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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO
_____________
COMMISSION FILE NUMBER 33-64325
REUNION INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1439715
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
62 SOUTHFIELD AVENUE
ONE STAMFORD LANDING SUITE 208
STAMFORD, CT 06902
(Address of principal executive offices)
(203) 324-8858
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_].
As of September 30, 1999 the Registrant had 3,940,100 shares of common
stock, par value $.0l, outstanding.
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<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1999 (Unaudited)
and December 31, 1998 2
Consolidated Statements of Operations (Unaudited)
Three Months and Nine Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Qualitative and Quantitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURE 20
FORWARD LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements include any statements
preceded by, followed by or that include the words "believes," "expects,"
"anticipates," "intends," or similar expressions. These forward-looking
statements speak only as of the date of this Form 10-Q, and the Company
expressly disclaims any obligation or undertaking to publicly release any
updates or revisions to any forward-looking statements contained herein.
Although the Company believes that its expectations are based on reasonable
assumptions, it cannot assure you that the expectations contained in such
forward-looking statements will be achieved. Such statements involve risks,
uncertainties and assumptions which could cause actual results to differ
materially from those contained in such statements. Such factors include, but
are not limited to, domestic and international economic conditions which affect
the volume of sales of business and consumer goods by the Company's customers
and, therefore, the volume of sales of component parts produced by the Company;
the cost and availability of materials, labor and other goods and services used
in the Company's operations; actions of the Company's competitors and industry
trends, which affect the pricing of the Company's products; the cost of interest
on the Company's debt; and the effects of our, or parties with whom we do
business, failure to achieve Year 2000 compliance. In addition, the Company's
plans and objectives with respect to financing, asset sales and the proposed
merger with Chatwins Group, Inc. are conditioned on the occurrence of certain
events, some of which are beyond the control of the Company.
1
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REUNION INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 1,211 $ 2,009
Accounts Receivable, Less Allowance for
Doubtful Accounts of $146 and $360, respectively 12,277 12,389
Inventories 6,732 7,104
Customer Tooling-in-Process 97 897
Deferred crop costs 1,039 -
Other Current Assets 1,763 803
-------- --------
Total Current Assets 23,119 23,202
-------- --------
Property, Plant and Equipment---- Net 38,541 41,353
-------- --------
Other Assets
Goodwill 7,841 8,371
Other 1,675 1,948
-------- --------
Total Other Assets 9,516 10,319
-------- --------
TOTAL ASSETS $ 71,176 $ 74,874
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
2
<PAGE>
REUNION INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- ---------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current Portion of Long-Term Debt $ 12,015 $ 11,155
Short Term Term Debt - Related Parties - 1,015
Accounts Payable 8,365 8,684
Advances From Customers 1,222 1,249
Accrued Bargo Judgment - 8,425
Accrued Environmental Costs 1,538 1,723
Other Current Liabilities 3,729 3,868
------------- -------------
Total Current Liabilities 26,869 36,119
LONG-TERM DEBT 20,763 15,245
LONG-TERM DEBT - RELATED PARTIES 1,385 1,385
OTHER LIABILITIES 3,288 3,279
------------- -------------
Total Liabilities 52,305 56,028
------------- -------------
COMMITMENTS AND CONTINGENCIES - NOTE 5
REDEEMABLE PREFERRED STOCK OF CONSOLIDATED SUBSIDIARY 557 607
MINORITY INTERESTS 2,602 2,000
STOCKHOLDERS' EQUITY
Common Stock ($.01 par value; 20,000 authorized;
3,940 and 3,900 issued and outstanding, respectively) 39 39
Additional Paid-in Capital 29,403 29,332
Accumulated Deficit (Since January 1, 1989) (13,131) (12,961)
Foreign Currency Translation Adjustments (599) (171)
------------- -------------
Total Stockholders' Equity 15,712 16,239
------------- -------------
$ 71,176 $ 74,874
============= =============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
3
<PAGE>
REUNION INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1999 1998 1999 1998
-------- ------- ------ ---------
<S> <C> <C> <C> <C>
NET SALES
Plastics $ 17,553 $ 22,957 $ 55,057 $ 74,029
Agriculture 1,887 - 2,710 -
-------- ------- ------ ---------
19,440 22,957 57,767 74,029
Cost of Sales
Plastics 14,743 19,436 46,994 63,071
Agriculture 1,546 - 2,398 -
-------- ------- ------ ---------
16,289 19,436 49,392 63,071
GROSS PROFIT 3,151 3,521 8,375 10,958
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,490 2,790 8,835 8,824
PROVISION FOR MERGER AND REFINANCING COSTS - 1,362 - 1,362
-------- ------- ------ ---------
OPERATING INCOME 661 (631) (460) 772
OTHER INCOME AND (EXPENSE)
Interest Expense (964) (872) (2,282) (2,366)
Provision for Bargo Judgment - - (1,646) (8,825)
Bargo Settlement Gain - - 3,617 -
Other, Including Interest Income 174 (111) 476 (176)
-------- ------- ------ ---------
(790) (983) 165 (11,367)
-------- ------- ------ ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (129) (1,614) (295) (10,595)
Income Tax Benefit (Expense) 45 652 36 577
-------- ------- ------ ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS (84) (962) (259) (10,018)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 459 - 89 (1,200)
-------- ------- ------ ---------
NET INCOME (LOSS) 375 (962) (170) (11,218)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT 233 477 (428) 388
-------- ------- ------ ---------
COMPREHENSIVE INCOME (LOSS) $ 608 $ (485) $ (598) $ (10,830)
======== ======= ======= =========
INCOME (LOSS) PER SHARE - BASIC AND DILUTED
Income (Loss) from Continuing Operations $ (0.02) $ (0.25) $ (0.07) $ (2.59)
Income (Loss) from Discontinued Operations 0.12 - 0.03 (0.31)
======== ======= ======= =========
Net Income (Loss) $ 0.10 $ (0.25) $ (0.04) $ (2.90)
======== ======= ======= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic and diluted 3,940 3,900 3,919 3,874
======== ======= ======= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
REUNION INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1999 1998
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (170) $ (11,218)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operating Activities
Depreciation 2,911 2,713
Goodwill amortization 535 523
Debt issuance costs amortization 809 206
Provision for Bargo judgment 400 8,825
Bargo settlement gain (3,617) -
Provision for environmental liability - 1,200
-------- ---------
868 2,249
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable 112 (1,518)
(Increase) Decrease in Inventory 372 (1,155)
Increase (Decrease) in Accounts Payable (319) 1,485
Payment of Bargo settlement (5,000) -
Other - net (865) 773
-------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (4,832) 1,834
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Joint Venture Interest, Net of Cash Acquired - (1,720)
Sale of Agricultural Land 1,440 2,695
Capital Expenditures (1,933) (3,107)
Loan to Related Party (310) -
Other (401) 451
-------- ---------
NET CASH USED IN INVESTING ACTIVITIES (1,204) (1,681)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Debt Obligations 13,750 960
Debt Issuance Costs (325) -
Payments of Debt Obligations (7,638) (2,613)
Increase (Decrease) in Short Term Borrowings (746) 646
Proceeds from Issuance of Redeemable Preferred Stock of Subsidiary - 583
Proceeds from exercise of stock options and warrants 69 92
Other (3) 43
-------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 5,107 (289)
-------- ---------
EFFECT OF EXCHANGE RATE ON CASH 131 -
-------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (798) (136)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,009 2,085
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,211 $ 1,949
======== =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
5
<PAGE>
REUNION INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
NOTE 1. CONSOLIDATED FINANCIAL STATEMENTS
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, and incurred a loss
of $170 in the nine months ended September 30, 1999. Corporate expenses,
including salaries and benefits, professional fees and other public company
costs, are expected to approximate $1,500 annually. The Company settled its
litigation with Bargo Energy Company ("Bargo") in June 1999, and paid $5,000 to
Bargo on July 15, 1999. On September 2, 1999, the Company paid $973 for
settlement of a California tax audit. In addition, a significant portion of the
$1,378 accrued for environmental remediation of the Louisiana properties (see
Note 5) is expected to be expended during the next twelve months.
The Company's subsidiary, Oneida Rostone Corp. ("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 and Juliana Vineyards
(the Company's wine grape subsidiary). The new credit facility also provided 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. The $5,000
settlement payment to Bargo in July 1999 was funded by a temporary overadvance
on the revolver portion of the CITBC credit facility and the letter of credit
was released. In August 1999, the credit facility was amended to increase term
loan A to $8,250 and provide for a $3,000 term loan B. This amended facility
replaces the temporary overadvance and provides additional working capital for
ORC.
In previous quarters, ORC was not in compliance with a financial covenant
to maintain EBITDA (as defined in the financing agreements with CITBC) of not
less than specified amounts each fiscal quarter and CITBC waived compliance with
this covenant. In connection with the amended credit facility described above,
the financial covenants in the loan agreement were also amended to levels that
management believes are reasonably attainable in future quarters. ORC was in
compliance with the amended covenants at September 30, 1999.
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
and January 1999, the Company borrowed a total of $1,040 from Stanwich
Financial Service Corp., ("SFSC"), a related party. These borrowings bear
interest at 15% and were originally due to mature September 30, 1998. The
Company repaid $800 of this borrowing, including interest, in February 1999 and
$303, including interest, in August 1999. There can be no assurances that
additional financing will be arranged, or that SFSC will lend additional funds.
If the Company is unable to arrange additional financing or complete the merger
described below, it will be necessary to reduce or defer corporate headquarters
salaries and other corporate expenses and it may be necessary to sell one or
more of the Company's businesses.
6
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
As described in Note 3, the Company has announced that it has entered into
an amended and restated merger agreement with Chatwins Group, Inc. 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 cash flow requirements. There can be no assurances that any of these
transactions will be consummated.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Reunion
Industries, Inc. ("RII") and its majority owned subsidiaries. As used herein,
the term "Company" refers to RII, its predecessors and its subsidiaries, unless
the context indicates otherwise. All intercompany transactions and accounts are
eliminated in consolidation.
FINANCIAL STATEMENTS AT SEPTEMBER 30, 1999
The Consolidated Balance Sheet at September 30, 1999 and the Consolidated
Statements of Operations and Cash Flows for the three months and nine months
ended September 30, 1999 and 1998 included herein are unaudited. However, in the
opinion of management of the Company, they reflect all adjustments necessary to
present fairly the results for the interim periods. Such results are not
necessarily indicative of results to be expected for the year. The Consolidated
Balance Sheet at December 31, 1998 has been derived from the audited financial
statements at that date. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
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 the period.
Potential common shares include shares issuable upon exercise of the Company's
stock options and warrants. Potential common shares were not included in the
weighted average number of shares for 1999 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 2001 and may adopt it earlier.
7
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
NOTE 2. INVENTORIES
Inventories consisted of the following:
September 30, 1999 December 31, 1998
------------------ -----------------
Raw Materials $ 3,327 $ 3,308
Work-in process 997 962
Finished Goods 2,408 2,834
--------- ---------
Total $ 6,732 $ 7,104
--------- ---------
NOTE 3. PROPOSED MERGER WITH CHATWINS GROUP, INC.
The Company and Chatwins Group, Inc., a Delaware corporation that owns
approximately 37% of the issued and outstanding shares of common stock of the
Company ("CGI"), have entered into an agreement for a stock-for-stock merger of
CGI with and into the Company. Upon completion of the merger, the CGI stock
outstanding will be converted into 9,500,000 shares of Company common stock,
plus up to an additional 500,000 shares if CGI achieves certain post-merger
performance targets. The shares of the Company's common stock currently held by
CGI will be canceled in the merger. The merger is subject to approval by the
Company's stockholders, the securing of adequate financing to refinance certain
debt of the Company and CGI and to operate the combined company, and the
condition that holders of no more than 5% of CGI stock exercise their appraisal
rights under Delaware law.
In connection with the merger, Reunion and CGI are jointly pursuing long-
term financing options in an effort to consummate the merger within the next
several months. There can be no assurances that the long-term financing can be
completed or that the merger will be approved or consummated.
NOTE 4. LITIGATION AND TAX AUDIT SETTLEMENTS
Bargo Energy Company Litigation
In June 1999, the Company and Bargo Energy Company reached agreement on the
terms of a settlement of their litigation concerning a November 1995 stock
purchase agreement for the sale of the Company's subsidiary, Reunion Energy
Company ("REC") to Bargo. In July 1998, the trial court had entered judgment
affirming a jury finding awarding Bargo $5,000 in punitive damages and awarding
approximately $3,000 in attorneys' fees and costs. The Company's appeal was
pending.
On July 15, 1999, the Company and Bargo signed the Settlement Agreement,
the Company paid Bargo $5,000 and the parties released all claims against each
other. As described in Note 1, the settlement payment was funded by a temporary
overadvance on ORC's revolving credit facility.
8
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
Through June 1999, the Company had recorded provisions totaling $8,825 for
the trial court judgment plus interest at 10% and $2,060 for credit support and
guarantee fees related to the bond filed by the Company to suspend execution on
the judgement while the Company appealed. As a result of the settlement, the
Company recognized a gain in June 1999 of $3,617, the amount by which the
recorded provisions exceeded the settlement amount plus remaining credit support
costs.
California Tax Audit
In June 1999, the Company reached agreement with the California Franchise
Tax Board to settle the assessment of additional taxes for 1991, 1992 and 1993.
The settlement agreement is subject to final approval by the State of
California, which management expects will be received. Under the settlement
agreement, Reunion paid $973, including interest, from the proceeds of a sale of
a portion of the Company's vineyard property in California. The Company accrued
$595 in prior years for this obligation based on settlement discussions. As a
result of the settlement, the Company accrued an additional $370 in June 1999,
with a corresponding charge to discontinued operations.
NOTE 5. CONTINGENCIES
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 material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
The Company's plastic products and service business routinely uses
chemicals and solvents, some of which are classified as hazardous substances.
The Company's oil and gas business and related activities routinely involved the
handling of significant amounts of waste materials, some of which are classified
as hazardous substances. The Company's vineyard operations routinely use
fungicides and insecticides, the handling, storage and use of which is regulated
under the Federal Insecticide, Fungicide and Rodenticide Act, as well as
California laws and regulations.
Except as described in the following paragraphs, the Company believes it is
currently in material compliance with existing environmental protection laws and
regulations and is not involved in any significant remediation activities or
administrative or judicial proceedings arising under federal, state or local
environmental protection laws and regulations. In addition to management
personnel who are responsible for monitoring environmental compliance
9
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
and arranging for remedial actions that may be required, the Company has also
employed outside consultants from time to time to advise and assist in 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, the Rostone division of ORC 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 $235 to date and
has accrued an additional $160 based on current estimates of remediation costs.
Certain of these costs are recoverable from the seller of Rostone (a related
party) by offset to obligations due the seller.
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. During the second quarter of 1999, the Company
conducted remediation work on the property. The Company has paid $112 and is
required to pay an additional $63 of the total cost of approximately $300. A
regulatory hearing has been scheduled for November 1999 to consider the adequacy
of the remediation conducted to date. At September 30, 1999, the remaining
balance accrued by the Company for remediation costs was $1,378 Owners of a
portion of the property have objected to the Company's cleanup methodology and
have filed suit to require additional procedures. The Company is contesting this
litigation, and believes its proposed methodology is well within accepted
industry practice for remediation efforts of a similar nature. No accrual has
been made for costs of any alternative cleanup methodology which might be
imposed as a result of the litigation.
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.
10
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
NOTE 6. SEGMENT INFORMATION
The following table presents information about the results of operations
of the Company's business segments:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Plastic products and services $ 17,553 $ 22,957 $ 55,057 $ 74,029
Agriculture 1,887 0 2,710 0
-------- -------- -------- --------
$ 19,440 $ 22,957 $ 57,767 $ 74,029
======== ======== ======== ========
INCOME (LOSS) BEFORE INTEREST, TAXES, DEPRECIATION
AND AMORTIZATION (EBITDA)
Plastic products and services $ 1,694 $ 2,302 $ 4,188 $ 6,877
Agriculture 777 (55) 618 (40)
Corporate and other (288) (1,895) 627 (11,830)
-------- -------- -------- --------
$ 2,183 $ 352 $ 5,433 $ (4,993)
======== ======== ======== ========
DEPRECIATION AND AMORTIZATION
Plastic products and services $ 905 $ 976 $ 2,935 $ 2,884
Agriculture 445 117 510 349
Corporate and other (2) 1 1 3
-------- -------- -------- --------
$ 1,348 $ 1,094 $ 3,446 $ 3,236
======== ======== ======== ========
INCOME (LOSS) BEFORE INTEREST AND TAXES (EBIT)
Plastic products and services $ 789 $ 1,326 $ 1,253 $ 3,993
Agriculture 332 (172) 108 (389)
Corporate and other (286) (1,896) 626 (11,833)
-------- -------- -------- --------
835 (742) 1,987 (8,229)
Interest expense (964) (872) (2,282) (2,366)
-------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES $ (129) $ (1,614) $ (295) $(10,595)
======== ======== ======== ========
</TABLE>
11
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's principal operations are in the plastic products and services
industry through its wholly owned subsidiary ORC. The Company is also engaged
in wine grape agricultural operations in Napa County, California through its
wholly owned subsidiary Juliana Vineyards ("Juliana").
The Company and Chatwins Group, Inc., a Delaware corporation that owns
approximately 37% of the issued and outstanding shares of common stock of the
Company ("CGI"), have entered into an amended agreement for a stock-for-stock
merger of CGI with and into the Company. Upon completion of the merger, the
CGI stock outstanding will be converted into 9,500,000 shares of Company common
stock, plus up to an additional 500,000 shares if CGI achieves certain post-
merger performance targets. The shares of the Company's common stock currently
held by CGI will be canceled in the merger. The merger is subject to approval by
the Company's stockholders, the securing of adequate financing to refinance
certain debt of the Company and CGI and to operate the combined company, and the
condition that holders of no more than 5% of CGI stock exercise their
appraisal rights under Delaware law.
In connection with the merger, Reunion and Chatwins are jointly pursuing
long-term financing options in an effort to consummate the merger within the
next several months. There can be no assurances that the long-term financing can
be completed or that the merger will be approved or consummated.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999
The Company had net income of $0.4 million during the three months ended
September 30, 1999 compared to a net loss of $1.0 million for the three months
ended September 30, 1998.
ORC: ORC had revenues of $17.6 million and operating income of $0.7 million
for the three months ended September 30, 1999 compared to revenues of $22.9
million and operating income of $1.2 million for the three months ended
September 30, 1998.
The 24% decrease in revenues resulted from several factors, including
certain customers relocating manufacturing operations to Mexico and Asia,
reduced customer orders for continuing programs, end of product cycles and
delays in new program starts, which affected all ORC facilities. ORC backlog
totaled $17.3 million at September 30, 1999, compared to backlog of $16.7
million at December 31, 1998 and backlog of $20.7 million at September 30, 1998.
Backlog is also affected by customers' continuing movement to just-in-time
ordering and shorter delivery cycles.
Cost of sales totaled $14.8 million, or 84.0% of net sales, for the three
months ended September 30, 1999 compared to $19.4 million, or 84.7% of net
sales, for the three months ended September 30, 1998 . Gross profit was $2.8
million for the three months ended September 30, 1999 compared to $3.5 million
in the prior year period. The decrease in both cost of sales and gross profit
resulted from the decrease in revenues.
12
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REUNION INDUSTRIES, INC. AND SUBSIDIARIES
Selling, general and administrative expenses were $2.1 million for the
three months ended September 30, 1999, compared to $2.3 million for the three
months ended September 30, 1998. Operating income was $0.7 million for the three
months ended September 30, 1999 compared to $1.2 million in the comparable 1998
period, primarily because of the decrease in revenues.
JULIANA: Juliana had operating income of $0.3 million on grape sales of
$1.2 million and miscellaneous revenues of $0.7 million for the three months
ended September 30, 1999. Juliana's agricultural operations were accounted for
on the equity method in the prior year period, and the results for the period
were included in Other Income and (Expense).
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSE: Corporate general and
administrative expenses, consisting primarily of executive and administrative
salaries and benefits, professional fees and other public company costs, totaled
$0.3 million for the three months ended September 30, 1999 compared to $0.5
million for the three months ended September 30, 1998.
As a result of the termination of a previous merger agreement with CGI
because of the inability to raise sufficient financing under then-current market
conditions, the Company recorded a charge of $1.4 million in the third quarter
of 1998 to write off accumulated legal, investment banking and other costs
related to the merger.
OTHER INCOME AND (EXPENSE): Interest expense was $1.0 million for the three
months ended September 30, 1999 compared to $0.9 million for the prior year
period. The Company recognized breakeven results from its equity investment in
the agricultural operations for the three months ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999
The Company had a net loss of $0.2 million for the nine months ended
September 30, 1999 compared to a net loss of $11.2 million for the nine months
ended September 30, 1998.
ORC: Revenues and operating income of ORC were $55.1 million and $1.0
million, respectively, for the nine months ended September 30, 1999 compared to
revenues and operating income of $74.0 million and $3.7 million, respectively,
for the nine months ended September 30, 1998.
The 26% decrease in revenues resulted from several factors, including
certain customers relocating manufacturing operations to Mexico and Asia,
reduced customer orders for continuing programs, end of product cycles and
delays in new program starts, which affected all ORC facilities. ORC backlog
totaled $17.3 million at September 30, 1999, compared to backlog of $16.7
million at December 31, 1998 and backlog of $20.7 million at September 30, 1998.
Backlog is also affected by customers' continuing movement to just-in-time
ordering and shorter delivery cycles.
Cost of sales totaled $47.0 million, or 85.4% of net sales, for the nine
months ended September 30, 1999 compared to $63.1 million, or 85.2% of net sales
for the nine months ended September 30, 1998. Gross profit was $8.1 million for
the nine months ended June 30, 1999 compared to $10.9 million in the prior year
period. The decrease in both cost of sales and gross profit resulted from the
decrease in revenues.
13
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
Selling, general and administrative expenses were $7.1 million for the nine
months ended September 30, 1999, compared to $7.2 million for the nine months
ended September 30, 1998. The 1999 period included a $0.5 million provision for
supplemental retirement compensation. Operating income was $1.0 million for the
nine months ended September 30, 1999 compared to $3.7 million in the comparable
1998 period, primarily because of the decrease in revenues.
JULIANA: Juliana had an operating loss of $0.1 million on grape sales of
$1.2 million and miscellaneous revenues of $1.5 million for the nine months
ended September 30, 1999. Juliana's agricultural operations were accounted for
on the equity method in the prior year period, and the results for the period
were included in Other Income and (Expense).
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
$1.4 million for the nine months ended September 30, 1999 and $1.6 million for
the nine months ended September 30, 1998. The 1999 amount includes $0.2 million
of expenses incurred in connection with the proposed sale of ORC, which was
subsequently terminated. The 1999 and 1998 amounts include $0.2 million and $0.4
million, respectively, of legal costs for the Company's litigation with Bargo.
As a result of termination of a previous merger agreement with CGI because
of the inability to raise sufficient financing under then-current market
conditions, the Company recorded a charge of $1.4 million in the third quarter
of 1998 to write off accumulated legal, investment banking and other costs
related to the merger.
OTHER INCOME AND (EXPENSE): Interest expense was $2.3 million for the nine
months ended September 30, 1999 compared to $2.4 million for the prior year
period as a result of lower interest rates on ORC's new credit facility with
CITBC. The Company recorded a charge of $8.8 million in the 1998 period to
record entry of judgment in the Company's litigation with Bargo. The Company
also recorded a $1.6 million charge in the 1999 period for interest and credit
support fees relating to the bond posted in the appeal of the Bargo litigation
judgment, and recognized a gain of $3.6 million in the 1999 period as a result
of the settlement of this litigation. See Note 4 of the Notes to Consolidated
Financial Statements. The Company recognized break-even results from its equity
investment in the agricultural operations for the nine months ended
September 30, 1998.
DISCONTINUED OPERATIONS
The Company recognized income from discontinued operations of $0.5 million
and $0.1 million, respectively in the three month and nine month periods ended
September 30, 1999. The third quarter income was from receipt of a payment from
an insurance company on claims relating to the offshore drilling business
discontinued in 1993. The Company recorded a $0.4 million charge in the second
quarter of 1999 as a result of the settlement of a California tax audit. The
Company recorded a $1.2 million discontinued operations charge in the second
quarter of 1998 to increase its accrual for estimated environmental remediation
costs relating to oil and gas properties in Louisiana.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY OF 1999 ACTIVITIES
Cash and cash equivalents totaled $1.2 million at September 30, 1999.
During the nine months ended September 30, 1999, cash decreased $0.8 million,
with $4.8 million used in operations, $1.2 million used in investing activities
and $5.1 million provided by financing activities.
14
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
Investing Activities: Capital expenditures were $1.9 million and proceeds
from the sale of agricultural land were $1.4 million.
Financing Activities: Proceeds from new term loan borrowings totaled $13.8
million, principally due to Juliana's $7.5 million refinancing and the $6.0
million borrowing under ORC's credit facility to fund the Bargo settlement
payment as described below. Principal payments reduced long-term obligations by
$7.6 million, including $5.7 million repaid from the proceeds of the Juliana
refinancing. Net short term borrowings were reduced $0.7 million.
FACTORS AFFECTING FUTURE LIQUIDITY
Because of various restrictions included in the Company's loan
arrangements, management must separately consider liquidity and financing for
corporate requirements, ORC and Juliana.
CORPORATE: Corporate expenses, including salaries and benefits,
professional fees and other public company costs, are expected to be
approximately $1.5 million annually. A payment of $5.0 million to settle the
Bargo litigation was made on July 15, 1999 and a settlement payment of
approximately $1.0 million to conclude a California tax audit was made on
September 2, 1999. In addition, a significant portion of the $1.4 million
accrued for environmental remediation of the Louisiana properties, described
below under "Contingencies and Uncertainties," is expected to be expended during
the next twelve months. The Company's source of funds for these expenses, other
than from additional borrowings, are from cash balances and permitted payments
by ORC and Juliana. The corporate cash balance at September 30, 1999 was $0.1
million.
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 and Juliana. 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's
corporate operating and debt service requirements.
The new credit facility also provided a letter of credit guarantee to
provide credit support for a supersedeas bond in the Bargo litigation. In
addition to the ORC assets, the facility is secured by a guarantee by Mr.
Charles E. Bradley, Sr., the Company's President and Chief Executive Officer, a
pledge of assets by Stanwich Financial Services Corp., ("SFSC"), a related
party, 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 bond in the
Bargo litigation.
The $5.0 million settlement payment to Bargo in July 1999 was funded by a
temporary overadvance on the revolver portion of ORC's credit facility and the
letter of credit was released. In August 1999, the credit facility was amended
to increase term loan A to $8.25 million and provide for a $3.0 million term
loan B. This amended facility replaces the temporary overadvance and provides
additional working capital for ORC. The guarantee by Mr. Bradley and the pledges
of collateral by Reunion and SFSC were continued under this amendment.
Substantially all the amounts permitted to be paid by ORC to Reunion are
expected to be used to fund continuing guarantee fees on this loan facility.
15
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
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
and the first quarter of 1999, the Company borrowed a total of $1.0 million from
SFSC. These borrowings bear interest at 15%, and were due to mature September
30, 1998. Reunion Industries repaid $0.8 million, including interest, in
February 1999 and $0.3 million, including interest, in August 1999. There can be
no assurances that additional financing will be arranged, or that SFSC will lend
additional funds. If Reunion is unable to complete the merger with CGI and the
related refinancing transaction, or arrange alternative financing, during the
fourth quarter of 1999, it will be necessary to reduce or defer corporate
headquarters salaries and other corporate expenses and it may be necessary to
sell one or more of the company's businesses.
As described above under "General," the Company has announced that it has
entered into an amended and restated merger agreement with Chatwins and is
pursuing long term financing in connection with the proposed merger. If the
merger and refinancing are completed, management believes that there will be
sufficient resources for the Company's operating and debt service requirements.
There can be no assurances that any of these transactions will be consummated.
ORC: In October 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 September 30, 1999 ORC had $0.8 million in revolving
credit availability.
JULIANA: 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
a $3.7 million 4-month note and for working capital. In March 1999, Juliana
entered into a $1.5 million one-year credit facility with Napa National Bank
secured by grape sale contracts for the 1999 harvest. The proceeds were used for
1999 farming operations and will be repaid from proceeds of grape sales.
In August 1999, Juliana sold a portion of the vineyard property to a third
party for net proceeds of $1.4 million. The proceeds were used to pay the
California tax settlement and to repay debt to SFSC. The Company is continuing
its efforts to sell the remaining vineyard property, but there is no assurance
that it will be able to do so at a reasonable price or at all. If the Company is
unable to sell additional parcels, it may not be possible for Juliana to fund
its operating requirements over the next twelve months without funding from
Corporate.
CONTINGENCIES AND UNCERTAINTIES
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 $1.2 million to discontinued operations, based on revised
estimates of the remaining remediation costs. During the second quarter of 1999,
the Company conducted remediation work on the property. The Company is required
to pay $0.2 million of the total cost of $0.3 million. A regulatory hearing has
been scheduled for November 1999 to consider the adequacy of the remediation
conducted to date. At September 30, 1999, the remaining balance accrued by the
16
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
Company for these remediation costs is approximately $1.4 million. Owners of a
portion of the property have objected to the Company's proposed cleanup
methodology and have filed suit to require additional procedures. The Company is
contesting this litigation, and believes its proposed methodology is well within
accepted industry practice for remediation efforts of a similar nature. No
accrual has been made for any costs of any alternative cleanup methodology which
might be imposed as a result of the litigation.
YEAR 2000 COMPUTER COMPLIANCE
The Company, like most companies, utilizes electronic technology which
includes computer hardware and software systems that process information and
perform calculations that are date-and time-dependent. The Company is aware that
the coming of the Year 2000 poses pervasive and complex problems in that
virtually every computer operation (including manufacturing equipment and other
non-information systems equipment), unless it is Year 2000 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 Year 2000. The Company is also aware that it may not only
be negatively affected by the failure of its own systems to be Year 2000
compliant, but may also be negatively affected by the Year 2000 non-compliance
of its vendors, customers, lenders and any other party with which the Company
transacts business.
The Company has completed its assessment of all of the systems and software
in place at all locations and has implemented hardware replacements and software
upgrades where necessary to achieve Year 2000 compliance. Because the Company
uses integrated accounting and manufacturing software provided by third party
vendors, it has avoided internal programming costs associated with modifying
code and data to handle dates past the year 2000. The latest software releases
provided by the respective third party vendors have achieved Year 2000
certification from independent testing organizations. The Company has upgraded
all of its software to Year 2000 compliant releases. Upgrading and testing is
complete at all of the company's seven manufacturing locations and at the
headquarters location. Significant customers and outside vendors such as
suppliers, banks and payroll services have been contacted and have provided
assurances that they are Year 2000 compliant. Because the Company has completed
the upgrading of all of its software, management has not developed a Year 2000
contingency plan. Management continues to monitor the Year 2000 compliance
process and will develop contingency plans if problems are identified in the
future.
The Company has incurred internal staff and other costs as a result of
modifying existing systems to be Year 2000 compliant. Such costs were 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 estimates that the incremental cost to the Company of
enterprise-wide Year 2000 compliance will total approximately $0.05 million.
Management recognizes that the failure of the Company or any party with
which the Company conducts business to be Year 2000 compliant in a timely manner
could have a material adverse impact on the operations of the Company. If the
Company's systems were to fail because they were not Year 2000 compliant, the
Company would incur significant costs and inefficiencies. Manual systems for
manufacturing and financial control would have to be implemented and staffed.
Significant customers might decide to cease doing business with the Company.
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. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in part from
the uncertainty of the Year 2000 readiness of third-parties, the company cannot
ensure its ability to resolve problems associated with the Year 2000 issue that
may affect its operations and business, or expose it to third-party liability in
a timely and cost-effective manner.
17
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
In the operation of its business, the Company has market risk exposures to
foreign currency exchange rates, raw material prices and interest rates. Each of
these risks and the Company's strategies to manage the exposure is discussed
below.
The Company 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 the Company's sales in 1998 and 27% for the nine months ended September
30, 1999. The Company's operating results could be affected by changes in
foreign currency exchange rates or weak economic conditions in Europe. The
Company does not actively hedge its foreign currency risk because the
international operations are self-financed and the translation exposure is not
considered material to the Company's financial condition, liquidity or results
of operations.
The principal raw materials used by the Company are thermoplastic polymers.
These materials are available from a number of suppliers. Prices for these
materials are affected by changes in market demand, and there can be no
assurances that prices for these and other raw materials will not increase in
the future. The Company's contracts with its customer generally provide that
such price increases can be passed through to the customers.
The Company's operating results are subject to risk from interest rate
fluctuations on debt which carries variable interest rates. The variable rate
debt was approximately $21 million at September 30, 1999, which is
representative of balances outstanding during the year following the funding of
the settlement payment for the Bargo litigation. A 0.25% change in interest
rates would affect results of operations by approximately $0.05 million.
18
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) CURRENT REPORTS ON FORM 8-K
During the quarter ended September 30, 1999, the Company filed no
reports on Form 8-K.
19
<PAGE>
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REUNION INDUSTRIES, INC.
(Registrant)
By /s/ Richard L. Evans
---------------------------------------
Richard L. Evans
Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
Date: November 15, 1999
20
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