAC is not a party or subject to
any agreement or understanding, and to SAC's knowledge, there is no agreement or
understanding between any persons and/or entities, which affects or relates to
the voting or giving of written consents with respect to any security of SAC.
3.4. Subsidiaries. SAC does not own or control, directly or indirectly,
-------------
any interest in any other corporation, association or other business entity.
3.5. Valid Issuance of Preferred and Common Stock. The outstanding shares
---------------------------------------------
of SAC Capital Stock are duly and validly authorized and issued, fully paid and
nonassessable.
3.6. Financial Statements. SAC has previously furnished to Reunion true
---------------------
and complete copies of its (i) unaudited financial statements for the year ended
December 31, 1998; and (ii) unaudited interim financial statements for the two
months ended February 28, 1999. The unaudited financial statements have been
prepared in accordance with GAAP applied on a consistent basis (except as may be
indicated therein or in the notes thereto) and fairly present the financial
position of SAC as of the dates thereof and the results of operations and
changes in cash flow of SAC for the periods then ended, subject, in the case of
the interim financial statements, to normal year-end adjustments which are
neither individually nor in the aggregate expected to be material.
3.7. Changes. Since December 31, 1998, there has not been:
--------
(a) any adverse change in the assets, condition (financial or otherwise),
affairs, business, operations, properties, or liabilities of SAC from that
reflected in the balance sheet as of such date, referred to in Section 3.6
above, except for changes in the ordinary course of business which do not
constitute, either individually or in the aggregate, a SAC Material Adverse
Effect;
(b) any material change in the liabilities or obligations of SAC,
contingent or otherwise, whether due or to become due, whether by way of
guaranty, endorsement, indemnity, warranty or otherwise, except for the
incurrence of current liabilities in the ordinary course of business, none of
which has had a SAC Material Adverse Effect;
(c) any damage, destruction or loss, whether or not covered by insurance,
materially and adversely affecting the properties, operations or business of
SAC;
(d) any waiver by SAC of a valuable right or of a material debt owed to
it;
(e) any loans made by SAC other than advances of expenses made in the
ordinary course of business;
5
<PAGE>
(f) any declaration or payment of any dividend or other distribution of the
assets of SAC or any direct or indirect redemption, purchase or acquisition of
any securities of SAC;
(g) any incurrence of indebtedness for money borrowed or any other
liabilities individually in excess of $50,000 or, in the case of indebtedness
and/or liabilities individually less than $50,000, in excess of $100,000 in the
aggregate;
(h) any sale, exchange or other disposition of any of SAC's assets, other
than in the ordinary course of business;
(i) to the best of SAC's knowledge, any other event or condition of any
character which could reasonably be expected to result in a SAC Material Adverse
Effect;
(j) any increase in compensation of any of its existing officers, or the
rate of pay of its employees as a group, except as part of regular compensation
increases in the ordinary course of business;
(k) any resignation or termination of employment of any officer or key
employee of SAC; or
(l) any agreements to do or enter into any of the foregoing.
3.8. Governmental Approvals and Filings. Except as set forth on Schedule
-----------------------------------
3.8 and except for the filing of the Certificate of Merger in accordance with
the Delaware GCL, no approval, authorization, consent, license, clearance or
order of, declaration or notification to, or filing, registration or compliance
with, any governmental or regulatory authority, is required in order to permit
SAC to enter into this Agreement or to consummate the transactions contemplated
herein.
3.9. Litigation. (a) There is no action, suit, proceeding or investigation
-----------
pending or, to SAC's knowledge, currently threatened in writing against SAC or
its property, assets or business which might reasonably be expected to result,
either individually or in the aggregate, in a SAC Material Adverse Effect,
including without limitation, actions pending or threatened involving the prior
employment of any of SAC's employees, their use in connection with SAC's
business of any information or techniques allegedly proprietary to any of their
former employers, or their obligations under any agreements with prior
employers; and (b) SAC is not a party or subject to the provisions of any order,
writ, injunction, award, judgment or decree of any court, arbitration panel or
government agency or instrumentality.
3.10. Patents and Trademarks. SAC has sufficient title and ownership of all
-----------------------
patents, trademarks, service marks, trade names, copyrights, trade secrets,
information, proprietary rights and processes necessary for its business as now
conducted and without any conflict with or infringement of the rights of others
which could reasonably be expected to result in a SAC Material Adverse Effect.
Except as set forth in Schedule 3.10, there are no outstanding options, licenses
or agreements of any kind relating to any patent or patent application owned by
SAC, nor is SAC bound by or a party to any options, licenses or agreements of
any kind with respect to the patents, trademarks, service marks, trade names,
6
<PAGE>
copyrights, trade secrets, licenses, information, proprietary rights and
processes owned by any other person or entity. SAC has not received any
communications or claims alleging that SAC has violated or, by conducting its
business as currently conducted, would violate any of the patents, trademarks,
service marks, trade names, copyrights, trade secrets, licenses, information,
proprietary rights and processes of any other person or entity. SAC is not aware
that any of its employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court of administrative agency, that would
interfere with the use of such employee's best efforts to promote the interests
of SAC or that would conflict with SAC's business as proposed to be conducted.
Neither the execution and delivery of this Agreement nor the carrying on of
SAC's business by the employees of SAC will, to SAC's knowledge, conflict with
or result in a breach of the terms, conditions or provisions of or constitute a
default under any contract, covenant or instrument under which any of such
employees is now obligated.
3.11. No Conflict. Neither the execution, delivery and performance of this
------------
Agreement by SAC, nor the consummation by SAC of the transactions contemplated
hereby will (i) conflict with, or result in a breach of any of the terms,
conditions or provisions of the Certificate of Incorporation or By-laws of SAC,
(ii) except for loans from Madeline LLC (the "Cerberus Loan") and SFSC (the
"Stanwich Loan"), conflict with, result in a breach or violation of, give rise
to a default under or result in the acceleration of performance under any
mortgage, lease, agreement, note, bond, indenture, guarantee or any statute,
regulation, ordinance, writ, injunction, order, judgment or decree to which SAC
may be subject, which conflict, breach, default, violation or acceleration could
reasonably be expected to have a SAC Material Adverse Effect, or (iii) give rise
to an imposition of any Lien of any nature whatsoever upon any of the assets of
SAC.
3.12. Agreements.
-----------
(a) Except in connection with employment arrangements in the ordinary
course of business, there are no agreements, understanding or transactions
between SAC and any of its officers or directors or any affiliate thereof.
(b) Except for the Cerberus Loan and the Stanwich Loan, there are no
agreements, understanding or transactions to which SAC is a party or by which it
is bound which (i) involve obligations (contingent or otherwise) of, or payments
to, SAC in excess of $500,000 other than in the ordinary course of business,
(ii) are material to the conduct and operations of SAC's business or properties
(including, without limitation, the license of any patent, copyright, trade
secret or other proprietary rights to or from SAC), (iii) restrict or adversely
affect the development, manufacture or distribution of SAC's products or
services, (iv) except as set forth on Schedule 3.12, involve any written
employment or consulting arrangement between SAC and any person, or (v) involve
any material oral employment or consulting arrangement between SAC and any
person.
(c) SAC, and to SAC's knowledge, each other party thereto has performed or
is now performing in all material respects its obligations under, and is not in
material default (and would not by the lapse of time or the giving of notice or
both be in material default) under, or in breach or violation of, nor has SAC
received notice of any asserted claim of a default by
7
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SAC under, or a breach or violation by SAC of, any of the material agreements to
which it is a party.
3.13. Title to Property and Assets. Except as set forth on Schedule 3.13,
-----------------------------
SAC has good title to its property and assets free and clear of all Liens,
except Liens granted in connection with the Cerberus Loan and the Stanwich Loan
and such Liens which do not materially impair SAC's ownership or use of such
property or assets. With respect to the property and assets it leases, SAC is in
substantial compliance with such leases and, to its knowledge, holds a valid
leasehold interest free of any Liens other than those granted in connection with
the Cerberus Loan. All of SAC's properties and assets are, in all material
respects, in good operating condition, subject to normal wear and tear.
3.14. Labor Agreements and Actions; Employee Benefits. SAC is not bound by
------------------------------------------------
or subject to (and none of its assets or properties is bound by or subject to)
any written or oral, express or implied, contract, commitment or arrangement
with any labor union, and within the last two (2) years no labor union has
requested or, to the knowledge of SAC, has sought to represent any of the
employees, representatives, or agents of SAC; there is no strike or other labor
dispute involving SAC pending or, to the knowledge of SAC, threatened, which
could reasonably be expected to have a SAC Material Adverse Effect, nor is SAC
aware of any labor organization activity involving its employees. Except as
noted in Schedule 3.14 hereto, SAC does not have any employee benefit plans
presently in force with respect to profit-sharing or pensions.
3.15. Tax Matters. SAC (i) has timely filed all tax returns that are
------------
required to have been filed by it with all appropriate governmental agencies
(and all such returns are true and correct and fairly reflect in all material
respects its operations for tax purposes); and (ii) has timely paid all taxes
owed or assessed against it (other than taxes the validity of which are being
contested in good faith by appropriate proceedings). The assessment of any
additional taxes for periods for which returns have been filed is not expected
to exceed the reserves reflected in the financial statements described in
Section 3.6 and, to SAC's knowledge, there are no material unresolved questions
or claims concerning SAC's tax liability. SAC's federal income tax returns have
not been reviewed or audited by any taxing authority. There is no pending
dispute with any taxing authority relating to any of said returns which, if
determined adversely to SAC, would result in the assertion by any taxing
authority of any valid material tax deficiency.
3.16. Minute Books. The minute books of SAC contain a complete and accurate
-------------
record of all meetings of directors and stockholders since the date of
incorporation and all actions by written consent.
3.17. Insurance. SAC keeps its properties adequately insured and maintains
----------
(i) insurance to such extent and against such risks, including fire, as is
customary with companies in the same or similar businesses, (ii) workers'
compensation insurance in the amount required by applicable law, (iii) product
liability insurance, which shall include product liability insurance, in the
amount customary with companies in the same or similar business against claims
for personal injury or death on properties owned, occupied or controlled by
them, and (iv) such other insurance as may be required by law.
8
<PAGE>
3.18. Year 2000. SAC has reviewed, is reviewing or will review, the areas
----------
within its business and operations which could be materially adversely affected
by, and has developed, or is developing or will develop a program to address on
a timely basis, the risk that certain computer applications used by SAC may be
unable to recognize and perform properly date-sensitive functions involving
dates prior to and after December 31, 1999 (the "Year 2000 Problem"). The Year
2000 Problem is not reasonably expected to have a SAC Material Adverse Effect.
3.19. Suppliers and Customers. SAC has no reason to believe that any of
------------------------
SAC's ten largest suppliers or customers by volume will cease to do business
with SAC as a result of the execution of this Agreement or the consummation of
the transactions contemplated hereunder.
3.20. Permits, Licenses, Authorizations; Compliance with Laws. SAC has all
--------------------------------------------------------
licenses, franchises, certificates of occupancy, permits and other governmental
authorizations which are material and necessary to conduct its business, and SAC
is not in violation in any material respect of any such license, franchise,
certificate of occupancy, permit or other governmental authorization, or any
statute, law, ordinance, rule regulation, judgment, order or decree applicable
to it or any of its properties.
3.21. Broker's or Finder's Fees. Neither SAC nor any of its affiliates has
--------------------------
authorized any person to act as broker, finder, banker, consultant, intermediary
or in any other similar capacity which would entitle such person to any
investment banking, brokerage, finder's or similar fee from SAC in connection
with the transactions contemplated by this Agreement.
3.22. Disclosure. Neither this Agreement nor any document or information
-----------
furnished to Reunion by SAC pursuant to this Agreement contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements of SAC contained herein or therein not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF REUNION
-----------------------------------------
Reunion represents and warrants to SAC as of the date hereof and as at the
Effective Time as follows (it being understood that for purposes of this Section
4, Reunion shall include each of its subsidiaries):
4.1. Organization and Good Standing. Reunion is a corporation duly
-------------------------------
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has all corporate power and authority to own, lease and operate
its properties and to carry on its business as now being conducted. Reunion is
duly qualified to do business and in good standing in each jurisdiction where
the character of property owned or leased by it or the nature of its activities
makes such qualification necessary, except for those jurisdictions where the
failure to be so qualified would not, individually or in the aggregate, have a
Reunion Material Adverse Effect. As used herein, the term "Reunion Material
Adverse Effect" means a material adverse
9
<PAGE>
effect on the condition (financial or otherwise), business, assets or results of
operations of Reunion and its subsidiaries, taken as a whole, or on the ability
of Reunion to consummate the transactions contemplated by this Agreement.
4.2. Power and Authority; Execution and Delivery. Reunion has all requisite
--------------------------------------------
corporate power and authority to execute, deliver and perform its obligations
under this Agreement. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby have been duly
approved and authorized by all requisite corporate action of Reunion. Except for
the filing of the Certificate of Merger in accordance with Section 1.1(b), no
further corporate actions or approvals on the part of Reunion are required under
applicable law for the consummation of the Merger. This Agreement has been duly
executed and delivered by Reunion and constitutes the legal, valid and binding
obligation of Reunion, enforceable against Reunion in accordance with its terms
except to the extent that enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the enforcement of creditors'
rights generally and subject to general principles of equity (regardless of
whether enforcement is sought in a court of law or equity).
4.3. Governmental Approvals and Filings. Except as set forth on Schedule
-----------------------------------
4.3 and except for the filing of the Certificate of Merger in accordance with
the Delaware GCL, no approval, authorization, consent, license, clearance or
order of, declaration or notification to, or filing, registration or compliance
with, any governmental or regulatory authority, is required in order to permit
Reunion to enter into this Agreement or to consummate the transactions
contemplated herein.
4.4. No Conflict. Except as set forth in Schedule 4.4, neither the
------------
execution, delivery and performance of this Agreement by Reunion, nor the
consummation by Reunion of the transactions contemplated hereby will (i)
conflict with, or result in a breach of any of the terms, conditions or
provisions of the Certificate of Incorporation or By-laws of Reunion, (ii)
conflict with, result in a breach or violation of, give rise to a default under
or result in the acceleration of performance under any mortgage, lease,
agreement, note, bond, indenture, guarantees or any statute, regulation,
ordinance, writ, injunction, order, judgment or decree to which Reunion may be
subject, which conflict, breach, default, violation or acceleration would have a
Reunion Material Adverse Effect, or (iii) give rise to an imposition of any
Lien, charge, security interest or encumbrance of any nature whatsoever upon any
of the assets of Reunion.
4.5. Merger Consideration. When issued, the shares of Series B Reunion
---------------------
Preferred to be issued in the Merger will be duly authorized, validly issued,
fully-paid and nonassessable and free and clear of all Liens and preemptive
rights. The certificates or instruments representing such shares will be in due
and proper form.
4.6. Reports and Financial Statements. Reunion has previously furnished to
---------------------------------
SAC true and complete copies of its (i) Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 substantially in the form to be filed with
the SEC and Current Reports on Form 8-K as filed with the SEC since December 31,
1998. Reunion will provide SAC a true and complete copy of each Quarterly Report
on Form 10-K promptly after filing such report with the SEC. As of their
respective dates, Reunion's Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, and Current Reports on Form 8K referred to above did not, and will
not, when
10
<PAGE>
filed, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited consolidated financial statements and unaudited interim
financial statements included in such reports or other filings have been
prepared in accordance with GAAP applied on a consistent basis (except as may be
indicated therein or in the notes thereto) and fairly present the consolidated
financial position of Reunion and its subsidiaries as of the dates thereof and
the consolidated results of operations and changes in cash flow of Reunion and
its subsidiaries for the periods then ended, subject in the case of unaudited
interim financial statements, to normal year-end adjustments which are neither
individually nor in the aggregate expected to be material.
4.7. Absence of Material Adverse Change. Except as set forth in the reports
-----------------------------------
listed in Section 4.6, since December 31, 1998 there has not been any Reunion
Material Adverse Effect.
4.8. Capitalization of Reunion. Reunion's authorized capital stock consists
--------------------------
of (i) 20,000,000 shares of Reunion Common Stock of which 3,900,065 are
outstanding on the date hereof, and (ii) 10,000,000 shares of Preferred Stock,
par value $.01 per share, of which none are outstanding on the date hereof. All
of the issued and outstanding shares of capital stock of Reunion are duly
authorized and validly issued, fully-paid and nonassessable.
4.9. Certificate of Incorporation and By-laws.
-----------------------------------------
(a) Reunion has delivered to SAC copies of its Certificate of Incorporation
and all amendments thereto, which copies are complete and correct. Reunion is
not in default under, or in violation of, any provisions of its Certificate of
Incorporation. Reunion's Certificate of Incorporation has not been amended since
December 31, 1998 and, except as contemplated by this Agreement, no action has
been taken for the purpose of effecting any amendment thereto.
(b) Reunion has delivered to SAC copies of its By-laws and all amendments
thereto, which copies are complete and correct. Reunion is not in default under,
or in violation of, any provision of its By-Laws. Reunion's By-laws have not
been amended since the date of certification thereof and no action has been
taken for the purpose of effecting any amendment thereto.
4.10. Legal Proceedings. Except as set forth in the reports referred in
------------------
Section 4.6 (i) there are no suits, actions, claims, proceedings (including,
without limitation, arbitration or administrative proceedings) or investigations
pending or to the knowledge of Reunion threatened in writing against Reunion or
its property, assets or business which could reasonably be expected,
individually or in the aggregate, to have a Reunion Material Adverse Effect; and
(ii) Reunion is not a party or subject to the provisions of any judgment, order,
injunction, decree or award of any court, arbitration panel or government agency
or instrumentality.
4.11. Permits, Licenses, Authorizations; Compliance with Laws.
--------------------------------------------------------
Reunion has all licenses, franchises, certificates of occupancy, permits and
other governmental authorizations which are material and necessary to conduct
its business, and Reunion is not in violation in any
11
<PAGE>
material respect of any such license, franchise, certificate of occupancy,
permit or other governmental authorization, or any statute, law, ordinance, rule
regulation, judgment, order or decree applicable to it or any of its properties.
4.12. Broker's or Finder's Fees. Neither Reunion nor any of its affiliates
--------------------------
has authorized any person to act as broker, finder, banker, consultant,
intermediary or in any other similar capacity which would entitle such person to
any investment banking, brokerage, finder's or similar fee from Reunion in
connection with the transactions contemplated by this Agreement.
4.13. Disclosure. Neither this Agreement nor any document or information
-----------
furnished to SAC by Reunion pursuant to this Agreement contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements of Reunion contained herein or therein not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PRINCIPAL SHAREHOLDERS
--------------------------------------------------------
Each of the SAC Shareholders hereby severally, but not jointly, represents
and warrants to Reunion with respect to itself as follows:
5.1. Capacity and Authority. Such SAC Shareholder has full legal capacity
-----------------------
and authority to execute, deliver and perform its obligations under this
Agreement. This Agreement has been duly executed and delivered by such SAC
Shareholder and constitutes the legal, valid and binding obligation of such SAC
Shareholder, enforceable against it in accordance with its terms except to the
extent that enforceability may be limited by applicable bankruptcy, insolvency
or similar laws affecting the enforcement of creditors' rights generally and
subject to general principles of equity (regardless of whether enforcement is
sought in a court of law or equity).
5.2. Government Approvals and Filings. No approval, authorization, consent,
---------------------------------
license, clearance or order of, declaration, or notification to, or filing,
registration or compliance with any governmental or regulatory authority is
required to permit such SAC Shareholder to enter into this Agreement or to
consummate the transactions contemplated herein.
ARTICLE VI
COVENANTS OF SAC AND THE SAC SHAREHOLDERS
-----------------------------------------
SAC and the SAC Shareholders (but, as to the SAC Shareholders, only with
respect to Section 6.3) covenant and agree that:
6.1. Regular Course of Business. Except as otherwise consented to in
---------------------------
writing by Reunion, prior to the Closing SAC will carry on its businesses only
in the ordinary course and substantially in accordance with past practices, and
SAC will use commercially reasonable
12
<PAGE>
efforts to preserve its present business organization intact and keep available
the services of its present executive officers.
6.2. Restricted Activities and Transactions. Except as otherwise consented
---------------------------------------
to in writing by Reunion or contemplated by this Agreement or as resulting from
the consummation of the transactions contemplated by this Agreement, prior to
the Closing SAC will not:
(a) amend its Certificate of Incorporation or By-laws;
(b) except in the ordinary course of business and substantially in
accordance with past practices, (i) borrow or agree to borrow any funds or
mortgage or pledge any of its assets, tangible or intangible, (ii) voluntarily
incur, assume or become subject to, whether directly or by way of guarantee or
otherwise, any material obligation or liability (absolute or contingent), (iii)
cancel or agree to cancel any material debts or claims, or (iv) lease, sell,
transfer or encumber, agree to lease, sell, transfer or encumber, or grant or
agree to grant any preferential rights to lease or acquire, any of its assets,
property or rights;
(c) except as set forth on the Schedules hereto, (i) grant any increase in
compensation or benefits, or (ii) make, pay or accrue any bonuses, pension,
profit sharing or similar payment to any director, officer or employee of SAC
other than payment of 1998 performance bonuses accrued as of December 31, 1998;
(d) acquire control or ownership of any other corporation, association,
joint venture, partnership, business trust or other business entity, or acquire
control or ownership of all or a substantial portion of the assets of any of the
foregoing, or merge, consolidate or otherwise combine with any other corporation
or enter into any agreement providing for any of the foregoing;
(e) except as set forth on the Schedules hereto or in the ordinary course
of business consistent with past practice, hire any additional professional
personnel or make any change in the responsibilities or office of any officer of
SAC;
(f) except as set forth on the Schedules hereto or in the ordinary course
of business consistent with past practice, enter into any material contract or
agreement or materially modify any existing material agreement;
(g) declare, set aside, make or pay any dividend or other distribution with
respect to its capital stock, or retire or redeem any of such capital stock, or
take any action which would have an effect equivalent to any of the foregoing;
or
(h) agree or commit to do any of the foregoing.
13
<PAGE>
6.3. Consent to Merger Agreement.
----------------------------
(a) Each SAC Shareholder, in accordance with Section 228 of the Delaware
GCL, hereby irrevocably approves the form, terms, and provisions of this
Agreement, and hereby irrevocably consents to and authorizes SAC (or any officer
designated by the Board of Directors of SAC) to enter into the Merger Agreement
and to perform its obligations thereunder.
(b) Each of the SAC Shareholders hereby waives all rights available to it
under the Delaware GCL to demand Appraisal of its shares of SAC Capital Stock.
6.4. Consents, Approvals and Filings. SAC will use its best efforts to
--------------------------------
obtain on or before the Closing all necessary approvals, authorizations,
registrations, consents, licenses, clearances or orders of governmental and
regulatory authorities referred to in Section 3.8.
6.5. Access to Books, Records and Other Information. SAC will afford to
-----------------------------------------------
Reunion and its accountants, attorneys and agents such information as Reunion
may reasonably request (including such copies of documents as Reunion may
reasonably request) and reasonable access to the books and records of SAC.
ARTICLE VII
COVENANTS OF REUNION
--------------------
Reunion covenants and agrees that:
7.1. Regular Course of Business. Except as otherwise consented to in
---------------------------
writing by SAC, prior to the Closing Reunion will carry on its businesses only
in the ordinary course and substantially in accordance with past practices, and
Reunion will use commercially reasonable efforts to preserve its present
business organization intact and keep available the services of its present
executive officers.
7.2. Restricted Activities and Transactions. Except as otherwise consented
---------------------------------------
to in writing by SAC or contemplated by this Agreement or as resulting from the
consummation of the transactions contemplated by this Agreement, prior to the
Closing Reunion will not:
(a) amend its Certificate of Incorporation or By-laws;
(b) except in the ordinary course of business and substantially in
accordance with past practices or as contemplated by this Agreement among (i)
borrow or agree to borrow any funds or mortgage or pledge any of its assets,
tangible or intangible, (ii) voluntarily incur, assume or become subject to,
whether directly or by way of guarantee or otherwise, any material obligation or
liability (absolute or contingent), (iii) cancel or agree to cancel any material
debts or claims, or (iv) lease, sell, transfer or encumber, agree to lease,
sell, transfer or encumber, or grant or agree to grant any preferential rights
to lease or acquire, any of its assets, property or rights;
14
<PAGE>
(c) acquire control or ownership of any other corporation, association,
joint venture, partnership, business trust or other business entity, or acquire
control or ownership of all or a substantial portion of the assets of any of the
foregoing, or merge, consolidate or otherwise combine with any other corporation
or enter into any agreement providing for any of the foregoing; provided that
Reunion, or one of its subsidiaries, may enter into a merger or other
acquisition agreement with each of Chatwins and NPS Acquisition Corp.
(collectively, the "Acquisitions").
(d) issue or sell any shares of its capital stock or issue or award any
options, warrants or other rights with respect to its capital stock, except in
connection with the Acquisitions; or agree or commit to do any of the foregoing.
(e) Consents, Approvals and Filings.
7.3. Consents, Approvals and Filings. Reunion will use its best efforts to
--------------------------------
obtain on or before the Closing all necessary approvals, authorizations,
registrations, consents, licenses, clearances or orders of governmental and
regulatory authorities referred to in Section 4.3.
7.4. Access to Books, Records and Other Information. Reunion will afford to
-----------------------------------------------
SAC and its accountants, attorneys and agents such information as SAC may
reasonably request (including such copies of documents as SAC may reasonably
request) and reasonable access to the books and records of Reunion.
ARTICLE VIII
MUTUAL COVENANTS
----------------
8.1. Payment of Expenses. Except as otherwise specifically provided
--------------------
elsewhere herein, each party to this Agreement shall be responsible for its own
costs and expenses incurred in connection with the transactions contemplated by
this Agreement.
8.2. Public Announcements. Reunion and SAC shall to the maximum extent
---------------------
feasible advise and confer with each other prior to the issuance of any reports,
public statements or releases pertaining to this Agreement or any transaction
contemplated hereby.
8.3. No Shop. From the date hereof until the Effective Time, except in
--------
connection with the Acquisitions and as otherwise required to comply with
applicable law, Reunion and SAC shall not and shall not permit any officer,
director or other agent of Reunion or SAC, directly or indirectly, to take any
action to seek, initiate, negotiate or encourage or enter into or participate in
any discussions regarding, any offer from any third party to acquire any shares
of capital stock of such third party, or to sell to such third party any shares
of capital stock of either Reunion or SAC, to merge or consolidate with Reunion
or SAC, or to otherwise acquire any significant portion of the assets of Reunion
or SAC or to acquire any significant portion of the assets of such third party.
15
<PAGE>
ARTICLE IX
CONDITIONS TO OBLIGATIONS OF REUNION
------------------------------------
The obligation of Reunion to consummate the transactions contemplated by
this Agreement shall be subject to the fulfillment, on or prior to the Closing,
of the following conditions:
9.1. Representations and Warranties True at the Closing. The
---------------------------------------------------
representations and warranties of SAC contained in this Agreement shall be true
and correct in all material respects, except to the extent such representations
were made as of a specific date other than the date hereof.
9.2. Performance of Covenants. SAC shall have performed in all material
-------------------------
respects all covenants required to be performed by it under this Agreement prior
to the Closing.
9.3. Opinion of Counsel. SAC shall have delivered to Reunion an opinion,
-------------------
dated the Closing Date and addressed to Reunion, of Richards & O'Neil, LLP in
form and substance reasonably satisfactory to Reunion and its counsel.
9.4. No Governmental or Other Proceeding. No order of any court or
------------------------------------
administrative agency shall be in effect which restrains or prohibits any
transaction contemplated hereby or which would limit or otherwise affect in any
material respect the Merger.
9.5. No Material Adverse Change. There shall not have been since the date
---------------------------
hereof any occurrence which could reasonably be expected to have a SAC Material
Adverse Effect.
9.6. Certificate of SAC. SAC shall have furnished Reunion with a
-------------------
Certificate of SAC signed by its principal executive officer to the effect that
the representations and warranties of SAC contained in this Agreement are true
and correct in all material respects at and as of the Closing Date as though
such representations and warranties were made on such date (except as to
representations and warranties which are expressly limited to a state of facts
existing at a time prior to the Closing Date) and that SAC has performed or
complied in all material respects with all terms, covenants and provisions of
this Agreement required to be performed or complied with by it prior to or at
the Closing.
9.7. Certificate of Merger. SAC shall have executed and delivered to
----------------------
Reunion the Certificate of Merger to be filed with the Secretary of State in
connection with the Merger.
9.8. Merger with CGI. Reunion shall have consummated its merger with
----------------
Chatwins.
9.9. Refinancing. Reunion shall have an enforceable agreement or agreements
------------
with one or more lenders to consummate and/or continue one or more credit
facilities, the proceeds of which will be sufficient to redeem the $50,000,000
principal amount Senior Notes of Chatwins due 2003 (the "Senior Notes") and to
provide adequate working capital resources to
16
<PAGE>
Reunion after the Merger, and all conditions precedent to the amendment and/or
funding of such credit facilities shall have been satisfied other than the
consummation of the Merger.
ARTICLE X
CONDITIONS TO OBLIGATIONS OF SAC
--------------------------------
The obligations of SAC to consummate the transactions contemplated by this
Agreement shall be subject to the fulfillment, on or prior to the Closing, of
the following conditions:
10.1. Representations and Warranties True at the Closing Date. The
--------------------------------------------------------
representations and warranties of Reunion contained in this Agreement shall be
true and correct in all material respects, except for representations and
warranties which were made as of a specified date other than the date hereof.
10.2. Performance of Covenants. Reunion shall have performed in all
-------------------------
material respects all covenants required to be performed by it under this
Agreement prior to the Closing.
10.3. Opinion of Counsel. Reunion shall have delivered to SAC an opinion,
-------------------
dated the Closing Date and addressed to SAC, of Buchanan Ingersoll Professional
Corporation, in form and substance reasonably satisfactory to SAC and its
counsel.
10.4. Other Approvals and Consents. All required approvals and
-----------------------------
authorizations of governmental and regulatory authorities shall have been
obtained.
10.5. No Governmental or Other Proceeding. No order of any court or
------------------------------------
administrative agency shall be in effect which restrains or prohibits any
transaction contemplated hereby or which would limit or otherwise affect in any
material respect the Merger.
10.6. Certificate of Reunion. Reunion shall have furnished SAC with a
-----------------------
Certificate of Reunion signed by its respective President or any Vice President
to the effect that, except for changes thereto agreed to in writing by SAC, the
representations and warranties of Reunion contained in this Agreement are true
and correct in all material respects at and as of the Closing Date as though
such representations and warranties were made on such date (except as to
representations and warranties which are expressly limited to a state of facts
existing at a time prior to the Closing) and that Reunion has performed or
complied in all material respects with all terms, covenants and provisions of
this Agreement required to be performed or complied with by it prior to or at
the Closing.
10.7. Certificate of Merger. Reunion shall have executed and delivered to
----------------------
SAC the Certificate of Merger to be filed with the Secretary of State in
connection with the Merger.
10.8. No Material Adverse Change. There shall not have been since the date
---------------------------
hereof any occurrence which could reasonably be expected to have a Reunion
Material Adverse Effect.
17
<PAGE>
10.9. No Breaches. There shall not exist on the Closing Date any covenant
------------
in any loan or other agreement between SAC and any party that would be breached
by the consummation of the transactions contemplated by this Agreement.
10.10. Refinancing. Reunion shall have an enforceable agreement or
------------
agreements with one or more lenders to consummate and/or continue one or more
credit facilities, the proceeds of which will be sufficient to redeem the Senior
Notes, and to provide adequate working capital resources to Reunion after the
Merger, and all conditions precedent to the amendment and/or funding of such
credit facilities shall have been satisfied other than the consummation of the
Merger.
10.11. Reunion Preferred. The Board of Directors of Reunion shall have
------------------
approved and Reunion shall have filed with the Secretary of State and delivered
to SAC, a Certificate of Designations with respect to the Series B Reunion
Preferred having the terms described in Section 1.2(b) hereof.
10.12. Merger with CGI. Reunion shall have consummated its merger with
----------------
Chatwins.
ARTICLE XI
TERMINATION
-----------
11.1. Termination. This Agreement may be terminated (i) by the mutual
------------
consent of Reunion and SAC; (ii) by Reunion or SAC at any time after 120 days
after the date hereof if for any reason the Merger shall not by such date have
been consummated and such failure to consummate the Merger is not caused by a
breach of this Agreement by the terminating party; (iii) by Reunion if there has
been a misrepresentation or breach on the part of SAC in the representations,
warranties and covenants of SAC set forth herein which, if curable, has not been
cured within 10 days of notice thereof by Reunion and which breach, if not
cured, would cause a failure of the conditions set forth in Sections 9.1 or 9.2;
(iv) by SAC if there has been a misrepresentation or breach on the part of
Reunion in the representations, warranties and covenants of Reunion set forth
herein which, if curable, has not been cured within 10 days of notice thereof by
SAC and which breach, if not cured, would cause a failure of the conditions set
forth in Sections 10.1 or 10.2; and (v) by Reunion or SAC if any court or
administrative agency of competent jurisdiction shall have issued an order which
restrains or prohibits any transaction contemplated hereby or which would limit
or otherwise effect in any material respect the Merger and such order shall have
become final and nonappealable.
11.2. Effect of Termination. If this Agreement is validly terminated by
----------------------
Reunion or SAC pursuant to Section 11.1, this Agreement will forthwith become
null and void and there will be no liability or obligation on the part of
Reunion or SAC (or any of their respective representatives or affiliates),
except (i) that the provisions of Sections 8.1 and 8.2 will continue to apply
following any such termination and (ii) that nothing contained herein shall
relieve any party hereto from liability for breach of its representations,
warranties, covenants or agreements contained in this Agreement.
18
<PAGE>
11.3. Termination after Shareholder Vote. At any time prior to the
----------------------------------
Effective Time this Agreement may be terminated by the Board of Directors of
Reunion or SAC pursuant to Section 11.1 hereof notwithstanding the prior
approval of this Agreement and the Merger by their respective stockholders.
ARTICLE XII
INDEMNIFICATION
---------------
12.1. Indemnification.
---------------
(a) Reunion shall indemnify and hold harmless SAC, each of its directors
and officers, and each person or entity, if any, who controls SAC within the
meaning of the Securities Act against all losses, claims, damages or
liabilities, joint or several, to which SAC or any such director, officer or
controlling person may become subject (i) which arise out of or are caused by
any breach by Reunion of any representation or warranty of Reunion contained
in this Agreement or any related agreement, or (ii) which arise out of or are
caused by any breach or other failure to perform any covenant, agreement or
other obligation of Reunion contained in this Agreement or any related
agreement; and Reunion shall reimburse SAC or any such director, officer or
controlling person for any reasonable legal or other expenses in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that Reunion shall not be required to indemnify and hold
- --------
harmless or reimburse SAC to the extent that any such loss, claim, damage,
liability or expense arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission in any document made in
reliance upon and in conformity with written information furnished to Reunion by
or on behalf of SAC for use in the preparation of such documents.
(b) SAC shall indemnify and hold harmless Reunion, each of its directors
and officers, and each person or entity, if any, who controls Reunion within the
meaning of the Securities Act against all losses, claims, damages or
liabilities to which Reunion or any such director or officer
or controlling person may become subject (i) which arise out of or are caused by
any breach by SAC of any representation or warranty of SAC contained in
this Agreement or any related agreement or (ii) which arise out of or are
caused by any breach or other failure to perform any covenant, agreement or
other obligation of SAC contained in this Agreement or any related
agreement; and SAC shall reimburse Reunion for any reasonable legal or other
expenses reasonably incurred by Reunion or any such director or officer or
controlling person in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that SAC shall not be
--------
required to indemnify and hold harmless or reimburse Reunion to the extent that
any such loss, claim, damage, liability or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission in any document made in reliance upon and in conformity with written
information furnished to SAC by or on behalf of Reunion for use in the
preparation of such documents.
(c) Promptly after receipt by a party who is, under paragraphs (a) or
(b) of this Section 12.1 an indemnified party, of notice of the commencement of
any action with respect to which indemnification may be sought under this
Section 12.1, such indemnified party shall
19
<PAGE>
notify the indemnifying party. Such notice shall be a condition precedent to any
liability of the indemnifying party for indemnification contained in this
Section 12.1; provided, however, that the rights of the indemnified party to
indemnification or compensation hereunder will only be affected by its failure
to give prompt notice to the indemnifying party of the commencement of such
action if and to the extent that such failure prejudices the indemnifying party
in the defense of such action. In case any such action is being brought against
any indemnified party and it notifies an indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to assume and control the
defense of the action at its expense and if the indemnifying party gives notice
to such indemnified party of its election to assume and control the defense, the
indemnifying party will not be liable to such indemnified party for any legal
expenses subsequently incurred by the indemnified party in connection with the
defense or investigation of the action, so long as and to the extent that the
indemnifying party continues to diligently defend the indemnified party.
(d) No action for indemnity under this Article XII may be brought or
maintained by either party after the Effective Time.
ARTICLE XIII
MISCELLANEOUS PROVISIONS
------------------------
13.1 Notices, Etc. All notices, requests, demands, and other communications
-------------
hereunder shall be in writing and shall be deemed to have been duly given, when
delivered in person, telegraphed, or when mailed by certified or registered
mail, postage prepaid, or when given by telex or facsimile transmission
(promptly confirmed in writing), as follows:
(a) If to SAC:
Stanwich Acquisition Corp.
One Stamford Landing,
62 Southfield Avenue
Stamford, Connecticut 06902
Telephone: 203-325-0551
Facsimile: 203-967-3923
Attention: President
20
<PAGE>
with a copy to:
Richards & O'Neil, LLP
885 Third Avenue
New York, New York 10022-4873
Telephone: 212-207-1200
Facsimile: 212-750-9022
Attention: Brian D. Beglin, Esq.
(b) If to Reunion:
Reunion Industries, Inc.
One Stamford Landing,
62 Southfield Avenue
Stamford, Connecticut 06902
Telephone: 203-324-8858
Facsimile: 203-967-3923
Attention: President
(c) with a copy to:
Buchanan Ingersoll Professional Corporation
One Oxford Centre, 301 Grant Street, 20th Floor
Pittsburgh, Pennsylvania 15219
Telephone: 412-562-8800
Facsimile: 412-562-1041
Attention: Herbert B. Conner, Esq.
or such other person as the person entitled to notice shall designate in
writing, such writing to be delivered to the other parties hereto in the manner
provided in this Section 13.1.
13.2. Survival of Representations and Warranties. The representations
------------------------------------------
and warranties contained herein and in any certificate delivered pursuant hereto
shall not survive the Closing Date and the consummation of any or all of the
transactions contemplated hereby.
13.3 Entire Agreement; Amendment. This Agreement (including the
----------------------------
various Schedules hereto) sets forth the entire agreement and understanding of
the parties in respect of the transactions contemplated hereby and supersedes
all prior agreements, arrangements and understandings relating to the subject
matter hereof. This Agreement may be amended or modified only by a written
instrument executed by Reunion and SAC. The Boards of Directors of Reunion and
SAC may amend this Merger Agreement at any time prior to the time that this
Merger Agreement (or a certificate in lieu thereof) filed with the Secretary of
State of Delaware becomes effective in accordance with Section 103 of the
Delaware GCL, provided that an amendment made subsequent to the adoption of this
Merger Agreement by the stockholders of Reunion and SAC shall not (1) change the
amount or kind of shares, securities, cash, property and/or rights to be
received in exchange for or on conversion of all or any of the shares of any
class or series thereof of SAC (2) alter or change any term of the Certificate
of Incorporation of Reunion to be effected by the Merger, or (3) alter or change
any of the terms and conditions of
21
<PAGE>
this Merger Agreement if such alteration or change would adversely affect the
holders of any class or series of capital stock of Reunion or SAC.
13.4. Individual Provisions. If any provision of this Agreement is held
---------------------
to be illegal, invalid or unenforceable under any present or future law, and if
the rights or obligations of any party hereto under this Agreement will not be
materially and adversely affected thereby, (i) such provision will be fully
severable, (ii) this Agreement will be construed and enforced as if such
illegal, invalid and unenforceable provision had never comprised a part hereof,
(iii) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the legal, invalid or unenforceable
provision, and (iv) there will be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible.
13.5. General. This Agreement: (i) shall be governed by and construed and
-------
enforced in accordance with the laws of the State of Delaware, without giving
effect to the choice of law principles thereof; (ii) shall inure to the benefit
of the parties hereto and their heirs, personal representatives, successors and
permitted assigns, nothing in this Agreement, expressed or implied, being
intended to confer upon any other person any rights or remedies hereunder; (iii)
may not be assigned by a party without the prior written consent of the other
parties; and (iv) may be executed in two or more counterparts, each of which
shall be deemed an original but all of which together shall constitute one and
the same instrument. The Section, Schedule and other headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
22
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
the day and year first above written.
REUNION INDUSTRIES, INC.
By: /s/ Richard L. Evans
_______________________________
Name: Richard L. Evans
Title: Executive Vice President
STANWICH ACQUISITION CORP.
By: /s/ Charles E. Bradley, Sr.
_______________________________
Name: Charles E. Bradley, Sr.
Title:
SAC SHAREHOLDERS
----------------
/s/ Kimball J. Bradley
___________________________________
Kimball J. Bradley
/s/ Richard L. Evans
___________________________________
Richard L. Evans
/s/ Charles E. Bradley
___________________________________
Charles E. Bradley
STANWICH FINANCIAL SERVICES CORP.
By: /s/ Richard L. Evans
_______________________________
Name: Richard L. Evans
Title: Vice President
23
<PAGE>
EXHIBIT 5.1
March 31, 1999
Reunion Industries, Inc.
One Stamford Landing
62 Southfield Avenue
Stamford, Connecticut 06902
Re: Reunion Industries, Inc.
Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as special counsel to Reunion Industries, Inc., a Delaware
corporation (the "Company"), in connection with the preparation and filing with
the Securities and Exchange Commission of a registration statement on Form S-4
(the "Registration Statement"), covering up to 9,000,000 shares
of the Common Stock, $0.01 par value per share (the "common stock"), of the
Company to be issued pursuant to the merger contemplated by the Merger
Agreement, dated as of March 30, 1999, (the "Merger Agreement"), between the
Company and Chatwins Group, Inc., a Delaware corporation.
In rendering the opinion set forth herein, we have examined executed
copies, telecopies or photocopies of: (i) the Registration Statement; (ii) the
Certificate of Incorporation, the By-laws and minute books of the Company; (iii)
the Merger Agreement; and (iv) such other records, documents, certificates and
other instruments as in our judgment are necessary or appropriate as a basis for
the opinion expressed below. In our examination of such documents we have
assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as originals,
the conformity to original documents of all documents submitted to us as
certified or photostatic copies, and the authenticity of the originals of such
copies. As to any facts material to this opinion which we did not independently
establish or verify, we have relied upon statements and representations of
officers and other representatives of the Company.
Based upon the foregoing, and in reliance thereon, and subject to the
qualifications, assumptions and exceptions heretofore and hereinafter set forth,
we are of the opinion that the Common Stock to be issued in accordance with the
Merger Agreement when issued and delivered in accordance with the terms and
conditions of the Merger Agreement against receipt of the consideration provided
for therein, will be validly issued, fully paid and nonassessable.
We do not express, or purport to express, any opinion with respect to the
laws of any jurisdiction other than the General Corporation Law of the State of
Delaware and the federal securities laws of the United States of America, in
each case as in effect on the date hereof.
<PAGE>
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and further consent to the use of our name under the
heading "Legal Matters" in the Proxy Statement/Prospectus which forms a part
thereof. In giving this consent, we do not thereby admit that we are in
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations promulgated thereunder by
the Securities and Exchange Commission. This opinion is given as of the date
hereof and we assume no obligation to update or supplement this opinion to
reflect and any facts or circumstances which may hereafter occur or come to our
attention or any changes in law which may hereafter occur.
Very truly yours,
Buchanan Ingersoll Professional Corporation
/s/ Stephen W. Johnson
By:_______________________
Stephen W. Johnson
-2-
<PAGE>
Exhibit 8.1
FINN DIXON & HERLING LLP
One Landmark Square
Stamford, Connecticut 06901
Telephone (203) 325-5000
Facsimile (203) 348-5777
March 30, 1999
Board of Directors
Reunion Industries, Inc.
One Stamford Landing
62 Southfield Avenue
Stamford, Connecticut 06902
Gentlemen:
We have acted as special tax counsel to Reunion Industries, Inc., a
Delaware corporation (the "Company"), in connection with the proposed execution
and delivery of the Merger Agreement, dated as of March 30, 1999 (the "Merger
Agreement"), between the Company and Chatwins Group, Inc., a Delaware
corporation ("CGI"). In connection with your approval of the Merger Agreement,
you propose to (i) except the transactions contemplated by the Merger Agreement
from the transfer restrictions contained in Article V of the Certificate of
Incorporation of the Company (the "Transfer Restrictions"), and (ii) extend the
Transfer Restrictions to the date which is three years from the date of
consummation of the Merger provided for in the Merger Agreement (the "Merger").
In our capacity as such counsel we have reviewed the proposed Merger
Agreement and the Company's Certificate of Incorporation and such other
documents, records and legal matters as we have deemed necessary or relevant for
purposes of issuing the opinions hereinafter expressed. Capitalized terms used
herein and not otherwise defined herein are used with the meanings ascribed to
such terms in the Certificate of Incorporation of the Company.
You have advised us that:
a. A principal purpose of the Merger is not the evasion or
avoidance of federal income tax through utilization of the net operating loss
carryovers (including any "net unrealized built-in loss," as defined under
applicable law), capital loss carryovers, general business credit carryovers,
alternative minimum tax credit carryovers and foreign tax credit carryovers (the
"Tax Benefits") to which the Company is entitled pursuant to the Internal
Revenue Code of 1986, as amended, or any successor statute (collectively, the
"Code "), and the Treasury Regulations promulgated thereunder (the "Treasury
Regulations");
<PAGE>
b. Since March 30, 1996, (i) no Person has made any Transfer of any
shares of stock of the Corporation to any other person prohibited by Section
5.1(2) of the Certificate of Incorporation of the Company, except that an
aggregate of 17,465 shares of Company Common Stock has been issued to Persons
who were and remain members of the Company's Public Group and that approximately
7% of the Company's outstanding Common stock has been acquired by Stanwich
Financial Services Corporation from Parkdale Holdings N.V., and (ii) there has
been no transfer of the ownership interests in any entity that directly or
indirectly owns 5% or more of the Company Common Stock, except for transfers to
Persons whose indirect ownership of Company Common Stock was attributed to the
transferor under the constructive ownership rules of Section 382 of the Code and
the Treasury Regulations thereunder, and except for certain transfers which, in
the aggregate, did not result in an increase in the indirect ownership of
Company Common Stock of any 5-Percent Shareholder of more than two percentage
points.
c. If any Transfer of any shares of stock of the Company occurs
within three years after consummation of the Merger which would be prohibited by
Article V of the Certificate of Incorporation, but for the occurrence of the
Expiration Date referred to therein (the "Original Expiration Date"), the Tax
Benefits that could be utilized by the Company may be limited;
d. You intend to extend the Original Expiration Date to the date
which is the earlier of (x) the day after the third anniversary of the
effectiveness of the merger of CGI with and into the Company provided for in the
Merger Agreement, (y) repeal of Section 382 of the Code if the Board of
Directors determines that the restrictions are no longer necessary, and (z) the
beginning of a taxable year of the Company as to which the Board of Directors
determined prior to the beginning of such taxable year that no Tax Benefits may
be carried forward, unless the Board of Directors fixes an earlier or later date
in accordance with Section 5.7 of Article V of the Certificate of Incorporation
of the Company (the "Amended Expiration Date").
e. The preferred stock of Reunion (the "Preferred Stock") to be
issued pursuant to the Merger Agreement shall be nonvoting, nonconvertible
stock. The Preferred Stock shall not participate in corporate growth to any
significant extent and, upon redemption or liquidation, shall be entitled to
payment of an amount no greater than the Initial Redemption Value (as defined in
the Merger Agreement) of such Preferred Stock plus all accrued but unpaid
dividends.
Based upon and subject to the foregoing, we are of the opinion that:
1. For federal income tax purposes, permitting the Company to issue
up to 9,000,000 shares of its Common Stock, par value $.01 per share, as
contemplated by the Merger Agreement, will
<PAGE>
not jeopardize the Company's full utilization of the Tax Benefits either by
subjecting such Tax Benefits to the limitations of Section 382 of the Code and
the Treasury Regulations thereunder or by resulting in the disallowance of such
Tax Benefits under Section 269 of the Code.
2. The extension of the Original Expiration Date to the Amended
Expiration Date is necessary or desirable to preserve the Tax Benefits under the
Code and the Treasury Regulations.
Members of this firm are attorneys admitted to practice in the States of
Connecticut and New York and we express no opinion as to any laws or regulations
of any jurisdiction other than Connecticut and New York except the federal laws
of the United States of America and the Delaware General Corporation Law.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and further consent to the use of our name under the
headings "Legal Matters" and "Proposal 1: The Merger--Other Merger-Related
Matters" in the Proxy Statement/Prospectus which forms a part thereof. In giving
this consent, we do not thereby admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations promulgated thereunder by the Securities
and Exchange Commission.
This opinion is given as of the date hereof. We assume no obligation to
update or supplement this opinion to reflect any facts or circumstances, or
changes in law, which may hereafter occur or come to our attention or any
changes in law which may hereafter occur. The opinions given herein are limited
to those opinions expressly set forth herein and therein and no other opinions
shall be implied. This opinion is given solely for your benefit and may not be
relied upon by any other person or entity, and may not be disclosed, except with
the prior express written consent of a member of this firm, to any other person
or entity.
Very truly yours,
/s/ FINN DIXON & HERLING LLP
<PAGE>
Exhibit 8.2
FINN DIXON & HERLING LLP
One Landmark Square
Stamford, Connecticut 06901
Telephone (203) 325-5000
Facsimile (203) 348-5777
March 30, 1999
Board of Directors
Reunion Industries, Inc.
One Stamford Landing
62 Southfield Avenue
Stamford, CT 06902
Gentlemen:
We have acted as special tax counsel in connection with the proposed merger
(the "Merger") of Chatwins Group, Inc., a Delaware corporation ("Chatwins"),
with and into Reunion Industries, Inc., a Delaware corporation ("Reunion"),
pursuant to the terms of the Merger Agreement, as amended, dated as of March
30, 1999, between Reunion and Chatwins (the "Merger Agreement"). Defined terms
used in this opinion and not defined herein shall have the respective meanings
ascribed to such terms in the Merger Agreement.
In connection with this opinion, we have examined and relied upon originals
or copies, certified or otherwise identified to our satisfaction, of the Merger
Agreement and such other documents as we have deemed necessary or appropriate
in order to enable us to render the opinions below. In our examination, we have
assumed the genuineness of all signatures, the legal capacity of all natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified,
conformed or photostatic copies and the authenticity of the originals of such
copies. In addition, in rendering our opinions we have relied upon certain
representations (attached hereto) made to us by Reunion and Chatwins, without
having independently confirmed the accuracy thereof.
The opinions set forth below are based upon the Internal Revenue Code of
1986, as amended (the "Code"), the Treasury Regulations issued thereunder
("Treasury Regulations"), administrative interpretations thereof and judicial
decisions with respect thereto as of the date hereof. In rendering the opinions
expressed below we have assumed that: (a) the Merger will be valid and
effective in accordance with the Delaware General Corporate Law and will be
consummated in accordance with the terms of the Merger Agreement; and (b) each
of Reunion and Chatwins will comply with all reporting obligations with respect
to the Merger required under the Code and the Treasury Regulations.
An inaccuracy in the assumed facts or the representations, or a change after
the date hereof in the law applicable to the Merger, could adversely affect our
opinions. No ruling has been (or will be) sought from the Internal Revenue
Service as to the federal income tax consequences of any aspect of the Merger.
Based on and subject to the foregoing, it is our opinion that for federal
income tax purposes:
(i) the Merger will be treated as a tax-free reorganization under Section
368(a)(1)(A) of the Code;
(ii) no gain or loss will be recognized by Chatwins' stockholders on the
receipt of shares of Reunion Common Stock solely in exchange for shares of
Chatwins Common Stock;
(iii) the tax basis of shares of Reunion Common Stock received pursuant to the
Merger will equal the tax basis of the shares of Chatwins Common Stock
exchanged therefor;
<PAGE>
(iv) provided that the shares of Chatwins Common Stock are held as capital
assets at the time of the Merger, the holding period of the shares of
Reunion Common Stock received in the Merger will include the holding
period of the shares of Chatwins Common Stock exchanged therefor; and
(v) no gain or loss will be recognized by the stockholders of Reunion solely as
a result of the consummation of the Merger.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and further consent to the use of our name under the
headings "Legal Matters" and "Proposal 1: The Merger--Other Merger-Related
Matters" in the Proxy Statement/Prospectus which forms a part thereof. In
giving this consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the rules and regulations promulgated thereunder by the
Securities and Exchange Commission.
No opinion is expressed as to any matter not specifically addressed above.
Further, no opinion is expressed as to the tax consequences of any of the
transactions under any foreign, state, or local tax law. The opinions given
herein are provided in connection with the transactions contemplated by the
Merger Agreement, and this letter and the opinions given herein may not, unless
otherwise specifically agreed to in writing by a member of this firm, be
circulated or used, quoted or relied upon for any other purpose or by any
person or entity other than the addressees. This opinion is given as of the
date hereof and we assume no obligation to update or supplement this opinion to
reflect any facts or circumstances which may hereafter occur or come to our
attention or any changes in law which may hereafter occur.
Very truly yours,
/s/ FINN DIXON & HERLING LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Reunion Industries, Inc. of our report
dated March 17, 1999 relating to the financial statements of Reunion Industries,
Inc., which appears in such Prospectus. We also consent to the references to us
under the headings "Experts" and "Selected Financial Data" in such Prospectus.
However, it should be noted that PricewaterhouseCoopers LLP has not prepared or
certified such "Selected Financial Data."
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
New York, NY
March 31, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Reunion Industries, Inc. of our report
dated March 26, 1999 relating to the financial statements of Chatwins Group,
Inc. which appears in such Prospectus. We also consent to the references to us
under the headings "Experts" and "Selected Financial Data" in such Prospectus.
However, it should be noted that PricewaterhouseCoopers LLP has not prepared or
certified such "Selected Financial Data."
/s/ PricewaterhouseCoopers LLP
- ---------------------------------
PricewaterhouseCoopers LLP
Pittsburgh, PA
March 31, 1999
<PAGE>
Exhibit 23.3
March 30, 1999
Reunion Industries, Inc.
One Stamford Landing
62 Southfield Avenue
Stamford, Connecticut 06902
We hereby consent to the use of our name and to the description of our
opinion letter, dated March 30, 1999, under the caption "Opinion of Reunion
Industries' Financial Advisor" in, and to the inclusion of such opinion letter
as Annex B to, the proxy statement/prospectus of Reunion Industries, Inc. By
giving such consent we do not thereby admit that we come within the category of
persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
LEGG MASON WOOD WALKER, INCORPORATED
By: /s/ B. Andrew Schmucker
----------------------------------------
Managing Director
<PAGE>
Exhibit 99.2
P R O X Y
Reunion Industries, Inc.
PROXY for Annual Meeting of Stockholders
To Be Held June 8, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Reunion Industries, Inc. a Delaware
corporation, hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders and Proxy Statement/Prospectus, each dated ______________, 1999,
and hereby appoints Charles E. Bradley, Sr. and Richard L. Evans, or either of
them, proxies and attorneys-in-fact, with full power to each of substitution, on
behalf of the undersigned, to represent the undersigned at the Annual Meeting of
Stockholders of Reunion Industries, Inc. to be held on June 8, 1999 at the
Holiday Inn Select Stamford, 700 Main Street, Stamford, Connecticut, at 10:00
a.m., local time, and at all adjournments or postponements thereof, and to vote
shares of Common Stock that the undersigned would be entitled to vote if then
and there personally present, on all matters set forth on the reverse side
hereof.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE HEREIN. IF NO SPECIFICATION IS INDICATED, THE SHARES
REPRESENTED BY THIS PROXY WILL BE VOTED FOR APPROVAL OF THE MERGER AGREEMENT AND
FOR THE ELECTION OF THE NAMED NOMINEES AS DIRECTORS.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
- --------------------------------------------------------------------------------
<PAGE>
[X]Please mark votes
as in this example
THE BOARD OF DIRECTORS RECOMMENDED A VOTE "FOR" THE FOLLOWING PROPOSAL:
1. PROPOSAL 1: To approve the
Agreement and Plan of
Merger, dated March 30, 1999,
by and BETWEEN Reunion Industries, Inc.
and Chatwins Group, Inc.
For Against Abstain
[ ] [ ] [ ]
2. PROPOSAL 2: The election as directors (except as
indicated below) of the following nominees:
Thomas N. Amonett, Charles E. Bradley, Sr.,
Thomas L. Cassidy, W.R. Clerihue,
Franklin Myers and John G. Poole.
For Against Abstain
[ ] [ ] [ ]
(Instructions: To withhold authority to vote
for any individual nominee, write the
nominee's name below.)
____________________________________
3. OTHER BUSINESS: In their discretion, the proxy holders
are hereby authorized to vote on such
other business as may properly come
before the Annual Meeting, including,
among other things, a motion to adjourn
the Annual Meeting to another time and/or
place for, among other things, the purpose
of soliciting additional proxies.
Note: Please sign exactly as your name
appears on your stock certificate. If the
stock is registered in the names of two
or more persons, each should sign.
Executors, administrators, trustees,
guardians, attorneys and corporate
officers should insert their titles.
Signature(s)
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Date
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NOTE: Please mark, sign, and date and return the proxy card promptly using the
enclosed envelope.
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