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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) March 16, 2000
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Commission File Number 33-64325
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REUNION INDUSTRIES, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 06-1439715
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
300 WEYMAN PLAZA, SUITE 340
PITTSBURGH, PENNSYLVANIA 15236
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(Address of principal executive offices, including zip code)
(412) 885-5501
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(Registrant's telephone number, including area code)
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<PAGE> 2
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Current Report on Form 8-K/A contains forward-looking statements as
defined by Section 21E of the Securities Act of 1934, as amended, concerning,
but not limited to, the potential for the future issuance of Reunion
Industries, Inc. common stock, the application of purchase accounting to and
future amortization of any resulting goodwill from the merger and acquisition
described herein, the repayment terms of credit facilities and management's
beliefs regarding the adequacy of funds for operating requirements and debt
service over the next twelve months. These forward-looking statements are
dependent on future events, including results of operations and market forces
beyond the control of Reunion. Note that all forward-looking statements
involve risks and uncertainties including, without limitation, factors which
could cause the future results and shareholder values to differ significantly
from those expressed in the forward-looking statements. In light of the risks
and uncertainties inherent in the forward-looking statements included herein,
the inclusion of such information should not be regarded as a representation
by Reunion or any other person that the forward-looking statements will occur.
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This Current Report on Form 8-K/A amends Items 7(a) and 7(b) of the
Current Report on Form 8-K filed on March 31, 2000.
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits.
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(a) Financial Statements
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
- ------------------------------------------ ----
CHATWINS GROUP, INC.
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Consolidated Financial Statements as of December 31, 1999 and 1998
and for the Years Ended December 31, 1999, 1998 and 1997 and Information
Related to Chatwins Group:
Report of Independent Accountants.........................................4
Consolidated Balance Sheet................................................5
Consolidated Statement of Income and Comprehensive Income.................6
Consolidated Statement of Cash Flows......................................8
Notes to Consolidated Financial Statements...............................10
Information Related to Chatwins Group....................................36
STANWICH ACQUISITION CORP.
- --------------------------
Audited Financial Statements as of December 31, 1999 and 1998
and for the Years Ended December 31, 1999 and 1998:
Report of Independent Accountants........................................56
Balance Sheet............................................................57
Statement of Operations..................................................58
Statement of Cash Flows..................................................59
Notes to the Financial Statements........................................60
(b) Pro Forma Financial Information
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INDEX TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------
REUNION INDUSTRIES, INC.
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Information About the Unaudited Pro Forma
Consolidated Condensed Financial Statements............................72
Unaudited Pro Forma Consolidated Condensed
Balance Sheet as of December 31, 1999..................................74
Unaudited Pro Forma Consolidated Condensed
Statement of Operations for the year December 31, 1999.................77
Notes to Unaudited Pro Forma Consolidated
Condensed Financial Statements.........................................79
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REPORT OF INDEPENDENT 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,
1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States,
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.
As discussed in Note 2 to the accompanying consolidated financial
statements, Chatwins Group merged with Reunion Industries, Inc., an affiliated
company, on March 16, 2000.
As discussed in Note 1 to the accompanying consolidated financial
statements, Chatwins Group changed its method of accounting for start-up costs
as of January 1, 1999.
PRICEWATERHOUSECOOPERS LLP
Pittsburgh, Pennsylvania
April 14, 2000
<PAGE> 5
CHATWINS GROUP, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
At December 31,
1999 1998
ASSETS: -------- --------
Cash and equivalents $ 252 $ 197
Receivables, net (note 1) 25,787 29,654
Inventories (note 3) 12,648 14,506
Other current assets 3,179 3,816
Net assets of discontinued
operations (note 20) - 24,646
-------- --------
Total current assets 41,866 72,819
Property, plant and equipment, net (note 4) 16,675 17,542
Investment (note 5) 6,270 6,707
Due from related parties (note 14) 3,144 1,403
Goodwill, net (note 1) 3,371 3,575
Other assets, net (note 6) 9,694 6,430
-------- --------
Total assets $ 81,020 $108,476
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY:
Revolving credit facility (note 8) $ 5,834 $ 34,005
Current maturities of debt (notes 2, 9 and 10) 25,022 25,010
Trade payables 12,543 14,151
Other current liabilities (note 7) 6,343 8,818
Net liabilities of discontinued
operations (note 20) 3,011 -
-------- --------
Total current liabilities 52,753 81,984
Long-term debt (notes 2, 9 and 10) 24,997 25,057
Other liabilities 1,883 1,533
-------- --------
Total liabilities 79,633 108,574
-------- --------
Commitments and contingent liabilities (note 18) - -
Redeemable preferred stock (note 11) 8,938 8,482
Warrant value (note 9) - 14
Stockholders' equity (note 12):
Common stock (400,000 shares authorized,
292,862 and 289,677 shares outstanding) 3 3
Capital in excess of par value 873 859
Treasury stock (500) (500)
Accumulated deficit (7,927) (8,956)
-------- --------
Total stockholders' equity (7,551) (8,594)
-------- --------
Total liabilities, redeemable preferred stock
and stockholders' equity $ 81,020 $108,476
======== ========
See accompanying notes to consolidated financial statements.
<PAGE> 6
CHATWINS GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except share and per share data)
Year Ended December 31,
1999 1998 1997
-------- -------- --------
Net sales $121,090 $134,478 $136,284
Cost of sales 101,122 108,501 111,205
-------- -------- --------
Gross profit 19,968 25,977 25,079
Selling, general and administrative 12,742 13,740 13,380
Other expense, net 495 579 595
-------- -------- --------
Operating profit 6,731 11,658 11,104
Interest expense, net 7,989 7,453 7,374
Equity in loss from continuing operations
of affiliate 566 4,056 373
-------- -------- --------
Income (loss) from continuing operations
before income taxes (1,824) 149 3,357
Provision for (benefit from) income taxes (1,463) 46 851
-------- -------- --------
Income (loss) from continuing operations (361) 103 2,506
-------- -------- --------
Discontinued operations, net of tax:
Income (loss) from Discontinued Klemp to
May 28, 1999, less applicable
income taxes (benefit) of $58,
($342) and ($149), respectively 136 (1,145) (409)
Gain on disposal of Discontinued Klemp (domestic),
less applicable income taxes of $3,905 8,422 - -
Provision for estimated expenses of
Discontinued Klemp (domestic), less
applicable income tax benefit of $864 (1,859) - -
Estimated loss on disposal of Discontinued
Klemp (foreign) including provision
of $545 for operating losses during
the phase-out period, less applicable
income tax benefit of $1,900 (4,087) - -
Estimated loss on disposal of discontinued
oil and gas operations, less applicable
income tax benefit of $311 (669) - -
Equity in income (loss) from discontinued
operations of affiliate, less applicable
income taxes (benefit) of $50, ($221) and
$108, respectively 79 (429) 162
-------- -------- --------
Total income (loss) from
discontinued operations 2,022 (1,574) (247)
-------- -------- --------
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CHATWINS GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (continued)
(in thousands, except share and per share data)
Year Ended December 31,
1999 1998 1997
-------- -------- --------
Income (loss) before cumulative effect of
change in accounting principle 1,661 (1,471) 2,259
Cumulative effect of change in
accounting principle, less applicable
income tax benefit of $91 (176) - -
-------- -------- --------
Net and comprehensive income (loss) $ 1,485 $ (1,471) $ 2,259
======== ======== ========
Income (loss) applicable to common stockholders $ 1,029 $ (1,927) $ 1,803
======== ======== ========
Earnings per share - basic (note 13):
Continuing operations $ (2.82) $ (1.33) $ 8.44
Discontinued operations 6.97 (5.94) (1.02)
Change in accounting principle (0.60) - -
-------- -------- --------
Earnings (loss) per share - basic $ 3.55 $ (7.27) $ 7.42
======== ======== ========
Weighted average shares outstanding - basic 290,036 265,088 242,887
======== ======== ========
Earnings per share - diluted (note 13):
Continuing operations $ (2.82) $ (1.33) $ 7.00
Discontinued operations 6.97 (5.94) (0.84)
Change in accounting principle (0.60) - -
-------- -------- --------
Earnings (loss) per share - diluted $ 3.55 $ (7.27) $ 6.16
======== ======== ========
Weighted average shares outstanding - diluted 290,036 265,088 292,887
======== ======== ========
See accompanying notes to consolidated financial statements.
<PAGE> 8
CHATWINS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31,
1999 1998 1997
-------- -------- --------
Cash flow from operating activities:
Net income (loss) $ 1,485 $ (1,471) $ 2,259
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation 3,637 3,922 3,438
Amortization of intangibles 634 564 405
Amortization of deferred financing fees 1,308 671 550
Deferred tax provision (benefit) (616) (517) 810
Equity in net loss of affiliate 437 4,706 103
Gain on sale of property (1,681) - -
Gain on sale of Discontinued Klemp (domestic) (12,327) - -
Provision for estimated expenses of
Discontinued Klemp (domestic) 2,723 - -
Provision for estimated loss on disposal of
Discontinued Klemp (foreign) 5,987 - -
Provision for estimated loss on disposal of
discontinued oil and gas operations 980 - -
Payments of expenses of discontinued operations (1,586) - -
Changes in assets and liabilities:
Decrease (increase) in receivables 3,867 (4,094) (7,841)
Decrease (increase) in inventories 1,858 (3,782) (97)
Decrease (increase) in other current assets 637 (47) (343)
Increase (decrease) in trade payables
and other current liabilities (3,290) 1,800 4,478
Increase in due from related parties (1,741) (803) (600)
Net change in other assets and liabilities (6,480) (4,217) (850)
-------- -------- --------
Cash provided by (used in) operating activities (4,168) (3,268) 2,312
-------- -------- --------
Cash flow from investing activities:
Proceeds from sale of
Discontinued Klemp (domestic) 32,052 - -
Proceeds from sale of discontinued
oil and gas operations 189 - -
Proceeds from sale of investment in joint venture 275 - -
Proceeds from sale of property 4,563 - -
Capital expenditures (2,585) (5,095) (5,044)
Investment in joint venture - (100) -
-------- -------- --------
Cash provided by (used in) investing activities 34,494 (5,195) (5,044)
-------- -------- --------
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CHATWINS GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(in thousands)
Year Ended December 31,
1999 1998 1997
-------- -------- --------
Cash flow from financing activities:
Repayments of debt (72) (48) (47)
Repayments to related parties - - (579)
Revolving credit facilities borrowings 170,396 191,281 180,115
Revolving credit facilities repayments (198,567) (183,337) (177,683)
Payments of deferred financing costs (1,213) (1,105) (127)
Net increase (decrease) in outstanding checks (793) 1,279 1,431
-------- -------- --------
Cash provided by (used in) financing activities (30,249) 8,070 3,110
-------- -------- --------
Net increase (decrease) in cash and equivalents 77 (393) 378
Less: Change in cash of discontinued operations (22) 10 (10)
Cash and equivalents, beginning of year 197 580 212
-------- -------- --------
Cash and equivalents, end of year $ 252 $ 197 $ 580
======== ======== ========
Supplemental cash flow information:
Interest paid $ 8,819 $ 9,211 $ 9,226
======== ======== ========
Income taxes paid (refunded) $ 279 $ (139) $ 205
======== ======== ========
See accompanying notes to consolidated financial statements.
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CHATWINS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Chatwins Group, Inc., is composed of five divisions that design,
manufacture and market metal products. Chatwins Group's principal products
include large, seamless pressure vessels for highly pressurized gases;
industrial hydraulic and pneumatic cylinders; 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
all of Chatwins Group's net sales in 1999 and 1998.
Discontinued Operations
During the second quarter of 1999, Chatwins Group's management adopted a
plan to exit the grating manufacturing business through the disposition of
substantially all the business and assets of its Klemp division (Discontinued
Klemp). Upon adoption of the plan, Chatwins Group classified and began
accounting for Discontinued Klemp, including its international grating
subsidiaries, as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
(APB 30), which requires discontinued operations to be reported separately
from continuing operations.
During the third quarter of 1999, Chatwins Group's management adopted a
plan to liquidate its oil and gas business through the disposition of all of
its oil and gas related assets. Upon adoption of the plan, Chatwins Group
classified and began accounting for the oil and gas business as a discontinued
operation in accordance with APB 30.
Prior period information contained in these consolidated financial
statements and accompanying notes have been restated to reflect Discontinued
Klemp and the discontinued oil and gas business in accordance with APB 30.
See note 20.
Principles of Consolidation
The consolidated financial statements include the accounts of Chatwins
Group and its majority- and wholly-owned subsidiaries. All significant
intercompany transactions and balances 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, if any, 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
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course of business are subsequently adjusted to actual results. Actual
results could differ from such estimates.
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 $196,000 and $512,000 in allowance for
doubtful accounts at December 31, 1999 and 1998, 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, at standard costs
which approximate the "last-in, first-out" (LIFO) method of inventory
valuation for approximately 73% and 81% of total inventories at December 31,
1999 and 1998, respectively, and at standard costs which approximate the
"first-in, first-out" (FIFO) method for the remaining inventories. See note
3.
Other Current Assets
Other current assets is primarily comprised of net current deferred tax
assets, deposits and prepaid expenses. See note 17.
Property, Plant and Equipment
Property, plant and equipment is 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.
Investment
Investment is comprised of Chatwins Group's holdings of Reunion
Industries Inc. common stock. See notes 2 and 5.
Goodwill
Goodwill, which represents the excess of the purchase consideration over
the fair value of the net assets of acquired businesses, is being amortized
generally over 20 years using the straight-line method. Accumulated
amortization of goodwill at December 31, 1999 and 1998, is $1,785,000 and
$1,581,000, respectively.
Chatwins Group regularly evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life of goodwill may
warrant revision or the carrying value of goodwill may not be recoverable. In
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evaluating goodwill for possible impairment, Chatwins Group uses an estimate
of undiscounted future cash flows over the goodwill's remaining estimated
useful life. Should this analysis indicate that goodwill is impaired,
Chatwins Group would write-down its carrying value to fair market value.
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 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, 1999 and 1998 (in thousands):
At December 31,
1999 1998
-------- --------
Uncompleted contract costs over related billings $ 8,381 $ 10,556
Uncompleted contract billings over related costs (4,755) (5,297)
-------- --------
$ 3,626 $ 5,259
======== ========
Translation of Foreign Currencies
All amounts in the accompanying consolidated financial statements are
denominated in U.S. dollars. Assets and liabilities of discontinued foreign
operations whose local currency is the functional currency are translated at
exchange rates in effect at the balance sheet date. Revenues and expenses of
discontinued foreign operations are translated at average exchange rates
during the period. Translation gains and losses, if any, are not included in
results of discontinued operations, but are accumulated as a separate
component of the equity accounts of discontinued operations. Gains and losses
from foreign currency transactions, if any, are included in results of
discontinued operations.
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,
<PAGE> 13
which assumes they are exercised at the beginning of the period.
Fair Market Value Disclosure
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 investment, insofar as it was practical
to determine, was deemed to approximate fair value based on current market
conditions. 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 annual interest rate at
which dividends accrete which approximates Chatwins Group's average borrowing
rate on its debt. 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 issuance of the $50 million principal amount of
13% senior notes.
Change in Accounting Principle
Effective January 1, 1999, Chatwins Group adopted the AICPA's Statement
of Position 98-5, "Reporting on the Costs of Start-up Activities," which
requires that the costs of start-up activities be expensed as incurred. Such
adoption is reported as the cumulative effect of a change in accounting
principle and resulted in the write-off of $176,000 of start-up costs, net of
taxes of $91,000. These start-up costs primarily related to Chatwins Group's
international subsidiaries.
Recent Accounting Pronouncement
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging
Activities." This statement 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. Chatwins Group does not
presently have transactions involving derivative instruments.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform
to 1999 classifications.
NOTE 2: SUBSEQUENT EVENTS: THE MERGER AND REFINANCING
The Merger
On March 16, 2000, Chatwins Group and Reunion Industries, Inc. (Reunion)
merged (see note 18). Prior to the merger, Chatwins Group owned approximately
37% of Reunion's issued and outstanding common stock. See note 5. In the
merger, Reunion issued 9,500,000 shares of common stock to holders of Chatwins
Group's common stock. The 1,450,000 shares of Reunion common stock previously
owned by Chatwins Group were retired in the merger, as were the previously
issued shares of Chatwins Group common stock. The merger agreement also
provides that up to an additional 500,000 shares of Reunion common stock will
be issued to former Chatwins Group common stockholders if the former Chatwins
Group businesses achieve specified performance levels in 2000.
<PAGE> 14
Reunion will account for the merger as a purchase pursuant to APB 16,
"Business Combinations." Chatwins Group will be the acquirer for purposes of
applying purchase accounting to the merger. Therefore, Chatwins Group's
assets and liabilities will continue to be carried at their historical book
values after the merger and Reunion's assets and liabilities will be revalued.
The excess of the purchase price over the fair value of assets acquired and
liabilities assumed (goodwill), if any, for the acquisition of the
approximately 63% of Reunion's common stock not previously owned by Chatwins
Group will be capitalized and amortized over fifteen years.
Holders of Chatwins Group Class D, Series A, B and C preferred stock
received 9,033 shares of Reunion Series A preferred stock in the merger. The
Reunion Series A preferred stock has an initial redemption price of
$9,033,000. Cumulative dividends at 10% per annum of the initial redemption
price are payable as and when declared by Reunion's Board of Directors.
Dividends on the Reunion Series A preferred stock are senior to dividends on
its common stock but junior to dividends on its Series B preferred stock, also
issued at the time of the merger in a related transaction. Subject to
Delaware law and restrictions in its debt agreements, Series A preferred stock
may be redeemed at Reunion's option if no shares of Series B preferred stock
are outstanding.
The Refinancing
Simultaneously with the merger, Reunion entered into $72.5 million of
senior secured credit facilities with Bank of America (BOA). These credit
facilities consist of a $39.0 million revolving credit facility, a $25.8
million term loan A facility, a $5.0 million term loan B facility and a $2.7
million capital expenditures facility.
Proceeds from initial borrowings under the Bank of America credit
facilities were used for various purposes, including repayment of Chatwins
Group's existing credit facilities with Bank of America (see note 8) and
retirement of $25.0 million of Chatwins Group's 13% senior notes plus accrued
and unpaid interest (see note 9). Reunion had approximately $3.8 million of
borrowing availability after the initial borrowings.
Chatwins Group was required to make sinking fund payments to redeem $12.5
million principal amount of the senior notes on May 1 in each of 2000 through
2003 at face value plus accrued interest. Chatwins Group was required to
offer to purchase $25 million of the senior notes on June 1, 2000 at face
value plus accrued interest. In February 2000, Chatwins Group solicited the
holders of the $49,975,000 of 13% senior notes outstanding asking them to
waive their right to participate in the June 1, 2000 $25.0 million purchase
offer, of which $47,450,000 agreed to waive such right resulting in a maximum
purchase offer obligation on June 1, 2000 of $2,525,000. However, the $25.0
<PAGE> 15
million of 13% senior notes repaid from the merger proceeds can be applied
against Chatwins Group's obligations for future sinking fund payments and
purchase offer as follows (in thousands):
May 1, June 1, May 1,
2000 2000 2001 Total
-------- -------- -------- --------
Sinking fund payment or
purchase offer obligation $ 12,500 $ 2,525 $ 12,500 $ 27,525
$25.0 million applied to
future obligations (12,500) (2,525) (9,975) (25,000)
-------- -------- -------- --------
Maximum required payment $ - $ - $ 2,525 $ 2,525
======== ======== ======== ========
In the merger, Reunion assumed the obligations of Chatwins Group under
the indenture governing the remaining $24,975,000 of 13% senior notes. Based
on the above, the indenture provides that up to $2,525,000 principal amount of
the 13% senior notes is scheduled to be repaid in May 2001, $12,500,000 is
scheduled to be repaid in May 2002 and the remainder is scheduled to be repaid
in May 2003.
NOTE 3: INVENTORIES
Inventories are comprised of the following (in thousands):
At December 31,
1999 1998
-------- --------
Raw material $ 5,228 $ 6,144
Work-in-process 3,866 4,797
Finished goods 3,625 3,632
-------- --------
Gross inventories 12,719 14,573
Less: LIFO reserves (71) (67)
-------- --------
Inventories $ 12,648 $ 14,506
======== ========
<PAGE> 16
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following (in thousands):
At December 31,
1999 1998
-------- --------
Land $ 1,078 $ 1,078
Buildings and improvements 7,338 7,331
Machinery and equipment 22,129 21,284
Computer systems 3,835 3,094
Furniture and fixtures 843 1,281
Construction-in-progress 2,822 2,661
-------- --------
Property, plant and equipment 38,045 36,729
Less: Accumulated depreciation and depletion (21,370) (19,187)
-------- --------
Property, plant and equipment, net $ 16,675 $ 17,542
======== ========
NOTE 5: INVESTMENT IN REUNION COMMON STOCK
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. Reunion is primarily engaged in the manufacture of high volume,
precision plastics products, providing engineered plastics services and
compounding and molding thermoset polyester resins. Reunion also has wine
grape agricultural operations in Napa County, California.
Chatwins Group's investment in Reunion is being accounted for under the
equity method of accounting. Chatwins Group's share of Reunion's operating
results for 1999, 1998 and 1997 is included in the accompanying consolidated
statement of income and other comprehensive income as equity income (loss)
from operations of affiliate. On March 16, 2000, Chatwins Group and Reunion
merged. See note 2.
<PAGE> 17
Certain summarized financial information related to Reunion at December
31, 1999 and 1998 and for the years ended December 31, 1999, 1998 and 1997 is
set forth below (in thousands):
1999 1998 1997
-------- -------- --------
Current assets $ 19,183 $ 23,202
======== ========
Other assets $ 47,128 $ 51,672
======== ========
Current liabilities $ 24,824 $ 36,119
======== ========
Other liabilities $ 23,705 $ 19,909
======== ========
Redeemable preferred stock $ 524 $ 607
======== ========
Minority interests $ 2,713 $ 2,000
======== ========
Stockholders' equity $ 14,545 $ 16,239
======== ========
Net sales $ 76,099 $ 97,318 $ 93,378
======== ======== ========
Operating income (loss) $ (476) $ 1,495 $ 2,513
======== ======== ========
Loss from continuing operations $ (1,488) $(10,440) $ (981)
======== ======== ========
Income (loss) from discontinued operations $ 339 $ (1,710) $ 710
======== ======== ========
Net loss $ (1,149) $(12,383) $ (271)
======== ======== ========
NOTE 6: OTHER ASSETS
Other assets consist of the following (in thousands):
At December 31,
1999 1998
-------- --------
Deferred financing costs (net of accumulated
amortization of $2,976 and $2,067) $ 2,454 $ 2,525
Cash surrender value of life insurance policies 2,874 2,381
Other 4,366 1,524
-------- --------
Total other assets $ 9,694 $ 6,430
======== ========
<PAGE> 18
NOTE 7: OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
At December 31,
1999 1998
-------- --------
Accrued wages and benefits $ 2,478 $ 2,619
Accrued pension costs (note 15) 220 295
Accrued postretirement benefits (note 15) 1,092 1,021
Accrued interest 1,140 1,300
Other 1,413 3,583
-------- --------
Total other current liabilities $ 6,343 $ 8,818
======== ========
NOTE 8: REVOLVING CREDIT FACILITY
On October 30, 1998, Chatwins Group and Bank of America, N.A. (BOA;
formerly known as NationsBank), a national banking association, executed a
financing and security agreement (Financing Agreement) wherein BOA provided
Chatwins Group with a revolving credit facility (BOA Facility) of up to a
maximum principal amount of $40.0 million, including a letter of credit
facility of up to $5.0 million. On March 16, 2000, the BOA Facility was
repaid. See note 2.
During the period it was in effect, the BOA Facility included various
representations, warranties and affirmative and negative covenants by Chatwins
Group and provided BOA 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 BOA Facility.
Financial covenants in the BOA Facility included an adjusted earnings before
interest, taxes, depreciation and amortization excluding amortization of
deferred financing costs (BOA 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 BOA EBITDA is adjusted for domestic
capital expenditures. Beginning on December 31, 1998, these covenants
required Chatwins Group to maintain a rolling twelve-month minimum adjusted
BOA EBITDA to fixed charge coverage ratio of 1.25:1 and a maximum indebtedness
to cash flow ratio of 5.0:1. At December 31, 1999 such ratios were 2.4:1 and
4.7:1, respectively, and complied with the financing agreement. Chatwins
Group was also in compliance with all other representations, warranties and
covenants at December 31, 1999.
On September 30, 1999, Chatwins Group completed the sale of its domestic
grating business for $32.1 million in cash and the assumption by the buyer of
certain operating liabilities, subject to post-closing adjustments. See note
20. Substantially all of the proceeds were used to repay borrowings under the
BOA Facility. Borrowings outstanding under the BOA Facility at December 31,
1999 totaled $5.8 million and the weighted average interest rate for borrowing
was 8.5%. For 1999, including the effect on interest expense from the
amortization of deferred financing costs related to the BOA Facility, the
effective interest rate for average outstanding borrowings of $25.3 million
under the BOA Facility was 9.7%.
<PAGE> 19
NOTE 9: LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
At December 31,
1999 1998
-------- --------
13% senior notes due May 1, 2003 (net of
unamortized discount of $52 and $76) $ 49,923 $ 49,924
Other 96 143
-------- --------
Total long-term debt 50,019 50,067
Current maturities (25,022) (25,010)
-------- --------
Total long-term debt, less current maturities $ 24,997 $ 25,057
======== ========
In May 1993, Chatwins Group issued the senior notes and 50,000 warrants
to purchase 50,000 shares of Chatwins Group's common stock. The senior notes
bear interest at 13% per year. Interest is 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 make sinking fund
payments to redeem $12.5 million principal amount of the senior notes on May 1
in each of 2000 through 2003 at face value plus accrued interest. Chatwins
Group was 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 10 for a discussion relating to the June 1, 1999 purchase offer. For
a discussion of the May 1, 2000 sinking fund payment, the June 1, 2000
purchase offer and the maturity of the remaining $24,975,000 of senior notes
after the repayment of $25,000,000 of senior notes in the merger refinancing,
see note 2.
Through December 31, 1999, 49,975 warrants were exercised at $.01 per
share resulting in the issuance of 49,975 shares of Chatwins Group common
stock. The remaining 25 warrants were exercised in March 2000.
NOTE 10: JUNE 1, 1999 SENIOR NOTE PURCHASE OFFER
Pursuant to its obligations under the indenture, on May 12, 1999,
Chatwins Group issued a notice offering to purchase up to $25.0 million of
senior notes on June 1, 1999. Chatwins Group further notified senior note
holders and the trustee that it did not expect to have sufficient liquidity on
June 1, 1999 to consummate the purchase offer if more than $2 million worth of
senior notes were tendered.
As of 5:00 p.m. Eastern time on June 1, 1999, the expiration of the
purchase offer, holders of $24,121,000 principal amount of senior notes had
accepted the purchase offer. On June 2, 1999, Chatwins Group sent a notice to
holders of the $24,121,000 principal amount of tendered senior notes
requesting that their tender be withdrawn in exchange for a withdrawal fee of
2% of principal amount of senior notes tendered (withdrawal notice). The
withdrawal notice also informed the tendering senior note holders of a:
* Third Party Purchase Offer - pursuant to an agreement dated May 28, 1999,
between Chatwins Group and Contrarian Capital, LLC (Contrarian), Contrarian
<PAGE> 20
agreed to purchase senior notes from all tendering holders for the same price
payable by Chatwins Group in the purchase offer and Contrarian had already
elected to withdraw the tender of all senior notes it acquired, if any, in
exchange for the same 2% withdrawal fee,
and
* Possible Asset Sale - Chatwins Group had executed a non-binding letter of
intent (LOI) to sell substantially all of the assets of its Klemp division.
See note 20.
The withdrawal notice further informed tendering senior note holders that
if Chatwins Group did not receive withdrawal elections for the full
$24,121,000 of principal amount of tendered senior notes, either from
tendering senior note holders or Contrarian, Chatwins Group did not expect to
consummate any of the purchases contemplated by the purchase offer, whereupon
an event of default would arise under the indenture.
The withdrawal notice was to expire at 9:30 a.m. Eastern time on June 7,
1999. However, on June 8, 1999, Chatwins Group sent notice to tendering
senior note holders that the request to withdraw tendered senior notes was
being extended indefinitely but could be terminated by Chatwins Group without
prior notice (withdrawal extension). The withdrawal extension also informed
the tendering senior note holders that:
* holders of $7,100,000 principal amount of tendered senior notes had
withdrawn their tenders in exchange for the 2% withdrawal fee,
* Contrarian had purchased or agreed to purchase from tendering senior note
holders and withdraw the tender for $16,186,000 principal amount of senior
notes,
and
* $835,000 principal amount of tendered senior notes remained outstanding
under the purchase offer.
Because Chatwins Group was not able to deposit with the trustee or the
paying agent for the tendered senior notes an amount equal to 100% of the
aggregate principal amount, plus any accrued and unpaid interest, of tendered
senior notes by 12:30 p.m. Eastern time on June 7, 1999 as required by the
indenture, on June 8, 1999, Chatwins Group delivered notice to the trustee of
an event of default.
Ultimately, $7,125,000 principal amount of tendered senior notes withdrew
their tenders directly, $16,971,000 principal amount of tendered senior notes
were purchased and tenders withdrawn by Contrarian and $25,000 principal
amount of tendered senior notes were purchased and retired by Chatwins Group.
In exchange for its purchases of tendered senior notes, Chatwins Group paid
Contrarian a $375,000 stand-by fee in addition to the 2% withdrawal fee which
totalled $339,420. Holders of the $7,125,000 principal amount of senior notes
that withdrew their tenders received withdrawal fees totalling $142,500.
As the result of the tender withdrawals totalling $24,096,000 principal
amount of senior notes, either by tendering senior note holders or Contrarian,
the repayment by Chatwins Group of $25,000 principal amount of tendered senior
notes not withdrawn or sold to Contrarian and the payment by Chatwins Group of
<PAGE> 21
all withdrawal and stand-by fees, the event of default was cured. On June 23,
1999, Chatwins Group sent notice to all tendering senior note holders of the
termination of the withdrawal extension and notice to the trustee of the cure
of the event of default.
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. Charles E. Bradley
(Mr. Bradley) and John G. Poole (Mr. Poole) are the sole executive officers
and directors. Mr. Bradley is Chairman of the Board of Directors of Chatwins
Group. Mr Poole is a director of Chatwins Group. 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):
Class D
--------------------------------
Series A Series B Series C Total
-------- -------- -------- --------
Balance at January 1, 1997 $ 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
Accretions 225 80 151 456
-------- -------- -------- --------
Balance at December 31, 1999 $ 4,591 $ 1,731 $ 2,616 $ 8,938
======== ======== ======== ========
On March 16, 2000, all of Chatwins Group's Class D preferred stock,
including accrued but unpaid dividends, was converted to Reunion Series A
preferred stock in the merger. See note 2.
Redeemable preferred stocks are being accreted by a charge against
accumulated deficit for the accumulated but unpaid dividends on such stock.
At December 31, 1999 and 1998, dividends in arrears were $4,379,000 and
$3,923,000, respectively.
<PAGE> 22
NOTE 12: STOCKHOLDERS' EQUITY
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. On March 16,
2000, all of Chatwins Group's common stock was retired in the merger with
Reunion. See note 2.
The following represents all activity in stockholders' equity for the 3-
year period ended December 31, 1999 (in thousands):
Year Ended December 31,
1999 1998 1997
-------- -------- --------
Par value of common stock, January 1 and
December 31 $ 3 $ 3 $ 3
======== ======== ========
Treasury stock (41,109 shares carried
at cost), January 1 and December 31 $ (500) $ (500) $ (500)
======== ======== ========
Capital in excess of par value, January 1 $ 859 $ 663 $ 663
Warrant exercises (note 9) 14 196 -
-------- -------- --------
Capital in excess of par value, December 31 $ 873 $ 859 $ 663
======== ======== ========
Accumulated deficit, January 1 $ (8,956) $ (7,029) $ (8,832)
Net income (loss) 1,485 (1,471) 2,259
Preferred stock accretions (note 11) (456) (456) (456)
-------- -------- --------
Accumulated deficit, December 31 $ (7,927) $ (8,956) $ (7,029)
======== ======== ========
Total stockholders' equity, January 1 $ (8,594) $ (6,863) $ (8,666)
Warrant exercises 14 196 -
Net income (loss) 1,485 (1,471) 2,259
Preferred stock accretions (456) (456) (456)
-------- -------- --------
Total stockholders' equity, December 31 $ (7,551) $ (8,594) $ (6,863)
======== ======== ========
<PAGE> 23
NOTE 13: EARNINGS PER COMMON SHARE
The computations of basic and diluted earnings per common share (EPS) for
the years ended December 31, 1999, 1998 and 1997 are as follows (in thousands,
except share and per share amounts):
Income Shares EPS
-------- -------- -------
Year ended December 31, 1999:
Net income $ 1,485
Less: Preferred stock dividend accretions (456)
--------
Income available to common stockholders,
shares outstanding and basic EPS $ 1,029 290,036 $ 3.55
======== ======== =======
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)
======== ======== =======
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
======== ======== =======
For 1999 and 1998, assumed exercise of warrants has an anti-dilutive
effect on per-share income (loss) from continuing operations. Therefore,
basic and diluted EPS are the same for 1999 and 1998.
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, 1999, 1998 and 1997, 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,
1999 and 1998.
<PAGE> 24
Kingway Service Agreement
On November 3, 1997, Stanwich Acquisition Corporation (SAC) acquired
Kingway Material Handling (Kingway) 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. Kimball J. Bradley (Kimball
Bradley) and 15% by Mr. Richard L. Evans (Mr. Evans). Kimball Bradley is
Senior Vice President of Chatwins Group and son of Mr. Bradley. Mr. Evans is
an officer of Reunion. Similar to Auto-Lok, Kingway 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
Kingway 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 Kingway from SAC. This right of first
negotiation has since expired. The integration of Kingway's business into
Auto-Lok's facility took place primarily during the second quarter of 1998.
During 1999, costs totaling $1,550,245 were charged to Kingway under this
agreement. At December 31, 1999, Chatwins Group had receivables totaling
$2,151,314 from Kingway. During 1998, costs totaling $1,298,631 were charged
to Kingway under this agreement. At December 31, 1998, Chatwins Group had
receivables totaling $780,000 from Kingway.
Simultaneously with the merger, Reunion acquired Kingway. Subsequent to
the merger and acquisition, Reunion intends to integrate Kingway and Auto-Lok
into a single business unit. See note 2.
NAPTech Services Agreement
On August 25, 1998, NPS Acquisition Corp. (NPSAC), also known as NAPTech
Pressure Systems (NAPTech), 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 NPSAC entered into
a services agreement pursuant to which CPI would provide certain
administrative services to NAPTech for cash fees. The NAPTech services
agreement was for one year and may be renewed annually upon agreement by both
Chatwins Group and NAPTech. In August 1999, this agreement was extended for
an additional one year period. During 1999, costs totalling $899,087 were
charged to NAPTech under this agreement. During 1998, costs totalling
$148,000 were charged to NAPTech under this agreement. At December 31, 1999,
Chatwins Group had receivables totaling $993,087 from NAPTech. At December
31, 1998, Chatwins Group had receivables totaling $148,000 from 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.
CPS Leasing
Chatwins Group has entered into various 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 1998
and 1999, Chatwins Group made lease payments totaling $209,989 and $613,156,
<PAGE> 25
respectively, to CPSL.
BOA Guarantee
Beginning in January 1999, Mr. Bradley guaranteed up to $3.5 million of
the special availability amount (as defined) borrowed under the BOA Facility
for a fee of 5% annually. The guarantee ended by its terms on September 30,
1999. Chatwins Group paid Mr. Bradley a guarantee fee of $112,500 in October
1999.
Butler Air
Beginning in February 1998, Chatwins Group 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 Chatwins Group officers and employees at rates
which Chatwins Group believes are comparable to those available from third
parties. Chatwins Group paid a monthly fee of $5,000 which was credited
against services used. This arrangement was terminated in June 1999.
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 also 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
<PAGE> 26
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, 1999) 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, 1999) 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 following table sets forth the changes in the benefit obligations and
plan assets for the years ended December 31, 1999 and 1998 and the funded
status at December 31, 1999 and 1998 of Chatwins Group's pension and other
postretirement benefit plans (in thousands):
Pension Other Postretirement
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
Change in benefit obligation:
Benefit obligation, beginning $ 2,134 $ 2,002 $ 944 $ 919
Service cost 110 108 39 28
Interest cost 137 128 65 65
Actuarial loss (gain) (74) 14 (1) (29)
Benefits paid (133) (118) (42) (39)
-------- -------- -------- --------
Benefit obligation, ending $ 2,174 $ 2,134 $ 1,005 $ 944
======== ======== ======== ========
Change in plan assets:
Fair value, beginning $ 1,492 $ 1,365 $ - $ -
Actual return 299 80 - -
Company contribution 212 165 42 39
Benefits paid (133) (118) (42) (39)
-------- -------- -------- --------
Fair value, ending $ 1,870 $ 1,492 $ - $ -
======== ======== ======== ========
Funded status:
Net obligation, ending $ 304 $ 642 $ 1,005 $ 944
Unrecognized costs:
Prior service costs (61) (69) 8 8
Net (loss) gain 14 (229) 666 705
Transition obligation (37) (49) (587) (636)
-------- -------- -------- --------
Accrued benefit cost $ 220 $ 295 $ 1,092 $ 1,021
======== ======== ======== ========
<PAGE> 27
Net periodic pension and other postretirement benefits costs for the
following years ended December 31 are as follows (in thousands):
Pension Other Postretirement
---------------------- ----------------------
1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ------
Benefits earned during year $ 110 $ 108 $ 96 $ 39 $ 28 $ 45
Interest cost 137 128 120 65 65 105
Amortization of:
Prior service cost 8 8 7 - - -
Unrecognized net loss (gain) 1 - 3 (43) (52) (10)
Unrecognized net obligation 12 12 12 50 50 49
Expected return on plan assets (132) (118) (93) - - -
------ ------ ------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs 136 138 145 $ 111 $ 91 $ 189
====== ====== ======
Defined contribution plan cost 901 765 786
------ ------ ------
Net periodic pension costs $1,037 $ 903 $ 931
====== ====== ======
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:
1999 1998 1997
-------- -------- --------
Discount rate 7.25% 6.75% 6.75%
======== ======== ========
Expected rate of return on plan assets 8.25% 8.25% 8.0%
======== ======== ========
For the calculation of the net periodic pension costs to be recorded in
2000, 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:
1999 1998 1997
-------- -------- --------
Discount rate 6.75% 6.75% 7.5%
======== ======== ========
Healthcare cost trend rate 3.0% 3.0% 3.0%
======== ======== ========
Rate of compensation increase 2.0% 2.0% 2.0%
======== ======== ========
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 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
<PAGE> 28
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, 1999 by approximately
$112,000, increase net periodic cost by approximately $30,000 and increase the
total of the service and interest cost components by approximately $17,000.
Conversely, a one percentage point decrease in the assumed healthcare cost
trend rate would result in approximate decreases in each by $93,000, $24,000
and $13,000, respectively.
NOTE 16: LEASES
Minimum rental commitments under all noncancellable operating leases in
effect at December 31, 1999, were as follows (in thousands):
Year ended December 31,
Total 2000 2001 2002 2003 2004 After 2003
- ------- ------ ------ ------ ------ ------ ----------
$12,285 $2,190 $1,898 $1,627 $1,475 $1,264 $3,831
======= ====== ====== ====== ====== ====== ======
Operating lease rental expense for the years ended December 31, 1999,
1998 and 1997, amounted to $2,189,000, $2,003,000 and $1,765,000,
respectively.
NOTE 17: INCOME TAXES
The tax provision for continuing operations is comprised of the following
amounts (in thousands):
Year Ended December 31,
1999 1998 1997
-------- -------- --------
Current:
Federal $ 88 $ - $ 91
State and local (252) - 48
-------- -------- --------
Total (164) - 139
-------- -------- --------
Deferred:
Federal (1,299) 46 712
-------- -------- --------
Total (1,299) 46 712
-------- -------- --------
Total tax provision (benefit) $ (1,463) $ 46 $ 851
======== ======== ========
<PAGE> 29
Chatwins Group's effective income tax rate from continuing operations,
reflected in the accompanying consolidated statement of income, differs from
the statutory rate due to the following (in thousands):
Year Ended December 31,
1999 1998 1997
-------- -------- --------
Computed amount at statutory rate (34%) $ (620) $ 51 $ 1,141
Net change in valuation allowance (640) - (360)
State and local income taxes (252) - 48
Goodwill amortization 49 23 1
Foreign sales corporation dividends - (20) (59)
Other - net - (8) 80
-------- -------- --------
Total tax provision (benefit) $ (1,463) $ 46 $ 851
======== ======== ========
Components of consolidated income taxes consist of the following (in
thousands):
Year Ended December 31,
1999 1998 1997
-------- -------- --------
Income (loss) from continuing operations $ (1,463) $ 46 $ 851
Equity income (loss) from discontinued
operations of affiliate 50 (221) 108
Income (loss) from discontinued operations 888 (342) (149)
Change in accounting principle (91) - -
-------- -------- --------
Total consolidated tax provision (benefit) $ (616) $ (517) $ 810
======== ======== ========
Temporary differences and carryforwards that gave rise to significant
portions of deferred tax assets and liabilities are as follows (in thousands):
At December 31,
1999 1998
-------- --------
Depreciation $ (2,391) $ (3,210)
Inventory basis differences (665) (1,285)
Other (995) (1,217)
-------- --------
Deferred tax liabilities (4,051) (5,712)
-------- --------
Loss carryforwards (NOLs) 147 4,589
Book reserves 2,615 2,070
Deferred compensation 135 196
Tax credit carryforwards 848 759
Unicap adjustments 199 235
Other 854 316
-------- --------
Deferred tax assets 4,798 8,165
Less: Valuation allowance - (640)
-------- --------
Deferred tax assets, net 4,798 7,525
-------- --------
Deferred taxes, net asset $ 747 $ 1,813
======== ========
<PAGE> 30
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. Chatwins Group's 1999 taxable income
utilized substantially all of its NOLs, such utilization providing tax
benefits of approximately $2.2 million. Based on its 1999 review of the
valuation allowance, Chatwins Group concluded that a valuation allowance is
not necessary as the portion of deferred tax assets against which the
valuation allowance had previously been provided were realized during 1999.
Chatwins Group believes that its future taxable income will be sufficient for
full realization of the deferred tax assets. At December 31, 1999, Chatwins
Group had net operating loss carryforwards for Federal tax return reporting
purposes of approximately $0.4 million, all of which expire in 2018.
The current and noncurrent classifications of the deferred tax balances
are as follows (in thousands):
At December 31,
1999 1998
-------- --------
Current:
Deferred tax assets $ 2,647 $ 2,966
Deferred tax liabilities (957) (1,285)
Less: Valuation allowance - (232)
-------- --------
Current deferred taxes, net asset 1,690 1,449
-------- --------
Noncurrent:
Deferred tax assets 2,151 5,199
Deferred tax liabilities (3,094) (4,427)
Less: Valuation allowance - (408)
-------- --------
Noncurrent deferred taxes,
net asset (liability) (943) 364
-------- --------
Deferred taxes, net asset $ 747 $ 1,813
======== ========
At December 31, 1999, there were deferred tax assets of $1.7 million in
other current assets and deferred tax liabilities of $0.9 million in other
liabilities. At December 31, 1998, there were deferred tax assets of $1.4
million and $0.4 million in other current assets and other assets,
respectively.
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 December 1999, a stockholder of Reunion filed a purported class-action
lawsuit in Delaware Chancery Court alleging, among other things, that
Reunion's public stockholders would be unfairly diluted in the merger with
Chatwins Group. The lawsuit sought to prevent completion of the merger and,
the merger having been completed, seeks rescission of the merger or awarding
of damages. The lawsuit is in its early stages and discovery has not begun.
<PAGE> 31
Reunion has announced that it intends to vigorously contest the suit.
In June 1993, the U.S. Customs Service (Customs) made a demand on
Chatwins Group's former industrial rubber distribution division for $612,948
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 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.
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, 1999.
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 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. See
note 14.
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.
<PAGE> 32
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.
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's continuing operations manufactures its products in the
United States. Of Chatwins Group's $121.1 million of consolidated net sales
for 1999, $6.5 million were export sales to other countries ($4.5 million to
the Far East; $1.3 million to Canada; $0.4 million to Latin and South America;
and $0.3 million to the U.K.).
During 1999, 1998 and 1997, 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 and commonly occurs for different
customers from one year to the next.
<PAGE> 33
Segment data years ended December 31, 1999, 1998 and 1997 (in thousands
except for related notes):
Sales EBITDA(1) Cap. Ex. Assets(2)
1999: --------- --------- --------- ---------
Alliance $ 26,117 $ (663) $ 323 $ 14,519
Auto-Lok 34,342 3,176 265 13,921
CPI 25,226 4,726 754 18,266
Hanna 32,019 3,950 320 15,666
Steelcraft 3,386 336 96 1,576
Headquarters - (1,711) 37 17,072
Discontinued operations - - 790 -
-------- -------- -------- --------
Totals $121,090 9,814 $ 2,585 $ 81,020
======== ======== ========
Depreciation and amortization(3) (3,083)
Interest expense (7,989)
Equity in loss of affiliate (566)
--------
Loss from continuing operations
before income taxes $ (1,824)
========
Alliance $ 41,982 $ 2,485 $ 232 $ 18,111
Auto-Lok 25,794 1,775 400 10,645
CPI 28,284 6,003 1,421 20,117
Hanna 34,458 5,714 214 17,544
Steelcraft 3,960 644 10 1,651
Headquarters - (2,007) 72 15,762
Discontinued operations - - 2,746 24,646
-------- -------- -------- --------
Totals $134,478 14,614 $ 5,095 $108,476
======== ======== ========
Depreciation and amortization(3) (2,956)
Interest expense (7,453)
Equity in loss of affiliate (4,056)
--------
Income from continuing operations
before income taxes $ 149
========
1997:
Alliance $ 43,791 $ 3,817 $ 265 $ 14,872
Auto-Lok 26,524 899 716 10,054
CPI 28,171 5,882 1,446 17,071
Hanna 33,420 4,721 229 15,916
Steelcraft 4,378 889 14 1,705
Headquarters - (2,398) 24 20,794
Discontinued operations - - 2,350 22,867
-------- -------- -------- --------
Totals $136,284 13,810 $ 5,044 $103,279
======== ======== ========
Depreciation and amortization(3) (2,706)
Interest expense (7,374)
Equity in loss of affiliate (373)
--------
Income from continuing operations
before income taxes $ 3,357
========
<PAGE> 34
(1) EBITDA is presented as it is the primary measurement used by management in
assessing segment performance.
(2) Headquarters total assets at December 31, 1999, 1998 and 1997 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 $1,308,000, $671,000
and $550,000 for the years ended December 31, 1999, 1998 and 1997,
respectively, which is included in interest expense.
NOTE 20: DISCONTINUED OPERATIONS
During the second quarter of 1999, Chatwins Group's management adopted a
plan to exit the grating manufacturing business through the disposition of
substantially all of the business and assets of Discontinued Klemp. Upon
adoption of the plan, Chatwins Group classified and began accounting for
Discontinued Klemp, including its international grating subsidiaries, as
discontinued operations in accordance with APB 30.
On May 28, 1999, Chatwins Group entered into a non-binding letter of
intent with AMICO, which was subsequently amended on July 12, 1999 and on
August 17, 1999, for the sale of the domestic business and assets of
Discontinued Klemp. On September 30, 1999, Chatwins Group completed the sale
of its domestic grating business and assets to AMICO for $32.1 million in cash
and the assumption by AMICO of certain operating liabilities, subject to post-
closing adjustments. Substantially all of the cash proceeds from the sale
were used to pay down borrowings under the BOA Facility.
The sale of the domestic business and assets of Discontinued Klemp
resulted in a pre-tax gain of approximately $12.3 million, classified within
discontinued operations, net of tax, at $8.4 million. Chatwins Group retained
certain obligations of Discontinued Klemp and is obligated to pay various
expenses of the sale, all of which have been estimated to total approximately
$2.7 million and are classified within discontinued operations, net of tax, at
$1.9 million, and within net assets (liabilities) of discontinued operations
as reserve for estimated expenses. Through December 31, 1999, Chatwins Group
paid in cash almost $1.6 million of such expenses. In December 1999, this
reserve was increased by $0.7 million for additional identified future items.
Obligations retained and expenses required to be paid by Chatwins Group
primarily include non-cancelable lease commitments and legal and professional
fees.
During the third quarter of 1999, Chatwins Group's management adopted a
plan to liquidate its oil and gas business through the disposition of all of
its oil and gas related assets. Upon adoption of the plan, Chatwins Group
classified and began accounting for the oil and gas business as a discontinued
operation in accordance with APB 30.
Management provided a reserve for estimated losses on disposals of its
international grating businesses and its oil and gas operations of $6.0
million and $1.0 million, respectively. Such estimated losses on disposal are
classified within discontinued operations, net of tax, at $4.1 million
(including $0.5 million for estimated operating losses during the phase-out
period) and $0.7 million, respectively, and within net assets (liabilities) of
discontinued operations as reserve for estimated loss on disposal. During the
fourth quarter of 1999, $3.4 million of such reserve was utilized to write-off
receivables due to Chatwins Group from Klemp de Mexico ($2.6 million) and to
<PAGE> 35
recognize losses on disposal from sales of oil and gas assets ($0.8 million).
Cash proceeds from the sales of oil and gas related assets during the fourth
quarter of 1999 totalled approximately $0.2 million. Such cash proceeds were
used to paydown borrowings under the BOA Facility.
The remaining assets and liabilities of discontinued operations include
the assets and liabilities of the Chinese grating manufacturing discontinued
business and certain assets and liabilities of the domestic grating business
not purchased or assumed by AMICO. These assets and liabilities have been
separately classified on the balance sheet as net assets of (liabilities)
discontinued operations. A summary follows (in thousands):
At December 31,
1999 1998
-------- --------
ASSETS:
Cash and cash equivalents $ 166 $ 144
Receivables, net 1,235 8,686
Inventories, net 559 6,240
Other current assets 75 918
Property, plant and equipment, net 2,562 14,829
Goodwill, net - 930
Deferred taxes 520 -
Other assets, net 724 1,789
-------- --------
Total assets 5,841 33,536
-------- --------
LIABILITIES AND EQUITY:
Current maturities of debt 615 756
Trade payables 475 6,293
Other current liabilities 434 1,468
Reserve for estimated losses on disposal 3,615 -
Reserve for estimated expenses 1,854 -
Other long-term debt 680 680
Other liabilities 401 79
Minority interest 778 968
Cumulative translation adjustment - (1,354)
-------- --------
Total liabilities and equity 8,852 8,890
-------- --------
Net assets (liabilities) of
discontinued operations $ (3,011) $ 24,646
======== ========
Pursuant to APB 30, the consolidated financial statements reflect the
operating results of discontinued operations separately from continuing
operations. Summarized results of discontinued operations for the years ended
December 31, 1999 and 1998 follow (in thousands):
1999 1998
-------- --------
Net sales $ 41,140 $ 57,108
Loss before taxes (1,350) (1,487)
The above results of discontinued operations include allocated
interest expense of $1,905,000 and $2,542,000 for the years ended December 31,
1999 and 1998, respectively. The above results of discontinued operations for
1999 includes a $1,681,000 gain on sale of the property which comprised the
former Chicago manufacturing facility of Discontinued Klemp.
<PAGE> 36
INFORMATION RELATED TO CHATWINS GROUP, INC.
BUSINESS
Chatwins Group, Inc. (Chatwins Group), through its five 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
manufacturing divisions, and the principal fabricated and machined products
produced by them, include:
. Alliance - industrial cranes and large mill equipment
. Auto-Lok - roll formed and structural storage racks
. CP Industries - large, seamless pressure vessels for highly pressurized
gases
. Hanna - industrial hydraulic and pneumatic cylinders
. Steelcraft - cold-rolled steel leaf springs
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.
RECENT DEVELOPMENTS
The Merger
On March 16, 2000, Chatwins Group and Reunion Industries, Inc. (Reunion)
merged. Prior to the merger, Chatwins Group owned approximately 37% of
Reunion's issued and outstanding common stock. Reunion is primarily engaged
in the manufacture of high volume, precision plastics products, providing
engineered plastics services and compounding and molding thermoset polyester
resins. Reunion also has wine grape agricultural operations in Napa County,
California.
In the merger, Reunion issued 9,500,000 shares of common stock to holders
of Chatwins Group's common stock. The 1,450,000 shares of Reunion common
stock previously owned by Chatwins Group were retired in the merger, as were
the previously issued shares of Chatwins Group common stock. The merger
agreement also provides that up to an additional 500,000 shares of Reunion
common stock will be issued to former Chatwins Group common stockholders if
the former Chatwins Group businesses achieve specified performance levels in
2000.
Holders of Chatwins Group Class D, Series A, B and C preferred stock
received 9,033 shares of Reunion Series A preferred stock in the merger. The
Reunion Series A preferred stock has an initial redemption price of
$9,033,000. Cumulative dividends at 10% of the initial redemption price are
payable as and when declared by Reunion's Board of Directors. Dividends on
<PAGE> 37
the Reunion Series A preferred stock are senior to dividends on its common
stock but junior to dividends on its Series B preferred stock, also issued at
the time of the merger in a related transaction. Subject to Delaware law and
restrictions in its debt agreements, Series A preferred stock may be redeemed
at Reunion's option if no shares of Series B preferred stock are outstanding.
The Refinancing
Simultaneously with the merger, Reunion entered into $72.5 million of
senior secured credit facilities with Bank of America. These credit
facilities consist of a $39.0 million revolving credit facility, a $25.8
million term loan A facility, a $5.0 million term loan B facility and a $2.7
million capital expenditures facility.
Proceeds from initial borrowings under the Bank of America credit
facilities were used for various purposes, including repayment of Chatwins
Group's existing credit facilities with Bank of America and retirement of
$25.0 million of Chatwins Group's 13% senior notes plus accrued and unpaid
interest.
In the merger, Reunion assumed the obligations of Chatwins Group under
the indenture governing the remaining $24,975,000 of 13% senior notes. The
indenture provides that up to $2,525,000 principal amount of the 13% senior
notes is scheduled to be repaid in May 2001, $12,500,000 is scheduled to be
repaid in May 2002 and the remainder is scheduled to be repaid in May 2003.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
Acquisition of Kingway by Reunion
On November 3, 1997, Stanwich Acquisition Corporation (SAC), an
affiliated company, acquired Kingway Material Handling (Kingway) from the
Kingston-Warren Corporation. SAC is a privately-held company whose common
stock is owned 42.5% by Mr. Bradley, 42.5% by Kimball Bradley and 15% by Mr.
Evans. Similar to Auto-Lok, Kingway is in the business of producing
industrial and commercial storage racks and materials handling systems.
Simultaneously with the merger, Reunion acquired Kingway. Since May
1998, Kingway has been operating in the facilities of Chatwins Group's Auto-
Lok division under a services agreement that provides that Kingway would use
Auto-Lok's surplus floor space, production workforce, administrative
organization and equipment in exchange for fees approximately equal to Auto-
Lok's costs. Subsequent to the merger and acquisition, Reunion intends to
integrate Kingway and Auto-Lok into a single business unit.
Cured Defaults Under Indenture
Purchase Offer
Pursuant to its obligations under the indenture, on May 12, 1999,
Chatwins Group issued a notice offering to purchase up to $25.0 million of
senior notes on June 1, 1999. Chatwins Group further notified senior note
holders and the trustee that it did not expect to have sufficient liquidity on
June 1, 1999 to consummate the purchase offer if more than $2 million worth of
senior notes were tendered.
<PAGE> 38
As of 5:00 p.m. Eastern time on June 1, 1999, the expiration of the
purchase offer, holders of $24,121,000 principal amount of senior notes had
accepted the purchase offer. On June 2, 1999, Chatwins Group sent a notice to
holders of the $24,121,000 principal amount of tendered senior notes
requesting that their tender be withdrawn in exchange for a withdrawal fee of
2% of principal amount of senior notes tendered (withdrawal notice). The
withdrawal notice also informed the tendering senior note holders of a:
* Third Party Purchase Offer - pursuant to an agreement dated May 28, 1999,
between Chatwins Group and Contrarian Capital, LLC (Contrarian), Contrarian
agreed to purchase senior notes from all tendering holders for the same price
payable by Chatwins Group in the purchase offer and Contrarian had already
elected to withdraw the tender of all senior notes it acquired, if any, in
exchange for the same 2% withdrawal fee,
and
* Possible Asset Sale - Chatwins Group had executed a non-binding letter of
intent to sell substantially all of the assets of its Klemp division. See
"Discontinued Operations."
The withdrawal notice further informed tendering senior note holders that
if Chatwins Group did not receive withdrawal elections for the full
$24,121,000 of principal amount of tendered senior notes, either from
tendering senior note holders or Contrarian, Chatwins Group did not expect to
consummate any of the purchases contemplated by the purchase offer, whereupon
an event of default would arise under the indenture.
The withdrawal notice was to expire at 9:30 a.m. Eastern time on June 7,
1999. However, on June 8, 1999, Chatwins Group sent notice to tendering
senior note holders that the request to withdraw tendered senior notes was
being extended indefinitely but could be terminated by Chatwins Group without
prior notice (withdrawal extension). The withdrawal extension also informed
the tendering senior note holders that:
* holders of $7,100,000 principal amount of tendered senior notes had
withdrawn their tenders in exchange for the 2% withdrawal fee,
* Contrarian had purchased or agreed to purchase from tendering senior note
holders and withdraw the tender for $16,186,000 principal amount of senior
notes,
and
* $835,000 principal amount of tendered senior notes remained outstanding
under the purchase offer.
Because Chatwins Group was not able to deposit with the trustee or the
paying agent for the tendered senior notes an amount equal to 100% of the
aggregate principal amount, plus any accrued and unpaid interest, of tendered
senior notes by 12:30 p.m. Eastern time on June 7, 1999 as required by the
indenture, on June 8, 1999, Chatwins Group delivered notice to the trustee of
an event of default.
Ultimately, $7,125,000 principal amount of tendered senior notes withdrew
their tenders directly, $16,971,000 principal amount of tendered senior notes
were purchased and tenders withdrawn by Contrarian and $25,000 principal
<PAGE> 39
amount of tendered senior notes were purchased and retired by Chatwins Group.
In exchange for its purchases of tendered senior notes, Chatwins Group paid
Contrarian a $375,000 stand-by fee in addition to the 2% withdrawal fee which
totalled $339,420. Holders of the $7,125,000 principal amount of senior notes
that withdrew their tenders received withdrawal fees totalling $142,500.
As the result of the tender withdrawals totalling $24,096,000 principal
amount of senior notes, either by tendering senior note holders or Contrarian,
the repayment by Chatwins Group of $25,000 principal amount of tendered senior
notes not withdrawn or sold to Contrarian and the payment by Chatwins Group of
all withdrawal and stand-by fees, the event of default was cured. On June 23,
1999, Chatwins Group sent notice to all tendering senior note holders of the
termination of the withdrawal extension and notice to the trustee of the cure
of the event of default.
Suzhou Grating
In May of 1998, Chatwins Group executed a joint venture agreement
pursuant to which it contributed $100,000 to Suzhou Grating, a fiberglass
reinforced plastic grating manufacturer in China. The investment constituted
a default under the indenture.
During 2000, Chatwins Group and the trustee for the senior notes agreed
to several supplemental indentures and waiver of covenants of the indenture
for the senior notes, one of which included waiver of this default.
Bradley Family Limited Partnership
In May of 1998, Mr. Bradley transferred all of his shares of Chatwins
Group common stock to the Charles E. Bradley, Sr. Family Limited Partnership
for estate planning purposes. The Bradley Family Limited Partnership granted
voting control over such shares to Stanwich Partners, which in turn granted
voting control over such shares to Mr. John G. Poole, a director and
beneficial stockholder of Chatwins Group. Because Mr. Bradley no longer had
voting control over such shares of Chatwins Group common stock, a breach
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.
During 2000, Chatwins Group and the trustee for the senior notes agreed
to several supplemental indentures and waiver of covenants of the indenture
for the senior notes, one of which included waiver of this default.
Discontinued Operations
During the second quarter of 1999, Chatwins Group's management adopted a
plan to exit the grating manufacturing business through the disposition of
substantially all the business and assets of its Klemp division (Discontinued
Klemp). Upon adoption of the plan, Chatwins Group classified and began
accounting for Discontinued Klemp, including its international grating
subsidiaries, as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions"
(APB 30), which requires discontinued operations to be reported separately
from continuing operations.
<PAGE> 40
On May 28, 1999, Chatwins Group entered into a non-binding letter of
intent (LOI) with Alabama Metal Industries (AMICO), which was subsequently
amended on July 12, 1999 and on August 17, 1999, for the sale of the domestic
business and assets of Discontinued Klemp. On September 30, 1999, Chatwins
Group completed the sale of its domestic grating business and assets to AMICO
for $32.1 million in cash and the assumption by AMICO of certain operating
liabilities, subject to post-closing adjustments which are still pending.
Substantially all of the cash proceeds from the sale were used to pay down
borrowings under Chatwins Group's revolving credit facility with Bank of
America (BOA Facility).
During the third quarter of 1999, Chatwins Group's management adopted a
plan to liquidate its oil and gas business through the disposition of all of
its oil and gas related assets. Upon adoption of the plan, Chatwins Group
classified and began accounting for the oil and gas business as a discontinued
operation in accordance with APB 30. Through the end of 1999, Chatwins Group
had substantially liquidated its oil and gas assets for cash proceeds
totalling approximately $189,000. Such cash proceeds were used to paydown
borrowings under the BOA Facility.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Exercise of Warrants
Through December 31, 1999, 49,975 warrants were exercised at $.01 per
share resulting in the issuance of 49,975 shares of Chatwins Group common
stock. The remaining 25 warrants were exercised in March 2000.
Sale of Property
During April 1999, Chatwins Group sold the land and building which
comprised the former Chicago, Illinois location of its Klemp division, which
was relocated to Libertyville, Illinois in early 1999. The property was sold
to a privately held Illinois limited liability corporation. Net cash proceeds
received by Chatwins Group as a result of the sale totalled $4.56 million. Of
the $4.56 million of net proceeds, $2.28 million was used to repay a portion
of borrowings under a special availability amount under the BOA Facility and
$2.28 million was used to repay a portion of other borrowings under the BOA
Facility. Once reduced, this special availability amount could not be
reborrowed. See "Liquidity and Capital Resources."
Recent Accounting Pronouncements
Effective January 1, 1999, Chatwins Group adopted the AICPA's Statement
of Position 98-5, "Reporting on the Costs of Start-up Activities," which
requires that the costs of start-up activities be expensed as incurred. Such
adoption is reported as the cumulative effect of a change in accounting
principle and results in the write-off of $176,000 of start-up costs, net of
taxes of $91,000. These start-up costs primarily related to Chatwins Group's
international subsidiaries.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging
Activities." This statement 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
<PAGE> 41
depending on the reason for holding the derivative. Chatwins Group does not
presently have transactions involving derivative instruments.
INDIVIDUAL OPERATING DIVISIONS
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.
Auto-Lok - Founded in 1946, Auto-Lok manufactures 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.
CP Industries - Founded in 1897, CP Industries, 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.
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.
<PAGE> 42
The following represents historical net sales, EBITDA, and total assets
by division for the years ended December 31, 1999, 1998 and 1997 (in
thousands, including notes hereto, unless otherwise indicated):
Total
Net Sales EBITDA(1) Assets(2)
--------- --------- ---------
At and for the year ended
December 31, 1999:
Alliance $ 26,117 $ (663) $ 14,519
Auto-Lok 34,342 3,176 13,921
CP Industries 25,226 4,726 18,266
Hanna 32,019 3,950 15,666
Steelcraft 3,386 336 1,576
-------- ------- --------
Totals $121,090 $11,525 $ 63,948
======== ======= ========
At and for the year ended
December 31, 1998:
Alliance $ 41,982 $ 2,485 $ 18,111
Auto-Lok 25,794 1,775 10,645
CP Industries 28,284 6,003 20,117
Hanna 34,458 5,714 17,544
Steelcraft 3,960 644 1,651
-------- ------- --------
Totals $134,478 $16,621 $ 68,068
======== ======= ========
At and for the year ended
December 31, 1997:
Alliance $ 43,791 $ 3,817 $ 14,872
Auto-Lok 26,524 899 10,054
CP Industries 28,171 5,882 17,071
Hanna 33,420 4,721 15,916
Steelcraft 4,378 889 1,705
-------- ------- --------
Totals $136,284 $16,208 $ 59,618
======== ======= ========
(1) Excludes headquarters expenses in the years ended December 31, 1999 of
$1,711, December 31, 1998 of $2,007 and December 31, 1997 of $2,398. See
"Selected Historical Financial Data" for operating income and a definition of
EBITDA.
(2) Excludes headquarters assets at December 31, 1999 of $17,072, at December
31, 1998 of $15,762 and at December 31, 1997 of $20,794.
General Aspects Applicable to the Chatwins Group Divisions
Raw Materials - The major raw materials used by Chatwins Group include
steel coils, structural bars, 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 1999.
There can be no assurance that prices for these and other raw materials used
by Chatwins Group will not increase in the future.
<PAGE> 43
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, 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 1999 were approximately
5% of total sales. Export sales were primarily made in four major geographic
areas during 1999 - the Far East, Canada, Mexico and South America and the
United Kingdom. CP Industries accounted for approximately 85% of export sales
during 1999. Of CP Industries' export sales, $4.5 million were the Far East
(primarily China and Taiwan) and $0.8 million were in Canada. Alliance and
Hanna represented all of the remainder, primarily in Canada and Mexico.
Backlog - Chatwins Group consolidated backlog at December 31, 1999 was
approximately $38.0 million and at December 31, 1998 was approximately $42.4
million. All backlog orders at December 31, 1999 are expected to ship within
a year.
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 1999, 1998 and 1997, 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 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.
As of December 31, 1999, Chatwins Group had a total of 802 people in
manufacturing, sales and administrative positions. Chatwins Group believes
its relations with its employees are good.
<PAGE> 44
A breakdown of Chatwins Group's work force by location and function at
December 31, 1999 is as follows:
General and
Manufacturing Administrative
----------------- -----------------
Division Location Union Non-Union Union Non-Union Total
- -------- -------------- ----- --------- ----- --------- -----
Alliance Alliance, OH 151(1) 15 36 202
Auto-Lok Acworth, GA 199 43 242
CP Industries McKeesport, PA 88(2) 5 8(3) 21 122
Hanna Chicago, IL 76 27 103
Milwaukee, WI 74 9 83
Headquarters Pittsburgh, PA 16 16
Steelcraft Miami, OK 30 4 34
--- --- --- --- ---
Totals 239 399 8 156 802
=== === === === ===
(1) United Steelworkers of America - Contract expires June 14, 2002.
(2) United Steelworkers of America - Contract expires May 31, 2001.
(3) United Steelworkers of America - Contract expires May 31, 2001.
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., 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 due to building safety concerns. A residual groundwater contamination
problem remains. Alco Standard Corporation, the owner of the Ipsen facility
<PAGE> 45
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
agreements. As of December 31, 1999, Chatwins Group had not received any
notice that Alco was failing to perform the approved groundwater remediation
plan.
Properties
Chatwins Group has a total of 71.2 acres and 1,409,233 square feet being
used for ongoing operations. Except for CP Industries' sales office in
Beijing, China, and Chatwins Group's corporate headquarters in Pittsburgh,
Pennsylvania, which is administrative, all locations are both manufacturing
and administrative facilities:
Square Land Expiration
Division Location Feet Acres Title Date
- -------- -------- ------- ----- ------ ----------
CP Industries McKeesport, PA 602,772 37.0 Owned -
Beijing, China 808 - Leased 10/31/00
Alliance Alliance, OH 383,865 14.8 Owned -
Hanna Chicago, IL 85,283 2.7 Owned -
Milwaukee, WI 68,000 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
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
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 was retained by Chatwins Group after the Ipsen sale.
Legal Proceedings
In June 1993, the U.S. Customs Service made a demand on Chatwins Group's
former industrial rubber distribution division for $612,948 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 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.
<PAGE> 46
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.
SELECTED HISTORICAL FINANCIAL DATA
(in thousands, including notes hereto,
except for share and per share amounts)
The following table sets forth selected historical consolidated financial
data of Chatwins Group. All data are reported in thousands, except for share
and per-share data. Historical data have been restated for the
classifications of the Klemp division and its oil and gas operations as
discontinued operations.
Year Ended December 31, 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
EARNINGS DATA(1):
Net sales $121,090 $134,478 $136,284 $103,689 $133,981
Cost of sales 101,122 108,501 111,205 84,458 108,017
-------- -------- -------- -------- --------
Gross profit 19,968 25,977 25,079 19,231 25,964
Selling, general and
administrative expenses 12,742 13,740 13,380 12,613 14,191
Other expense, net 495 579 595 251 455
-------- -------- -------- -------- --------
Operating profit 6,731 11,658 11,104 6,367 11,318
Interest expense, net(2) 7,989 7,453 7,374 7,284 7,536
Equity in loss from continuing
operations of affiliate 566 4,056 373 915 -
-------- -------- -------- -------- --------
Income (loss) before income
taxes from continuing
operations (1,824) 149 3,357 (1,832) 3,782
Provision for (benefit from)
income taxes(3) (1,463) 46 851 (659) 645
-------- -------- -------- -------- --------
Income (loss) from
continuing operations $ (361) $ 103 $ 2,506 $ (1,173) $ 3,137
======== ======== ======== ======== ========
Income (loss) from continuing
operations applicable to
common stockholders(4) $ (817) $ (353) $ 2,050 $ (1,629) $ 2,681
======== ======== ======== ======== ========
Weighted average common
shares outstanding(10) 290,036 265,088 292,887 242,887 292,887
======== ======== ======== ======== ========
Income (loss) from continuing
operations per common
share(10) $ (2.82) $ (1.33) $ 7.00 $ (6.70) $ 9.16
======== ======== ======== ======== ========
<PAGE> 47
SELECTED HISTORICAL FINANCIAL DATA (continued)
(in thousands, including notes hereto,
except for share and per share amounts)
Year Ended and At December 31, 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
OPERATING AND OTHER DATA:
Cash flow from (used in)
operating activities(11) (4,168) (3,268) 2,312 3,492 2,472
======== ======== ======== ======== ========
Cash flow from (used in)
investing activities(11) 34,494 (5,195) (5,044) (1,190) (6,866)
======== ======== ======== ======== ========
Cash flow from (used in)
financing activities(11) (30,249) 8,070 3,110 (2,303) 4,725
======== ======== ======== ======== ========
Depreciation and
amortization(6) 3,083 2,956 2,706 2,742 3,159
======== ======== ======== ======== ========
Capital expenditures 1,795 2,349 2,694 2,951 3,744
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital(9) $ 22,932 $ 25,156 $ 20,759 $ 18,198 $ 15,754
======== ======== ======== ======== ========
Total assets 81,020 108,476 103,279 95,211 100,987
======== ======== ======== ======== ========
Total long-term debt(8) 49,971 50,019 50,043 50,066 50,090
======== ======== ======== ======== ========
Redeemable preferred stock 8,938 8,482 8,026 7,570 7,114
======== ======== ======== ======== ========
Stockholders' equity(7) (7,551) (8,594) (6,863) (8,666) (7,771)
======== ======== ======== ======== ========
EBITDA(5): $ 9,814 $ 14,614 $ 13,810 $ 9,109 $ 13,988
======== ======== ======== ======== ========
(1) Chatwins Group holds a minority voting interest in Reunion which it
accounts for under the equity method. On September 14, 1995, Chatwins Group
sold Oneida Molded Plastics to Reunion. Such transaction was treated as the
disposal of a portion of a line of business with Oneida's historical operating
results through September 14, 1995 and resulting gain on sale of $1.2 million
classified within continuing operations.
(2) Includes amortization of debt issuance expenses of the following amounts
for the following years: 1999: $1,308; 1998: $671; 1997: $550; 1996: $632
and 1995: $564.
(3) See Note 17 to the consolidated financial statements of Chatwins Group
for the year ended December 31, 1999. 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, 1995 through December 31, 1997 have been approximately $20, $53
and $205, respectively. In 1998, Chatwins Group had a net refund of $139. In
1999, Chatwins Group paid $279.
<PAGE> 48
(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 of $456 in each of the years 1999 through 1995.
(5) EBITDA is calculated as follows:
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before taxes $ (1,824) $ 149 $ 3,357 $ (1,832) $ 3,782
Interest expense, net(2) 7,989 7,453 7,374 7,284 7,536
Depreciation and
amortization(6) 3,083 2,956 2,706 2,742 3,159
Equity loss from continuing
operations of affiliate 566 4,056 373 915 -
Gain on sale of business - - - - (1,190)
Loss on notes receivable - - - - 701
-------- -------- -------- -------- --------
EBITDA $ 9,814 $ 14,614 $ 13,810 $ 9,109 $ 13,988
======== ======== ======== ======== ========
Chatwins Group has included EBITDA in the Selected Historical Financial Data
due to the close relationship it bears to Chatwins Group's financial covenants
benefiting the 13% senior notes. Certain amounts that are included in results
of operations under generally accepted accounting principles are excluded from
this calculation of EBITDA.
(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 redeemable preferred stock of $14.9 million through
December 31, 1999.
(8) Excludes borrowings under revolving credit facilities and includes
current maturities of 13% senior notes.
(9) Represents current assets excluding net assets of discontinued
operations less current liabilities excluding borrowings under revolving
credit facilities, current maturities of senior notes and net liabilities of
discontinued operations.
(10) Includes the dilutive effect of the Chatwins Group warrants, except when
such inclusion is anti-dilutive.
(11) Current accounting rules do not require restatement of the statement of
cash flows upon the classification of a segment as a discontinued operation.
<PAGE> 49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Continuing Operations - 1999 compared to 1998
Net sales for 1999 totaled $121.1 million, compared to $134.5 million for
1998. Sales for 1999 decreased $13.4 million, or 10%, from 1998. Sales
decreased at all divisions except for Auto-Lok. Sales decreased $15.9 million
at Alliance due primarily to a decrease in order levels which have been
negatively impacted by a downturn in large capital projects in the steel
industry due to strong foreign competition. Sales decreased $3.1 million at
CPI due primarily to a decrease in order levels in the first third of 1999 and
a change in the mix of CPI's backlog to a higher percentage of items with
longer delivery schedules. Sales decreased $2.4 million at Hanna due
primarily to a softening in demand in its hydraulic product line.
Steelcraft's sales were down $0.6 million compared to last year due to weak
demand across all product lines but primarily in marine and recreational
springs as discretionary spending by consumers continued to shift towards
technology-based products. Auto-Lok's sales increase of $8.5 million was due
to increased product demand and an increase in large project shipments.
Gross profit for 1999 was $20.0 million, compared to $26.0 million of
gross profit for 1998, a decrease of $6.0 million. Gross profit margin in
1999 was 16.5%, compared to 19.3% in 1998. Gross profit during 1999 compared
to 1998 decreased $3.5 million at Alliance, $2.2 million at Hanna and $1.5
million at CPI and $0.3 million at Steelcraft, partially offset by a $1.5
million increase at Auto-Lok. Gross profit margin for 1999 compared to 1998
increased only at Auto-Lok and decreased at all other divisions. The increase
in gross profit and margin at Auto-Lok is due primarily to the division's
increased volume. The decreases in gross profits and margins at the remaining
divisions are due to decreases in volume noted above, price compression at
Alliance due to softness in the steel industry caused by foreign competition
and a change in product mix at Hanna to lower margin product lines.
Selling, general and administrative expenses for 1999 were $12.7 million,
compared to $13.7 million for 1998, a decrease of $1.0 million. Selling,
general and administrative expenses as a percentage of sales increased
slightly to 10.5% in 1999 compared to 10.2% in 1998. The decrease in selling,
general and administrative expenses was due to an overall effort to contain
and reduce such costs and administrative personnel reductions primarily at
Alliance. The increase in selling, general and administrative expenses as a
percentage of sales was due to the 10% decrease in sales while selling,
general and administrative expenses decreased only 7%.
Other expense for 1999 was $0.5 million, compared to other expense of
$0.6 million for 1998, a net decrease of $0.1 million. There were no
individually significant or offsetting items in either 1999 or 1998.
Interest expense, net, in 1999 was $8.0 million compared to $7.5 million
in 1998, an increase of $0.5 million. The increase in interest expense is due
to a $0.6 million increase in the level of amortization of deferred financing
costs partially offset by a reduction in average borrowing levels in the
fourth quarter of 1999 due to the sale of Chatwins Group's domestic grating
business in September 1999 and the application of the $32.1 million of cash
proceeds to borrowings under the BOA Facility.
Equity loss from continuing operations of affiliate in 1999 and 1998
<PAGE> 50
represents Chatwins Group's share of Reunion's loss from continuing
operations. Reunion's 1998 results from continuing operations were negatively
impacted by a litigation provision it recorded in its 1998 second quarter.
There was a tax benefit of $1.5 million for 1999 compared to a tax
provision of less than $0.1 million for 1998. The tax benefit for 1999 is
primarily the result of the pre-tax loss in 1999 and the reversal of the
valuation allowance of $640,000 for deferred tax assets. The 1998 tax
provision is related to the level of pre-tax earnings.
Results of Continuing Operations - 1998 Compared to 1997
Net sales for 1998 totaled $134.5 million, compared to $136.3 million for
1997. Sales for 1998 decreased $1.8 million, or 1%. A sales increase of $1.0
million at Hanna, was offset by decreases or flat revenues at the remaining
divisions. Sales decreased $1.8 million at Alliance, $0.7 million at Auto-Lok
and $0.4 million at Steelcraft. CP Industries reported flat revenues in 1998
compared to 1997. 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.
Gross profit for 1998 was $26.0 million, a 3% increase compared to $25.1
million for 1997. Gross profit margin was 19.3% in 1998, compared to 18.4% in
1997. Gross profit during 1998 compared to 1997 improved $1.1 million at
Hanna, $0.8 million at Auto-Lok and $0.5 million at CP Industries. 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 CP Industries, but down at 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 Kingway's operations. CP Industries' 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 expenses for 1998 were $13.7 million,
compared to $13.4 million for 1997, an increase of $0.3 million. Such
expenses as a percentage of sales increased to 10.2% for 1998 compared to 9.8%
in 1997. The increase in such expenses and such expenses 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 and 1997 of $0.6 million. There were no
individually significant or offsetting items in either 1998 or 1997.
Interest expense, net, for 1998 was $7.5 million, compared to $7.4
<PAGE> 51
million for 1997, an increase of $0.1 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).
Equity loss from continuing operations of affiliate in both 1998 and 1997
represents Chatwins Group's share of Reunion's loss from continuing
operations. Reunion's 1998 results of continuing operations were negatively
impacted by the Bargo litigation provision recorded by Reunion in its second
quarter of 1998.
There was a tax provision of less than $0.1 million in 1998, compared to
$0.9 million in 1997, an increase of $0.8 million. The increase in the tax
provision for 1998 compared to 1997 was due to a $360,000 reduction in the
valuation allowance for deferred tax assets during 1997 compared to no change
in the valuation allowance during 1998 as well as a decrease in pre-tax income
in 1998 over 1997.
Discontinued Operations
There was income from discontinued operations during 1999 of $2.0
million, compared to a loss of $1.6 million in 1998 and a loss of $0.2 million
in 1997. Income from discontinued operations in 1999 is comprised of income
from Discontinued Klemp of $0.1 million, a gain on sale of Discontinued Klemp
(domestic) of $8.4 million, a provision for estimated expenses of $1.9
million, an estimated provision for loss on disposal of Discontinued Klemp
(foreign) of $4.1 million and an estimated provision for loss on disposal of
the discontinued oil and gas operations of $0.7 million. Income from
Discontinued Klemp in 1999 includes a $1.7 million pre-tax effect gain on sale
of property. Income (loss) from Discontinued Klemp includes allocated
interest expense of $1.9 million in 1999, $2.5 million in 1998 and $2.3
million in 1997.
The losses in both 1998 and 1997 relate to Chatwins Group's operating
losses of Discontinued Klemp and its share of Reunion's income (loss) from
discontinued operations in each year.
Income (loss) from discontinued operations are net of taxes of $0.9
million in 1999 and tax benefits of $0.6 million and less than $0.1 million in
1997.
Liquidity and Capital Resources
General
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.
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.
<PAGE> 52
On October 30, 1998, Chatwins Group and Bank of America (BOA; formerly
known as NationsBank) executed a financing agreement which provided Chatwins
Group with the BOA 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 BOA Facility included a special availability amount, as defined in
the financing agreement, of $6.0 million. The special availability amount was
being reduced in $250,000 monthly increments which began in February 1999.
The special availability amount was further reduced by $2.28 million in April
1999 from the cash proceeds of the sale of property and fully repaid in
October 1999 from the cash proceeds from the sale of Chatwins Group's domestic
grating operations. The special availability amount could not be reborrowed
without BOA's consent. Availability under the BOA Facility was 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 BOA, 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 BOA Facility was
determined by reference to various rates including the BOA prime rate, the
Federal Funds rate or LIBOR, each plus an applicable margin. Chatwins Group
elected the rates upon notification to BOA with applicable margins ranging
from zero to 0.5% when using either the BOA prime rate or the Federal Funds
rate and from 2.0% to 2.75% when using LIBOR. The BOA Facility also included
an unused line fee and a monthly service charge.
The BOA Facility was secured by a lien in favor of BOA 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 was to expire on October 31, 2001 and was
renewable annually thereafter, subject to the approval of BOA, but not beyond
October 31, 2005.
The BOA Facility included various representations, warranties and
affirmative and negative covenants by Chatwins Group and provided BOA 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 BOA
Facility. Financial covenants in the BOA Facility included an adjusted
earnings before interest, taxes, depreciation and amortization to fixed charge
coverage ratio and an indebtedness to cash flow ratio, calculations of which
were defined in the financing agreement. Generally all amounts for
calculation of the ratios were derived from domestic operations and BOA
earnings before interest, taxes, depreciation and amortization was adjusted
for domestic capital expenditures. These covenants required Chatwins Group to
maintain a rolling twelve-month minimum adjusted BOA earnings before interest,
taxes, depreciation and amortization to fixed charge coverage ratio of 1.25:1
and a maximum indebtedness to cash flow ratio of 5.0:1. At December 31, 1999
such ratios were 2.4:1 and 4.7:1, respectively, and complied with the
financing agreement. Borrowings outstanding under the BOA Facility at
December 31, 1999 totaled $5.8 million and the weighted average rate for
borrowing was 8.5%. The BOA Facility was repaid on March 16, 2000 from the
refinancing proceeds in the merger of Reunion and Chatwins Group and is no
longer in place. See "Information Related to Chatwins Group - Recent
Developments - The Refinancing."
On July 23, 1999, Chatwins Group and BOA executed an amendment and waiver
to the BOA Facility. In general, the amendment and waiver fixed the special
<PAGE> 53
availability amount at $3.47 million, an increase of $1 million in the then
existing special availability amount. Additionally, the amendment provided
that the special availability amount would start to be reduced in weekly
amounts of at least $270,000 beginning August 16, 1999 only if Chatwins Group
failed to deliver certain documents related to the potential sale of a
division or failed to deliver additional collateral for the special
availability amount. The amendment and waiver also waived two instances of
noncompliance by Chatwins Group in June and July 1999 of the covenant that
required Chatwins Group to maintain a minimum average daily availability of no
less than $1.0 million. In exchange for providing Chatwins Group with the
amendment and waiver, BOA received $100,000 in fees and additional collateral
for the special availability amount. Chatwins Group was in compliance with
all representations, warranties and covenants at December 31, 1999.
During April 1999, Chatwins Group sold the land and building which
comprised the former Chicago, Illinois location of its Klemp division, which
was relocated to Libertyville, Illinois in early 1999. Net cash proceeds
received by Chatwins Group as a result of the sale totalled $4.56 million and
were used to repay borrowings under the BOA Facility. On May 3, 1999,
Chatwins Group paid its semi-annual interest payment of $3.25 million on the
13% senior notes from funds available under the BOA Facility, such
availability being partially the result of the application of the property
sale proceeds to the BOA Facility.
During September 1999, Chatwins Group sold its domestic grating business
for net cash proceeds of $32.1 million, which were used to repay borrowings
under the BOA Facility. On November 1, 1999, Chatwins Group paid its semi-
annual interest payment of $3.25 million on its 13% senior notes from funds
available under the BOA Facility, such availability being the result of the
application of the domestic grating operation sale proceeds to the BOA
Facility.
Based on its own liquidity, Chatwins Group was unable to consummate the
Purchase Offer on June 1, 1999, resulting in an event of default under the
Indenture. This event of default was subsequently cured by Chatwins Group.
See "Information Related to Chatwins Group - Recent Developments - Cured
Defaults Under Indenture - Purchase Offer."
Operating Activities
Operating activities used $4.2 million of cash during 1999, compared to
cash used of $3.3 million in 1998, an increase in cash used of $0.9 million.
This increase in cash used from operating activities was due primarily to a
$5.0 million decrease in operating profit partially offset by changes in
assets and liabilities, primarily a decrease in working capital in 1999 which
provided cash compared to an increase in working capital in 1998 which used
cash.
Operating activities used $3.3 million of cash during 1998, compared to
cash provided of $2.3 million in 1997, a decrease of $5.6 million. A $0.6
million increase in operating profit was reduced by an increase of $2.3
million in cash used to fund net working capital and a use of cash of $4.2
million from net changes in other assets and liabilities in 1998 compared to
cash used of only $0.9 million in 1997. The increase in cash used in 1998
from net changes in other assets and liabilities in 1998 was the result of
increases in prepaid expenses and deferred taxes and reductions of
liabilities, primarily at Chatwins Group's headquarters.
<PAGE> 54
Investing Activities
Investing activities provided $34.5 million of cash during 1999, compared
to cash used of $5.2 million during 1998, an increase in cash provided of
$39.7 million. The increase in cash provided from investing activities was
due to the $32.1 million of cash proceeds from the sale of Chatwins Group's
domestic grating operations in September 1999, the $4.6 million of cash
received from the sale of property in the second quarter of 1999 and a $2.5
million decrease in the level of capital expenditures in 1999 compared to
1998.
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. Capital expenditures of
approximately $5.0 million in each of 1998 and 1997 were essentially equal.
Financing Activities
Financing activities during 1999 used $30.2 million in cash, compared to
$8.1 million of cash provided during 1998, an increase in cash used of $38.3
million. This increase in cash used is the result of a decrease of $28.2
million in the level of net borrowings under revolving credit facilities
during 1999, primarily the result of the application of the proceeds from the
sale of the domestic grating operations, compared to an increase of $7.9
million in 1998.
Financing activities during 1998 provided $8.1 million in cash, compared
to $3.1 million of cash provided during 1997, an increase in cash provided of
$5.0 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.
Income Taxes
At December 31, 1999, Chatwins Group had net operating loss carryforwards
for Federal tax return reporting purposes of approximately $0.4 million, all
of which expire in 2018. 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.
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. Chatwins Group's 1999 taxable income
utilized substantially all of its NOLs. Based on its 1999 review of the
valuation allowance, Chatwins Group concluded that a valuation allowance is
not necessary as the portion of deferred tax assets against which the
valuation allowance had previously been provided were realized during 1999.
Chatwins Group believes that its future taxable income will be sufficient for
full realization of the deferred tax assets.
<PAGE> 55
The Year 2000
The year 2000 issue refers to the potential for disruption to business
activities caused by system and processing failures of date-related
calculations, and is the result of computer-controlled systems using two
digits rather than four to define the year potentially causing the inadvertent
recognition of "00" as the year 1900 rather than the year 2000. This could
result in system failure or miscalculation causing disruptions of operations,
including among other things, an inability to process transactions, send
invoices, or engage in other critical business activities.
To date, Chatwins Group has not experienced any material year 2000 issues
or business interruptions, either its own or third parties with which it
conducts business, from the coming of the year 2000. However, Chatwins Group
cannot assure that year 2000 issues will not be experienced in the future.
Chatwins Group continues to monitor its own systems and those of third parties
with which it conducts business for any year 2000 problems.
Chatwins Group has incurred approximately $0.1 million in its assessment
and remediation of potential year 2000 issues and does not expect to incur any
further year 2000 related costs.
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.
Chatwins Group's continuing operations manufactures its products in the
United States. Of Chatwins Group's $121.1 million of consolidated net sales
for 1999, $6.5 million were export sales to other countries ($4.5 million to
the Far East; $1.3 million to Canada; $0.4 million to Latin and South America;
and $0.3 million to the U.K.). 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 sells its products, which vary significantly from year to year, are
minimal. However, a significant fluctuation in such currencies could
adversely affect Chatwins Group's foreign customers' ability to fund its U.S.
dollar denominated payables which, if not hedged by such customers, could
significantly affect Chatwins Group's operating results.
Chatwins Group's exposure to interest rate risk arises primarily from
borrowing under the BOA Facility. Interest under the facility is determined
by reference to various rates including the BOA prime rate, the federal funds
rate or LIBOR, each plus an applicable margin. At December 31, 1999, the
weighted average rate for borrowing under the BOA Facility was 8.5% and
borrowings outstanding totaled $5.8 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 $60,000 increase in annual
interest expense.
The principal raw material used by Chatwins Group is steel. Steel is
available from a number of suppliers. Prices for steel are affected by, but
not limited to, changes in domestic and foreign markets supply and demand.
There can be no assurances that prices for the raw materials used by Chatwins
Group will not increase in the future or that such increases could be passed
through to its customers.
<PAGE> 56
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Stanwich Acquisition Corp.
In our opinion, the accompanying balance sheet and the related statements
of operations and of cash flows present fairly, in all material respects, the
financial position of Stanwich Acquisition Corp. (SAC), doing business as
Kingway Material Handling Company, at December 31, 1999 and 1998, and the
results of its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of SAC'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
auditing standards generally accepted in the United States, 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.
As discussed in Note 2 to the accompanying financial statements, SAC was
acquired by an affiliated company on March 16, 2000.
As discussed in Notes 3 and 4 to the accompanying financial statements,
SAC has engaged in various transactions and has established certain
relationships with various affiliates and stockholders. Because of these
relationships, it is possible that the terms of these transactions are not the
same as those that would result from transactions among wholly unrelated
parties.
PRICEWATERHOUSECOOPERS LLP
Pittsburgh, Pennsylvania
April 14, 2000
<PAGE> 57
STANWICH ACQUISITION CORP.
(D/B/A KINGWAY MATERIAL HANDLING COMPANY)
BALANCE SHEET
(in thousands, except share amounts)
At December 31,
1999 1998
-------- --------
ASSETS:
Cash in banks $ 291 $ 661
Accounts receivable (net of allowance for
doubtful accounts of $90 and $48) 3,756 4,203
Inventories (Note 5) 979 1,070
Prepaid and other current assets 113 96
-------- --------
Total current assets 5,139 6,030
Plant and equipment (Note 6) 2,143 2,278
Goodwill (net of accumulated amortization
of $1,913 and $1,029) (Note 2) 11,652 12,352
Deferred financing costs (net of accumulated
amortization of $484 and $158) - 326
Other noncurrent assets 35 53
-------- --------
Total assets $ 18,969 $ 21,039
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Revolver, related party (Notes 3, 4 and 7) $ 4,665 $ 7,565
Term loan (Note 8) 6,180 6,180
Accounts payable 1,215 1,053
Due to related parties (Note 4) 2,151 1,254
Other current liabilities 314 398
-------- --------
Total current and total liabilities 14,525 16,450
-------- --------
Contingent liabilities and commitments (Note 14) - -
Stockholders' equity (Note 10):
Common stock, $.01 par value (1,000 shares
authorized, issued and outstanding) - -
Additional paid-in-capital 25 25
Preferred stock, $.10 par value (10,000
shares authorized; 5,000 issued and
outstanding) (Note 9) 6,625 5,875
Accumulated deficit (2,206) (1,311)
-------- --------
Total stockholders' equity 4,444 4,589
-------- --------
Total liabilities and stockholders' equity $ 18,969 $ 21,039
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE> 58
STANWICH ACQUISITION CORP.
(D/B/A KINGWAY MATERIAL HANDLING COMPANY)
STATEMENT OF OPERATIONS
(in thousands)
Year Ended December 31,
1999 1998
-------- --------
Net sales $ 17,528 $ 17,474
Cost of sales 10,985 11,990
-------- --------
Gross profit 6,543 5,484
Selling, general and administrative 2,920 2,763
Amortization of goodwill 901 881
Other expense 18 -
-------- --------
Operating profit 2,704 1,840
Interest expense 2,886 2,234
Interest income 37 43
-------- --------
Loss before taxes (145) (351)
Income taxes - -
-------- --------
Net loss $ (145) $ (351)
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE> 59
STANWICH ACQUISITION CORP.
(D/B/A KINGWAY MATERIAL HANDLING COMPANY)
STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31,
1999 1998
-------- --------
Operating activities:
Net loss $ (145) $ (351)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 473 246
Amortization of goodwill 901 881
Amortization of deferred financing costs 326 158
Changes in assets and liabilities:
Accounts receivable 447 (1,203)
Inventories 91 374
Prepaid and other current assets (17) (94)
Accounts payable 162 527
Other current liabilities 813 377
Other noncurrent assets (266) (298)
-------- --------
Net cash provided by operating activities 2,785 617
-------- --------
Investing activities:
Capital expenditures (255) (1,006)
-------- --------
Net cash used in investing activities (255) (1,006)
-------- --------
Financing activities:
Repayment of related party debt (2,900) -
-------- --------
Net cash used in financing activities (2,900) -
-------- --------
Decrease in cash (370) (389)
Cash at beginning of period 661 1,050
-------- --------
Cash at end of period $ 291 $ 661
======== ========
Noncash Financing Activity:
Refinancing of debt $ - $ 5,935
======== ========
Supplemental Disclosures:
Cash paid for interest $ 2,843 $ 2,095
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE> 60
STANWICH ACQUISITION CORP.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION, BUSINESS DESCRIPTION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Stanwich Acquisition Corp. (SAC) is a privately-held Delaware corporation
formed for the purpose of acquiring substantially all of the assets and
assuming certain liabilities relating to the business of manufacturing,
distributing, marketing, selling and installing gravity flow racking and
computer assisted picking systems of the Kingston-Warren Corporation
(Kingston), a New Hampshire corporation. On September 11, 1997, SAC entered
into an asset purchase agreement with Kingston pursuant to which SAC acquired
the net assets of Kingston's flow racking and computer assisted picking
systems business in a transaction it accounted for under the purchase method
pursuant to Accounting Principles Board (APB) Opinion No. 16, "Business
Combinations" (SAC Acquisition). SAC is currently doing business as (D/B/A)
the Kingway Material Handling Company (Kingway). See note 2.
SAC has established certain relationships with and engaged in various
transactions with other entities, both private and public corporations, to
which they are related. In addition to relationships with SAC, these other
entities are related to and affiliated with each other. See notes 3 and 4.
Business Description
SAC operates in the material handling industry and manufactures two major
product lines for the order selection segment of the industry: gravity flow
racking and computer assisted picking systems (CAPS).
SAC's gravity flow order selection system utilizes low-slope angle
inclined shelves with roll tracking and is designed for businesses requiring
fast-paced and accurate order creation and distribution. It also allows for
merchandise rotation on a first-in, first-out basis.
SAC's CAPS software computerizes the order selection process by utilizing
a series of interconnected lights throughout a customer's distribution center.
The distribution center receives orders from a host computer which instantly
sends data to the pick line, thus eliminating paper pick lists and
significantly improving order accuracy and speed of distribution.
Summary of Significant Accounting Policies
Revenue Recognition
SAC recognizes revenue from sales of the following products and services:
. racking hardware;
. installation of racking hardware;
. computer hardware, including the electronic lighting hardware used by
the CAPS software;
. installation of the electronic lighting hardware;
<PAGE> 61
. CAPS software package; and,
. training and on-site support for the customer during the CAPS software
installation period.
Revenue is recognized when services are rendered or products are shipped
to the customer. In the case of the CAPS software, revenue is recognized when
the computer containing a copy of the software is shipped to the customer or
when SAC authorizes a customer to download the software onto a customer-owned
machine. Revenues from installation services, training, and on-site customer
support are recognized ratably during the period over which such services are
rendered. Sales are presented net of discounts and allowances.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposit accounts and other
cash equivalents with maturities of 3 months or less.
Accounts Receivable
SAC has no individual account or geographic concentrations of credit
risk. SAC performs credit reviews on new customers and periodic credit
reviews on existing customers and generally does not require collateral.
The following contract amounts are included in accounts receivable (in
thousands):
At December 31,
1999 1998
-------- --------
Uncompleted contract costs over related billings $ 1,215 $ 1,442
Uncompleted contract billings over related costs (28) (95)
-------- --------
Net costs over billings $ 1,187 $ 1,347
======== ========
Inventories
Inventories are stated at the lower of cost or market. Standard costs
are used which approximate the first-in, first-out method of inventory
valuation.
Plant and Equipment
In connection with the SAC Acquisition, the assets acquired by SAC were
adjusted to their estimated fair market values. Fair market value was based
on estimates included in an independent appraisal. Subsequent to the SAC
Acquisition, additions to plant and equipment are recorded at cost. Plant and
equipment is depreciated using the straight-line method over the estimated
useful lives of individual assets or asset groups. Estimated useful lives in
years for depreciation are as follows: 3 to 10 for machinery and equipment; 3
to 8 for computer systems and equipment; 5 to 10 for furniture and fixtures.
Expenditures for additions and improvements are capitalized. Repairs and
maintenance which do not extend the lives of the applicable assets are charged
to expense as incurred. At the time units of plant and equipment are sold,
the related cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is recognized in income. See notes 3 and 6.
<PAGE> 62
Goodwill
Goodwill recorded as a result of the SAC Acquisition is being amortized
using the straight-line method over 15 years.
SAC regularly evaluates whether events and circumstances have occurred
that indicate the remaining estimated useful life of goodwill may warrant
revision or the carrying value of goodwill may not be recoverable. In
evaluating goodwill for possible impairment, SAC uses an estimate of
undiscounted future cash flows over the goodwill's remaining estimated useful
life. Should this analysis indicate that goodwill is impaired, SAC would
write-down its carrying value to fair market value.
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, liabilities, revenues,
expenses and disclosures of contingencies during the reporting period which,
in the normal course of business, are subsequently adjusted to actual results.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform
to 1999 classifications.
NOTE 2: SUBSEQUENT EVENTS: THE REUNION ACQUISITION AND REFINANCING
On March 16, 2000, Reunion Industries, Inc. (Reunion) and Chatwins Group,
Inc. (Chatwins Group) merged. Prior to their merger, Reunion and Chatwins
Group were affiliated with SAC and each other (see note 4). Simultaneously
with and related to the merger, Reunion acquired SAC's common stock and assets
and assumed SAC's obligations (Reunion Acquisition). Reunion will account for
the acquisition of SAC as a purchase pursuant to Accounting Principles Board
Opinion No. 16, "Business Combinations." Therefore, SAC's assets and
liabilities will be revalued. The excess of the purchase price over the fair
value of assets acquired and liabilities assumed (goodwill), if any, will be
capitalized and amortized over fifteen years.
In the merger, Reunion entered into various senior secured credit
facilities. Proceeds from initial borrowings under the credit facilities were
used for various purposes, including $100,000 paid to holders of SAC's common
stock (see note 3), $6,180,000 to fully repay SAC's Term Loan (see note 8) and
$1,116,000 to repay a portion of SAC's Revolver (see note 7). The remainder
of SAC's obligation under the Revolver was assumed by Reunion.
In the Reunion Acquisition, holders of SAC's Series A preferred stock
(see note 9) received in exchange for their shares, 5,000 shares of Reunion
Series B preferred stock. The Reunion Series B preferred stock has a
redemption price of $5,000,000. Cumulative dividends at 15% of the redemption
price from November 2, 1997, the date of the SAC Acquisition, are payable as
and when declared by Reunion's board of directors. Cumulative dividends as of
the date of the Reunion Acquisition were $1,781,000. Dividends on the Reunion
Series B preferred stock are senior to dividends on its common stock and its
Series A preferred stock, issued in the merger of Reunion and Chatwins Group.
<PAGE> 63
Subject to Delaware law and restrictions in its debt agreements, Series B
preferred stock may be redeemed at Reunion's option. The redemption amount is
the redemption price plus accumulated unpaid dividends.
NOTE 3: THE SAC ACQUISITION AND RELOCATION
The following discussions of the SAC Acquisition and Relocation make
reference to various entities and individuals that are directly related to or
affiliated with each other. See note 4 for a discussion of related party
relationships and transactions.
The SAC Acquisition
On September 11, 1997, SAC entered into an asset purchase agreement with
Kingston pursuant to which SAC acquired substantially all of the assets of and
assumed certain liabilities relating to Kingston's business of manufacturing,
distributing, marketing, selling and installing gravity flow racking and
computer assisted picking systems for a net cash purchase price of
$18,050,000. Prior to the Reunion Acquisition, SAC was a privately-held
Delaware corporation owned 42.5% by Mr. Charles E. Bradley, Sr. (Mr. Bradley),
42.5% by Mr. Kimball J. Bradley (Kimball Bradley) and 15% by Mr. Richard L.
Evans (Mr. Evans). Contemporaneously with entering into the asset purchase
agreement, SAC entered into an escrow agreement with Kingston pursuant to
which it placed $850,000 in escrow to hold until the closing, a commitment
letter with Stanwich Financial Services Corp. (SFSC), an affiliated company,
pursuant to which SFSC committed to provide SAC with a $13,000,000 term loan
and to purchase $5,000,000 of SAC's mandatorily redeemable 15% cumulative
preferred stock, and a demand promissory note with SFSC for $1,000,000. Funds
for the $850,000 placed in escrow were provided by SFSC under the $1,000,000
demand note.
On November 3, 1997, the date of the closing of the SAC Acquisition, SAC
paid $17,286,275 to Kingston representing the purchase price of $18,050,000
less the $850,000 of funds in escrow which were released to Kingston at the
closing, less $47,000 of purchase price adjustments, plus $133,275 under a
transition services agreement with Kingston entered into at the closing and
described below. Also at the closing, SAC entered into employment agreements
with four key employees of Kingston's former flow racking and CAPS operations,
executed a $14,000,000 revolving credit facility with SFSC which replaced the
$13,000,000 term loan commitment and $1,000,000 demand note discussed above,
entered into a security agreement with SFSC to secure SAC's obligations to
SFSC under the revolving credit facility and issued 5,000 shares of Series A
Preferred Stock to SFSC for $5,000,000 in cash. Funds for the $17,286,275
paid to Kingston at the closing were provided by availability under the
$14,000,000 revolving credit facility and the $5,000,000 of proceeds from sale
of the Series A Preferred Stock. The excess of the purchase price over the
fair market value of the acquired net assets was recorded as goodwill.
The transition services agreement entered into by SAC and Kingston
provided that, for a six-month period from the closing date, Kingston would
provide manufacturing, administrative, computer, accounting, information and
consumer response services to SAC necessary to continue the flow racking and
CAPS operations under the new ownership during the six-month transition
period. The price for such services included a $29,000 per month fixed charge
for the use of Kingston's manufacturing facilities in New Hampshire and a
charge for variable costs such as employee wages and benefits. The payments
<PAGE> 64
for such services were to be made in advance on the first and fifteenth
business day of each month during the transition period, such payments
representing 50% of that month's estimate by Kingston of the cost of such
services to SAC. Such estimates were to be prepared by Kingston in good faith
and with sufficient supporting documentation as SAC may reasonably request.
The $133,275 paid to Kingston at the closing pursuant to the transition
services agreement represented 50% of the first month's transition services
cost to SAC. The transition services agreement was able to be terminated by
either party or extended by SAC pursuant to various procedures as defined in
the agreement. The transition services agreement was not extended. During
1998, including the initial charge paid at the closing, SAC paid Kingston
$868,885 for transition services pursuant to this transition services
agreement. Although SAC's management believes that amounts paid for
transition services during the transition period were reasonable for the
amount and nature of services received, it is possible that the costs of these
services might not have been the same had they been provided by wholly
unrelated third parties.
The Relocation
Subsequent to the transition period described above, it was necessary to
establish Kingway's business in a new location with adequate space and
overhead support. At the time Kingway was available for purchase, the
management of Chatwins Group wished to acquire Kingway as Kingway's flow
racking and CAPS were thought to be important product line extensions to
Chatwins' more traditional storage and material handling systems and Chatwins'
material handling manufacturing operations in Acworth, Georgia possessed
surplus floor space, production workforce, administrative organization and
equipment that could be utilized to continue Kingway's operations. Chatwins
was not, however, able to consummate the acquisition. Therefore, SAC and
Chatwins entered into a service agreement pursuant to which Kingway would
utilize Chatwins' surplus capacity in exchange for fees approximately equal to
Chatwins' cost to provide such capacity and Kingway's flow racking and CAPS
hardware manufacturing operations were relocated to Chatwins' facility in
Acworth, Georgia during the second quarter of 1998 (Relocation). Kingway's
software development and support staff remained in New Hampshire in newly
leased office space not affiliated with Chatwins or Kingston.
NOTE 4: RELATED PARTIES, RELATIONSHIPS AND TRANSACTIONS
The following is a discussion of related parties, relationships and
transactions of SAC and other parties. Subsequent to December 31, 1999,
events have occurred which have affected SAC. See note 2.
The Parties and Relationships
Reunion Industries, Inc. - Reunion is a publicly traded Delaware
corporation which, until its merger with Chatwins Group, was headquartered in
Stamford, Connecticut. Subsequent to the merger, Reunion's headquarters is
located in Pittsburgh, Pennsylvania. Mr. Bradley is Chief Executive Officer
and Chairman of the board of Reunion and 42.5% shareholder of SAC. Kimball
Bradley is Executive Vice President and a director of Reunion, son of Mr.
Bradley and 42.5% shareholder of SAC. Mr. Evans is Executive Vice President
and Secretary of Reunion and 15% shareholder of SAC. Mr. John G. Poole (Mr.
Poole) is a director of Reunion.
<PAGE> 65
Chatwins Group, Inc. - Until the merger, Chatwins was a privately held
Delaware corporation headquartered in Pittsburgh, Pennsylvania. Chatwins
owned approximately 38% of Reunion's outstanding common stock. Mr. Bradley
was Chairman of the Board and majority beneficial shareholder of Chatwins.
Kimball Bradley was Senior Vice President and a shareholder of Chatwins. Mr.
Poole was a director and shareholder of Chatwins.
Stanwich Financial Services Corp. - SFSC is a privately held Delaware
corporation headquartered in Stamford, Connecticut primarily engaged in the
business of providing acquisition financing and making equity investments.
SFSC is owned 50% by Mr. Bradley, 42.5% by Charles E. Bradley, Jr., Mr.
Bradley's son, and 7.5% by Mr. Poole. Mr. Evans is an officer of SFSC.
The Transactions
Chatwins Services Agreement - During 1999 SAC was charged $1,550,245 for
manufacturing, selling and administrative services under the Chatwins services
agreement. Of this amount, $937,495 was included in cost of goods sold and
$612,750 was included in selling, general and administrative expenses in the
accompanying statement of operations. During 1998 SAC was charged $1,298,631
for manufacturing, selling and administrative services under the Chatwins
services agreement. Of this amount, $850,996 was included in cost of goods
sold and $447,635 was included in selling, general and administrative expenses
in the accompanying statement of operations.
At December 31, 1999, SAC owed Chatwins $2,151,314 under the Chatwins
services agreement which is included in due to related parties in the
accompanying balance sheet. At December 31, 1998, SAC owed Chatwins $780,649
under the Chatwins services agreement which is included in due to related
parties in the accompanying balance sheet.
Although SAC's management believes that amounts paid for manufacturing,
selling and administrative services under the Chatwins services agreement were
reasonable for the amount and nature of services received, it is possible that
the costs of these services might not have been the same had they been
provided by wholly unrelated third parties.
Revolver - SFSC has provided SAC with a revolving credit facility.
During 1999, $1,355,702 of interest was paid by SAC to SFSC under the
Revolver. During 1998, $1,776,780 of interest was paid by SAC to SFSC under
the Revolver. At December 31, 1999, SAC had no interest payable to SFSC. At
December 31, 1998, SAC had accrued interest payable to SFSC of $293,696 which
is included in due to related parties in the accompanying balance sheet.
During 1999, SAC repaid borrowings totalling $2,900,000 to SFSC under the
Revolver. Proceeds for such repayments were provided from current operations
and the increase in the related party payable to Chatwins Group. An
additional $1,116,000 was repaid in the Reunion Acquisition.
SAC's management believes that the terms and conditions of the Revolver
are comparable to those that SAC may be able to obtain from a wholly unrelated
third party lender. See notes 7 and 8.
Term Loan - During 1998, SAC refinanced portions of the Revolver with
another lender. SFSC paid $180,000 of SAC's closing expenses related to these
refinancings which is included in due to related parties in the accompanying
balance sheet at December 31, 1998. See notes 7 and 8.
<PAGE> 66
NOTE 5: INVENTORIES
Inventories are comprised of the following (in thousands):
At December 31,
1999 1998
-------- --------
Raw materials $ 573 $ 772
Work-in-process 187 71
Finished goods 219 227
-------- --------
Inventories $ 979 $ 1,070
======== ========
NOTE 6: PLANT AND EQUIPMENT
Plant and equipment is comprised of the following (in thousands):
At December 31,
1999 1998
-------- --------
Machinery and equipment $ 2,451 $ 2,236
Computer systems and equipment 292 252
Furniture and fixtures 54 54
-------- --------
Plant and equipment 2,797 2,542
Accumulated depreciation (654) (264)
-------- --------
Plant and equipment, net $ 2,143 $ 2,278
======== ========
NOTE 7: REVOLVER
On November 3, 1997, SAC executed a revolving credit note agreement with
SFSC under which SFSC agreed to provide SAC with a revolving credit facility
of up to a maximum principal amount of $14,000,000 (Revolver). On such date
SAC borrowed $13,500,000, the substantial majority of the proceeds from which
were used to partially fund the SAC Acquisition. See note 3. In September
and October 1998, portions of borrowings under the Revolver were refinanced
with another lender. See note 8. At December 31, 1999, $4,664,700 was
outstanding under the Revolver. At December 31, 1998, $7,564,700 was
outstanding under the Revolver. During 1999, SAC repaid borrowings totalling
$2,900,000 to SFSC under the Revolver. Proceeds for such repayments were
provided from current operations and the increase in the related party payable
to Chatwins Group. An additional $1,116,000 was repaid in the Reunion
Acquisition. See note 2.
At December 31, 1999, SAC had no interest payable to SFSC. At December
31, 1998, SAC had accrued interest payable to SFSC of $293,696 which is
included in due to related parties in the accompanying balance sheet.
Interest under the Revolver is calculated at a fixed rate of 15% per
annum (360 days per the note agreement) on the principal amounts outstanding.
Interest is payable on the last business day (as defined) of each calendar
quarter which began on December 31, 1997. During 1999, $1,355,702 of interest
<PAGE> 67
was paid to SFSC under the Revolver. During 1998, $1,776,780 of interest was
paid to SFSC under the Revolver.
At the same time as the execution of the Revolver, SAC, its shareholders
and SFSC entered into security and pledge agreements wherein SAC assigned,
pledged and granted to SFSC a continuing security interest in and lien upon
all of SAC's property, assets and rights of every kind and SAC's shareholders
assigned, pledged and granted to SFSC a continuing security interest in and
lien upon all common stock held by them to secure borrowings under the
Revolver.
NOTE 8: TERM LOAN
On September 1 and October 19, 1998, SAC refinanced portions of the
Revolver with an unrelated third party lender. The initial refinancing was
for $5,235,000 and included $5,000,000 of cash proceeds paid to SFSC in
partial repayment of the Revolver, a $180,000 success fee payable to the
lender and $55,000 in fees paid to lender's counsel. Additional closing and
facility fees totalling $180,000 were paid to the lender on SAC's behalf by
SFSC related to this refinancing. SAC also paid $59,609 to its own counsel
related to this refinancing from internally generated cash. The second
refinancing was for $945,000 which included $935,300 of proceeds paid to SFSC
in partial repayment of the Revolver and $9,700 in fees paid to lender's
counsel.
Both of these refinancings were pursuant to a single term loan agreement
between SAC and its lender dated September 1, 1998 and subsequently amended on
October 19, 1998. The term loan agreement and total outstanding borrowings of
$6,180,000 had interim maturity dates of December 1, 1998, and March 1 and
June 1, 1999 and a final maturity date of September 1, 1999. The term loan
agreement required the payment of a $61,800 fee, as defined, on each interim
maturity date. Such fee was paid on each interim maturity date and recorded
as interest expense totalling $61,800 in 1998 and $185,400 in 1999.
On and subsequent to September 1, 1999, SAC and its lender entered into
several additional amendments of the term loan financing documents,
specifically to extend the final maturity date of the term loan. Each
amendment included either a single or multiple extensions of the final
maturity date and required the payment of a fee for each extension. From
September 1 through December 31, 1999, SAC paid additional fees totalling
$361,800. Fees paid after December 31, 1999 through the date of the Reunion
Acquisition totalled $322,000. SAC recorded all such fees as interest
expense.
Borrowings outstanding under the term loan agreement bore interest at an
annual rate of The Chase Manhattan Bank prime rate plus 5.0%, but in no case
less than 13.5%. The term loan agreement also provided for a post-default
rate of interest, as defined, of The Chase Manhattan Bank prime rate plus
7.0%, but in no case less than 15.5%. Interest payable under the post-default
rate was due on demand. On September 1, 1999, the term loan interest rate was
increased to the minimum post-default rate of 15.5% At December 31, 1999, the
rate for borrowings outstanding under the term loan agreement was 15.5%. At
December 31, 1998, the rate for borrowings outstanding under the term loan
agreement was 13.5%. Interest was payable on the first business day of each
month in arrears. During 1999, SAC paid $887,772 of interest excluding fees
under the term loan agreement. During 1998, SAC paid $255,683 of interest
<PAGE> 68
excluding fees under the term loan agreement.
Borrowings outstanding under the term loan agreement were secured by a
continuing security interest in and lien upon all of SAC's property, assets
and rights of every kind, such security interest and lien having been obtained
by the execution of a security agreement by SAC wherein SFSC pledged its
rights under the Revolver to the term loan lender. Borrowings under the term
loan agreement were also secured by (i) the individual guaranties of Mr.
Bradley, Kimball Bradley and Mr. Evans and corporate guaranty of SFSC; (ii)
the individual pledge and security agreements executed by Mr. Bradley, Kimball
Bradley and Mr. Evans wherein they pledged as collateral their holdings of all
shares of SAC common stock and holdings of common stock of another affiliated
corporation; (iii) the corporate pledge agreement of SFSC of its holdings of
the Series A Preferred Stock (see note 9) and its rights to and interests in
certain of its notes receivable and holdings of common stock of other
affiliated entities.
The term loan agreement included various representations, warranties and
affirmative and negative covenants by SAC and provided the lender 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 term loan
agreement. Financial covenants in the term loan agreement included the
maintenance by SAC of a minimum earnings before interest, taxes, depreciation
and amortization (EBITDA) and a maximum ratio of indebtedness to EBITDA,
calculations of which are defined in the term loan agreement. Beginning on
September 30, 1998, SAC was required to maintain a rolling twelve-month
minimum EBITDA of $2.1 million, which increased to $2.6 million on October 31,
1998 and to $3.0 million on May 31, 1999. For 1999, SAC's EBITDA was $4.1
million. Beginning on September 30, 1998, SAC was required to maintain a
maximum ratio of indebtedness to rolling twelve-month EBITDA of 3.00:1, which
decreased to 2.50:1 on October 31, 1998 and to 2.10:1 on May 31, 1999. For
1999, such ratio was 1.52:1. During 1999, SAC had complied with all financial
covenants pursuant to the term loan agreement. SAC was also in compliance
with all other representations, warranties and covenants at December 31, 1999.
On March 16, 2000, all borrowings outstanding under the Term Loan were
repaid. See note 2.
NOTE 9: PREFERRED STOCK
Prior to the Reunion Acquisition, SAC had one series of preferred stock
outstanding. This Series A Preferred Stock had a liquidation value of $1,000
per share and was entitled to receive preferential and cumulative dividends at
an annual rate of 15% of liquidation value. At December 31, 1999, the issued
and outstanding shares of SAC's Series A Preferred Stock totalled 5,000
shares. All of these shares were held by SFSC. Proceeds from the issuance of
the Series A Preferred Stock were used for the SAC Acquisition. See notes 2,
3, 7, 8 and 10.
In the Reunion Acquisition, holders of SAC's Series A preferred stock
received in exchange for their shares, 5,000 shares of Reunion Series B
preferred stock. The Reunion Series B preferred stock has a redemption price
of $5,000,000. Cumulative dividends at 15% of the redemption price from
November 2, 1997, the date of the SAC Acquisition, are payable as and when
declared by Reunion's board of directors. Cumulative dividends as of the date
of the Reunion Acquisition were $1,781,000. Dividends on the Reunion Series B
<PAGE> 69
preferred stock are senior to dividends on its common stock and its Series A
preferred stock, issued in the merger of Reunion and Chatwins Group. Subject
to Delaware law and restrictions in its debt agreements, Series B preferred
stock may be redeemed at Reunion's option. The redemption amount is the
redemption price plus accumulated unpaid dividends.
NOTE 10: STOCKHOLDERS' EQUITY
Activity in stockholders' equity is as follows (in thousands):
Pre- Accumu-
Common Capital ferred lated
Stock Paid-In Stock Deficit Total
-------- -------- -------- -------- --------
At January 1, 1998 $ - $ 25 $ 5,125 $ (210) $ 4,940
Activity for the year
ended December 31, 1998:
Net loss - - - (351) (351)
Preferred stock dividend
accretions - - 750 (750) -
-------- -------- -------- -------- --------
At December 31, 1998 - 25 5,875 (1,311) 4,589
Activity for the year
ended December 31, 1999:
Net loss - - - (145) (145)
Preferred stock dividend
accretions - - 750 (750) -
-------- -------- -------- -------- --------
At December 31, 1999 $ - $ 25 $ 6,625 $ (2,206) $ 4,444
======== ======== ======== ======== ========
Prior to the Reunion Acquisition, common stock outstanding totalled 1,000
shares and had a $.01 per share par value. Mr. Bradley and Kimball Bradley
owned 425 shares each and Mr. Evans owned 150 shares. All of these shares
were pledged as security for borrowings under the Revolver and Term Loan. On
March 16, 2000, Reunion acquired SAC's common stock. See notes 2, 7, 8 and 9.
SAC issued Series A Preferred Stock contemporaneously with the SAC
Acquisition. Dividends accreted from retained earnings since its issuance
totalled $1,625,000 at December 31, 1999.
NOTE 11: EMPLOYEE BENEFITS
Pensions and Other Postretirement Benefits
SAC does not sponsor, contribute to, or participate in any defined benefit
pension or other postretirement benefit plans. SAC has a defined contribution
plan covering all of its employees. SAC's defined contribution plan expense
for 1999 totalled $36,332. SAC's defined contribution plan expense for 1998
totalled $40,962.
Postemployment Benefits
Other than unemployment compensation benefits required by law, SAC does
not provide postemployment benefits to former or inactive employees.
<PAGE> 70
NOTE 12: INCOME TAXES
No provision for income taxes was made for the years ended December 31,
1999 and 1998 due to SAC's operating losses in each year.
Deferred income taxes result from temporary differences in the financial
bases and tax bases of assets and liabilities. For tax purposes, SAC is
treating the SAC Acquisition as a purchase of assets. Accordingly, as of the
date of the SAC Acquisition, the assets and liabilities of Kingway were
adjusted to their fair market values for both book and tax purposes. The
types of differences that give rise to significant portions of SAC's deferred
income tax liabilities and assets are shown in the following table (in
thousands):
At December 31,
1999 1998
-------- --------
Goodwill amortization $ (305) $ (327)
Depreciation (140) (103)
Other - (19)
-------- --------
Deferred tax liabilities (445) (449)
-------- --------
Loss carryforwards (NOLs) 500 440
Book reserves 68 86
Other 5 7
-------- --------
Deferred tax assets 573 533
Less: Valuation allowance (128) (84)
-------- --------
Deferred tax assets, net 445 449
-------- --------
Deferred taxes, net $ - $ -
======== ========
SFAS No. 109 requires a valuation allowance where it is "more likely than
not that some portion or all of the deferred tax assets will not be realized."
It further states that "forming a conclusion that a valuation allowance is not
needed is difficult when there is negative evidence such as losses in recent
years." The ultimate realization of SAC's deferred income tax assets depends
on its ability to generate sufficient taxable income in the future. While SAC
believes that the deferred income tax assets will be realized by future
operating results, such realization is uncertain. At December 31, 1999, SAC
had net operating loss carryforwards totalling $1.3 million, of which $1.1
million expires in 2018 and $0.2 million expires in 2019. The Reunion
Acquisition resulted in a change in ownership under the Internal Revenue Code
which limits the ability to utilize SAC's NOL carryforwards in subsequent
periods.
<PAGE> 71
The current and noncurrent classifications of deferred income tax
liabilities and assets are shown in the following table (in thousands):
At December 31,
1999 1998
-------- --------
Current:
Deferred tax assets $ 68 $ 86
Deferred tax liabilities - (19)
Less: Valuation allowance (68) (67)
-------- --------
Current deferred taxes - -
-------- --------
Noncurrent:
Deferred tax assets 505 447
Deferred tax liabilities (445) (430)
Less: Valuation allowance (60) (17)
-------- --------
Noncurrent deferred taxes - -
-------- --------
Deferred taxes, net $ - $ -
======== ========
NOTE 13: LEASES
Lease rental expense for 1999 totalled $85,503. At December 31, 1999,
SAC had minimum rental commitments under noncancelable operating leases as
follows: 2000 - $87,405; 2001 - $86,963; 2002 - $30,037; 2003 - $5,841; 2004
and after - $0.
NOTE 14: CONTINGENT LIABILITIES AND COMMITMENTS
There were no legal proceedings against SAC at December 31, 1999.
Additionally, there were no other contingent liabilities or commitments at
December 31, 1999 that would have a material impact on the financial position
or results of operations of SAC.
NOTE 15: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash in banks; Accounts receivable; Accounts payable; Due to related
parties - The carrying amounts of these financial instruments at December 31,
1999 and 1998 approximate fair value due to their short maturities.
Revolver, related party; Term Loan - The Revolver has a fixed interest
rate and the Term Loan has a variable interest rate with an interest rate
floor, both of which approximate current market rates. Accordingly,
management estimates that their carrying amounts approximate fair value at
December 31, 1999 and 1998.
<PAGE> 72
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 and the
simultaneous acquisition of Kingway.
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 will be revalued at their estimated fair value. The
excess of purchase price over fair value of assets acquired and liabilities
assumed (goodwill), if any, for the acquisition of the approximately 63% of
Reunion common stock 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 $8.1
million, consisting of 2,490,000 shares of Reunion common stock not owned by
Chatwins Group at December 31, 1999 valued at $3.25 per share, based on the
market price of Reunion common stock between July 28 and August 2, 1999,
immediately prior to the announcement of the July 28, 1999 approval by
Reunion's board of directors of the amended and restated merger agreement. In
June 1995, Chatwins Group had previously acquired 1,450,000 shares, which at
that time represented approximately 38% of Reunion's then outstanding common
stock and which at December 31, 1999 represented approximately 37% of
Reunion's outstanding common stock. The purchase price reflects the
acquisition of the approximately 63% of Reunion common stock not previously
owned by Chatwins Group.
Simultaneously with the closing of the merger and related refinancing,
Reunion acquired Kingway. This acquisition will be accounted for as a
purchase under APB Opinion No. 16. The unaudited pro forma consolidated
condensed financial statements assume that the consideration for the purchase
of Kingway includes the assumption of approximately $10.8 million of Kingway's
debt and the issuance of $6.6 million of preferred stock in exchange for
Kingway's existing preferred stock. Amounts related to Kingway are segregated
in the following unaudited pro forma financial statements because Kingway's
results are not included in either Reunion's or Chatwins Group's historical
results.
The unaudited pro forma consolidated condensed balance sheet is based on
the assumption that the merger and the simultaneous acquisition of Kingway
were completed on December 31, 1999. The unaudited pro forma consolidated
condensed income statement for the year ended December 31, 1999 is based on
the assumption that the merger and the simultaneous acquisition of Kingway
were completed January 1, 1999. The actual amounts of the sources and uses of
refinancing proceeds in the merger and acquisition on March 16, 2000 will
differ from the sources and uses presented in these unaudited pro forma
consolidated condensed financial statements due to differences in historical
financial statement amounts between December 31, 1999 and March 16, 2000.
The historical financial information for Reunion, Chatwins Group and
Kingway presented in the unaudited pro forma consolidated condensed balance
sheet and statement of operations for the year ended December 31, 1999 is
<PAGE> 73
derived from audited financial statements for the year then ended.
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 the dates indicated above, 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's, Chatwins Group's and Kingway's
financial statements. The financial statements, Management's Discussion and
Analysis of Financial Condition and Results of Operations and a description of
the business of Chatwins Group are included under Item 7(a) herein. The
financial statements of Kingway are included under Item 7(a) herein. The
financial statements of Reunion are included in its Annual Report on Form 10-K
for the year ended December 31, 1999 as filed with the Securities and Exchange
Commission on March 30, 2000.
<PAGE> 74
REUNION INDUSTRIES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
December 31, 1999 (in thousands)
Reunion Chatwins Pro Forma &
Industries Group Kingway Acquisition Pro Forma
Historical Historical Historical Adjustments Combined
---------- ---------- ---------- ------------- -----------
ASSETS:
Cash $ 2,455 $ 252 $ 291 $ 25,800 (5a)
5,000 (5a)
27,367 (5a)
(26,083)(5b)
(5,894)(5b)
(18,794)(5b)
(7,396)(5b) $ 2,998
Receivables 8,988 25,787 3,756 - 38,531
Inventories 6,034 12,648 979 - 19,661
Other Current 1,706 3,179 113 - 4,998
-------- -------- -------- -------- --------
Total Current
Assets 19,183 41,866 5,139 - 66,188
Property - net 37,637 16,675 2,143 - 56,455
Goodwill 7,676 3,371 11,652 8,093 (2)
9,900 (3)
(13,743)(4)
(9,164)(4)
2,281 (5c)
528 (5f) 20,594
Investment in
Reunion Common
Stock - 6,270 - (6,270)(3) -
Due from Related
Parties - 3,144 - (2,151)(6) 993
Deferred
Financing
Costs 528 2,454 - 1,404 (5a)
(821)(5d)
(811)(5e)
(528)(5f) 2,226
Other Assets 1,287 7,240 35 (3,630)(3)
(802)(4)
9,164 (4) 13,294
-------- -------- -------- -------- --------
Total Assets $ 66,311 $ 81,020 $ 18,969 $ (6,550) $159,750
======== ======== ======== ======== ========
<PAGE> 75
REUNION INDUSTRIES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (Continued)
December 31, 1999 (in thousands)
Reunion Chatwins Pro Forma &
Industries Group Kingway Acquisition Pro Forma
Historical Historical Historical Adjustments Combined
---------- ---------- ---------- ------------- -----------
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Current Long-
Term Debt $ 3,339 $ 25,022 $ 6,180 $(25,000)(5b)
(1,500)(5b)
(6,180)(5b)
26 (5d) $ 1,887
Short-Term Debt-
Related Parties - - 4,665 (1,116)(5b) 3,549
Revolving Credit 8,044 5,834 - 28,771 (5a)
(5,834)(5b)
(8,044)(5b) 28,771
Trade Payables 7,629 12,543 1,215 - 21,387
Due to Related
Parties - - 2,151 (2,151)(6) -
Accrued Other 5,812 6,343 314 (1,083)(5b)
(60)(5b) 11,326
Net Liabilities of
Discontinued
Operations - 3,011 - - 3,011
-------- -------- -------- -------- --------
Total Current
Liabilities 24,824 52,753 14,525 (22,171) 69,931
Other Long-Term
Debt 19,613 24,997 - (9,250)(5b) 35,360
New Term Debt - - - 25,800 (5a)
5,000 (5a) 30,800
Related Party
Debt 1,017 - - - 1,017
Other
Liabilities 3,075 1,883 - - 4,958
-------- -------- -------- -------- --------
Total
Liabilities 48,529 79,633 14,525 (621) 142,066
-------- -------- -------- -------- --------
<PAGE> 76
REUNION INDUSTRIES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (Continued)
December 31, 1999 (in thousands)
Reunion Chatwins Pro Forma &
Industries Group Kingway Acquisition Pro Forma
Historical Historical Historical Adjustments Combined
---------- ---------- ---------- ------------- -----------
Minority
Interests 2,713 - - - 2,713
-------- -------- -------- -------- --------
Redeemable
Preferred Stock 524 8,938 - (8,938)(5g) 524
-------- -------- -------- -------- --------
Stockholders'
Equity:
Common Stock 39 3 - 117 (2)
(39)(4) 120
Paid-in Capital 29,402 873 25 (500)(1)
7,976 (2)
(29,402)(4)
(25)(5c) 8,349
Preferred Stock - - 6,625 8,938 (5g)
(6,625)(5g)
6,625 (5g) 15,563
Treasury Stock - (500) - 500 (1) -
Translation
Adjustment (786) - - 786 (4) -
Retained Earnings
(accumulated
deficit) (14,110) (7,927) (2,206) 14,110 (4)
2,206 (5c)
(847)(5d)
(811)(5e) (9,585)
-------- -------- -------- -------- --------
Total
Stockholders'
Equity 14,545 (7,551) 4,444 3,009 14,447
-------- -------- -------- -------- --------
Total
Liabilities
and
Stockholders'
Equity $ 66,311 $ 81,020 $ 18,969 $ (6,550) $159,750
======== ======== ======== ========= ========
<PAGE> 77
REUNION INDUSTRIES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(in thousands, except per share amounts)
Reunion Chatwins Pro Forma &
Industries Group Kingway Acquisition Pro Forma
Historical Historical Historical Adjustments Combined
---------- ---------- ---------- ------------ -----------
SALES $ 76,099 $ 121,090 $ 17,528 $ - $214,717
Operating Costs
and Expenses:
Cost of Sales 64,943 100,822 10,985 - 176,750
Selling, General
and Admin. 10,937 12,742 2,920 - 26,599
Amortization of
Goodwill 695 204 901 (427)(a) 1,373
Other - 591 18 - 609
-------- -------- -------- -------- --------
OPERATING
PROFIT (LOSS) (476) 6,731 2,704 427 9,386
OTHER (INCOME)
EXPENSE:
Interest Expense 3,392 7,989 2,886 (2,583)(b) 11,684
Provision for Bargo
Judgment
and Costs 1,646 - - - 1,646
Bargo Settlement
Gain (3,617) - - - (3,617)
Equity loss from
affiliate - 566 - (566)(c) -
Other (Income)
Expense (635) - (37) - (672)
-------- -------- -------- -------- --------
Income (Loss)
from Continuing
Operations
Before Taxes (1,262) (1,824) (145) 3,576 345
Income Tax
Expense
(Benefit) 226 (1,463) - 1,375 (d) 138
-------- -------- -------- -------- --------
Income (Loss) from
Continuing
Operations (1,488) (361) (145) 2,201 207
Preferred Stock
Dividends - (456) (750) (392)(e) (1,598)
-------- -------- -------- -------- --------
Income (Loss)
Available
to Common
Stockholders $ (1,488) $ (817) $ (895) $ 1,809 $ (1,391)
======== ======== ======== ======== ========
<PAGE> 78
REUNION INDUSTRIES, INC.
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(in thousands, except per share amounts)
Reunion Chatwins Pro Forma &
Industries Group Kingway Acquisition Pro Forma
Historical Historical Historical Adjustments Combined
---------- ---------- ---------- ------------ -----------
Income (Loss)
from
Continuing
Operations
per Common
Share:
Basic $ (0.38) $ (2.82) $ (0.12)
======== ======== ========
Diluted $ (0.38) $ (2.82) $ (0.12)
======== ======== ========
Weighted Average
Number of
Common Shares
Basic 3,924 290 11,974
======== ======== ========
Diluted 3,924 290 11,974
======== ======== ========
<PAGE> 79
REUNION INDUSTRIES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(in thousands)
Note 1. Pro Forma Adjustments to the Unaudited Pro Forma Consolidated
Condensed Balance Sheet
Adjustments to the unaudited pro forma combined balance sheet as
of December 31, 1999:
(1) To retire Chatwins Group's treasury stock.
(2) To record issuance of 9,500,000 shares of Reunion common stock
to Chatwins Group stockholders. Purchase price determined based on 2,490,000
shares, representing Reunion common stock not owned by Chatwins Group at
December 31, 1999, times $3.25 per share, based on the market price of Reunion
common stock between July 28, 1999 and August 2, 1999, immediately prior to
the announcement of the July 28, 1999 approval by Reunion's board of the
amended and restated merger agreement.
(3) To eliminate Chatwins Group's investment in Reunion, including
acquisition costs and deferred taxes.
(4) To eliminate Reunion's consolidated equity accounts and
deferred merger costs and record a deferred tax asset of $9.2 million based on
management's best estimate of the probable use of NOLs during the carryforward
period.
<PAGE> 80
(5) To record the sources and uses of the net proceeds and other
transactions related to the merger, the new term debt and the new revolving
credit facility:
(5a) Sources of proceeds:
Gross Issuance Net
Proceeds Costs Proceeds
-------- -------- --------
New term loan A proceeds $ 25,800 $ - $ 25,800
New term loan B proceeds 5,000 - 5,000
New revolving credit facility proceeds 28,771 (1,404) 27,367
-------- -------- --------
Totals $ 59,571 $ (1,404) $ 58,167
======== ======== ========
(5b) Uses of proceeds:
Classifications of Debt and Other
------------------------------------------------
Long Total
Current Revolver -term Other Uses
-------- -------- -------- -------- --------
Partial Senior Note
Redemption:
Principal $ - $ - $ 25,000 $ - $ 25,000
Accrued Interest - - - 1,083 1,083
-------- -------- -------- -------- --------
- - 25,000 1,083 26,083
-------- -------- -------- -------- --------
Chatwins Revolver Paydown:
Outstanding borrowings - 5,834 - - 5,834
Accrued interest and fees - - - 60 60
-------- -------- -------- -------- --------
- 5,834 - 60 5,894
-------- -------- -------- -------- --------
Reunion Industries Debt
Paydown:
CITBC revolver - 8,044 - - 8,044
CITBC term loan 1,500 - 9,250 - 10,750
-------- -------- -------- -------- --------
1,500 8,044 9,250 - 18,794
-------- -------- -------- -------- --------
Subtotal 1,500 13,878 34,250 1,143 50,771
-------- -------- -------- -------- --------
Acquisition of Kingway:
Kingway debt 6,180 - - - 6,180
Kingway debt - related party 1,116 - - - 1,116
Kingway common stock - - - 100 100
-------- -------- -------- -------- --------
7,296 - - 100 7,396
-------- -------- -------- -------- --------
Totals $ 8,796 $ 13,878 $ 34,250 $ 1,243 $ 58,167
======== ======== ======== ======== ========
<PAGE> 81
Acquisition Detail:
The purchase prices and their allocations to the assets and liabilities
acquired are as follows (in thousands):
Reunion Kingway
-------- --------
Purchase price:
Common stock $ 8,093 $ -
Series B preferred - 6,625
Cash - 100
-------- --------
$ 8,093 $ 6,725
======== ========
Allocation of purchase price:
Cash $ 1,552 $ 291
Receivables 5,680 3,756
Inventories 3,813 979
Other current assets 1,078 113
Property 23,787 2,143
Other assets 307 35
Debt assumed (19,589) (10,845)
Trade payables (4,822) (1,215)
Due to related parties (643) (2,151)
Other accruals (3,673) (314)
Other liabilities (1,943) -
Minority interests (1,715) -
Redeemable preferred stock (331) -
Goodwill 4,592 13,933
-------- --------
$ 8,093 $ 6,725
======== ========
(5c) Incremental goodwill on Kingway acquisition:
Purchase price of Kingway common stock $ 100
Less net assets acquired:
Kingway common equity (25)
Kingway retained deficit 2,206 2,181
-------- --------
Incremental goodwill $ 2,281
========
(5d) Charges related to Chatwins Group Senior Note
redemption:
Write-off original issue discount $ 26
Write-off old deferred financing costs 821
--------
Charges to retained earnings $ 847
========
<PAGE> 82
(5e) Write-off Chatwins revolver deferred
financing costs $ 811
========
(5f) Write-off old Reunion Industries
deferred financing costs $ 528
========
(5g) Conversion of Chatwins Group's and Kingway's redeemable
preferred stocks into new Reunion callable Series A and Series B preferred
stocks, respectively.
(6) Eliminate intercompany receivables and payables.
Note 2. Pro Forma Adjustments to the Unaudited Pro Forma Consolidated
Condensed Statement of Operations
Adjustments to the unaudited pro forma consolidated condensed
statement of operations for the year ended December 31, 1999:
(a) To record the amortization of negative goodwill related to the
merger of Chatwins Group and Reunion, as well as the amortization of
incremental goodwill related to the acquisition of Kingway over a 15-year
period. No adjustments have been made to depreciation. The book values of
property for Reunion and Kingway are assumed to approximate fair value because
substantially all of these assets have been recently restated to fair value as
a result of the application of purchase accounting under APB Opinion 16.
(b) To record the effect on interest expense for 1999 resulting
from the merger and acquisition:
Pro Forma Pro Forma
Annual Rates Balance Interest
------------ -------- --------
Pro Forma Interest Expense:
Senior notes 13% $ 24,975 $ 3,247
New revolving credit facility Prime + .50% 46,780 4,015
New term loan A Prime + .75% 25,800 2,279
New term loan B 20% 5,000 1,000
Other debt - actual 1999 442
--------
Total Pro Forma Cash Interest 10,983
Amortization of deferred financing costs 701
--------
Total Pro Forma Interest 11,684
Less: Historical Interest Expense (14,267)
--------
Pro Forma Merger Interest Adjustment $ (2,583)
========
A 0.125% change in interest rates would affect interest expense by
approximately $90 for the year ended December 31, 1999 assuming completion of
the merger, the refinancing and the acquisition of Kingway.
<PAGE> 83
(c) To eliminate Chatwins Group's equity loss from continuing
operations of Reunion.
(d) To adjust the proforma combined income tax expense for
continuing operations to an effective rate of approximately 40% of pro forma
combined income from continuing operations before taxes.
(e) To record incremental dividends on Reunion's Series A
preferred stock at 10% per annum.
<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Current Report on Form 8-K/A to be signed on
its behalf by the undersigned, thereto duly authorized.
Date: May 4, 2000 REUNION INDUSTRIES, INC.
----------- (Registrant)
By: /s/Joseph C. Lawyer
------------------------
Joseph C. Lawyer
President and Chief
Operating Officer
By: /s/John M. Froehlich
------------------------
John M. Froehlich
Executive Vice President
of Finance and Chief
Financial Officer
