==============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 2004, Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
---------- ----------
Commission File Number 01-15739
--------
REUNION INDUSTRIES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 06-1439715
------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
11 STANWIX STREET, SUITE 1400, PITTSBURGH, PENNSYLVANIA 15236
-------------------------------------------------------------
(Address of principal executive offices, including zip code)
(412) 281-2111
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: COMMON STOCK, $.01 par value
Name of Each Exchange on Which Registered: AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
-----
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Act). Yes No X
----- -----
At March 15, 2005, 16,278,519 shares of common stock were issued and
outstanding. As of June 30, 2004, the aggregate market value of the voting
stock held by non-affiliates of the registrant (computed by reference to the
average of the high and low sales prices on the American Stock Exchange) was
$3,333,774.
DOCUMENTS INCORPORATED BY REFERENCE: Part III, Items 10 through 14 of this
report are incorporated from the Registrant's definitive proxy statement to be
filed on or before May 2, 2005.
==============================================================================
REUNION INDUSTRIES, INC.
TABLE OF CONTENTS
Page No.
--------
PART I
Item 1. Business 4
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 32
Item 8. Consolidated Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosures 34
Item 9a. Controls and Procedures 34
PART III
Item 10. Directors and Executive Officers of the Registrant 35
Item 11. Executive Compensation 35
Item 12. Security Ownership of Certain Beneficial
Owners and Management 35
Item 13. Certain Relationships and Related Transactions 35
Item 14. Principal Accounting Fees and Services 35
PART IV
Item 15. Exhibits, Financial Statements Schedules,
and Reports on Form 8-K 36
SIGNATURES 37
- 2 -
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act that are intended to be covered by the safe harbors created thereby. The
forward-looking statements contained in this report are enclosed in brackets [
] for ease of identification. Note that all forward-looking statements
involve risks and uncertainties. Factors which could cause the future results
and shareholder values to differ materially from those expressed in the
forward-looking statements include, but are not limited to, the strengths of
the markets which the Company serves, the Company's ability to generate
liquidity and the Company's ability to service its debts and meet financial
covenants. Although the Company believes that the assumptions underlying the
forward-looking statements contained in this report are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurances
that the forward-looking statements included or incorporated by reference in
this report will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included or
incorporated by reference herein, the inclusion of such information should not
be regarded as a representation by the Company or any other person that the
Company's objectives and plans will be achieved. In addition, the Company
does not intend to, and is not obligated to, update these forward-looking
statements after filing and distribution of this report, even if new
information, future events or other circumstances have made them incorrect or
misleading as of any future date.
- 3 -
PART I
ITEM 1. BUSINESS
GENERAL
Reunion Industries, Inc., a Delaware corporation ("Reunion Industries" or
"Reunion"), is the successor by merger, effective March 16, 2000, of Chatwins
Group, Inc. ("Chatwins Group") with and into Reunion Industries, Inc. The
terms "Company" and "We" refer to Reunion after the merger. Reunion
Industries' executive offices are located at 11 Stanwix Street, Suite 1400,
Pittsburgh, Pennsylvania 15222 and its telephone number is (412) 281-2111.
The Company owns and operates industrial manufacturing operations that
design and manufacture engineered, high-quality products for specific customer
requirements, such as large-diameter seamless pressure vessels, hydraulic and
pneumatic cylinders, grating and precision plastic components. Until December
2004, the Company's products also included leaf springs. Such business was
sold in January 2005. Additionally, during the year 2004, the Company decided
to exit the thermoset plastics portion ("Rostone") of its plastics segment.
Rostone was both a compounder and molder of thermoset polyester resins. Prior
to 2003, the Company's products also included heavy duty cranes, bridge
structures and materials handling systems. These businesses were sold during
2002. All of these sold businesses, as well as Rostone, are reported as
discontinued operations.
The Company's customers include original equipment manufacturers and end-
users in a variety of industries, such as transportation, power generation,
chemicals, metals, home electronics, office equipment and consumer goods. The
Company's business units are organized into two major product categories:
* Metals manufactures and markets fabricated and machined industrial metal
parts and products including large-diameter seamless pressure vessels,
hydraulic and pneumatic cylinders and grating. .
* Plastics manufactures precision molded plastic parts and provides
engineered plastics services.
Metals includes three reportable segments: Pressure vessels; Cylinders
and Grating. Plastics is a single segment.
METALS
Our Metals businesses include:
CPI - CPI, founded in 1897 and located in McKeesport, Pennsylvania,
specializes in manufacturing large, seamless pressure vessels for the above
ground storage and transportation of highly pressurized gases such as natural
gas, hydrogen, nitrogen, oxygen and helium. These pressure vessels are
provided to customers such as industrial gas producers and suppliers, the
alternative fueled vehicle compressed natural gas fuel industry, chemical and
petrochemical processing facilities, shipbuilders, NASA, public utilities and
gas transportation companies.
Hanna - Hanna, founded in 1901 and located in Libertyville, Illinois,
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.
Shanghai Klemp Metal Products Co., Ltd. Located in Shanghai, China, this
business was formed in 1995 when the Company entered into a joint venture
agreement with two other Chinese based affiliates. The Company has a 65%
- 4 -
interest in the joint venture. In 1999, the Company adopted a plan to exit
the grating manufacturing business and was able to sell all of its grating
businesses, with the exception of this business in China, in that year. This
grating business was classified as a discontinued business from that time
until the year 2004. In the four years since adopting this plan, the Company
has made several unsuccessful attempts to dispose of its investment in the
joint venture and now perceives that a presence in China is consistent with
its future plans for certain of its continuing operations. As a result and in
connection with our Chinese partners' expressed desire to return control of
the business to the Company for various reasons, the Company has decided to
retain its investment in the Chinese joint venture and returned it to
continuing operations effective at the beginning of 2004
Markets and Customers. Metals operates in mature markets. Except for
pressure vessels, Metals' products are sold in highly competitive markets both
in the U.S. and internationally and compete 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. CPI is the dominant provider of pressure
vessels in the U.S. Many of our competitors have financial and other
resources that are substantially greater than ours. [Competitive pressures or
other factors could cause us to lose market share or erode prices which could
negatively impact the Company's results of operations.]
Individual customers sometimes account for more than 10% of Metals'
sales. However, during 2004, no customer accounted for more than 10% of
Metals' sales.
Sales and Marketing. Metals 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 independent distributors that specialize in metal
products.
Raw Materials. The major raw materials used by Metals include 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 began to rise half way through the 2004 year and
continue to rise into 2005. [Increases in the prices of raw materials could
negatively affect our operating results if they can not be passed on to our
customers.]
Backlog. Metals' U.S. backlog, which the Company believes is firm, was
$16.0 million at December 31, 2004 and $10.5 million at December 31, 2003. As
of February 28, 2005, Metals backlog continued to increase and was more than
$21 million at that date.
Research and Development. Our Metals research and development activities
relate to improving the quality and performance of our products. We also
develop ways to meet the design requirements and specifications of customers
that require customized products. To do this, there are engineering
departments at all major metals manufacturing divisions. Metals' products are
not materially dependent on any patents, licenses or trademarks.
PLASTICS
Our Plastics Segment operates under the name ORC Plastics. Founded in
1964 as Oneida Molded Plastics, this Plastics division designs and produces
injection molded parts and provides secondary services, such as hot stamping,
welding, printing, painting and assembly of such products, and designs and
builds custom molds at its tool shop in order to produce component parts for
specific customers. The division's principal products consist of specially
designed and manufactured components for office equipment; business machines;
computers and peripherals; telecommunications, packaging and industrial
equipment; and recreational and consumer products.
- 5 -
Markets and Customers. The markets for Plastics' products exceeded $25
billion annually and are very competitive. The competitors are international
companies with multi-plant operations based in the United States, Germany,
France and Japan, and approximately 3,800 independent companies located in the
United States engaged in the custom molding business. Most of these companies
are privately owned and have sales volumes ranging from $3 million to $7
million per year. About one-half of the total injection molding market is
supplied by in-house molding shops. The Plastics division competes on the
basis of customer service, product quality and price.
During 2004, three customers accounted for approximately 34% of the
Plastics division's sales, with each individual customer exceeding 10% of the
Plastics division sales. [Loss of any of these customers could adversely
affect our results of operations]. The Plastics division is trying to
diversify its customer base and has approximately 500 customers. ORC Plastics
wants more customers in the business machines, consumer products and medical
products industries. [We believe that growth opportunities exist in these
industries.]
Sales and Marketing. Sales are made through an internal sales staff and
a network of independent manufacturers' representatives working from regional
offices throughout the eastern United States. We pay commissions of between
2% and 5% percent of sales based upon volume.
Raw Materials. The Plastics division uses thermoplastic polymers which
are available from a number of suppliers. Prices for these materials are
affected by changes in market demand. Although many of our contracts provide
that price increases can be passed through to the customers, [increases in the
prices of raw materials could negatively affect our operating results if they
can not be passed on to our customers.]
Research and Development. Plastics' research and development activities
relate to meeting design requirements and specifications of customers that
require customized products. To meet these objectives, the division has
engineering personnel at each of its manufacturing locations. The division's
business is not materially dependent on any patents, licenses or trademarks.
Backlog. Plastics backlog, which the Company believes is firm, was $8.2
million at December 31, 2004 and $5.1 million at December 31, 2003. As of
February 28, 2005, the Plastics backlog continued to increase and was more
than $8.5 million at that date.
REPORTABLE SEGMENT DATA - See Note 17 of Notes to Consolidated Financial
Statements of this report for financial information about Reunion's segments.
See Item 7A "Quantitative and Qualitative Disclosures About Market Risk" of
this report for financial information about geographic areas.
Employees
At December 31, 2004, in its ongoing operations, Reunion Industries
employed 533 full time employees, both in the United States and in China, of
whom 334 were employed in Metals and 188 were employed in Plastics. There
were 11 corporate employees. The Company believes its relations with its
employees are good. A breakdown of the Company's workforce by location and
function at December 31, 2004 is as follows.
- 6 -
General and
Group Location Manufacturing Administrative Total
-------- -------- ----------------- ----------------- -----
Union Non-Union Union Non-Union
----- --------- ----- ---------
Metals:
McKeesport, PA 83(1) 6 8(2) 14 111
Libertyville, IL 96 20 116
Shanghai, China 77 29 106
Beijing, China 1 1
Plastics:
Oneida, NY 66 13 79
Phoenix, NY 59 3 62
Siler City, NC 42 5 47
Corporate:
Pittsburgh, PA 11 11
--- --- - --- -----
Totals 83 346 8 96 533
=== === = === =====
(1) United Steelworkers of America - Contract expires May 31, 2006.
(2) United Steelworkers of America - Contract expires May 31, 2006.
The employee in Beijing, China is a Chinese national and relates to seamless
pressure vessel sales efforts in that region. The employees in Shanghai,
China are Chinese nationals and relate to the Company's grating subsidiary.
These Chinese nationals are not covered by a union nor are they covered by any
benefit or insurance plans sponsored by the Company.
As of December 31, 2004, approximately 17% of the Company's workforce was
covered by collective bargaining agreements, none of which expire within one
year of December 31, 2004.
Available Information
Reunion's website is http://www.reunionindustries.com. Reunion makes
available free of charge, through its website, its annual, quarterly and
current reports, and any amendments to those reports, as soon as reasonably
practicable after electronically filing such reports with the Securities and
Exchange Commission. Information contained on Reunion's website is not part
of this report.
- 7 -
ITEM 2. PROPERTIES
The Company has a total of 83.1 acres and approximately 1.2 million
square feet under roof being used for ongoing operations. Except for CPI's
sales office in Beijing, China and the Company's corporate offices sites in
Pittsburgh, PA, which are administrative, all locations are both manufacturing
and administrative facilities:
Approx.
Square Land Expiration
Group Location Feet Acres Title Date
-------- -------- ------- ----- ----- ----------
Metals: McKeesport, PA 603,000 37.0 Owned -
Beijing, China 1,000 - Leased 10/31/07
Shanghai, China 20,500 Leased 01/01/25
Libertyville, IL 56,000 - Leased 12/31/13
Milwaukee, WI 68,000 3.2 Owned -
Plastics: Oneida, NY 84,000 9.8 Owned -
Phoenix, NY 28,000 2.8 Owned
Phoenix, NY 20,000 2.0 Owned -
Siler City, NC 130,000 8.3 Owned -
Lafayette, IN 168,000 20.0 Owned -
Headquarters: Pittsburgh, PA 8,000 - Leased 4/30/05
The operations of the Company's Milwaukee, WI facility were relocated to
its leased facility in Libertyville, IL. [We are exploring our options with
regard to the Milwaukee facility.] During the year 2004, we combined Hanna's
Chicago operations with operations in the facility in Libertyville.
We also own certain oil and gas properties in Louisiana that were
retained when we disposed of our oil and gas operations in 2000. We retained
these properties because of litigation concerning environmental matters. [We
plan to operate the wells on the property for the net production revenues as
required by a litigation settlement agreement]
We also hold title to or recordable interests in federal and state leases
totaling approximately 55,000 acres near Moab, Utah, known as Ten Mile Potash.
Sylvanite, a potash mineral, is the principal mineral of interest and
occurrence in the Ten Mile Potash property. To date, Ten Mile Potash has not
yielded any significant revenues from mining operations or any other
significant revenues. [We are exploring our options with regard to these
interests.]
All of our facilities have been in operation for a sufficient period of
time to demonstrate their suitability for manufacturing and administrative
purposes. [The production capacities of our facilities are sufficient for
future needs.]
- 8 -
ITEM 3. LEGAL PROCEEDINGS
The Company is and has been involved in a number of lawsuits and
administrative proceedings, which have arisen in the ordinary course of
business of the Company and its subsidiaries. A summary of pending legal
proceedings follows.
Asbestos (ORC)
--------------
Since July 10, 2001, various legal actions, some involving multiple
plaintiffs, alleging personal injury/wrongful death from asbestos exposure
have been filed in multiple states, including California, Oregon, Washington,
New York and Mississippi, against a large number of defendants, including
Oneida Rostone Corporation (ORC), pre-merger Reunion's Plastics subsidiary and
the Company's Plastics segment. In October 2001, Allen-Bradley Company, a
former owner of the Rostone business of ORC, accepted Reunion Industries'
tender of its defense and indemnification in the first such lawsuit filed,
pursuant to a contractual obligation to do so. Subsequent to the acceptance
of the tender of defense and indemnification in the first lawsuit, Allen-
Bradley Company has accepted the Company's tender of defense and
indemnification in a total of 135 separate actions, all of which have been
defended by Allen-Bradley Company.
Asbestos (Alliance)
-------------------
The Company has been named in approximately 2,400 separate asbestos suits
filed since January 1, 2001 by various plaintiffs' law firms in Michigan,
Pennsylvania, Ohio, Illinois, Maryland, Alabama and W. Virginia. The claims
are primarily directed against over 100 defendants, including Reunion, and
allege that cranes from the Company's former crane manufacturing location in
Alliance, OH, were present in various steel mills located in those states and
that those cranes contained asbestos to which plaintiffs were exposed over a
40 year span. Counsel for the Company has filed an answer to each complaint
denying liability by the Company and asserting all alternative defenses
permitted under the various Courts' Case Management Orders. Counsel for the
Company has successfully resolved approximately 500-600 cases with no cost to
the Company. The Company denies that it manufactured any products containing
asbestos or otherwise knew or should have known that any component part
manufacturers provided products containing asbestos. It has been further
denied that the Company was otherwise advised by component part manufacturers
that component parts could be hazardous, or otherwise constitutes a health
risk. The Company intends to vigorously defend against these lawsuits.
NAPTech Suit
------------
On or about March 16, 2004, Shaw NAPTech, Inc. ("NAPTech"), as successor
by merger to NAPTech, Inc. and NAPTech PS Corporation, filed a suit against
the Company in state court in Baton Rouge, Louisiana, to collect payment on a
subordinated note (the "NAPTech Note") issued to NAPTech and assumed by the
Company in a January 2001 acquisition. In April, 2005 the trial court in this
case entered a summary judgment in favor of NAPTech in the amount of
$3,145,403 in principal, plus $1,207,760 in unpaid interest through November
30, 2003, plus interest at 15% per annum on the unpaid principal after
November 30, 2003. This judgment does not constitute a new liability, as the
Company has recorded the liability under the NAPTech Note in its consolidated
balance sheets since January, 2001. The trial court rejected defenses raised
by the Company that the suit is currently barred by a subordination agreement
to which NAPTech is a party and that the court lacks personal jurisdiction
over the Company. The Company intends to appeal from this judgment on the
grounds that the trial court was in error in rejecting its defenses. There is
no assurance that the appeal will be successful. Also named as defendants in
the suit are Charles E. Bradley, Sr. (a director of the Company), as guarantor
of the NAPTech Note, and KSB Acquisition Corp. and Hanna Investment Corp.
(both of which are affiliates of Mr. Bradley), as pledgors of certain assets
securing the note.
- 9 -
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting held on December 15, 2004, the
stockholders (1) approved an amendment to the Certificate of Incorporation
(the "Charter Amendment") to increase by 10 million the number of authorized
common shares of the Company and to eliminate the Company's preferred shares,
(2) approved the 2004 Stock Option Plan (the "Option Plan"), which provides
for up to 1 million shares of the Company's common stock to be available for
future option grants under the Plan to key employees, directors and
consultants of the Company, and (3) elected seven directors for a term ending
at the next Annual Meeting. The votes, in thousands of shares, on the Charter
Amendment and the Option Plan were as follows:
Proposal Voted For Voted Against Non-Votes Abstaining
----------------- --------- ------------- --------- ----------
Charter Amendment 10,417 144 3,729 1,680
Option Plan 10,063 482 3,729 1,696
The votes, in thousands of shares, on the election of directors were as
follows:
Nominee Voted For Withheld
----------------------- --------- --------
Thomas J. Amonett 14,221 1,749
Charles E. Bradley, Sr. 14,222 1,748
Kimball J. Bradley 14,222 1,748
Thomas L. Cassidy 14,235 1,735
David E. Jackson 14,236 1,734
Joseph C. Lawyer 14,224 1,746
John G. Poole 14,224 1,746
- 10 -
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Reunion Industries' common stock is traded on the American Stock
Exchange. As of March 15, 2005, there were 1,167 holders of record of Reunion
Industries' common stock with an aggregate of 16,278,519 shares outstanding.
The table below reflects the high and low sales prices for the quarterly
periods for 2004 and 2003.
QUARTER ENDED High Low
------------- ------ ------
2004
March 31.......................................$0.680 $0.320
June 30........................................$0.600 $0.310
September 30...................................$0.550 $0.250
December 31....................................$0.500 $0.220
2003
March 31.......................................$0.200 $0.110
June 30........................................$0.350 $0.150
September 30...................................$0.500 $0.170
December 31....................................$0.890 $0.180
No cash dividends have been declared or paid during the past two fiscal
years. Cash dividends are limited by the availability of funds, and by
restrictions contained in our loan agreements. [We do not anticipate paying
cash dividends on our common stock in the foreseeable future.]
Equity Compensation Plan Information
Securities issued, and securities available, under equity compensation
plans as of December 31, 2004 are as follows:
Equity Compensation Plans
---------------------------
Approved by Not Approved
Security by Security
Holders Holders
------------ ------------
Number of common stock shares to be issued upon
exercise of outstanding options 614,000 -
========= =========
Weighted-average exercise price of
outstanding options $0.51 -
========= =========
Number of common stock shares remaining available
for future issuance under equity
compensation plans (excluding outstanding
options) 1,161,100 -
========= =========
- 11 -
ITEM 6. SELECTED FINANCIAL DATA
All data is reported in thousands, except for per-share data. The data
is derived from the consolidated financial statements presented in Item 15
which also should be read. Effective January 1, 2002, we ceased amortizing
goodwill.
Year Ended December 31, 2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
EARNINGS DATA:
Net sales (1) $ 68,650 $ 55,053 $ 55,187 $ 81,440 $ 88,836
Cost of sales 55,651 45,775 47,086 67,987 67,889
-------- -------- -------- -------- --------
Gross profit 12,999 9,278 8,101 13,453 20,947
Selling, general and
administrative expenses 8,993 9,460 11,366 13,231 14,255
Gain on extinguishment of debt (3,540) (10,991) - - -
Provision for restructuring - - - 6,811 -
Other (income) expense, net (788) (299) (805) 1,180 (6,223)
-------- -------- -------- -------- --------
Operating profit (loss) 8,334 11,108 (2,460) (7,769) 12,915
Interest expense, net(2) 7,937 6,939 8,020 7,044 6,791
Equity in loss from continuing
operations of affiliate - - - - 296
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income
taxes and minority interests 397 4,169 (10,480) (14,813) 5,828
Provision for (benefit from)
income taxes - - - 12,678 (616)
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before minority interests 397 4,169 (10,480) (27,491) 6,444
Less: minority interests 330 - - - -
-------- -------- -------- -------- --------
Income (loss) from
continuing operations $ 67 $ 4,169 $(10,480) $(27,491) $ 6,444
======== ======== ======== ======== ========
Income (loss) from continuing
operations applicable to
common stockholders $ 126 $ 4,169 $(10,480) $(27,491) $ 6,444
======== ======== ======== ======== ========
Weighted average common shares
Outstanding - basic 16,279 16,279 15,591 15,587 13,236
======== ======== ======== ======== ========
Weighted average common shares
Outstanding - diluted 18,812 16,654 15,591 15,612 13,306
======== ======== ======== ======== ========
Income (loss) from continuing
operations per common share
- basic $ 0.01 $ 0.26 $ (0.67) $ (1.76) $ 0.49
======== ======== ======== ======== ========
Income (loss) from continuing
operations per common share
- diluted $ 0.01 $ 0.25 $ (0.67) $ (1.76) $ 0.48
======== ======== ======== ======== ========
- 12 -
OPERATING AND OTHER DATA:
Cash flow from (used in)
operating activities(3) $ (3,323) $ (2,665)$ (979) $ 5,050 $ 5,507
======== ======== ======== ======== ========
Cash flow from (used in)
investing activities(3) (780) 173 27,931 (2,532) 27,997
======== ======== ======== ======== ========
Cash flow from (used in)
financing activities(3) 4,565 2,440 (27,337) (3,863) (31,385)
======== ======== ======== ======== ========
Depreciation and
amortization(4) 2,480 2,582 2,762 5,392 4,639
======== ======== ======== ======== ========
Capital expenditures(5) 729 200 188 519 1,457
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Total assets 56,596 51,523 51,009 84,416 116,439
======== ======== ======== ======== ========
Debt in default - - 40,049 64,389 -
======== ======== ======== ======== ========
Revolving credit facility 14,485 9,214 - - 19,367
======== ======== ======== ======== ========
Long-term debt(6) 35,628 31,915 61 3,793 50,732
======== ======== ======== ======== ========
Stockholders' equity
(deficit) (25,583) (27,755) (30,840) (17,245) 21,559
======== ======== ======== ======== ========
EBITDA(7): $ 6,461 $ 1,966 $ (448) $ (148) $ 17,010
======== ======== ======== ======== ========
(1) Represents sales from continuing operations. The Company has adjusted
prior year financial data for the classifications of its springs and Rostone
divisions as discontinued operations.
(2) Includes amortization of debt issuance expenses and estimated warrant
value of the following amounts for the following years: 2004: $1,002; 2003:
$97; 2002: $754; 2001: $1,011; and 2000: $897.
(3) Not restated for discontinued operations.
(4) Excludes amortization of debt issuance expenses and depreciation and
amortization related to discontinued operations. See note (2) above.
(5) Excludes capital expenditures of discontinued operations.
(6) Excludes borrowings under revolving credit facilities and includes
current maturities of 13% senior notes for year 2000.
(7) EBITDA is calculated as follows:
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before taxes $ 397 $ 4,169 $(10,480) $(14,813) $ 5,828
Interest expense, net(2) 7,937 6,939 8,020 7,044 6,791
Depreciation and
amortization(4) 1,667 1,849 2,012 4,675 4,095
Gain on extinguishment of debt (3,540) (10,991) - - -
Write-off of impaired goodwill - - - 2,946 -
Equity loss from continuing
operations of affiliate - - - - 296
-------- -------- -------- -------- --------
EBITDA $ 6,461 $ 1,966 $ (448) $ (148) $ 17,010
======== ======== ======== ======== ========
- 13 -
EBITDA is presented in the Selected Historical Financial Data, not as an
alternative measure of operating results or cash flow from operations as
determined by accounting principles generally accepted in the United States,
but because it is a widely accepted financial indicator of a company's ability
to incur and service debt and due to the close relationship it bears to
Reunion's financial covenants in its borrowing agreements. Gains on
extinguishment of debt are excluded from the current definition of EBITDA.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is provided to assist readers in
understanding the Company's financial performance during the periods presented
and significant trends which may impact the future performance of the Company.
It should be read in conjunction with the consolidated financial statements
and accompanying notes included elsewhere in this Form 10-K.
GENERAL
The Company owns and operates industrial manufacturing operations
that design and manufacture engineered, high-quality products for specific
customer requirements, such as large-diameter seamless pressure vessels,
hydraulic and pneumatic cylinders, grating and precision plastic components.
Until December 2004, the Company's products also included leaf springs. Such
business was sold as of December 31, 2004. Additionally, during the year
2004, the Company decided to exit the thermoset plastics portion ("Rostone")
of its plastics segment. Rostone was both a compounder and molder of
thermoset polyester resins. Prior to 2003, the Company's products also
included heavy duty cranes, bridge structures and materials handling systems.
These businesses were sold during 2002. All of these sold businesses, as well
as Rostone, are reported as discontinued operations.
The Company's customers include original equipment manufacturers and end-
users in a variety of industries, such as transportation, power generation,
chemicals, metals, home electronics, office equipment and consumer goods. The
Company's business units are organized into two major product categories:
* Metals manufactures and markets fabricated and machined industrial metal
parts and products including large-diameter seamless pressure vessels,
hydraulic and pneumatic cylinders and grating.
* Plastics manufactures precision molded plastic parts and provides
engineered plastics services.
Metals includes three reportable segments: Pressure vessels; Cylinders
and Grating. Plastics is a single segment.
RECENT EVENTS
Shanghai Klemp Metal Products Co., Ltd
In December 1995, the Company entered into a joint venture agreement with
China Metallurgical Import & Export Shanghai Company and Wanggang Township
Economic Development Corporation. The Company has a 65% interest in the joint
venture. During 1996, the Company capitalized its investment in the joint
venture by contributing cash of $150,000 and machinery and equipment with an
estimated fair market value of $1.9 million to the joint venture. The joint
venture manufacturers grating panels and is located in Wangang Township,
Pudong New Area, Shanghai in the People's Republic of China.
- 14 -
In 1999, the Company adopted a plan to exit the grating manufacturing
business through the disposition of its grating businesses, including its
Chinese joint venture investment. Upon adoption of the plan, the grating
businesses and assets were classified and accounted for as discontinued
operations, including a provision for estimated loss on disposal of the
Chinese joint venture of $2.0 million, and we ceased consolidating the joint
venture as control of its daily operations was given to our joint venture
partners and our then expatriate management was removed.
In the four years since adopting this plan, the Company has made several
unsuccessful attempts to dispose of its investment in the joint venture and
now perceives that a presence in China is consistent with its future plans for
certain of its continuing operations. As a result and in connection with our
Chinese partners' expressed desire to return control of the business to the
Company for various reasons, the Company has decided to retain its investment
in the Chinese joint venture and returned it to continuing operations
effective at the beginning of 2004.
Congress Financial Financing
In May 2004, the Company and Congress Financial Corporation ("Congress
Financial"), which has since been merged into Wachovia Bank, N.A., amended
their Loan and Security Agreement (the "Congress Loan Agreement"). Pursuant
to the amendment, Congress Financial provided an additional $3.0 million loan
(the "Congress Supplemental Loan") to the Company within the limit of the
existing $25 million credit facility (the "Congress Loan Facility"), which did
not increase. Proceeds from the Congress Supplemental Loan were used to pay
trade payables and for other corporate purposes. Funds for the Supplemental
Loan were provided to Congress by two private capital funds (the "Junior
Participants") through their purchase of junior participation interests in the
Congress Loan Facility in the amount of $1.5 million each. In partial
consideration of such investment, the Company issued to each of the Junior
Participants a warrant to purchase 375,000 shares of the Company's common
stock at an initial exercise price of $0.01 per share, together with
registration rights. The warrants were issued in January 2005, after the
Company's Certificate of Incorporation was amended, with stockholder approval,
to increase the authorized number of shares of common stock of the Company by
10 million.
Interest on the Congress Supplemental Loan is payable monthly at a fixed
rate of 15% per annum. Like the rest of the Congress Loan Facility, the
Congress Supplemental Loan is collateralized by a continuing security interest
and lien on substantially all of the Company's assets.
The Congress Supplemental Loan is subject to the same financial and other
covenants under the Congress Loan Agreement as the rest of the Congress Loan
Facility, including the minimum amount of earnings before interest, taxes,
depreciation and amortization ("EBITDA") and the minimum fixed charge coverage
ratio.
Through August 2004, the Company achieved the minimum monthly EBITDA
required under the Congress Loan Agreement. However, the Company was unable
to achieve the required minimum monthly EBITDA of $650,000 for September 2004,
having generated only $604,000, as calculated under the terms of the Congress
Loan Agreement. In November 2004, Congress Financial and the Company entered
into another amendment to the Congress Loan Agreement that waived the minimum
EBITDA covenant for September 2004, eliminated the minimum EBITDA covenant for
October 2004 and significantly reduced the monthly minimum EBITDA covenant
going forward. The Company was in compliance with all other financial,
affirmative and negative covenants in September 2004, including the required
minimum fixed charge coverage ratio of 0.77:1 for the third quarter of 2004,
having achieved a third quarter 2004 ratio of 1.17:1. However, as part of
this amendment to the Congress Loan Agreement the covenant as to the minimum
fixed charge coverage ratio was eliminated for all future quarters.
- 15 -
Under the above noted November 2004 amendment, the Company was required
to maintain new minimum monthly amounts of EBITDA of $280,000 in November
2004, $290,000 in December 2004, $350,000 in January 2005, $280,000 in
February 2005 and $300,000 per month thereafter. In January 2005, the Company
failed to meet the minimum monthly amount, when it had an EBITDA loss for the
month of $39,000. Congress has waived this EBITDA shortfall, and the Company
is currently not in default under the Congress Loan Agreement.
SFSC Settlement
Effective May 10, 2004, the Company's indebtedness to and from Stanwich
Financial Services Corp. ("SFSC") was settled on the following terms: (1)
pursuant to the judgment referred to below, the Company is obligated to pay
SFSC the sum of $4.29 million on or before December 31, 2006, plus interest on
such sum at the rate of 10% per annum from such effective date, in
satisfaction of the Company's indebtedness to SFSC, (2) SFSC's indebtedness to
the Company in the amount of $310,000 plus interest was cancelled and (3)
provided it performs its obligations under the settlement and the judgment,
the Company will be released from the claims of SFSC's creditors. As
contemplated by the settlement agreement, a judgment has been entered against
the Company for the settlement amount by the United States Bankruptcy Court
for the District of Connecticut, in SFSC's pending Chapter 11 Bankruptcy
proceeding. The settlement amount does not constitute a new liability of the
Company, as it relates to indebtedness and a note receivable that had
previously been recorded on the Company's balance sheet. The settlement
resulted in a $3.3 million gain on debt extinguishment calculated as follows
(in thousands):
Interest
Payable and Fee
Description (Receivable) Accruals Totals
------------------------------- ---------- ---------- ---------
SFSC note receivable $ (310) $ (155) $ (465)
Reserve for interest receivable - 100 100
SFSC collateral fee - 690 690
SFSC credit support fee - 294 294
SFSC note payable 2,999 1,693 4,692
SFSC note payable 500 317 817
SFSC note payable 100 57 157
SFSC note payable by assignment 1,017 320 1,337
-------- -------- --------
Totals $ 4,306 $ 3,316 7,622
======== ========
Less: Note payable under settlement agreement (4,290)
--------
Gain on SFSC litigation settlement $ 3,332
========
The gain on debt extinguishment of $3.1 million recorded in the first
quarter of 2004 was under the assumption that the settlement agreement would
be effective as of January 1, 2004. However, subsequent to the filing of our
Form 10-Q for the quarter ended March 31, 2004, the parties to the settlement
agreement set the effective date of the settlement as May 10, 2004.
Accordingly, the Company recorded an additional gain on debt extinguishment of
$262,000 in the 2004 second quarter to reflect the settlement as if the
Company continued to accrue interest under the terms of the prior SFSC notes
payable through May 10, 2004.
- 16 -
13% Senior Notes
In January 2004, we solicited our noteholders for the second time to
consent to certain provisions and waivers of the indenture governing the 13%
senior notes. In the first consent in November 2003, $23,250,700 of the
$24,855,000 principal amount of senior notes, or 93.55%, had consented. The
second consent solicitation period ended on April 28, 2004 at which time
holders of an additional $434,300 principal amount of senior notes had
consented. The significant provisions of the solicitation requested that the
noteholders consent to waive all then existing defaults under the indenture,
cancel all accrued and unpaid interest, cancel 12% of the principal amount of
senior notes and extend the maturity of the notes to December 2006.
Accordingly, 12% of the $434,300 principal amount of senior notes of
noteholders that had consented to the various provisions and waivers in the
second solicitation, or $52,000, was extinguished pursuant to the provisions
of the consent. As of April 28, 2004, accrued and unpaid interest related to
the 13% senior notes consenting in the second solicitation totaled $156,000.
Such interest was extinguished pursuant to the provisions of the consent.
On February 3, 2005, the Company announced that it was unable to make a
$2,928,000 interest payment by February 2, 2005 to the holders of the 13%
Senior Notes. Holders of more than 80% of the principal amount of such Senior
Notes agreed to enter into a Standstill Agreement with the Company, pursuant
to which such holders agreed that they would not exercise and will (to the
extent within their control) cause the Trustee not to exercise any remedies
provided for in the Indenture under which the Senior Notes were issued, or any
other agreements related to such notes, with respect to this payment default
or with respect to a potential event of default if the Company fails to make
the next scheduled interest payment due April 1, 2005. In the Standstill
Agreement, such holders agreed to defer the $2,928,000 of interest not paid,
plus any interest that is not paid on the next regularly scheduled due date of
April 1, 2005, to December 2006. On April 1, 2005 the Company was unable to
make this scheduled interest payment.
RESULTS OF OPERATIONS
Year Ended December 31, 2004 Compared to
Year Ended December 31, 2003
Continuing Operations
Net sales, gross margins and EBITDA percentages for 2004 and 2003 are as
follows. The percentages of EBITDA to net sales exclude corporate and other
EBITDA. Including corporate and other EBITDA, the percentages of consolidated
EBITDA to net sales for the years ended 2004 and 2003 are 9.4% and 3.6%.
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2004 2003 2004 2003 2004 2003
--------- --------- ------ ------ ------ ------
Pressure vessels $ 22,921 $ 21,371 21.4% 22.4% 17.4% 18.0%
Cylinders 18,488 17,891 14.0% 13.6% 3.1% 2.0%
Grating 9,306 - 24.9% - 13.7% -
Plastics 17,935 15,791 17.8% 13.0% 12.3% 7.7%
--------- --------- ------ ------ ------ ------
Totals $ 68,650 $ 55,053 18.9% 16.9% 11.8% 9.8%
========= ========= ====== ====== ====== ======
Net sales for the year ended December 31, 2004 were up $13.6 million, or
24.7%, compared to the 2003 year. Sales in 2004 include $9.3 million of sales
from the consolidation of the Company's 65% owned Chinese grating
manufacturing subsidiary. Such operation had been treated as a discontinued
operation. See "Minority Interests" and "Return of Discontinued Operations to
Continuing Operations - Change in Plan" below. Excluding such grating sales,
2004 sales were up $4.3 million, or 7.8%, when compared to 2003. Such sales
- 17 -
increase reflects the effects of increased backlogs in all segments of the
business, which continued to grow throughout the year and produced higher
fourth quarter sales in 2004 than in 2003.
All segments of the business entered the 2004 year with historically low
backlogs and all segments of the business recorded lower sales for the first
nine months of year 2004 as compared to the comparable period in 2003.
However, all segments were able to achieve higher backlogs as the year
progressed and all segments recorded significantly higher sales in the fourth
quarter of 2004 compared to 2003. Such higher 2004 fourth quarter sales, when
added to the first nine months sales, enabled each segment to achieve higher
sales for the full year 2004 than in the full year 2003. Such improving
backlogs in all segments reflect an improving overall economic environment as
well as our ability to overcome customers' concerns over our financial
condition. [Management anticipates that it will be able to continue to
increase its existing backlog in the first half of 2005].
Gross margin as a percentage of sales increased approximately 12% in 2004
when compared to the 2003 percentage primarily due to the inclusion of the
Chinese grating subsidiary in 2004. Excluding the sales and gross margin of
the Chinese grating subsidiary, the U.S. operations gross margin percentage
increased to 18.0% in 2004 from 16.9% in 2003. This increase in gross profit
margin was primarily attributable to operating efficiencies from the increase
in sales in 2004 combined with overall lower cost structures resulting from
cost reduction efforts in 2003, especially in the Plastics segment. The
consolidation of the cylinder operations in 2004 into a single facility also
had a favorable effect on the gross profit margin of that segment. Only the
pressure vessel segment recorded lower 2004 gross profit margins as a
percentage of sales and this was primarily attributable to production
interruptions in June 2004 caused by an electrical failure which resulted in
unanticipated costs and underabsorbed overheads.
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation, which is presented, not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a widely
accepted financial indicator of a company's ability to incur and service debt
and due to the close relationship it bears to Reunion's financial covenants in
its borrowing agreements. Excluding the Chinese grating subsidiary and
corporate and other EBITDA, EBITDA and EBITDA as a percentage of sales
increased in 2004 compared to 2003 primarily due not only to the same factors
affecting gross profit margin discussed above, but also to significant
reductions in selling, general and administrative expenses as discussed below.
A reconciliation of EBITDA to operating income for 2004 and 2003 by segment
and corporate and other is as follows (in thousands):
Operating
Profit Deprec- Amortiz-
(Loss) iation ation EBITDA
--------- --------- --------- ---------
2004:
-----
Pressure vessels $ 3,395 $ 584 $ - $ 3,979
Cylinders 409 171 - 580
Grating 1,267 7 - 1,274
Plastics 1,347 863 - 2,210
Corporate and other(1)(2) (1,624) 42 - (1,582)
-------- -------- -------- --------
Totals 4,794 $ 1,667 $ - $ 6,461
======== ======== ========
Gain on debt extinguishment 3,540
--------
Operating profit $ 8,334
========
- 18 -
2003:
-----
Pressure vessels $ 3,184 $ 653 $ - $ 3,837
Cylinders 107 246 - 353
Plastics 316 900 - 1,216
Corporate and other(2)(3) (3,490) 50 - (3,440)
-------- -------- -------- --------
Totals 117 $ 1,849 $ - $ 1,966
======== ======== ========
Gain on debt extinguishment 10,991
--------
Operating profit $ 11,108
========
(1) Includes income totaling $0.6 million from reduction in environmental
reserve.
(2) Excludes gain on debt extinguishment of $3.540 million in 2004 and $10.991
million in 2003.
(3) Includes gains totaling $0.2 million on sales of property and equipment.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for 2004 were $9.0
million, compared to $9.5 million for the 2003. SGA in 2004 includes $1.1
million from the Chinese grating joint venture. Excluding this, SGA decreased
to $7.9 million domestically, or by $1.6 million. This decrease in SGA
occurred in all segments, as well as the corporate office, and reflects a full
year's benefit of cost cutting measures and payroll reductions implemented in
2003 as well as continuing expense reductions in 2004. Excluding the sales
and SGA of the grating subsidiary, SGA as a percentage of sales decreased to
13.4% for 2004 compared to 17.2% in 2003.
Gains on Debt Extinguishments
As described above in this Item 7 under the captions "RECENT
EVENTS"/"SFSC Settlement," the settlement of the Company's obligations to SFSC
resulted in a $3.32 million gain on debt extinguishment in 2004.
As described above in this Item 7 under the captions "RECENT EVENTS"/"13%
Senior Notes," $2.8 million of the principal of and $8.2 million of accrued
and unpaid interest on certain of the Company's 13% Senior Notes were
cancelled or extinguished in 2003, and $52,000 of the principal of and
$156,000 of accrued and unpaid interest on certain of such notes were
cancelled or extinguished in 2004.
Other Income
Other income for 2004 was $788,000, compared to other income of $299,000
for 2003. The components are as follows:
2004 2003 Change
-------- -------- --------
Costs to consolidate cylinder locations $ 264 $ - $ 264
Adjustments of environmental reserve (601) - (601)
Gain on sale of property - (138) 138
Reduction of the lease termination reserve (97) (117) 20
Write-off of assets - 117 (117)
Other income, net (354) (161) (193)
-------- -------- --------
Total other income, net $ (788) $ (299) $ (489)
======== ======== ========
During May 2004, we completed the consolidation of our cylinder
manufacturing operations into a single facility in Libertyville, Illinois.
Costs totaling $264,000 were incurred in 2004. The Company finalized the
settlement of a Louisiana environmental litigation matter in 2004. Such
- 19 -
settlement has resulted in a new estimate of the required reserve, which
resulted in a $601,000 adjustment. In June 2003, the Company sublet its idle
manufacturing facility in Clearfield, Utah and, therefore, has recorded rental
income in both 2004 and 2003. The Company sold idle property in the 2003
third quarter which resulted in a gain. There were no other individually
significant items of other income or expense in 2004 or 2003.
Minority Interests
Minority interests of $0.3 million represent income during 2004 allocated
to the minority ownerships of the Company's consolidated foreign grating joint
venture. Minority interests are calculated based on the percentage of
minority ownership. See "Return of Discontinued Operations to Continuing
Operations - Change in Plan" below.
Interest Expense
Interest expense for 2004 was $7.9 million compared to $6.9 million for
2003. This increase is primarily due to the higher level of amortization of
deferred financing costs and estimated warrant value as well as the accrual of
fees in connection with debt guarantees in 2004 than in 2003.
Income Taxes
There was no tax provision from continuing operations in 2004 or 2003.
The Company has net operating loss carryforwards for Federal tax return
reporting purposes totaling $64.1 million at December 31, 2004. The years in
which such net operating losses expire are as follows (in thousands):
Year ending December 31:
------------------------------
2007 $ 6,067
2008 609
2009 3,235
2010 2,520
After 2010 51,666
[The Company may be able to utilize its loss carryforwards against
possible increased future profitability.] However, management has determined
to fully reserve for the total amount of net deferred tax assets as of
December 31, 2004 [and to continue to do so during 2005 until management can
conclude that it is more likely than not that some or all of our loss
carryforwards can be utilized.]
Return of Discontinued Operations to Continuing Operations - Change in Plan
See above "RECENT EVENTS", "Shanghai Klemp Metal Products Co., Ltd",
under this Item 6.
Year Ended December 31, 2003 Compared to
Year Ended December 31, 2002
Continuing Operations
Net sales, gross margins and EBITDA percentages for 2003 and 2002 are as
follows. The percentages of EBITDA to net sales exclude corporate and other
EBITDA. Including corporate and other EBITDA, the percentages of consolidated
EBITDA to net sales for the years ended 2003 and 2002 are 3.6% and (1.0%).
- 20 -
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2003 2002 2003 2002 2003 2002
--------- --------- ------ ------ ------ ------
Pressure vessels $ 21,371 $ 17,317 22.4% 14.3% 18.0% 5.2%
Cylinders 17,891 18,087 13.6% 10.8% 2.0% (1.6%)
Plastics 15,791 19,783 13.0% 18.5% 7.7% 12.2%
--------- --------- ------ ------ ------ ------
Totals $ 55,053 $ 55,187 16.9% 14.7% 9.8% 5.5%
========= ========= ====== ====== ====== ======
Pressure vessels sales were up in 2003 compared to 2002. This increase
is due to this segment's return to almost normal production and shipment
levels during the first half of 2003 compared to management's decision to
shut-down our pressure vessels facility for the first two months of 2002 with
a limited production schedule. We made this decision in 2002 to reduce
spending due to our liquidity problems and to lessen the strain on this
segment's raw material vendors.
Cylinder sales were flat for 2003 compared to 2002 due to weak fourth
quarter 2003 shipments caused by temporary customer facility shutdowns and a
resulting decrease in order levels. This segment continues to be affected by
softness in its markets.
The decrease in Plastics revenues in 2003 compared to 2002 began in the
second quarter of 2003 and is the result of several reasons including our
reduced ability to access raw materials, which was affected by tight
liquidity, and a lag in certain customers' decisions on newly quoted
programs, which are intended to replace finished programs, caused by
uncertainty surrounding our financial condition.
The increase in gross margin as a percentage of sales in the pressure
vessels segment in 2003 compared to 2002 is primarily due to increased sales
and to management's decision to shut-down our pressure vessels facility for
the first two months of 2002 as discussed above, resulting in a reduction in
production activity for the second quarter 2002 causing underabsorption of
overheads and a lower gross margin as a percentage of sales than would
normally be expected. The increase in gross margin as a percentage of sales
at cylinders is the result of actions to reduce costs through workforce
reductions taken in the 2002 third quarter to better match production
resources with volume levels. Although the same actions to reduce costs were
also taken at plastics, the benefits were more than offset by the decreased
volume level and the resulting effect of fixed costs on gross margin.
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation, which is presented, not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a widely
accepted financial indicator of a company's ability to incur and service debt
and due to the close relationship it bears to Reunion's financial covenants in
its borrowing agreements. EBITDA and EBITDA as a percentage of sales
increased during 2003 compared to 2002 primarily due to the same factors
affecting gross profit margin discussed above and our continued focus on
reducing selling, general and administrative costs in Plastics. A
reconciliation of EBITDA to operating income (loss) in 2003 and 2002 by
segment and corporate and other is as follows (in thousands):
- 21 -
Operating
Profit Deprec- Amortiz-
(Loss) iation ation EBITDA
--------- --------- --------- ---------
2003:
-----
Pressure vessels $ 3,184 $ 653 $ - $ 3,837
Cylinders 107 246 - 353
Plastics 316 900 - 1,216
Corporate and other(1)(2) (3,490) 50 - (3,440)
-------- -------- -------- --------
Totals 117 $ 1,849 $ - $ 1,966
======== ======== ========
Gain on debt extinguishment 10,991
--------
Operating profit $ 11,108
========
2002:
-----
Pressure vessels $ 201 $ 698 $ - $ 899
Cylinders (609) 323 - (286)
Plastics 1,497 924 - 2,421
Corporate and other(3) (3,549) 67 - (3,482)
-------- -------- -------- --------
Totals $ (2,460) $ 2,012 $ - $ (448)
======== ======== ======== ========
(1) - Includes gains totaling $226,000 on sales of property and equipment.
(2) - Excludes gain on debt extinguishment of $10,991,000. See "Gain on Debt
Extinguishment" below.
(3) - Include gain of $375,000 on sale of equipment.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for 2003 were $9.5
million, compared to $11.4 million for 2002. This decrease in SGA is due to
2002 including approximately $1.0 million of incremental legal, audit and
consultant costs related to the default on our bank financing that did not
recur in 2003. The remaining decrease is related to cost cutting measures
taken during 2002, including trimming the executive payroll and reductions in
administrative positions. SGA as a percentage of sales decreased to 17.2% for
2003 compared to 20.6% in 2002. SGA as a percentage of sales was lower in
2003 compared to 2002 due to lower incremental bank-induced costs and
previously described cost-cutting measures.
Gain on Debt Extinguishment
As described above in this Item 7 under the captions "RECENT EVENTS"/"13%
SENIOR NOTES," the Company made a Consent Solicitation to the holders of its
13% Senior Notes in 2003 and recirculated the solicitation in 2004. As a
result of consents received by the Company in 2003 from certain of such
holders, $2.8 million of the principal and $8.2 million of accrued and unpaid
interest on the 13% Senior Notes held by such consenting noteholders were
cancelled or extinguished in the fourth quarter of 2003.
[The Company is currently investigating other recapitalization scenarios
that include, among other things, the use of additional private capital fund
financing to repurchase at discounts with waivers of all accrued and unpaid
interest some portion or all of our senior and unsecured subordinated notes
payable.] The Company believes that, as the result of recent events related
to our refinancing and senior notes and, in view of our continuing efforts to
investigate other recapitalization scenarios, resulting gains from such
activities do not meet the criteria pursuant to APB 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" for classification as extraordinary.
- 22 -
Other Income
Other income for 2003 was $299,000, compared to other income of $805,000
for 2002. The components are as follows:
2003 2002 Change
-------- -------- --------
Gain on sale of property $ (138) $ - $ (138)
Reduction of the lease termination reserve (117) - (117)
Gain on sale of equipment (88) (375) 287
Write-off of assets 117 - 117
Other income, net (73) (430) 357
-------- -------- --------
Total other income, net $ (299) $ (805) $ 506
======== ======== ========
Other income in 2003 includes gains on sales of idle farmland in Boone
County, IL and excess manufacturing equipment of $88,000. We also adjusted
the lease termination reserve, resulting in a reduction of $117,000. The
lease termination reserve was reduced as the result of the execution of a
sublease agreement with another party resulting in a new estimate of future
lease termination costs. We also wrote-off assets of an inactive subsidiary
deemed to have no value. In January 2002, we sold equipment that had no book
value. The decrease in the remaining other income is primarily due to higher
levels of sales of scrap and miscellaneous parts in 2002 due to cleaning out
idled facilities.
Interest Expense
Interest expense for 2003 was $6.9 million compared to $8.0 million for
2002. For 2002, a total of $2.5 million of interest expense has been
allocated to or actually incurred in discontinued operations. On a combined
basis interest expense was $10.5 million in 2002. Average debt during 2003
was significantly less than 2002 levels due to pay-downs with proceeds from
asset sales in June 2002 and September 2002. Also, in 2002 compared to 2003,
the Company was paying a higher default rate on the BOA revolving credit and
term loan facilities and we paid $1,675,000 in amendment and overadvance fees
to BOA in 2002. These decreases from 2002 were partially offset by more than
$800,000 in fees and costs charged to interest expense incurred during our
continuing refinancing efforts during 2003 with other lenders.
Income Taxes
There was no tax provision from continuing operations in 2003 or 2002.
The Company had net operating loss carryforwards for Federal tax return
reporting purposes totaling $115.2 million at December 31, 2003, $53.1 million
of which expired by the end of 2004. Management has determined to fully
reserve for the total amount of net deferred tax assets until management can
conclude that it is more likely than not that some or all of our loss
carryforwards can be utilized.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company manages its liquidity as a consolidated enterprise. The
operating groups of the Company carry minimal cash balances. Cash generated
from group 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 group operating activities generally is provided from funds
available under the same revolving credit arrangements.
- 23 -
Recent Events
Financing Transactions
In 2003 and 2004, the Company received financing, or amended
existing financing arrangements, in the following transactions:
1. In August 2003, LC Capital Master Fund ("LC Capital") made a term
loan of $2.5 million to the Company (the "First LCC Loan").
2. In connection with the Congress Financial refinancing described
below, LC Capital made a second term loan of $1.0 million to the Company on
December 3, 2003 (the "Second LCC Loan"). The First LCC Loan and the Second
LCC Loan were combined into a single loan of $3.5 million, and the promissory
note for the First LCC Loan was replaced by an amended promissory note in the
amount of $3.5 million (the "Amended LCC Note"). The principal of the Amended
LCC is payable in December 2006, bears interest at the rate of 10% per annum,
payable monthly, and is subordinate to the Company's indebtedness to Congress
Financial . The Amended LCC Note is secured by security interests in
substantially all of the Company's assets. In connection with these
financings, the Company has issued warrants to LC Capital to purchase 875,000
shares of the Company's common stock at a price of $0.01 per share.
3. Also in connection with the Congress Financial refinancing,
Mercury Capital Corporation ("Mercury Capital"), another private capital firm,
made a $4.2 term loan to the Company on December 3, 2003 (the "Mercury Capital
Loan"). The Mercury Capital Loan bears interest at the greater of 12% per
annum or the prime rate plus 8%, payable monthly. The principal is payable in
December 2006, subject to the Company's right to prepay without penalty after
May 2004. The Mercury Capital Loan is secured by mortgages on all of the
Company's real properties. In connection with the Mercury Capital Loan, the
Company issued an option to Mercury Capital to purchase up to 500,000 shares
of the Company's common stock at a price of $0.50 per share.
4. In December 3, 2003 the Company refinanced its senior secured loan
(revolving and term) with Bank of America, N.A. ("BOA") through a senior
secured credit facility (the "Congress Loan Facility) with Congress Financial
Corporation ("Congress Financial"), consisting of revolving credit, term loan
and letter of credit accommodations up to $25 million. The $3.2 million term
loan component of the Congress Loan Facility amortizes to the revolving credit
line under the facility at the rate of $53,000 per month, beginning on January
1, 2004. Interest on loans outstanding on the Congress Loan Facility (other
than the Supplemental Loan referred to in the next paragraph) is payable
monthly at a variable rate to the prime rate publicly announced from time to
time by Wachovia Bank, National Association plus 2.5%. The default rate of
interest is prime plus 4.5%. The Company's indebtedness under the Congress
Loan Facility is collateralized by security interests on substantially all of
the Company's assets.
In May, 2004 Congress made an additional loan of $3.0 million to the
Company under and within the limits of the Congress Loan Facility. See above
in this Item 7 under the captions "RECENT EVENTS"/"Congress Financial
Financing" for a description of this Supplemental Loan.
The Congress Loan Facility has a three-year term, subject to automatic
renewals of one year, unless either party gives notice of termination at least
90 days before the end of the term. On December 31, 2004, the Company had
outstanding borrowings under this facility of $17.2 million, including $11.7
million under the revolving credit line, $2.5 million under the term loan and
$3.0 million under the 2004 Supplemental Loan.
As described above in this Item 7 under the captions "RECENT
EVENTS"/"13% Senior Notes," in 2003 and 2004, in connection with the Congress
Financial refinancing, the Company restructured its indebtedness under its 13%
Senior Notes. Among other things, this restructuring resulted in a
cancellation of $2,842,000 of the principal and $8,357,000 of accrued and
unpaid interest under such notes.
- 24 -
The proceeds of the foregoing were used to repay the Company's loans
from Bank of America ($11.7 million on December 3, 2003) and for working
capital and other general corporate purposes.
SFSC Settlement
As described above in this Item 7 under the captions "RECENT
EVENTS"/"SFSC Settlement," the settlement of the Company's indebtedness to
Stanwich Financial Services Corp. on May 10, 2004 resulted in debt
extinguishment of $3.3 million and the extension of the due date for the $4.29
balance of this debt to December 31, 2006.
13% Senior Notes
As described above in this Item 7 under the captions "RECENT EVENTS"/"13%
Senior Notes," the Company made a Consent Solicitation to the holders of its
13% Senior Notes in 2003 and recirculated the solicitation in 2004. As a
result of consents received by the Company in response to these solicitations,
among other things, $2.8 million of the principal of and $8.2 million of
accrued and unpaid interest on certain of such notes were cancelled or
extinguished in 2003, and $52,000 of the principal and $156,000 of the accrued
and unpaid interest were cancelled or extinguished in 2004.
Summary of 2004 Activities
Cash and cash equivalents totaled $1.1 million and $0.7 million at
December 31, 2004 and 2003, respectively. For 2004, $3.3 million of cash used
by operating activities and $0.8 million of cash used for capital expenditures
was provided by $4.6 million of additional financing activities.
Operating Activities
Cash used by operating activities of $3.3 million in 2004 was primarily
the result of an increase in working capital, mainly receivables and
inventories.
Investing Activities
Cash used in investing activities in 2004 consisted solely of capital
expenditures of $0.8 million.
Financing Activities
As noted above, the Company arranged for a $3.0 million junior
participation loan with Congress. Funds for the additional $3.0 million of
supplemental financing were provided to Congress by two private capital funds
as the result of the execution of a junior participation loan transaction
between Congress and the two funds. These funds, plus $2.4 million of
increased borrowing under the Congress revolving credit facility provided $5.5
million of additional financing to the Company. The Company made repayments
of debt during the year of $0.7 million, mainly related to the scheduled debt
payments on the Congress term loan, and paid $0.4 million of financing costs
related to the December 2003 refinancing.
- 25 -
CONTRACTUAL OBLIGATIONS
The following represents a tabular summarization of the Company's
contractual obligations at December 31, 2004 for each of the next five years
and thereafter (in thousands):
Description Total 2005 2006 2007 2008 2009 2009+
----------------- ------- ------- ------- ------- ------- ------- -------
Congress revolving
credit facility $14,649 $ - $14,649 $ - $ - $ - $ -
Congress term loan 2,539 636 636 636 631 - -
Note payable 4,200 - 4,200 - - - -
Note payable 3,500 - 3,500 - - - -
13% senior notes 22,013 - 22,013 - - - -
Note payable 4,290 - 4,290 - - - -
Notes payable-
currently due 4,162 4,162 - - - - -
Note payable-
related parties 500 500 - - - - -
Capital lease
obligations
and SBA loans 9 9 - - - - -
Noncancellable
operating lease
commitments 9,501 1,552 1,151 1,039 1,020 969 3,770
------- ------- ------- ------- ------- ------- -------
Total contractual
obligations $65,363 $ 6,859 $50,439 $ 1,675 $ 1,651 $ 969 $ 3,770
======= ======= ======= ======= ======= ======= =======
The above table shows the contractual aggregate maturities of debt,
including $14.6 million of revolving credit facility borrowings, and
commitments under noncancellable operating leases. As of December 31, 2004,
holders of $1.2 million of principal amount of 13% senior notes had not
consented to the provisions and waivers in the November 2003 solicitation.
However, since the Company succeeded in obtaining the consent of holders of
more than 90% of the principal amount of senior notes, and since such holders
have directed the trustee to refrain from exercising any remedies in respect
of past, present or future defaults, the $1.2 million principal amount of
senior notes held by non-consenting holders is classified as being due in
December 2006. Notes payable - currently due and notes payable - related
parties, although contractually due, may not be paid due to restrictions
imposed by the Congress loan and security agreement.
CRITICAL ACCOUNTING POLICIES
Use of Estimates
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States.
Application of the accounting principles requires the Company's management
to make estimates about the future resolution of existing uncertainties and
that affect the reported amounts of assets, liabilities, revenues, expenses
which in the normal course of business are subsequently adjusted to actual
results. Actual results could differ from such estimates. In preparing these
financial statements, management has made its best estimates and judgments of
the amounts and disclosures included in the consolidated financial statements
giving due regard to materiality.
Revenue Recognition, Accounts Receivable and Allowance for Doubtful Accounts
Sales are recorded when title and risks of ownership transfer to the
buyer. Shipping and handling fees charged to customers are recorded as
revenues and the related costs are recorded as cost of sales.
- 26 -
The Company markets its products to a diverse customer base in the United
States and in other countries. Credit is extended after a credit review by
management, which is based on a customer's ability to perform its obligations.
Such reviews are regularly updated. The allowance for doubtful accounts is
based upon agings of customer balances and specific account reviews by
management. Reunion Industries has no concentration of credit risks and
generally does not require collateral or other security from its customers.
Accounts receivable are presented net of a reserve for doubtful accounts
of $202,000 at December 31, 2004 and $337,000 at December 31, 2003, which
represented 1.7% and 4.4%, respectively, of gross trade receivables (excluding
other non-trade receivables).
Inventories and Inventory Reserves
At December 31, 2004, inventories are stated at the lower of cost or
market, at costs that approximate the first-in, first-out method of inventory
valuation. During the third quarter of 2003, for those locations of the
Company that had been using the last-in, first-out method of inventory
valuation, we changed the method of valuing inventory to the first-in, first-
out method. The effect on the results of operations for the year ended
December 31, 2003 was inconsequential. Work-in-process and finished goods
include material costs, labor costs and manufacturing overhead. Reserves for
excess, slow-moving and obsolete inventories are based on reviews of inventory
usage reports for items more than one year old. The Company evaluates its
inventories on a quarterly basis to identify excess, slow-moving and obsolete
inventories and assess reserve adequacy. When this evaluation indicates such
inventories exist, the reserve is increased by a charge to operations or such
inventories are written off.
Goodwill and Impairment
The excess of the purchase consideration over the fair value of the net
assets of acquired businesses is considered to be goodwill. The Company
reviews goodwill when events or changes in circumstances indicate that the
carrying amount of goodwill may not be recoverable. We also review goodwill
as required by SFAS No. 142, "Goodwill and Other Intangible Assets", which
requires that goodwill be tested annually using a two-step process. The first
is to identify any potential impairment by comparing the carrying value of
reporting units to their fair value. If a potential impairment is identified,
the second step is to compare the implied fair value of goodwill with its
carrying amount to measure the impairment loss. Reporting unit fair value is
estimated using the income approach, which assumes that the value of a
reporting unit can be computed as the present value of the assumed future
returns of an enterprise discounted at a rate of return that reflects the risk
of an investment. A significant increase in the rate at which the assumed
future returns are discounted could result in an unexpected impairment charge
to goodwill, which could have a negative impact on our operating results.
At December 31, 2004, the Company had $11.0 million of goodwill on its
consolidated balance sheet. Of the $11.0 million of goodwill, $9.5 million
relates to the pressure vessels and springs segment and $1.5 million relates
to the cylinders segment. We have completed all transitional and annual
impairment tests necessary to date and concluded that our goodwill is not
impaired.
Pensions
The Company accounts for its defined benefit pension plans in accordance
with SFAS No. 87, "Employers' Accounting for Pensions" which requires that
amounts recognized in the consolidated financial statements be determined on
an actuarial basis. The Company makes contributions to the defined benefit
plans based on the minimum funding requirements of the Employee Retirement
Income Security Act of 1974.
- 27 -
The Company uses the fair value of plan assets to determine the expected
and actual returns on plan assets. The difference between the expected return
and actual return is deferred. During the second half of 2001 and the year
2002, the fair value of assets in both of the Company's defined benefit
pension plans decreased for various reasons, including a downturn in the
overall economy and unusual world events. During 2003 and 2004, the fair
value of assets increased but was mostly offset by an increase in the benefit
obligation. The Company has recorded additional minimum pension liabilities
in excess of amounts previously accrued totaling $1.9 million at December 31,
2004 and $2.0 million at December 31, 2003, which is classified as accumulated
comprehensive loss within stockholders' deficit at such dates. Although
management believes the long-term rates of return used to calculate the
expected returns on plan assets are reasonable, a trend of actual returns
being less than expected returns would cause future pension costs to increase.
In determining the discount rates to be used at the end of each year to
determine plan liabilities, the Company looks at rates of return on high-
quality, fixed-income investments that receive one of the two highest ratings
given by a recognized ratings agency. Changes in discount rates over the last
three years have not materially affected pension costs and the net effect of
changes in the discount rate, as well as the net effect of other changes in
actuarial assumptions and experience, have been deferred as allowed by SFAS
87.
[The Company currently expects consolidated pension costs in 2005 will
approximate 2004.]
Other Postretirement Benefits
The Company provides health benefits for certain retired employees at the
Company's pressure vessel operations and Plastics and of its Corporate
Executive Payroll. These plans are not funded. During 2004, management
decided to sell and close its Rostone operation. As a result, there was a
significant decrease in the expected benefit obligation of the Plastics
segment and a gain of $558,000 was recognized in 2004 and is included in
discontinued operations of Rostone. The other postretirement benefit costs
and the benefit obligation are actuarially determined based on discount rates
and expected trends in healthcare costs. Absent the gain from Rostone, costs
increased slightly in 2004 over 2003 and [the Company currently expects
consolidated other postretirement benefit costs for 2005 to increase slightly
from 2004.]
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for stock options and awards. Accordingly, no compensation costs
for stock options is included in operating results since all awards were made
at exercise prices at or above their fair value on the dates of grants.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure, amending FASB Statement No.
123, Accounting for Stock Based Compensation." This statement amends SFAS No.
123 to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-
based employee compensation. It also amends the disclosure provisions of SFAS
No. 123 to require prominent disclosure about the effects on operating results
of an entity's accounting policy decisions with respect to stock-based
employee compensation. SFAS No. 148 also amends APB 28, "Interim Financial
Reporting" to require disclosure about those effects in interim financial
information. Had the Company applied the fair value recognition provisions of
SFAS No. 123 there would have been no material effect on reported income
(loss) for years 2004, 2003 and 2002.
- 28 -
Environmental Contingencies
When it is probable that a liability has been incurred or an asset has
been impaired, a loss is recognized assuming the amount of the loss can be
reasonably estimated. The Company believes it is currently in material
compliance with existing environmental protection laws and regulations and is
no longer involved in any significant remediation activities or administrative
or judicial proceedings arising under federal, state or local environmental
protection laws and regulations. In addition to management personnel who are
responsible for monitoring environmental compliance and arranging for remedial
actions that may be required, the Company has also employed outside
consultants from time to time to advise and assist the Company's environmental
compliance efforts. As a result, the Company has no significant amount of
accruals for environmental costs.
FACTORS THAT COULD AFFECT FUTURE RESULTS
Reunion's vendors may restrict credit terms
We have corrected many vendor-related problems with liquidity generated
from the refinancing and from asset sales. However, another period of tight
liquidity could result in key vendors restricting or eliminating the extension
of credit terms to us. If this would happen, our ability to obtain raw
materials would be strained significantly and our ability to manufacture
products would be reduced.
Reunion's bank financing is subject to financial covenants
We are currently not in default on our bank financing and senior notes.
However, our bank financing is subject to monthly financial and other
covenants, and we have failed to meet such covenants on several occasions, for
which we were able to obtain default waivers. If our operations do not
improve during 2005, we may fail to meet one or more financial or other
covenants. If this would happen, we would be in default on our bank
obligations and, subject to the terms of the loan and security agreement, all
of our bank loans would be due and payable. Although it may be possible to
negotiate additional waivers of defaults, no assurances can be given that we
would be able to do so.
Reunion operates in highly competitive mature, niche markets
Our products are sold in highly competitive mature, niche markets and we
compete with companies of varying size, including divisions and subsidiaries
of larger companies that have financial resources that exceed ours. This
combination of competitive and financial pressures could cause us to lose
market share or erode prices, which could negatively impact our financial
position and results of operations.
Reunion's past performance could impact future prospects
Because of losses suffered by the Company over the past several years,
potential or current customers may decide not to do business with us. If this
were to happen, our sales may not increase or may decline. If sales do not
increase, or we experience a decline in sales, our ability to cover costs
would be further reduced, which could negatively impact our financial position
and results of operations.
Reunion is a going concern
The financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. At December 31, 2004, the
Company has a deficiency in working capital of $13.3 million, a loss from
continuing operations of $3.5 million before gain on debt extinguishment, cash
- 29 -
used in operating activities of $3.3 million and a deficiency in assets of
$25.6 million. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the outcome of this uncertainty.
We successfully refinanced our bank debt in December 2003 and have
extinguished a significant portion of our obligations under various debt
instruments over the past year. These steps have improved liquidity and
deferred the principal maturities on a significant portion of our debt.
However, on February 3, 2005, we announced that we were unable to make a
$2,928,000 interest payment by February 2, 2005 to the holders of the Senior
Notes. Holders of more than 80% of the principal amount of the Senior Notes
agreed to enter into a Standstill Agreement with the Company. Pursuant to
such Standstill Agreement, holders agreed that they would not exercise and
will (to the extent within their control) cause the Trustee not to exercise
any remedies provided for in the Indenture under which the Senior Notes were
issued, or any other agreements related to the Senior Notes, with respect to
this payment default or with respect to a potential Event of Default if the
Company fails to make the next scheduled interest payment due April 1, 2005.
In the Standstill Agreement, such holders agreed to defer payment of the
interest not paid by February 2, 2005, and any interest that is due April 1,
2005 and not paid, to December 2006. Although it may be possible to negotiate
additional waivers of defaults, no assurances can be given that we would be
able to do so.
The Company is investigating other recapitalization scenarios in an
effort to provide additional liquidity and extinguishments or deferrals of
debt obligations. Although we believe we can accomplish these plans, no
assurances exist that we will. Failure to accomplish these plans could have
an adverse impact on the Company's liquidity, financial position and future
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2004 and May 2004, the FASB issued FASB Staff Position Nos.
106-1 and 106-2, respectively, regarding accounting and disclosure
requirements related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (Act). Recognition of the Act was permitted to be
deferred under FASB Staff Position No. FAS 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." Under the provisions of the Act, companies that
provide prescription drug coverage to retirees over age 65 will be entitled to
a government subsidy beginning in 2006 if the benefits provided under the
company plan are at least actuarially equivalent to those that will otherwise
be offered by the government. The FASB issued final accounting guidance in
May 2004 with FASB Staff Position No. 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003", which requires that the effect of the Act to be
reflected in third quarter 2004 financial statements. The effect of such Act
has not had, and is not expected to have, any material effect on our financial
position or results of operations.
On December 17, 2003, the Staff of the Securities and Exchange Commission
(SEC or the Staff) issued Staff Accounting Bulletin No. 104, "Revenue
Recognition" (SAB 104), which supersedes Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements" (SAB 101). SAB 104 rescinds
accounting guidance contained in SAB 101 related to multiple element revenue
arrangements, superseded as a result of the issuance of Emerging Issues Task
Force Issue No. 00-21 (EITF 00-21), "Accounting for Revenue Arrangements with
Multiple Deliverables." Additionally, SAB 104 rescinds the SEC's Revenue
- 30 -
Recognition in Financial Statements Frequently Asked Questions and Answers
(the FAQ) issued with SAB 101 that had been codified in SEC topic 13, "Revenue
Recognition". While the wording of SAB 104 has changed to reflect the
issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain
largely unchanged by the issuance of SAB 104. The adoption of SAB 104 has not
had, and is not expected to have, a material effect on our financial condition
or results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." This
statement requires the allocation of fixed production overhead to inventory
based on the normal capacity of the production facilities and clarifies that
abnormal amounts of idle facility expense, freight, handling costs and wasted
materials should be recognized as period expense. The Statement is effective
for inventory costs incurred during fiscal years beginning after June 15,
2005. We are evaluating the impact of this Statement but do not expect it to
have a significant effect on our financial position or results of operations.
In December 2004, the FASB issued Staff Position No. FAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004." The American Jobs
Creation Act of 2004 introduces a special one-time dividends received
deduction on the repatriation of certain foreign earnings to a U.S. taxpayer,
provided certain criteria are met. FAS 109-2 provides accounting and
disclosure guidance for the repatriation provision, and was effective
immediately upon issuance. This accounting pronouncement had no impact on
Reunion as the Company did not repatriate earnings in 2004 for U.S. tax
purposes.
In December 2004, the FASB issued SFAS 123R, "Share Based Payment." SFAS
123R is a revision to SFAS 123 and supersedes APB 25, "Accounting for Stock
Issued to Employees," and amends SFAS 95, "Statement of Cash Flows." This
statement requires a public entity to expense the cost of employee services
received in exchange for an award of equity instruments. This statement also
provides guidance on valuing and expensing these awards, as well as disclosure
requirements of these equity arrangements. This statement is effective for the
first interim reporting period that begins after June 15, 2005.
SFAS 123R permits public companies to choose between the following two
adoption methods:
1. A "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS 123R
for all share-based payments granted after the effective date and (b) based on
the requirements of Statement 123 for all awards granted to employees prior to
the effective date of SFAS 123R that remain unvested on the effective date, or
2. A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under SFAS 123 for purposes
of pro forma disclosures either (a) all prior periods presented or (b) prior
interim periods of the year of adoption.
Reunion currently accounts for share-based payments to employees using
APB 25's intrinsic value method and, as such, recognizes no compensation
expense for employee stock options. The impact of the adoption of SFAS 123R on
Reunion cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. There would have been no material
impact on reported results of operations and earnings per share had the
Company applied the fair value provisions of SFAS 123 to share-based payments.
The adoption of SFAS 123R's fair value method may have an impact,
possibly material, on Reunion's future results of operations but is not
expected to significantly impact the Company's overall financial position.
SFAS 123R also requires the benefits of tax deductions in excess of recognized
compensation expense, if any, to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature. This
- 31 -
requirement may reduce net operating cash flows and increase net financing
cash flows in the consolidated statement of cash flows of periods after
adoption. Due to timing of the release of SFAS 123R and the choice between the
two adoption methods, the Company is still analyzing the ultimate impact that
this new pronouncement may have on its results of operations.
On March 29, 2005, the Staff of the Securities and Exchange Commission
(SEC or the Staff) issued Staff Accounting Bulletin No. 107, "Share-Based
Payment" (SAB 107). Although not altering any conclusions reached in SFAS
123R, SAB 107 provides the views of the Staff regarding the interaction
between SFAS 123R and certain SEC rules and regulations and, among other
things, provide the Staff's views regarding the valuation of share-based
payment arrangements for public companies. Reunion intends to follow the
interpretative guidance on share-based payment set forth in SAB 107 during the
Company's adoption of SFAS 123R.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the operation of its business, Reunion Industries has market risk
exposure to foreign currency exchange rates, raw material prices and interest
rates. Each of these risks and Reunion Industries' strategies to manage the
exposure is discussed below.
Excluding its subsidiary in Shanghai, China, Reunion Industries
manufactures its products in the United States and sells its products in the
United States and in foreign countries. The countries to which the Company
exports its products vary from year to year. International sales in 2004,
2003 and 2002 were primarily in four areas: the Far East; Latin and South
America; Western Europe; and Canada. The majority of international sales in
2004 and 2003 relate to pressure vessel sales to customers in Taiwan and the
People's Republic of China. Of Reunion's $59.3 million of consolidated net
sales from U.S. continuing operations for 2004, $7.4 million were export
sales, of which $6.0 million related to pressure vessel sales and $1.1 million
related to Plastics. Of the $6.0 million of foreign pressure vessel sales,
approximately $4.3 million was in the Far East (principally China and Taiwan)
and $1.1 million was in Canada. Of the $1.1 million of foreign Plastics
sales, approximately $0.4 million was in Mexico, approximately $0.3 was in
Canada and approximately $0.3 was in Western Europe. Foreign cylinder sales
for 2004 were approximately $0.4 million, primarily into Canada. Of Reunion's
$55.1 million of consolidated net sales for 2003, $7.5 million were export
sales, of which $6.0 million related to pressure vessel sales and $1.2 million
related to Plastics. The remainder related to cylinder sales in Canada. Of
the $6.0 million of foreign pressure vessel sales, approximately $4.9 million
was in the Far East (principally China and Taiwan) and $0.6 million was in
Western Europe. The remainder was in Canada. Plastics export sales included
$0.5 million in Mexico with the remainder in Europe and Canada. Of Reunion's
$55.2 million of consolidated net sales for 2002, $9.6 million were export
sales, of which $7.7 million related to pressure vessel sales and $1.6 million
related to Plastics. The remainder related to cylinder sales, primarily in
Canada. Of the $7.7 million of foreign pressure vessel sales, approximately
$6.7 million was in the Far East (principally China and Taiwan) and $0.7
million was in Western Europe. The remainder were in the Middle East and
Canada. Plastics export sales included $0.8 million in Mexico with the
remainder in Europe and Canada.
Export sales to foreign countries are denominated in U.S. dollars, the
Company's reporting currency. Accordingly, transaction loss exposures due to
fluctuations in the currencies of the countries to which the Company's
domestic locations export are minimal.
The major raw materials used by Metals include welded and seamless steel
tubing and pipe, steel alloy bars, steel plates, brass tubing and bars and
aluminum extrusions. The major raw material used by Plastics is thermoplastic
polymers. These materials are available from a number of suppliers. [Prices
for these materials are affected by changes in market demand, and there can be
- 32 -
no assurances that prices for these and other raw materials will not increase
in the future.] [Reunion Industries' contracts with its Plastics customers
generally provide that such price increases can be passed through to its
customers.] A 1.00% change in raw material prices would affect results of
operations by approximately $400,000.
Reunion Industries' operating results are subject to risk from interest
rate fluctuations on debt that carries variable interest rates. The variable
rate debt was approximately $15.2 million at December 31, 2004, which is
representative of balances outstanding during the year. A 1.00% change in
interest rates would affect results of operations by approximately $150,000.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reunion's consolidated financial statements are set forth beginning at
Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
As required by Rule 13a-15(b), Reunion's management, including the
Chief Executive Officer and Chief Financial Officer, conducted an evaluation
as of the end of the period covered by this report, of the effectiveness of
Reunion's disclosure controls and procedures as defined in Exchange Act
Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that Reunion's disclosure controls and
procedures were effective as of the end of the period covered by this report.
As required by Rule 13a-15(d), Reunion's management, including the Chief
Executive Officer and Chief Financial Officer, also conducted an evaluation of
Reunion's internal control over financial reporting to determine whether any
changes occurred during the fourth fiscal quarter that have materially
affected, or are reasonably likely to materially affect, Reunion's internal
control over financial reporting. Due to staff reductions and additional
burdens placed on the Plastics division, due primarily to Management's
decision to dispose of its Rostone operation, the internal controls at the
Plastics division showed some deterioration during the fourth quarter which
resulted in our auditors proposing several adjusting entries. Management is
focused on correcting and improving these internal controls and has
restructured plant reporting and supervision responsibilities at the Plastics
division to address these issues. We have concluded that such deterioration
has not materially affected the financial results presented for the year.
It should be noted that any system of controls, however well designed
and operated, can provide only reasonable, and not absolute, assurance that
the objectives of the system will be met. In addition, the design of any
control system is based in part upon certain assumptions about the likelihood
of future events.
- 33 -
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the captions "Proposal, Election of Directors" and
"Management Information; Executive Officers" is incorporated herein by
reference from the Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission on or before May 2, 2005.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Management Information" and
"Proposal; Election of Directors; Director Compensation" is incorporated
herein by reference from the Company's definitive Proxy Statement to be filed
with the Securities and Exchange Commission on or before May 2, 2005.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information under the caption "Ownership Information" is incorporated
herein by reference from the Company's definitive Proxy Statement to be filed
with the Securities and Exchange Commission on or before May 2, 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Ownership Information; Certain
Relationships and Related Transactions" is incorporated herein by reference
from the Company's definitive Proxy Statement to be filed with the Securities
and Exchange Commission on or before May 2, 2005.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information under the caption "Fees Paid to Mahoney Cohen & Company,
CPA, P.C." is incorporated herein by reference from the Company's definitive
Proxy Statement to be filed with the Securities and Exchange Commission on or
before May 2, 2005.
- 34 -
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents included in this report:
The following consolidated financial statements and financial statement
schedules of Reunion Industries, Inc. and its subsidiaries are included in
Part II, Item 8:
1. Financial Statements (Pages F-1 through F- 47)
Report of Management
Report of Independent Registered Public Accounting Firm ?
Mahoney Cohen & Company, CPA, P.C.
Report of Independent Registered Public Accounting Firm -
Ernst & Young LLP
Consolidated Balance Sheets - December 31, 2004 and 2003
Consolidated Statements of Operations and Comprehensive
Income (Loss) - Years Ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows - Years Ended December 31, 2004,
2003 and 2002
Notes to Consolidated Financial Statements
2. Financial Statement Schedules (Page S-1)
Schedule II - Valuation and Qualifying Accounts and Reserves
Other schedules have been omitted because they are either not required,
not applicable, or the information required to be presented is included in
Reunion Industries' financial statements and related notes.
3. Exhibits
See pages E-1 to E-4 for a listing of exhibits filed with this report or
incorporated by reference herein.
(b) Current Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated and filed on
February 3, 2005 under Item 2 to announce that, following the failure of the
Company by February 2, 2005 to make a $2,928,000 interest payment to the
holders of its 13% Senior Notes, holders of more than 80% of the principal of
such notes had entered into a Standstill Agreement with the Company. Pursuant
to such Standstill Agreement, holders agreed that they would not exercise and
will (to the extent within their control) cause the Trustee not to exercise
any remedies provided for in the Indenture under which the Senior Notes were
issued, or any other agreements related to the Senior Notes, with respect to
this payment default or with respect to a potential Event of Default if the
Company fails to make the next scheduled interest payment due April 1, 2005.
In the Standstill Agreement, such holders agreed to defer payment of the
interest not paid by February 2, 2005, and any interest that is due April 1,
2005 and not paid, to December 2006.
- 35 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: April 15, 2005 REUNION INDUSTRIES, INC.
--------------
By: /s/ Charles E. Bradley, Sr.
----------------------------
Charles E. Bradley, Sr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons in the
capacities and on this 15th day of April, 2005.
Signature Title
--------- -----
/s/ Kimball J. Bradley President, Chief Operating Officer
--------------------------- and Director
Kimball J. Bradley
/s/ Joseph C. Lawyer Vice Chairman and Director
---------------------------
Joseph C. Lawyer
/s/ John M. Froehlich Executive Vice President, Chief
--------------------------- Financial Officer, Treasurer and
John M. Froehlich Assistant Secretary (chief financial
and accounting officer)
/s/ Thomas N. Amonett Director
---------------------------
Thomas N. Amonett
/s/ Thomas L. Cassidy Director
---------------------------
Thomas L. Cassidy
/s/ David E. Jackson Director
---------------------------
David E. Jackson
/s/ John G. Poole Director
---------------------------
John G. Poole
- 36 -
REUNION INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page
------------------------------------------ ----
Report of Management....................................................F-2
Report of Independent Registered Public Accounting Firm ? Mahoney
Cohen & Company, CPA, P.C.............................................F-3
Report of Independent Registered Public Accounting Firm ? Ernst &
Young LLP.............................................................F-4
Consolidated Balance Sheets.............................................F-5
Consolidated Statements of Operations and
Comprehensive Income (Loss)...........................................F-6
Consolidated Statements of Cash Flows...................................F-8
Notes to Consolidated Financial Statements..............................F-9
- F-1 -
Report of Management
Management is responsible for the preparation and integrity of the
consolidated financial statements appearing in this Annual Report on Form 10-
K. The financial statements were prepared in conformity with accounting
principles generally accepted in the United States of America appropriate
under the circumstances and, accordingly, include some amounts based on
management's best judgments and estimates. Financial information in this
Annual Report on Form 10-K is consistent with that in the financial
statements.
Management is responsible for maintaining a system of internal business
controls and procedures to provide reasonable assurance, at an appropriate
cost/benefit relationship, that assets are safeguarded and that transactions
are authorized, recorded and reported properly. The internal control system
is augmented by appropriate reviews by management, written policies and
guidelines, careful selection and training of qualified personnel and a
written code of business ethics applicable to all employees of Reunion and its
subsidiaries. Management believes that Reunion's internal controls provide
reasonable assurance that assets are safeguarded against material loss from
unauthorized use or disposition and that the financial records are reliable
for preparing financial statements and other data and maintaining
accountability for assets.
The Audit Committee of the Board of Directors, composed solely of
Directors who are not employees or officers of Reunion, meets on a regular
periodic basis with the independent auditors and management to discuss
internal business controls, auditing and financial reporting matters. The
Committee reviews with the independent auditors the scope and results of the
audit effort. The Committee also meets with the independent auditors without
management present to ensure that the independent auditors have free access to
the Audit Committee.
The independent auditors, Mahoney Cohen & Company, CPA, P.C., are
engaged to audit the consolidated financial statements of Reunion and to
conduct such tests and related procedures as they deem necessary in accordance
with auditing standards promulgated by the Public Company Accounting Oversight
Board (United States). The opinion of the independent auditors, based upon
their audits of the consolidated financial statements, is contained in this
Annual Report on Form 10-K.
/s/ Charles E. Bradley, Sr. /s/ John M. Froehlich
------------------------------------ --------------------------------------
Charles E. Bradley, Sr. John M. Froehlich
Chairman and Chief Executive Officer Executive Vice President and
Chief Financial Officer
- F-2 -
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Reunion Industries, Inc.
We have audited the accompanying consolidated balance sheets of Reunion
Industries, Inc. and Subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of operations and comprehensive income (loss)
and cash flows for the years then ended. Our audit also included the
financial statement schedule listed in the Index at Item 15. These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion. An
audit also 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, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Reunion Industries, Inc. and Subsidiaries at December 31, 2004 and 2003,
and the consolidated results of their operations and their cash flows for the
years then ended, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects, the
information set forth therein.
The accompanying financial statements have been prepared assuming that Reunion
Industries, Inc. and Subsidiaries will continue as a going concern. As more
fully described in Note 1, at December 31, 2004, the Company has a deficiency
in working capital of $13.3 million, a loss from continuing operations of $3.5
million before gain on debt extinguishment, cash used in Operating Activities
of $3.3 million and a deficiency in assets of $25.6 million. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
March 18, 2005
- F-3 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Reunion Industries, Inc.
We have audited the consolidated statements of operations and comprehensive
income (loss) and cash flows of Reunion Industries, Inc. for the year ended
December 31, 2002. Our audit also included the financial statement schedule
listed in the Index at Item 15(a) for the year ended December 31, 2002. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged
to perform an audit of the Company's internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly we express no such opinion. An audit also 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows
of Reunion Industries, Inc. for the year ended December 31, 2002, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that Reunion
Industries, Inc. will continue as a going concern. As more fully described in
Note 1, at December 31, 2002, the Company is in default on $40.0 million of
debt, has a deficiency in working capital of $57.8 million, a loss from
continuing operations of $11.5 million, and a deficiency in assets of $30.8
million. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
As discussed in Note 1 to the Consolidated Financial Statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" in 2002.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
March 14, 2003
- F-4 -
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
At December 31, At December 31,
2004 2003
-------------- --------------
ASSETS:
Cash and cash equivalents $ 1,146 $ 656
Receivables, net 12,768 8,591
Advances to employees 26 56
Inventories, net 9,300 6,753
Other current assets 1,832 1,212
Assets of discontinued operations, current 3,216 3,208
--------- --------
Total current assets 28,288 20,476
Property, plant and equipment, net 9,374 10,304
Property, plant and equipment, held for sale 2,911 3,893
Due from related parties 919 1,405
Goodwill, net 10,994 10,994
Other assets, net 4,110 4,438
Other assets of discontinued operations - 13
--------- --------
Total assets $ 56,596 $ 51,523
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current maturities of debt $ 645 $ 683
Revolving credit facilities 14,485 9,214
Trade payables 9,300 8,619
Accrued salaries and benefits 1,184 1,645
Accrued interest 5,663 2,119
Accrued environmental reserves 230 832
Due to related party 285 3,276
Other current liabilities 4,266 5,149
Notes payable 4,161 4,161
Notes payable - related parties 500 5,115
Current liabilities of discontinued
operations 827 1,191
--------- --------
Total current liabilities 41,546 32,790
Long-term debt 35,628 31,915
Other liabilities 3,759 3,859
Non-current liabilities of
discontinued operations 916 1,500
--------- --------
Total liabilities 81,849 79,278
Minority interests 330 -
Commitments and contingent liabilities - -
Stockholders' deficit:
Common stock ($.01 par value, 30,000,000 shares
authorized, 16,278,519 shares issued
and outstanding) 163 163
Capital in excess of par value 27,866 25,609
Accumulated other comprehensive loss (1,902) (1,979)
Accumulated deficit (51,710) (51,548)
--------- --------
Stockholders' deficit (25,583) (27,755)
--------- --------
Total liabilities and stockholders' deficit $ 56,596 $ 51,523
========= ========
See accompanying notes to consolidated financial statements.
- F-5 -
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share information)
Year Ended December 31,
2004 2003 2002
-------- -------- --------
Sales:
Metals $ 50,715 $ 39,262 $ 35,404
Plastics 17,935 15,791 19,783
-------- -------- --------
Total sales 68,650 55,053 55,187
-------- -------- --------
Cost of Sales:
Metals 40,914 32,032 30,969
Plastics 14,737 13,743 16,117
-------- -------- --------
Total cost of sales 55,651 45,775 47,086
-------- -------- --------
Gross profit 12,999 9,278 8,101
Selling, general & administrative 8,993 9,460 11,366
Gain on debt extinguishment (3,540) (10,991) -
Other (income) expense, net (788) (299) (805)
-------- -------- --------
Operating profit (loss) 8,334 11,108 (2,460)
Interest expense, net 7,937 6,939 8,020
-------- -------- --------
Income (loss) from continuing operations
before income taxes and
minority interests 397 4,169 (10,480)
Provision for income taxes - - -
-------- -------- --------
Income (loss) from continuing operations
Before minority interests 397 4,169 (10,480)
Less: Minority interests 330 - -
-------- -------- --------
Income (loss) from continuing operations 67 4,169 (10,480)
Discontinued operations, net of tax:
Income(loss)from discontinued springs
operations, less applicable income
taxes of $-0- 176 (198) 165
Loss on disposal of springs operations,
less applicable income taxes of $-0- (318) - -
Loss from discontinued Rostone operations,
less applicable income taxes of $-0- (87) (389) (1,218)
Loss on disposal of discontinued bridges
and cranes operations, less applicable
income taxes of $-0- and $-0-, respectively - (942) (3,913)
Income (loss) from discontinued materials
handling operations, less applicable
income taxes of $-0- and $-0-, respectively - - (537)
Gain on disposal of discontinued materials
handling systems operations, less
applicable income taxes of $-0- - - 3,124
-------- -------- --------
Loss from discontinued operations (229) (1,529) (2,379)
-------- -------- --------
- F-6 -
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(continued)(in thousands, except per share information)
Year Ended December 31,
2004 2003 2002
-------- -------- --------
Net income (loss) (162) 2,640 (12,859)
Other comprehensive income (loss),
net of $-0- tax:
Reduction in (additional) pension
liability in excess of unrecognized
prior service cost 77 31 (874)
-------- -------- --------
Comprehensive income (loss) $ (85) $ 2,671 $(13,733)
======== ======== ========
Earnings (loss) applicable to common
stockholders $ (162) $ 2,640 $(12,859)
======== ======== ========
Earnings (loss) per common share-basic:
Continuing operations $ - $ 0.26 $ (0.67)
Discontinued operations (0.01) (0.10) (0.15)
-------- -------- --------
Income (loss) per common share-basic $ (0.01) $ 0.16 $ (0.82)
======== ======== ========
Earnings (loss) per common share-diluted:
- basic and diluted:
Continuing operations $ - $ 0.25 $ (0.67)
Discontinued operations (0.01) (0.09) (0.15)
-------- -------- --------
Income (loss) per common share
- basic and diluted $ (0.01) $ 0.16 $ (0.82)
======== ======== ========
Weighted average shares outstanding - basic 16,279 16,279 15,591
======== ======== ========
Weighted average shares outstanding - diluted 18,812 16,654 15,591
======== ======== ========
See accompanying notes to consolidated financial statements.
- F-7 -
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2004 2003 2002
-------- -------- --------
Cash flow from operating activities:
Net income (loss) $ (162) $ 2,640 $(12,859)
Adjustments to reconcile net (loss) income to
net cash from operating activities:
Depreciation 2,480 2,582 2,762
Amortization of deferred financing fees 864 71 754
Amortization of estimated warrant value 138 16 -
Gain on extinguishment of debt (3,540) (10,991) -
Gain on sale of property and equipment - (226) (375)
Provision for bad debt - 130 -
Write-off of impaired assets - 117 -
Increase in minority interest 330 - -
Changes in assets and liabilities:
(Increase)decrease in receivables (4,014) 2,165 6,431
(Increase)decrease in inventories (2,819) (312) 1,366
(Increase) decrease in other current assets 517 486 (662)
Increase (decrease) in trade payables
and other current liabilities 1,076 (150) 3,585
Net change in other assets and liabilities (267) 807 (1,981)
Capitalization from China joint venture 2,074 - -
-------- -------- --------
Cash used in operating activities (3,323) (2,665) (979)
-------- -------- --------
Cash flow from investing activities:
Proceeds from sale of discontinued materials
handling systems operations - - 25,000
Proceeds from sale of assets of discontinued
bridges and cranes operations - - 3,058
Proceeds from sale of property - 455 375
Capital expenditures (780) (282) (502)
-------- -------- --------
Cash provided by(used in) investing activities (780) 173 27,931
-------- -------- --------
Cash flow from financing activities:
Proceeds from issuance of debt 3,000 11,375 -
Repayments of debt (682) (4,001) (13,740)
Revolving credit facilities borrowings 70,774 67,105 116,157
Revolving credit facilities repayments (68,340) (69,678) (126,845)
Payments of deferred financing costs (431) (2,161) -
Net increase(decrease) in outstanding checks 244 (200) (2,909)
-------- -------- --------
Cash provided by (used in) financing activities 4,565 2,440 (27,337)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents 462 (52) (385)
Less: Change in cash of discontinued operations 28 29 436
Cash and cash equivalents, beginning of year 656 679 628
-------- -------- --------
Cash and cash equivalents, end of year $ 1,146 $ 656 $ 679
======== ======== ========
Supplemental cash flow information:
Interest paid $ 2,642 $ 2,304 $ 4,619
======== ======== ========
Income taxes paid (refunded) $ 6 $ 5 $ (326)
======== ======== ========
See accompanying notes to consolidated financial statements.
- F-8 -
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 1: ACCOUNTING POLICIES
Nature of Business
The Company owns and operates industrial manufacturing operations that
design and manufacture engineered, high-quality products for specific customer
requirements, such as large-diameter seamless pressure vessels, hydraulic and
pneumatic cylinders, grating and precision plastic components. Until December
2004, the Company's products also included leaf springs. Such business was
sold in January 2005. Additionally, during the year 2004, the Company decided
to exit the thermoset plastics portion ("Rostone") of its plastics segment.
Rostone was both a compounder and molder of thermoset polyester resins. Prior
to 2003, the Company's products also included heavy duty cranes, bridge
structures and materials handling systems. These businesses were sold during
2002. All of these sold businesses, as well as Rostone, are reported as
discontinued operations.
In December 1995, the Company entered into a joint venture agreement with
China Metallurgical Import & Export Shanghai Company and Wanggang Township
Economic Development Corporation. The Company has a 65% interest in the joint
venture. During 1996, the Company capitalized its investment in the joint
venture by contributing cash of $150,000 and machinery and equipment with an
estimated fair market value of $1.9 million to the joint venture. The joint
venture manufacturers grating panels and is located in Wangang Township,
Pudong New Area, Shanghai in the People's Republic of China.
In 1999, the Company adopted a plan to exit the grating manufacturing
business through the disposition of its grating businesses, including its
Chinese joint venture investment. Upon adoption of the plan, the grating
businesses and assets were classified and accounted for as discontinued
operations, including a provision for estimated loss on disposal of the
Chinese joint venture of $2.0 million, and ceased consolidating the joint
venture as control of its daily operations was given to our joint venture
partners and our then expatriate management was removed.
In the four years since adopting this plan, the Company has made several
unsuccessful attempts to dispose of its investment in the joint venture and
now perceives that a presence in China is consistent with its future plans for
certain of its continuing operations. As a result and in connection with our
Chinese partners' expressed desire to return control of the business to the
Company for various reasons, the Company has decided to retain its investment
in the Chinese joint venture and returned it to continuing operations
effective at the beginning of 2004.
The Consolidated Statement of Operations for 2004 includes the sales of
this grating subsidiary for the entire 2004 year along with the Company's
ownership share of the profits for the same period. The Consolidated Balance
Sheet at December 31, 2004 reflects the change in assets and liabilities from
the beginning of the 2004 year. Since such assets and liabilities turnover
more than once a year, the balance sheet at December 31, 2004 includes the
existing assets and liabilities of this subsidiary, excluding those assets
that were previously written down in 1999. The minority interest in this
subsidiary was calculated for the 35% ownership and the remaining amount was
treated as additional capital of the Company.
Going Concern
The financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. At December 31, 2004, the
Company has a deficiency in working capital of $13.3 million, a loss from
continuing operations of $3.5 million before gain on debt extinguishment, cash
- F-9 -
used in operating activities of $3.3 million and a deficiency in assets of
$25.6 million. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the outcome of this uncertainty.
The Company successfully refinanced our bank debt in 2003, extinguished
a significant portion of our obligations under the senior notes in 2003 and
2004 and removed all previously existing defaults on debt. These steps were
taken to improve liquidity and defer the principal maturities on a significant
portion of our debt. The Company is investigating other recapitalization
scenarios in an effort to provide additional liquidity and extinguishments or
deferrals of debt obligations. Although the Company believes that it can
accomplish these plans, no assurances exist that it will. Failure to
accomplish these plans could have an adverse impact on the Company's
liquidity, financial position and future operations.
Principles of Consolidation
The consolidated financial statements include the accounts of Reunion
Industries and its subsidiaries. All significant intercompany transactions
and balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates that affect the reported amounts of assets, liabilities, revenues,
expenses, and disclosures of contingencies during the reporting period.
Actual results could differ from management's estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposit accounts and other
cash equivalents with original maturities of 3 months or less.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are net of $202,000 and $337,000 in allowance for
doubtful accounts at December 31, 2004 and 2003, respectively. Credit is
extended after a credit review by management that is based on a customer's
ability to perform its obligations. Such reviews are regularly updated. The
allowance for doubtful accounts is based upon agings of customer balances and
specific account reviews by management. The Company has no concentration of
credit risks and generally does not require collateral or other security from
its customers.
Inventories and Reserves for Obsolescence
At December 31, 2004, inventories are stated at the lower of cost or
market, at costs that approximate the first-in, first-out method of inventory
valuation. During the third quarter of 2003, for those locations of the
Company that had been using the last-in, first-out method of inventory
valuation, the Company changed the method of valuing inventory to the first-
in, first-out method. Work-in-process and finished goods include material
costs, labor costs and manufacturing overhead. Reserves for excess, slow-
moving and obsolete inventories are based on reviews of inventory usage
reports for items more than one year old.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, including costs as
determined by the allocation of the purchase price in business acquisitions
accounted for using the purchase method, and depreciated over their estimated
useful lives using the straight-line method for financial statement purposes.
- F-10 -
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 operations when incurred. 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.
Goodwill
The Company has recorded goodwill totaling $11.0 million at December 31,
2004, of which $9.5 million relates to our pressure vessels and $1.5 million
relates to our cylinders segment. Effective January 1, 2002, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill
and Other Intangible Assets" and ceased amortizing goodwill. The Company
completed internal impairment tests of goodwill as of January 1, 2002 and
engaged an independent valuation consultant to confirm our conclusions. The
Company completed additional impairment tests of goodwill as of December 31,
2004, 2003 and 2002. The Company concluded that goodwill is not impaired.
Long-Lived Assets and Impairment
The Company reviews long-lived assets for impairment whenever
circumstances indicate that the carrying amount of the asset may not be
recoverable, and recognizes an impairment loss when the undiscounted future
cash flows expected to be generated by the asset are less than the carrying
amount of the asset. Long-lived assets held for sale, other than assets to be
disposed of in connection with disposal of a discontinued business segment,
are reported at the lower of carrying amount or fair value less cost to sell.
Revenue Recognition
Sales are recorded when shipped and title and risks of ownership transfer
to the buyer. Shipping and handling fees charged to customers are recorded as
revenues and the related costs are recorded as cost of sales.
Environmental Policies
Environmental expenditures that relate to current operations are either
expensed or capitalized depending on the nature of the expenditure.
Expenditures relating to conditions caused by past operations that do not
contribute to current or future revenue generation are expensed. Liabilities
are recorded when environmental assessments and/or remediation actions are
probable, and the costs can be reasonably estimated.
Income Taxes
The Company provides deferred income taxes for all temporary differences
between financial and income tax reporting using the liability method.
Deferred taxes are determined based on the estimated future tax effect of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of enacted tax laws. A valuation allowance
is recorded for net deferred tax assets if it is more likely than not that
such assets will not be realized. The Company has significant net operating
loss and investment tax credit carryforwards for tax purposes, portions of
which may expire unutilized.
Earnings Per Share
Basic earnings per share is computed based on the weighted average number
of common shares outstanding during the period. Diluted earnings per share
gives effect to all dilutive potential common shares outstanding during this
period. Potential common shares include shares issuable upon exercise of the
Company's stock options and issuable upon exercise of warrants.
- F-11 -
Potential common shares relating to warrants and options to purchase
common stock aggregating approximately 2,533,000 and 375,000 are included in
the weighted average number of shares for the years ended December 31, 2004
and 2003, respectively. There were no potential common shares in 2002.
Recent Accounting Pronouncements
In January 2004 and May 2004, the FASB issued FASB Staff Position Nos.
106-1 and 106-2, respectively, regarding accounting and disclosure
requirements related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (Act). Recognition of the Act was permitted to be
deferred under FASB Staff Position No. FAS 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." Under the provisions of the Act, companies that
provide prescription drug coverage to retirees over age 65 will be entitled to
a government subsidy beginning in 2006 if the benefits provided under the
company plan are at least actuarially equivalent to those that will otherwise
be offered by the government. The FASB issued final accounting guidance in
May 2004 with FASB Staff Position No. 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003", which requires that the effect of the Act to be
reflected in third quarter 2004 financial statements. The effect of such Act
has not had, and is not expected to have, any material effect on our financial
position or results of operations.
On December 17, 2003, the Staff of the Securities and Exchange Commission
(SEC or the Staff) issued Staff Accounting Bulletin No. 104, "Revenue
Recognition" (SAB 104), which supersedes Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements" (SAB 101). SAB 104 rescinds
accounting guidance contained in SAB 101 related to multiple element revenue
arrangements, superseded as a result of the issuance of Emerging Issues Task
Force Issue No. 00-21 (EITF 00-21), "Accounting for Revenue Arrangements with
Multiple Deliverables." Additionally, SAB 104 rescinds the SEC's Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers
(the FAQ) issued with SAB 101 that had been codified in SEC topic 13, "Revenue
Recognition". While the wording of SAB 104 has changed to reflect the
issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain
largely unchanged by the issuance of SAB 104. The adoption of SAB 104 has not
had, and is not expected to have, a material effect on our financial condition
or results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." This
statement requires the allocation of fixed production overhead to inventory
based on the normal capacity of the production facilities and clarifies that
abnormal amounts of idle facility expense, freight, handling costs and wasted
materials should be recognized as period expense. The Statement is effective
for inventory costs incurred during fiscal years beginning after June 15,
2005. The Company is evaluating the impact of this Statement but does not
expect it to have a significant effect on financial position or results of
operations.
In December 2004, the FASB issued Staff Position No. FAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004." The American Jobs
Creation Act of 2004 introduces a special one-time dividends received
deduction on the repatriation of certain foreign earnings to a U.S. taxpayer,
provided certain criteria are met. FAS 109-2 provides accounting and
disclosure guidance for the repatriation provision, and was effective
immediately upon issuance. This accounting pronouncement had no impact on
Reunion as the Company did not repatriate earnings in 2004 for U.S. tax
purposes.
- F-12 -
In December 2004, the FASB issued SFAS 123R, "Share Based Payment." SFAS
123R is a revision to SFAS 123 and supersedes APB 25, "Accounting for Stock
Issued to Employees," and amends SFAS 95, "Statement of Cash Flows." This
statement requires a public entity to expense the cost of employee services
received in exchange for an award of equity instruments. This statement also
provides guidance on valuing and expensing these awards, as well as disclosure
requirements of these equity arrangements. This statement is effective for the
first interim reporting period that begins after June 15, 2005.
SFAS 123R permits public companies to choose between the following two
adoption methods:
1. A "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS 123R
for all share-based payments granted after the effective date and (b) based on
the requirements of Statement 123 for all awards granted to employees prior to
the effective date of SFAS 123R that remain unvested on the effective date, or
2. A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under SFAS 123 for purposes
of pro forma disclosures either (a) all prior periods presented or (b) prior
interim periods of the year of adoption
Reunion currently accounts for share-based payments to employees using
APB 25's intrinsic value method and, as such, recognizes no compensation
expense for employee stock options. The impact of the adoption of SFAS 123R on
Reunion cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. There would have been no material
impact on reported results of operations and earnings per share had the
Company applied the fair value provisions of SFAS 123 to share-based payments.
The adoption of SFAS 123R's fair value method may have an impact,
possibly material, on Reunion's future results of operations but no material
impact on overall financial position. SFAS 123R also requires the benefits of
tax deductions in excess of recognized compensation expense, if any, to be
reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement may reduce net operating
cash flows and increase net financing cash flows in the consolidated statement
of cash flows of periods after adoption. Due to timing of the release of SFAS
123R and the choice between the two adoption methods, the Company is still
analyzing the ultimate impact that this new pronouncement may have on its
results of operations.
On March 29, 2005, the Staff of the Securities and Exchange Commission
(SEC or the Staff) issued Staff Accounting Bulletin No. 107, "Share-Based
Payment" (SAB 107). Although not altering any conclusions reached in SFAS
123R, SAB 107 provides the views of the Staff regarding the interaction
between SFAS 123R and certain SEC rules and regulations and, among other
things, provide the Staff's views regarding the valuation of share-based
payment arrangements for public companies. Reunion intends to follow the
interpretative guidance on share-based payment set forth in SAB 107 during the
Company's adoption of SFAS 123R.
Reclassifications
Certain reclassifications of prior year amounts may have been made to
conform to 2004 classifications.
- F-13 -
NOTE 2: RECENT EVENTS
Annual Meeting
At the Company's Annual Meeting held on December 15, 2004, the Company's
stockholders adopted and approved (1) an amendment to the Company's
Certificate of Incorporation to increase by 10 million (to 30 million) the
number of authorized shares of the Company's common stock and to eliminate the
Company's preferred shares and (2) the Company's 2004 Stock Option Plan,
which provides for up to 1 million shares of the Company's common stock to be
available for future option grants to key employees, directors and consultants
of the Company.
Congress Financial Corporation Revolving and Term Loan Credit Facility
In May 2004, the Company and Congress Financial Corporation ("Congress
Financial") entered an amendment to their loan and security agreement (the
"Congress Loan Agreement"), pursuant to which Congress Financial provided an
additional $3.0 million loan (the "Congress Supplemental Loan") to the Company
within the limit of the existing $25 million credit facility (the "Congress
Loan Facility"), which did not increase. Proceeds from this loan were used to
pay trade payables and for other corporate purposes. Funds for the
Supplemental Loan were provided to Congress Financial by two private capital
funds (the "Junior Participants") through their purchase of junior
participation interests in the Congress Financial Loan Facility in the amount
of $1.5 million each. In partial consideration of such investment, the
Company issued to each of the Junior Participants a warrant to purchase
375,000 shares of the Company's common stock at an initial exercise price of
$0.01 per share, together with registration rights. The warrants were issued
in January 2005 after the Company's Certificate of Incorporation was amended,
in December 2004 with stockholder approval, to increase the authorized number
of shares of common stock of the Company by 10 million.
Interest on the Congress Supplemental Loan is payable monthly at a fixed
rate of 15% per annum. Like the rest of the Congress Loan Facility, the
Congress Supplemental Loan is collateralized by a security interest and lien
on substantially all of the Company's assets.
The Congress Supplemental Loan is subject to the same financial covenants
and other covenants under the Congress Loan Agreement as the rest of the
Congress Loan Facility, including the minimum amount of earnings before
interest, taxes, depreciation and amortization ("EBITDA") and the minimum
fixed charge coverage ratio.
Through August 2004, the Company achieved the minimum monthly EBITDA
required under the Congress Loan Agreement. However, the Company was unable
to achieve the required minimum monthly EBITDA of $650,000 for September 2004,
having generated only $604,000, as calculated under the terms of the Congress
Loan Agreement. In November 2004, Congress Financial and the Company entered
into another amendment to the Congress Loan Agreement that waived the minimum
EBITDA covenant for September 2004, eliminated the minimum EBITDA covenant for
October 2004 and significantly reduced the monthly minimum EBITDA covenant
going forward. The Company was in compliance with all other financial,
affirmative and negative covenants in September 2004, including the required
minimum fixed charge coverage ratio of 0.77:1 for the third quarter of 2004,
having achieved a third quarter 2004 ratio of 1.17:1. However, as part of
this amendment, the minimum fixed charge coverage ratio was eliminated in all
future quarters.
- F-14 -
Under the above described November 2004 amendment to the Congress Loan
Agreement, the Company was required to maintain new minimum monthly amounts of
EBITDA of $280,000 in November 2004, $290,000 in December 2004, $350,000 in
January 2005, $280,000 in February 2005 and $300,000 per month thereafter. In
January 2005, the Company failed to meet the minimum monthly amount, when it
had an EBITDA loss for the month of $39,000. Congress Financial has waived
this EBITDA shortfall, and the Company is currently not in default under the
Congress Loan Agreement.
See also NOTE 7 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, below, for
additional information about the Company's financing arrangements with
Congress Financial.
13% Senior Notes
In November, 2003 the Company made a Consent Solicitation to the holders
of its 13% Senior Notes requesting that, among other things, the holders
consent to (1) a waiver of all then-existing defaults under the Indenture
governing such notes, (2) cancellation of 12% of the principal amount of such
notes, (3) the extension of the maturity of such notes to December, 2006 and
(4) changing the schedule for interest payments under such notes to quarterly,
beginning January, 2005. In the fourth quarter of 2003, the holders of
$23,250,750 (or 93.55%) of the $24,855,000 principal amount of such notes
provided the requested consents. During the period from January 1, 2004
through April 28, 2004, in response to a recirculation of the Consent
Solicitation, the holders of an additional $434,300 principal amount of such
notes provided the requested consents. As a result of the consents received
in 2004, pursuant to the recirculation of the Consent Solicitation, $52,000 of
the principal and $156,000 of accrued and unpaid interest on the 13% Senior
Notes were cancelled or extinguished in April, 2004 (in addition to the $2.8
million of principal on and $8.2 million of accrued and unpaid interest on
such notes that were cancelled or extinguished in December, 2003). No portion
of the principal of or interest on any 13% Senior Notes held by non-consenting
holders has been cancelled. Each consenting noteholder received (1) a consent
fee of $27.625 for each $1,000 principal amount of such notes owned by such
holder, and (2) a warrant to purchase 76.18 shares of Reunion's common stock
at a price of $0.01 per share for each $1,000 principal amount of such notes
owned by such holder. In connection with the Consent Solicitation, the
Company granted the holders of the 13% Senior Notes a security interest in
substantially all of its assets.
On February 3, 2005, the Company announced that it was unable to make a
$2,928,000 interest payment by February 2, 2005 to the holders of the 13%
Senior Notes. Holders of more than 80% of the principal amount of such Senior
Notes agreed to enter into a Standstill Agreement with the Company, pursuant
to which such holders agreed that they would not exercise and will (to the
extent within their control) cause the Trustee not to exercise any remedies
provided for in the Indenture under which the Senior Notes were issued, or any
other agreements related to such notes, with respect to this payment default
or with respect to a potential event of default if the Company fails to make
the next scheduled interest payment due April 1, 2005. In the Standstill
Agreement, such holders agreed to defer the $2,928,000 of interest not paid,
plus any interest that is not paid on the next regularly scheduled due date of
April 1, 2005, to December 2006. On April 1, 2005 the Company was unable to
make this scheduled interest payment.
SFSC Settlement
Effective May 10, 2004, the Company's indebtedness to and from Stanwich
Financial Services Corp. ("SFSC") was settled on the following terms: (1)
pursuant to the judgment referred to below, the Company is obligated to pay
SFSC the sum of $4.29 million on or before December 31, 2006, plus interest on
- F-15 -
such sum at the rate of 10% per annum from such effective date, in
satisfaction of the Company's indebtedness to SFSC, (2) SFSC's indebtedness to
the Company in the amount of $310,000 plus interest was cancelled and (3)
provided it performs its obligations under the settlement and the judgment,
the Company will be released from the claims of SFSC's creditors. As
contemplated by the settlement agreement, a judgment has been entered against
the Company for the settlement amount by the United States Bankruptcy Court
for the District of Connecticut, in SFSC's pending Chapter 11 Bankruptcy
proceeding. The settlement amount does not constitute a new liability of the
Company, as it relates to indebtedness and a note receivable that had
previously been recorded on the Company's balance sheet. The settlement
resulted in a $3.3 million gain on debt extinguishment calculated as follows
(in thousands):
Interest
Payable and Fee
Description (Receivable) Accruals Totals
------------------------------- ---------- ---------- ---------
SFSC note receivable $ (310) $ (155) $ (465)
Reserve for interest receivable - 100 100
SFSC collateral fee - 690 690
SFSC credit support fee - 294 294
SFSC note payable 2,999 1,693 4,692
SFSC note payable 500 317 817
SFSC note payable 100 57 157
SFSC note payable by assignment 1,017 320 1,337
-------- -------- --------
Totals $ 4,306 $ 3,316 7,622
======== ========
Less: Note payable under settlement agreement (4,290)
--------
Gain on SFSC litigation settlement $ 3,332
NOTE 3: INVENTORIES
Inventories of continuing operations are comprised of the following (in
thousands):
At December 31,
2004 2003
-------- --------
Raw material $ 3,760 $ 2,674
Work-in-process 2,775 1,959
Finished goods 2,765 2,120
-------- --------
Inventories $ 9,300 $ 6,753
======== ========
Inventories are valued at the lower of cost or market, cost being
determined on the first-in, first-out method. In the third quarter of 2003,
for those locations of the company that had been using the last-in, first-out
method of inventory valuation, the Company changed the method of valuing
inventory to the first-in, first-out method. The effect on the results of
operations for the year ended December 31, 2003 was inconsequential. The
above amounts are net of inventory reserves of $682 and $553 at December 31,
2004 and 2003, respectively.
- F-16 -
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (PP&E) of continuing operations is comprised of
the following (in thousands):
At December 31,
2004 2003
-------- --------
Land $ 686 $ 686
Buildings and improvements 7,752 7,403
Machinery and equipment 15,678 15,876
Computer systems 2,580 2,662
Furniture and fixtures 566 477
Construction-in-progress 54 173
-------- --------
Property, plant and equipment 27,316 27,277
Less: Accumulated depreciation (17,942) (16,973)
-------- --------
Property, plant and equipment, net $ 9,374 $ 10,304
======== ========
NOTE 5: OTHER ASSETS
Other assets are comprised of the following (in thousands):
At December 31,
2004 2003
-------- --------
Deferred financing costs (net of accumulated
amortization of $864 and $0) $ 1,728 $ 2,161
Other 2,382 2,277
-------- --------
Total other assets $ 4,110 $ 4,438
======== ========
The Company refinanced its bank debt in 2003 and solicited the consent of
its senior noteholders to certain provisions and waivers of defaults under the
indenture governing the 13% senior notes. The Company has paid or accrued
$2.6 million of financing related costs, which have been deferred and are
being amortized over a three-year period using a straight line amortization
method which approximates the effective interest method of amortization.
The remainder of other assets is composed primarily of the cash surrender
value of life insurance policies of approximately $2.3 million on key
employees of the Company. Portions of cash surrender values of these policies
totaling $1.75 million secure borrowings under the Congress revolving credit
loan.
NOTE 6: OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
At December 31,
2004 2003
-------- --------
Accrued liabilities - legacy costs $ 656 $ 1,328
Accrued health self-insurance liability 888 754
Accrued liabilities - Shanghai China 333 -
Reserve for restructuring 42 474
Other 2,347 2,593
-------- --------
Total other current liabilities $ 4,266 $ 5,149
======== ========
- F-17 -
Accrued liabilities - legacy costs primarily represents the remaining
estimated liabilities of our discontinued bridges and cranes operations and
includes $0.4 million of trade payables, $0.2 million of future lease
commitments and $0.1 million of employee-related legacy costs such as deferred
and workers compensation costs. At December 31, 2003, this accrual also
includes estimated liabilities and a post-closing working capital adjustment
related to the sale of the material handling systems operations. The decrease
from December 31, 2003 represents payments and settlements of all such
liabilities. Accrued liabilities - Shanghai China represent that subsidiary's
accrued liabilities in China. Such Subsidiary was not consolidated in 2003.
(See NOTE 1.)
NOTE 7: LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
At December 31,
2004 2003
-------- --------
Congress revolving credit facility $ 11,650 $ 9,214
Junior participation to revolving credit
facility (net of warrant value of $165) 2,835 -
Congress term loan facility 2,539 3,175
Note payable due December 1, 2006 4,200 4,200
Note payable due December 5, 2006 (net of
warrant value of $71 and 83,respectively) 3,429 3,417
13% senior notes (net of warrant value of
$207 and 315, respectively) 21,806 21,750
Notes payable 8,451 4,161
Notes payable ? related parties 500 5,115
Capital leases and other 9 56
-------- --------
Total long-term debt 55,419 51,088
Classified as current (19,791) (19,173)
-------- --------
Long-term debt $ 35,628 $ 31,915
======== ========
Pursuant to EITF 95-22, "Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements that Include both a Subjective
Acceleration Clause and a Lock-Box Arrangement are Deemed to be Current", the
Company has classified its Congress revolving credit obligations, including
the junior participation, within current liabilities as the Congress agreement
contains language that implies that Congress has a subjective acceleration
clause that it could invoke at any time to accelerate the debt and includes a
required lock-box arrangement.
Congress Financial Corporation Revolving and Term Loan Credit Facility
On December 3, 2003, the Company entered into a new revolving and term
loan bank credit facility (the "Congress Loan Facility") with Congress
Financial Corporation ("Congress Financial" or "Congress"), which has since
been merged into Wachovia Bank, National Association. The Congress Loan
Facility consists of revolving credit, term loan and letter of credit
accommodations up to a maximum credit of $25.0 million. The term loan
amortizes to the revolving credit availability at a rate of $53,000 per month
beginning on January 31, 2004 until fully paid. This facility has a three-year
initial term and automatically renews for additional one-year increments
unless either party gives the other notice of termination at least 90 days
prior to the beginning of the next one-year term.
- F-18 -
Interest on loans outstanding under the Congress facility (other than the
Congress Supplemental Loan described in the next paragraph) is payable monthly
at a variable rate tied to the prime rate publicly announced from time to time
by Wachovia Bank, National Association, plus 2.50%. The facility also
provides for a default interest rate of the prime rate plus 4.50%.
The Congress Loan Facility is collateralized by a continuing security
interest and lien on substantially all of the Company's assets.
In May 2004, the Company and Congress Financial entered an amendment to
the loan and security agreement whereby Congress provided an additional $3.0
million of supplemental revolving credit financing to the Company. Proceeds
from the loan were used to pay trade payables and for other corporate
purposes. Funds for the additional $3.0 million of supplemental financing
were provided to Congress by two private capital funds as the result of the
execution of a junior participation loan transaction between Congress and the
two funds. Each fund participated in the supplemental financing at a ratio of
50% each. In addition to their junior participation loan having the same
level of collateral security as Congress as described below, each private
equity fund received, subject to shareholder approval, a warrant to purchase
375,000 shares of the Company's common stock at an initial exercise price of
$0.01 per share, together with registration rights. The warrants were issued
in January 2005, following the approval by the Company's stockholders to amend
the Company's Articles of Incorporation to increase the authorized number of
shares of common stock of the Company by 10,000,000. The value of the
warrants was estimated to be $165,000 at December 31, 2004 using the Black-
Scholes pricing model. This amount was recorded as an original issue discount
with an increase to paid-in capital and will be amortized to interest expense
using the effective interest method of amortization.
Interest on the Congress supplemental revolving credit financing is
payable monthly at a fixed rate of 15% per annum. The Congress supplemental
revolving credit financing is collateralized by a continuing security interest
and lien on substantially all of the current and after-acquired assets of
Reunion including, without limitation, all accounts receivable, inventory,
real property, equipment, chattel paper, documents, instruments, deposit
accounts, contract rights and general intangibles.
The Congress supplemental revolving credit financing is subject to the
same financial covenants and other covenants as the revolving credit and term
loan facilities, including the minimum amount of earnings before interest,
taxes, depreciation and amortization (EBITDA) and the minimum fixed charge
coverage ratio.
Through August 2004, the Company achieved the minimum monthly EBITDA
required for compliance with the Congress covenant. However, the Company was
unable to achieve the required minimum monthly covenant of $650,000 for
September 2004, having generated only $604,000 as calculated under the terms
of the facility. In November 2004, Congress and the Company entered into an
amendment of the revolving and term loan credit facility wherein Congress
waived the minimum EBITDA covenant for September 2004, eliminated the minimum
EBITDA covenant for October 2004 and significantly reduced the monthly minimum
EBITDA covenant going forward. The Company was in compliance with all other
financial, affirmative and negative covenants in September 2004, including the
required minimum fixed charge coverage ratio of 0.77:1 for the third quarter
of 2004, having achieved a third quarter 2004 ratio of 1.17:1. However, as
part of the amendment to the revolving and term loan credit facility, Congress
eliminated the minimum fixed charge coverage ratio in all future quarters.
- F-19 -
Under the above noted November 2004 amendment, the Company was required
to maintain new minimum monthly amounts of EBITDA of $280,000 in November
2004, $290,000 in December 2004, $350,000 in January 2005, $280,000 in
February 2005 and $300,000 per month thereafter. In January 2005, the Company
failed to meet the minimum monthly amount when it had an EBITDA loss for the
month of $39,000. Congress has waived this failure and the Company is
currently not in default of its Agreement.
Private Capital Fund Financing
On August 11, 2003, Reunion borrowed $2.5 million from a private capital
fund by executing a senior subordinated secured promissory note payable in the
amount of and with cash proceeds of $2.5 million. The note bears interest at
10% per annum, such interest being payable on the last day of every month in
arrears commencing on August 31, 2003. The principal amount of $2.5 million
was due on August 11, 2005 with voluntary prepayments permitted but was
extended to December 5, 2006 as discussed below. The note is secured by a
majority of the assets of Reunion, provided that such security interest is
subordinate to the security interest of Congress. In addition to its
subordinated security interest, the fund received a warrant to purchase
625,000 shares of the Company's common stock and registration rights with
respect to the warrant and shares issuable thereto at a price of $0.01 per
share. The value of the warrants was estimated to be $90,000 at the time of
their issuance using the Black-Scholes pricing model. This amount was
recorded as an original issue discount with an increase to paid-in capital and
is being amortized to interest expense using the effective interest method of
amortization. The cash proceeds were used for working capital and other
general corporate purposes.
In connection with the Congress refinancing on December 3, 2003, this
same private capital fund amended and restated its senior subordinated secured
promissory note to provide an additional $1.0 million of financing to the
Company at the same interest rate but changed the maturity date from August
11, 2005 to December 5, 2006. Additional warrants to purchase 325,000 were
eventually issued to the fund in January 2005, following the approval by the
Company's stockholders to amend the Company's Articles of Incorporation to
increase the authorized number of shares of common stock of the Company by
10,000,000. The value of these warrants was estimated to be $18,000 at the
time of their issuance using the Black-Scholes pricing model. This amount was
recorded as an original issue discount with an increase to paid-in capital and
is being amortized to interest expense using the effective interest method of
amortization.
In connection with the Congress refinancing on December 3, 2003, a
separate private capital fund provided the Company with a $4.2 million loan
evidenced by a senior subordinated secured promissory note payable with net
cash proceeds of $4.0 million after fees and expenses. The note bears
interest at a rate of the greater of 12%, or the prime rate as published in
the Wall Street Journal plus 8%. Interest is payable on the first day of
every month. The principal amount of $4.2 million is due on December 1, 2006.
Prepayments in whole or in part are permitted without penalty commencing in
May 2004. The note is secured by mortgage liens and/or deed of trust security
interests totaling $4.2 million encumbering all premises owned by the Company.
In addition to its security interest, the fund received a warrant to purchase
500,000 shares of the Company's common stock and registration rights with
respect to the warrant and shares issuable thereto at a price of $0.50 per
share. The warrants were estimated to have no value at the time of their
issuance using the Black-Scholes pricing model.
- F-20 -
13% Senior Notes
The Company had a total of $24.855 million of 13% senior notes
outstanding. The senior notes required semi-annual interest payments every
November 1st and May 1st and sinking fund payments of $12.5 million on May 1,
2002 and $12.355 million on May 1, 2003. Since November 1, 2001, the Company
was unable to make the required semi-annual interest payments or the sinking
fund payments due May 1, 2002 and 2003. As a result, an event of default, as
defined in the indenture governing the 13% senior notes, had existed since
December 1, 2001 as the Company was not able to make the November 1, 2001
semi-annual interest payment within the 30-day cure period provided for in the
indenture.
In November 2003, the Company solicited the consent of our noteholders to
certain provisions and waivers of the indenture governing the 13% senior notes
in an effort to facilitate the refinancing. The significant provisions of the
solicitation requested that the noteholders consent to permanently waive all
then existing defaults under the indenture, cancel all accrued and unpaid
interest, cancel 12% of the principal amount of senior notes and extend the
maturity of the notes to December 2006. In order for the consent to be
effective, the Company needed noteholders comprising at least 90% of the
principal amount of outstanding senior notes to consent. As of December 1,
2003, the end of the consent period, $23,250,700 of the $24,855,000 principal
amount of senior notes, or 93.55%, had consented. Accordingly, 12% of the
$23,250,700 principal amount of senior notes of noteholders that had consented
to the various provisions and waivers, or $2.8 million, was extinguished
pursuant to the provisions of the consent.
In January 2004, the Company solicited our noteholders for the second
time to consent to certain provisions and waivers of the indenture governing
the 13% senior notes. In the first consent in November 2003, $23,250,700 of
the $24,855,000 principal amount of senior notes, or 93.55%, had consented.
The second consent solicitation period ended on April 28, 2004 at which time
holders of an additional $434,300 principal amount of senior notes had
consented. The significant provisions of the solicitation requested that the
noteholders consent to waive all then existing defaults under the indenture,
cancel all accrued and unpaid interest, cancel 12% of the principal amount of
senior notes and extend the maturity of the notes to December 2006.
Accordingly, 12% of the $434,300 principal amount of senior notes of
noteholders that had consented to the various provisions and waivers in the
second solicitation, or $52,000, was extinguished pursuant to the provisions
of the consent.
In exchange for their consent, each consenting noteholder received a
consent fee of $27.625, warrants to purchase 76.18 shares of the Company's
common stock at $0.01 per share for each $1,000 of principal amount of notes
owned and a junior priority lien on the Company's assets. In the refinancing
that took place on December 3, 2003, the Company placed in escrow with the
trustee of the senior notes, $686,619 for payment of consent fees, of which
$642,301 has been or will be disbursed to consenting senior noteholders.
Warrants to purchase the Company's common stock totaling 1,771,217 have been
reserved for future issuance to consenting noteholders. The value of the
warrants was estimated to be $324,000 at the time of their issuance using the
Black-Scholes pricing model. This amount was recorded as an original issue
discount with an increase to paid-in capital and is being amortized to
interest expense using the effective interest method of amortization.
Effective with having obtained the consents of holders of at least 90% of the
principal amount of outstanding senior notes, all previously existing defaults
under the indenture for the 13% senior notes have been permanently waived.
- F-21 -
Notes Payable
Notes payable consists of a $1,017,000 note payable assumed by Reunion in
a previous year acquisition of a plastics operation and a $3,144,000 15% note
payable assumed by Reunion in connection with the acquisition by merger of NPS
Acquisition Corp ("NPSAC ") in January, 2001 ( the "NAPTech Note").
To facilitate the Congress Financial refinancing, in November 2003,
Reunion and the holder of the $1,017,000 note payable entered into a
replacement promissory note payable with an annual interest rate of the prime
rate, as published by Bank One, National Association, plus 8% with a maturity
date of December 8, 2004. The Company was unable to make this payment and the
note remains currently due. The Company made no payments of interest on this
note in 2004 and $74,180 of interest payments during 2003.
The original principal balance of the NAPTech Note, which is unsecured,
was $4.9 million. This Note bears interest at 15% per annum. In 2001 the
Company made $1.2 million in principal payments and seven monthly interest
payments under this Note from funds available under its revolving credit
facility. In January 2003, the Company made a principal payment of $500,000
with the proceeds of a subordinated loan from Charles E. Bradley, Sr., the
Chairman of our Board of Directors. On December 31, 2004, the principal
balance of the NAPTech Note was $3.1 million and accrued and unpaid interest
thereunder was $1.7 million. The NAPTech Note is in default and is currently
due and payable in full. The holder of the NAPTech Note has obtained a
judgment against the Company, as described below in NOTE 14 OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS under the caption "NAPTech Suit."
Notes Payable - SFSC and Related Parties
Notes payable to related parties at December 31, 2003 includes notes payable
to Stanwich Financial Services Corp. ("SFSC") , either directly or through
assignment, totaling $4.6 million with interest at 10% per annum on $100,000,
at 11% per annum on $1,017,000, at 15% per annum on $500,000 and at 18% per
annum on $2,998,000. As part of the settlement described above in NOTE 2 OF
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS under the caption "SFSC
Settlement," effective May 10, 2004, these notes were cancelled and replaced
by a $4.29 million judgment against the Company in favor of SFSC. This
judgment, which is unsecured, bears interest at the rate of 10% per annum.
The judgment is payable on or before December 31, 2006. The Company's
indebtedness under the judgment is subordinated to its indebtedness to
Congress Financial. The Company did not make any principal or interest
payments on its indebtedness to SFSC in 2003 or 2004. The SFSC settlement
resulted in a $3.3 gain on debt extinguishment for the Company in 2004.
Notes payable to related parties at December 31, 2004 consists only of a
December 31, 2002 note payable to Mr. Charles Bradley of $500,000 with
interest at 10% per annum, which note was issued to evidence a loan from him.
Such note was due on October 31, 2004. The proceeds of this loan were used to
partially pay the NAPTech Note. This note is subordinated to the Company's
indebtedness to Congress Financial. No payments of principal or interest have
been made on this note.
Aggregate Maturities
Aggregate maturities of long-term debt, excluding the Congress revolving
credit facility borrowings at December 31, 2004, are as follows (in
thousands):
Total 2005 2006 2007 2008 2009 2009+
------- ------- ------- ------- ------- ------- -------
$41,213 $ 5,307 $34,639 $ 636 $ 631 $ - $ -
======= ======= ======= ======= ======= ======= =======
- F-22 -
NOTE 8: STOCKHOLDERS' DEFICIT
The Company's Certificate of Incorporation was amended by vote of the
stockholders in 2005 to increase the authorized common stock from 20,000,000
shares to 30,000,000 shares and to eliminate the 10,000,000 shares of "blank
check" preferred stock of the Company. The common stock retained its par
value $.01 per share
No dividends have been declared or paid during the year with respect to
the common stock of the Company. Cash dividends are limited by the
availability of funds and by restrictions in the Company's debt agreements.
The following represents stockholders' equity (deficit) activity for each
year in the 3-year period ended December 31, 2004 (in thousands):
2004 2003 2002
-------- -------- --------
Par value of common stock, January 1 $ 163 $ 163 $ 156
Options exercise - - 7
Contingent share issuance - - -
-------- -------- --------
Par value of common stock, December 31 $ 163 $ 163 $ 163
======== ======== ========
Capital in excess of par value, January 1 $ 25,609 $ 25,195 $ 25,064
Warrant issuances 183 414 -
Options exercise - - 131
Capitalization from China Joint Venture (NOTE 1) 2,074 - -
-------- -------- --------
Capital in excess of par value, December 31 $ 27,866 $ 25,609 $ 25,195
======== ======== ========
Accumulated other comprehensive
loss, January 1 $ (1,979) $ (2,010) $(1,136)
Additional pension liability in excess of
unrecognized prior service cost 77 31 ( 874)
-------- -------- --------
Accumulated other comprehensive
loss, December 31 $ (1,902) $ (1,979) $ (2,010)
======== ======== ========
Accumulated deficit, January 1 $(51,548) $(54,188) $(41,329)
Net income (loss) (162) 2,640 (12,859)
-------- -------- --------
Accumulated deficit, December 31 $(51,710) $(51,548) $(54,188)
======== ======== ========
Total stockholders' equity
(deficit), January 1 $(27,755) $(30,840) $(17,245)
Warrant issuances 183 414 -
Options exercise - - 138
Capitalization from China Joint Venture (NOTE 1) 2,074 - -
Other comprehensive income (loss) 77 31 ( 874)
Net income (loss) (162) 2,640 (12,859)
-------- -------- --------
Total stockholders' deficit,
December 31 $(25,583) $(27,755) $(30,840)
======== ======== ========
- F-23 -
In 2003 and 2004, the Company issued to certain of its lenders warrants
to purchase an aggregate of 1.625 million shares of its common stock, in each
case at a price of $0.01 per share. The warrants and the transactions in
connection with which they were issued are described above in NOTE 7 OF NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS. The values of the warrants issued in
2003 and 2004 were estimated to be, respectively, $183 and $414 at the times
of their issuance, in all cases using the Black-Scholes pricing model. These
amounts were recorded as original issue discounts with an increase to paid-in-
capital and are being amortized to interest expense using the effective
interest method of amortization
The following represents common stock activity for the 3-year period
ended December 31, 2004(in thousands of shares):
Year Ended December 31,
2004 2003 2002
-------- -------- --------
Outstanding common stock, January 1 16,278 16,278 15,591
Options exercise - - 687
-------- -------- --------
Outstanding common stock, December 31 16,278 16,278 16,278
======== ======== ========
NOTE 9: STOCK OPTIONS
At December 31, 2004, the Company had four stock option plans. They are
described below. The Company accounts for its plans using APB Opinion 25 and
related interpretations. Stock options are granted at exercise prices equal
to or above the then current market price, so no compensation expense has been
recognized for the Company's stock option plans. At December 31, 2004,
1,161,100 shares of common stock were reserved for issuance under these plans.
The Repricing
At its meeting on June 12, 2002, the Board directed the Company's
management to take action to improve the value of outstanding stock options as
an incentive to the Company's employees that then held stock options. At its
meeting on September 26, 2002, the Company's management presented its plan to
the Board to offer to holders of the Company's stock options the opportunity
to reprice their stock options to an amount closer to recent trade amounts.
Elements of the repricing, if elected, included: (i) repricing of all
options held to $0.20 (twenty cents) per share, the closing price on the AMEX
of the Company's common stock on June 11, 2002, the day before the Board
directed management to take action, (ii) a no-exercise period through and
including December 12, 2002, (iii) automatic vesting of all repriced options
on December 13, 2002, and (iv) the opportunity to exercise all or any portion
of the repriced options at $0.20 per share through and including December 31,
2002. At the close of business on December 31, 2002, all repriced but
unexercised options were forfeited.
At the time of the repricing offer on September 30, 2002, there were
911,450 outstanding stock options held by directors, executive management and
other Company employees (including two former employees that retained their
stock options). Certain non-director employees were offered the opportunity
to offset amounts accrued for their prior years' bonuses against the exercise
price of their options. Mr. Bradley offset amounts owed to him under the SPI
Consulting Agreement against the $25,000 exercise price of his options.
Results of the repricing offer by group are as follows:
- F-24 -
Non-
Director Other
Directors Executive Employees Total
--------- --------- --------- ---------
Options on September 30, 2002 495,000 158,000 258,450 911,450
Elected to reprice - cash purchase (227,000) (30,000) (96,400) (353,400)
Elected to reprice - accrual offset (125,000) (128,000) (81,500) (334,500)
Elected to reprice - forfeited (99,000) - (80,550) (179,550)
--------- --------- --------- ---------
Options on December 31, 2002 44,000 - - 44,000
========= ========= ========= =========
One director holding 44,000 stock options did not reprice. Results of
the repricing offer by plan are as follows:
1998 1993 1992
Plan Plan Plan Total
--------- --------- --------- ---------
Options on September 30, 2002 675,617 196,833 39,000 911,450
Elected to reprice - cash purchase (278,567) (74,833) - (353,400)
Elected to reprice - accrual offset (195,500) (100,000) (39,000) (334,500)
Elected to reprice - forfeited (157,550) (22,000) - (179,550)
--------- --------- --------- ---------
Options on December 31, 2002 44,000 - - 44,000
========= ========= ========= =========
1992 Option Plan
Effective July 1, 1992, the Board of Directors and stockholders of the
Company approved the adoption of the 1992 Nonqualified Stock Option Plan (the
"1992 Option Plan"). The 1992 Option Plan, as amended, authorized the grant
of options and sale of 250,000 shares of common stock of the Company to key
employees, directors and consultants. In 1992, the Company granted a total of
211,000 options to its then four members of the Board of Directors and a
consultant to the Board. By the end of1995, these options had been exercised.
The Company granted the remaining 39,000 options to Mr. Bradley in March and
June of 2000. Mr. Bradley exercised these options in the previously discussed
repricing. No options remain available for issuance under the 1992 Option
Plan.
1993 Option Plan
Effective September 28, 1993, the Board of Directors and stockholders of
the Company approved the adoption of the 1993 Incentive Stock Option Plan (the
"1993 Option Plan") for the granting of options or awards covering up to
250,000 shares of the Company's common stock to officers and other key
employees. Under the terms of the 1993 Option Plan, the Compensation
Committee of the Board of Directors is authorized to grant (i) stock options
(nonqualified or incentive), (ii) restricted stock awards, (iii) phantom stock
options, (iv) stock bonuses and (v) cash bonuses in connection with grants of
restricted stock or stock bonuses. At December 31, 2004, 50,500 options were
available for issuance under the 1993 Option Plan.
1998 Option Plan
On August 4, 1998, the Company's stockholders ratified the adoption by
the Board of Directors, on June 1, 1998, of the 1998 Stock Option Plan (the
1998 Option Plan). The Compensation Committee of the Board of Directors is
authorized to grant incentive options and nonqualified options covering up to
600,000 shares of the Company's common stock to officers and other key
employees. At the Company's annual meeting of stockholders in May 2001, the
Company's stockholders approved a proposal to reserve an additional 600,000
shares of the Company's common stock for issuance under the 1998 Stock Option
Plan.
- F-25 -
At its meeting on June 26, 2003, the Board of Directors approved the
issuance of a total of 170,000 options to two directors and one non-director
executive of the Company. The per-share closing price on the AMEX of the
Company's common stock on June 25, 2003 was $0.25. Kimball Bradley received
100,000 options at an exercise price of $0.275 per share of Company common
stock. These options have a 5-year term and vest in one-third increments on
the first, second and third anniversaries of their issuance. Mr. David E.
Jackson, director, received 20,000 options and a non-director executive
received 50,000 options at an exercise price of $0.25 per share. These
options have a 10-year term and vest in one-third increments on the first,
second and third anniversaries of their issuance. By written unanimous
consent in lieu of a meeting dated December 1, 2003, the Board of Directors
approved the issuance of a total of 400,000 options to two directors of the
Company. The per-share closing price on the AMEX of the Company's common
stock on November 30, 2003 was $0.32. Kimball Bradley received 300,000
options and Mr. Bradley received 100,000 options at an exercise price of
$0.352 per share of Company common stock. These options have a 5-year term
and vest in one-third increments on the first, second and third anniversaries
of their issuance. At December 31, 2004, 110,600 options were available for
issuance under the 1998 Option Plan.
2004 Option Plan
Effective December 15, 2004, the Board of Directors and stockholders of
the Company approved the adoption of the 2004 Stock Option Plan (the "2004
Option Plan"). The 2004 Option Plan authorizes the grant of options and sale
of 1,000,000 shares of common stock of the Company to key employees, directors
and consultants. No options have been granted under the 2004 Option Plan.
A summary of the status of the Company's stock options and warrants as of
December 31, 2004, 2003 and 2002 and changes during the year is presented
below:
2004 2003 2002
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
------------- --------- -------- --------- -------- --------- --------
Outstanding at
beginning of year 614,000 $0.51 44,000 $2.94 1,089,000 $2.57
Granted - - 570,000 0.33 - -
Exercised - - - - (687,900) 0.20
Forfeited/expired - - - - (357,100) 0.20
--------- --------- ---------
Outstanding at
end of year 614,000 0.51 614,000 0.51 44,000 2.94
========= ========= =========
Options exercisable
at end of year 234,000 0.82 40,667 3.06 37,333 3.21
========= ========= =========
Weighted-average fair value of options granted:
Exercise price equal
to market price
on grant date $ - $ 0.25 $ -
========= ========= =========
Exercise price greater
than market price
on grant date $ - $ 0.34 $ -
========= ========= =========
- F-26 -
The following table summarizes information about stock options and
warrants outstanding at December 31, 2004:
Remaining Number Number
Exercise Contractual Outstanding Exercisable
Price Life at 12/31/04 at 12/31/04
--------- ----------- ----------- -----------
$0.2500 8.50 years 70,000 23,334
$0.2750 3.50 years 100,000 33,333
$0.3520 4.00 years 400,000 133,333
$1.0000 5.50 years 9,000 9,000
$1.4500 6.50 years 10,000 10,000
$3.0000 5.25 years 10,000 10,000
$5.0625 3.00 years 15,000 15,000
--------- ---------
614,000 234,000
========= =========
Had the Company used FASB Statement 123 to account for our stock options,
our operating results would not have been materially different from our
reported results.
NOTE 10: EMPLOYEE BENEFIT PLANS
The Company sponsors defined benefit plans and other postretirement
benefit plans for certain employees in Metals and Plastics and employees of
its Corporate Executive Payroll (as defined in the plan document).
Metals
Metals Pension Plan: Reunion sponsors a defined benefit pension plan
which covers substantially all of its employees at its McKeesport, PA pressure
vessel manufacturing location. This plan is the defined benefit plan from
former Chatwins Group. Benefits under this plan are based solely on
continuous years of service and are not affected by changes in compensation
rates.
The Company's funding policy with respect to this plan 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.
Metals and Corporate Executive Payroll Other Postretirement Plan:
Reunion maintains various postretirement healthcare and life insurance benefit
plans for certain active and retired employees. Covered active and retired
employees include those of the Company's McKeesport, PA pressure vessel
manufacturing location, pursuant to a November 1997 plan amendment which
became effective January 1, 1998 and employees of Reunion's Corporate
Executive Payroll.
Eligible active and retired employees of the one Metals operating
division for which postretirement benefits are provided include both union and
nonunion employees. Healthcare benefits for both union and nonunion retirees
are provided for the most part through comprehensive major medical and other
health benefit provisions subject to various retiree cost-sharing features.
The majority of employees eligible for healthcare benefits upon retirement are
former employees of USX Corporation (USX). A significant portion of
postretirement healthcare earned by such employees prior to 1987 is the
responsibility of USX. Life insurance benefits provided to eligible union
retirees are based on fixed amounts negotiated in labor agreements. Life
insurance benefits provided to eligible nonunion retirees are based on the
employee's annual base salary at retirement subject to a maximum benefit.
- F-27 -
Postretirement healthcare benefits for eligible active and retired
employees of Reunion's Corporate Executive Payroll are paid for by Reunion 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 employees of Reunion's Corporate Payroll are paid
for by Reunion 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 Reunion equal benefits paid.
The following table sets forth the changes in the benefit obligations and
plan assets for the years ended December 31, 2004 and 2003 and the funded
status at December 31, 2004 and 2003 of the Metals pension plan and the Metals
and Corporate Executive Payroll other postretirement benefits plans (in
thousands). The accrued benefit cost is included in other liabilities in the
accompanying consolidated balance sheet:
Pension Other Postretirement
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Change in benefit obligation:
Benefit obligation, beginning $ 3,578 $ 3,192 $ 1,965 $ 1,714
Service cost 139 140 93 75
Interest cost 214 207 116 104
Actuarial loss (gain) 242 177 (25) 397
Benefits paid (157) (138) (89) (325)
-------- -------- -------- --------
Benefit obligation, ending $ 4,016 $ 3,578 $ 2,060 $ 1,965
======== ======== ======== ========
Change in plan assets:
Fair value, beginning $ 2,201 $ 1,959 $ - $ -
Actual return 248 168 - -
Company contribution 397 212 89 325
Benefits paid (157) (138) (89) (325)
-------- -------- -------- --------
Fair value, ending $ 2,689 $ 2,201 $ - $ -
======== ======== ======== ========
Funded status:
Net obligation, ending $ 1,327 $ 1,377 $ 2,060 $ 1,965
Unrecognized costs:
Additional minimum pension
Liability 1,359 1,244 - -
Prior service costs (159) (179) 4 5
Net loss (1,200) (1,065) (456) (554)
Transition obligation - - (343) (392)
-------- -------- -------- --------
Accrued benefit costs $ 1,327 $ 1,377 $ 1,265 $ 1,024
======== ======== ======== ========
In addition to accrued benefit costs, amounts recognized in the
consolidated balance sheet include an intangible asset of $159,000 and
$179,000 and other comprehensive losses of $1,139,000 and $1,004,000 at
December 31, 2004 and 2003, respectively.
Net periodic pension and other postretirement benefits costs for the
following years for Metals pension and Metals and Corporate Executive Payroll
other postretirement benefits plans ended December 31 are as follows (in
thousands):
- F-28 -
Pension Other Postretirement
---------------------- ----------------------
2004 2003 2002 2004 2003 2002
------ ------ ------ ------ ------ ------
Benefits earned during year $ 139 $ 140 $ 141 $ 93 $ 75 $ 61
Interest cost 214 207 178 116 104 96
Early retirement incentive - - - - - -
Amortization of:
Prior service cost 21 20 15 (1) (1) -
Unrecognized net loss (gain) 54 46 11 75 24 (10)
Unrecognized net obligation - - 12 48 49 50
Expected return on plan assets (195) (183) (184) - - -
------ ------ ------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ 233 $ 230 $ 173 $ 331 $ 251 $ 197
====== ====== ====== ====== ====== ======
Assumptions used to develop Metals pension cost and projected benefit
obligation for the defined benefit pension plan for the following years ended
December 31 are as follows:
2004 2003 2002
-------- -------- --------
Discount rate 6.25% 6.25% 6.75%
======== ======== ========
Rate of compensation increase 2.0% 2.0% 2.0%
======== ======== ========
Expected rate of return on plan assets 7.75% 7.75% 7.75%
======== ======== ========
The details of Metal's pension plan assets by asset category are as
follows:
2004 2003
----------------- -----------------
Assets Percent Assets Percent
-------- -------- -------- --------
Equity securities $ 2,020 75% $ 1,298 59%
Corporate bonds 406 15 468 21
Government obligations 164 6 415 19
Cash and other 99 4 20 1
-------- -------- -------- --------
Total $ 2,689 100% $ 2,201 100%
======== ======== ======== ========
The Company's investment strategy for pension funds is to maintain at
least 50% of such funds in equity securities with the balance invested
primarily in bonds and other fixed income securities. The Company believes
that the returns on common stock over the long term will be higher than
returns from fixed income securities. Both equity and fixed income
investments are made across a wide range of industries and companies in order
to provide protection against the impact of volatility in any single industry
or company. The Company is currently using an expected rate of return of
7.75% on our assets and a 2.5% anticipated inflation rate which produces an
expected real rate of return of 5.25%. This rate was chosen by taking into
account our intended asset mix and the historical returns of the plan since
its inception. The Company expects to contribute $384,000 to the plan in
2005.
- F-29 -
Expected benefit payments under the Metal's pension plan, which reflect
expected future service, as appropriate, are as follows for the years
indicated (in thousands):
Benefits
--------
2005 $ 246
2006 253
2007 247
2008 278
2009 347
2010-2014 1,719
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:
2004 2003 2002
-------- -------- --------
Discount rate 6.25% 6.25% 6.75%
======== ======== ========
Healthcare cost trend rate (USX eligible) 2.0% 2.0% 3.0%
======== ======== ========
Healthcare cost trend rate (All others) 7.0% 7.0% 7.0%
======== ======== ========
Rate of compensation increase 2.0% 2.0% 2.0%
======== ======== ========
USX administers the postretirement healthcare plans for the eligible
employees of the McKeesport, PA location previously owned by USX and bills
Reunion for its share of the postretirement costs related to Reunion'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%. Such rate was reduced to
2% in 2003 after further review. For all others, the 7.0% is a weighted-
average based on an assumed rate of increase in per capita healthcare costs of
10% for 2004 with a gradual decrease to 5% and remaining at that level
thereafter. A one percentage point increase in the assumed healthcare cost
trend rate would increase the benefit obligation at December 31, 2004 by
approximately $272,000 and increase the total of the service and interest cost
components by approximately $39,000. Conversely, a one percentage point
decrease in the assumed healthcare cost trend rate would result in approximate
decreases in each by $219,000 and $32,000, respectively.
Plastics
Plastics Pension Plan: Reunion sponsors a defined benefit pension plan
which covered substantially all of its employees at its New York facilities.
Effective June 15, 1999, benefits were frozen.
Plastics Other Postretirement Plan: Reunion maintains a postretirement
healthcare plan for certain salaried and union retirees and their dependents.
Covered employees are eligible to participate in the medical benefit plan if,
at the time they retire, they have at least 10 years of service and have
attained 62 years of age. This plan is contributory via employee
contributions, deductibles and co-payments and are subject to certain annual,
lifetime and benefit-specific maximum amounts.
The following table sets forth the changes in the benefit obligations and
plan assets for the years ended December 31, 2004 and 2003 and the funded
status at December 31, 2004 and 2003 for Plastics pension and other
postretirement benefits plans (in thousands). The accrued pension benefit cost
is included in other liabilities in the accompanying consolidated balance
sheet and the accrued other postretirement cost is included in non-current
liabilities of discontinued operations:
- F-30 -
Pension Other Postretirement
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
Change in benefit obligation:
Benefit obligation, beginning $ 3,711 $ 3,376 $ 2,395 $ 1,833
Service cost - - 55 54
Interest cost 224 220 139 119
Plan curtailment - - (1,480) -
Actuarial loss (gain) 98 255 (97) 514
Benefits paid (137) (140) (97) (125)
-------- -------- -------- --------
Benefit obligation, ending $ 3,896 $ 3,711 $ 915 $ 2,395
======== ======== ======== ========
Change in plan assets:
Fair value, beginning $ 2,464 $ 1,906 $ - $ -
Actual return 308 437 - -
Company contribution 498 261 97 125
Benefits paid (137) (140) (97) (125)
-------- -------- -------- --------
Fair value, ending $ 3,133 $ 2,464 $ - $ -
======== ======== ======== ========
Funded status:
Net obligation, ending $ 763 $ 1,247 $ 915 $ 2,395
Unrecognized costs:
Additional minimum pension
Liability 1,436 1,470 - -
Net loss (1,436) (1,470) 1 (831)
-------- -------- -------- --------
Accrued benefit costs $ 763 $ 1,247 $ 916 $ 1,564
======== ======== ======== ========
In addition to accrued benefit costs, amounts recognized in the
consolidated balance sheet include other comprehensive losses of $763,000 and
$975,000 at December 31, 2004 and 2003, respectively.
Net periodic pension and other postretirement benefits costs for the
following years for Plastics pension and other postretirement benefits plan
ended December 31 are as follows (in thousands):
Pension Other Postretirement
---------------------- ----------------------
2004 2003 2002 2004 2003 2002
------ ------ ------ ------ ------ ------
Benefits earned during year $ - $ - $ - $ 56 $ 54 $ 42
Interest cost 224 220 213 138 119 97
Unrecognized net loss (gain) 62 64 33 52 16 -
Plan curtailment - - - (804) - -
Expected return on plan assets (237) (173) (196) - - -
------ ------ ------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs (income) $ 49 $ 111 $ 50 $ (558) $ 189 $ 139
====== ====== ====== ====== ====== ======
Assumptions used to develop the pension cost and projected benefit
obligation for the defined benefit pension plan for the following years ended
December 31, 2004, 2003 and 2002 are as follows:
- F-31 -
2004 2003 2002
-------- -------- --------
Discount rate 6.25% 6.25% 6.75%
======== ======== ========
Expected rate of return on plan assets 7.75% 7.75% 7.75%
======== ======== ========
The details of Plastic's pension plan assets by asset category are as follows:
2004 2003
----------------- -----------------
Assets Percent Assets Percent
-------- -------- -------- --------
Equity securities $ 2,207 70% $ 1,491 59%
Fixed income/bond funds 906 29 706 19
Cash and other 20 1 267 1
-------- -------- -------- --------
Total $ 3,133 100% $ 2,464 100%
======== ======== ======== ========
The Company's investment strategy for pension funds is to maintain at
least 50% of such funds in equity securities with the balance invested
primarily in bonds and other fixed income securities. The Company believes
that the returns on common stock over the long term will be higher than
returns from fixed income securities. Both equity and fixed income
investments are made across a wide range of industries and companies in order
to provide protection against the impact of volatility in any single industry
or company. The Company is currently using an expected rate of return of
7.75% on our assets and a 2.5% anticipated inflation rate which produces an
expected real rate of return of 5.25%. This rate was chosen by taking into
account our intended asset mix and the historical returns of the plan since
its inception. The Company expects to contribute $419,000 to the plan in
2005.
Expected benefit payments under the Plastic's pension plan, which reflect
expected future service, as appropriate, are as follows for the years
indicated (in thousands):
Benefits
--------
2005 $ 154
2006 163
2007 164
2008 171
2009 173
2010-2014 1,065
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:
2004 2003 2002
-------- -------- --------
Discount rate 6.25% 6.25% 6.75%
======== ======== ========
Healthcare cost trend rate 7.00% 7.00% 6.75%
======== ======== ========
- F-32 -
For measurement purposes, an assumed rate of increase in per capita
healthcare costs of 10% was used for 2004 with a gradual decrease to 5% and
remaining at that level thereafter. A one percentage point increase in the
assumed healthcare cost trend rate would increase the benefit obligation at
December 31, 2004 by approximately $46,000 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 $42,000 and $15,000, respectively.
Other Employee Benefit Plans
The Company also sponsors qualified contributory 401(k) plans covering
substantially all employees. For those employees electing to participate in
the 401(k) plans, employees can contribute up to an annually determined
maximum amount permitted by law and the Company makes matching contributions
up to specified limits. Effective December 31, 2002, the Company suspended
its matching contributions to the 401(k) plans. During 2002, the Company
expensed $299,000 in connection with this plan.
The Company does not provide any other postemployment benefits to former
or inactive employees except for unemployment compensation benefits required
by law.
NOTE 11: EARNINGS PER COMMON SHARE
The computations of basic and diluted earnings per common share (EPS) for
the years ended December 31, 2004, 2003 and 2002 are as follows (in thousands,
except per share amounts):
Income Shares EPS
-------- -------- -------
Year ended December 31, 2004:
Loss applicable to common stockholders,
weighted average shares outstanding
and basic EPS $ (162) 16,279 $ -
=======
Dilutive effect of stock options and warrants - 2,533
-------- --------
Loss applicable to common stockholders,
shares outstanding and diluted EPS $ (162) 18,812 $ -
======== ======== =======
Year ended December 31, 2003:
Income available to common stockholders,
weighted average shares outstanding
and basic EPS $ 2,640 16,279 $ 0.17
=======
Dilutive effect of stock options 375
-------- --------
Income available to common stockholders,
shares outstanding and diluted EPS $ 2,640 16,654 $ 0.16
======== ======== =======
Year ended December 31, 2002:
Loss applicable to common stockholders,
weighted average shares outstanding
and basic EPS $(12,859) 15,591 $ (0.82)
=======
Dilutive effect of stock options - -
-------- --------
Loss applicable to common stockholders,
shares outstanding and diluted EPS $(12,859) 15,591 $ (0.82)
======== ======== =======
- F-33 -
At December 31, 2004 and 2003, the Company's stock options outstanding
totaled 614,000. Such options for years 2004 and 2003 included a dilutive
component of 128,711 and 112 shares, respectively. At December 31, 2004 and
2003, outstanding warrants to purchase the Company's common stock totaled
3,476,585 and 2,896,238, respectively. Such warrants included a dilutive
component of 2,404,000 and 374,876 shares, respectively. At December 31, 2002
the Company's stock options outstanding totaled 44,000 and were not dilutive.
NOTE 12: INCOME TAXES
Due to the existence and use of the Company's net operating loss
carryforwards, there was no tax provision recorded for the years ending
December 31, 2004, 2003 and 2002.
The Company'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,
2004 2003 2002
-------- -------- --------
Computed amount at statutory rate (34%) $ 43 $ 897 $(3,921)
Net change in valuation allowance (17,794) (2,335) (3,069)
Section 108 cancellation of indebtedness
income exclusion 3,558 (3,737) -
Section 108 reduction of loss carryforwards
from cancellation of indebtedness
income exclusion (3,558) 3,737 -
Goodwill amortization (140) (140) (140)
Foreign sales exclusions (40) (57) (56)
Expiration of loss carryforwards 18,054 1,396 7,330
Chinese income tax exclusion (336) - -
Federal return to prior year's
provision adjustments 33 142 (193)
Non-deductible expenses 84 78 84
Other - net 96 19 (35)
-------- -------- --------
Total tax provision from continuing
operations $ - $ - $ -
======== ======== ========
Temporary differences and carryforwards that gave rise to significant
portions of deferred tax assets and liabilities are as follows (in thousands):
At December 31,
2004 2003
-------- --------
Depreciation $ (127) $ (340)
Historical goodwill (218) ( 53)
Other (139) (176)
-------- --------
Deferred tax liabilities (484) (569)
-------- --------
Loss carryforwards (NOLs) 21,793 39,161
Book reserves 2,470 2,933
Deferred compensation 493 521
Tax credit carryforwards 851 851
Unicap adjustments 167 156
Other 1,536 1,567
-------- --------
Deferred tax assets 27,310 45,189
Less: Valuation allowance (26,826) (44,620)
-------- --------
Deferred tax assets, net 484 569
-------- --------
Deferred taxes, net $ - $ -
======== ========
- F-34 -
At December 31, 2004, Reunion had net operating loss carryforwards for
federal tax return reporting purposes of approximately $64.1million, of which
$16.1 million will expire by the end of 2007. Management has concluded that
it is more likely than not that the Company's loss carryforwards will expire
unutilized and has determined to continue to fully reserve for the total
amount of net deferred tax assets as of December 31, 2004.
The current and noncurrent classifications of the deferred tax balances
are as follows (in thousands):
At December 31,
2004 2003
-------- --------
Current:
Deferred tax assets $ 2,363 $ 2,173
Deferred tax liabilities (24) (34)
Less: Valuation allowance (2,231) (2,056)
-------- --------
Current deferred, net asset 108 83
-------- --------
Noncurrent:
Deferred tax assets 24,947 43,016
Deferred tax liabilities (460) (535)
Less: Valuation allowance (24,595) (42,564)
-------- --------
Noncurrent deferred, net (liability) (108) (83)
-------- --------
Deferred taxes, net $ - $ -
======== ========
No U.S. federal or state corporate income tax return examinations are
currently in process. The Company believes adequate provisions for income
taxes have been recorded for all years.
NOTE 13: RELATED PARTIES, TRANSACTIONS AND BALANCES
Related Parties
Reunion Industries, Inc. - Reunion is a publicly traded Delaware
corporation headquartered in Pittsburgh, Pennsylvania. Charles E. Bradley,
Sr. (Mr. Bradley) is chairman of the board and Chief Executive Officer of
Reunion. Kimball Bradley is President, Chief Operating Officer, a director of
Reunion and son of Mr. Bradley. Mr. John G. Poole ("Mr. Poole") is a director
of Reunion.
Stanwich Consulting Corp., f/k/a Stanwich Partners, Inc. - Stanwich
Consulting Corp. ("SCC") was formerly engaged in the business of investment
banking and consulting. It is currently inactive. Mr. Bradley is the
President of SCC.
Stanwich Financial Services Corp. - SFSC is a privately held, currently
inactive, corporation that was formerly in the structured settlement business.
SFSC is owned 100% by Mr. Bradley. Prior to May 10, 2004, this company was a
related party to Reunion. On that date, management control of SFSC was vested
in a liquidating trustee and an executive committee, of which Mr. Bradley is
not a member, in accordance with SFSC's plan of reorganization in its
proceeding under Chapter 11 of the Bankruptcy Code. Accordingly, SFSC is no
longer a related party. See also "SFSC Settlement" in NOTE 2 of NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
NPS Acquisition Corp. - NPS Acquisition Corp. (NPSAC) was formed by Mr.
Bradley to acquire and hold NAPTech Pressure Systems (NAPTech). NAPTech was
based in Clearfield, Utah and engaged in the business of manufacturing
seamless steel pressure vessels, an existing Metals product line. In January
2001, NPSAC was purchased by the Company.
- F-35 -
CPS Leasing, Inc. - CPS Leasing, Inc. (CPSL) is a subsidiary of Consumer
Portfolio Services, Inc. (CPS). Mr. Bradley and Mr. Poole are stockholders of
CPS. Mr. Poole is a director of CPS and Mr. Bradley was a director until July
2001. Charles E. Bradley Jr., Mr. Bradley's son, is President of CPS. CPSL
is primarily engaged in machinery and equipment lease financing.
Transactions and Balances
SCC Consulting Agreement
Reunion had a consulting agreement with SCC which was terminated
effective September 30, 2002. During 2002, $225,000 was expensed related to
this agreement. At December 31, 2003, $117,205 was owed to SCC under this
agreement and is classified as due to related parties in the accompanying
consolidated balance sheet. Such amount was forgiven in the year 2004.
SFSC Indebtedness
Pursuant to a settlement that became effective on May 10, 2004 (the "SFSC
Settlement"), the Company is indebted in the amount of $4.29 million, plus
interest that accrues on that amount after May 10, 2004 at the rate of 10% per
annum. The settlement, which represents a compromise of the Company's
indebtedness to SFSC and SFSC's indebtedness to the Company, resulted in a
gain on debt extinguishment of $3.3 million for the Company in 2004. This
settlement amount is payable on December 31, 2006, but may be prepaid without
penalty. It is unsecured and is subordinate to the Company's indebtedness to
Congress Financial. For a description of the settlement agreement and the
indebtedness to which the SFSC Settlement relates, see NOTES 2 AND 7 OF NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS above under the captions "SFSC
Settlement" and "Notes Payable ? SFSC and Related Parties," respectively. The
Company made no payments of principal or interest to SFSC in 2003 or 2004.
SFSC Note Receivable
In August 1999, pre-merger Reunion loaned $310,000 to SFSC. The loan was
scheduled to be repaid in December 1999 with interest at 15%. In December
1999, the Company agreed to extend the maturity to March 2000 and loaned an
additional $40,000 to SFSC also with interest at 15%, which was repaid in
March 2000. The remaining balance including accrued and unpaid interest due
from SFSC at December 31, 2003 was $465,000 and is included at that date in
due from related parties in the accompanying consolidated balance sheet. This
note receivable was cancelled pursuant to the SFSC settlement referred to in
the preceding paragraph. As a result, this note no longer exists, having
been merged into the settlement.
CPS Leasing, Inc.
Reunion entered into various operating lease agreements with CPSL.
During 2004 and 2003, lease payments totaling $426,000 and $336,000,
respectively, were paid to or accrued for CPSL. At December 31, 2004, the
Company has future minimum rental commitments under noncancellable operating
leases with CPSL totaling $1,257,000.
SFSC Collateral Fees
To facilitate the completion of the Company's financing with Bank of
America in March 2000, SFSC provided side collateral in the form of CPS debt
and common stock to support the borrowings. For this credit support, SFSC was
to receive a 5% collateral fee for as long as the collateral was in place.
Such collateral remained in place until the Congress Financial refinancing in
December 2003. No payments were made under this arrangement during 2004, 2003
or 2002. At December 31, 2003, $690,041 was included in due to related party
in the accompanying consolidated balance sheet. This collateral fee
obligation was included in the SFSC settlement referred to above in this Note
under the caption "SFSC Indebtedness." As a result, this payable no longer
exists, having been merged into the settlement.
- F-36 -
In March 2000, SFSC pledged a $5.0 million note from CPS to secure the
obligations of NPSAC to the former owners of the business. NPSAC agreed to
pay SFSC a 2% credit support fee for this pledge. The Company assumed this
credit support obligation in the acquisition of NPSAC. No payments were made
under this arrangement during 2004, 2003 or 2002. At December 31, 2003,
accrued and unpaid fees totaling $293,943 were due to SFSC under this credit
support obligation and included in due to related party at that date in the
accompanying consolidated balance sheet. This collateral fee obligation was
included in the SFSC settlement referred to above in this Note under the
caption "SFSC Indebtedness." As a result, this payable no longer exists,
having been merged into the settlement.
Cash Surrender Value of Life Insurance Policies
The Company pays the premiums on life insurance policies covering Mr.
Bradley, Mr. Joseph C. Lawyer (Mr. Lawyer), the Company's vice chairman and a
director, and Mr. Poole. Pursuant to these arrangements, the Company will be
reimbursed for the premiums it pays for such policies from either the death
benefit of the policy or their cash surrender value. The covered individuals
have agreed with the Company that if the policy proceeds are insufficient to
reimburse the Company for the full amount of the premiums paid, they will
cover the shortfall. As of December 31, 2004 and 2003, premiums paid by the
Company in excess of the cash surrender values of the policies totaled
$919,000 and $940,000, respectively, and are included in due from related
parties in the accompanying consolidated balance sheets.
Mr. Bradley Note Payable
In January 2003, Mr. Bradley made a $500,000 payment on behalf of the
Company to Shaw NAPTech, Inc. This payment was applied to reduce by $500,000
the Company's indebtedness to Shaw NAPTech, Inc. To evidence this loan by Mr.
Bradley, the Company issued to him its unsecured $500,000 10% note payable.
The note payable became due on October 31, 2004. No principal or interest
payments have been made on this note. At December 31, 2004 and 2003, accrued
and unpaid interest related to this note totaled $100,000 and $50,000,
respectively, and, together with the principal of the note, is included in due
to related parties in the accompanying consolidated balance sheet. Mr.
Bradley's rights under this note are subordinate to the Company's indebtedness
to Congress Financial.
Mr. Bradley Guarantees
To facilitate the closing of the Congress Financial refinancing in
December 2003, Mr. Bradley provided a personal guarantee of $1.5 million of
the revolving credit portion of the Congress Loan Facility. In exchange for
his guarantee, the Board of Directors approved a 2% guarantee fee to be paid
to Mr. Bradley during the time period such guarantee is in place. Amounts
payable under this arrangement are being offset against an employee advance
previously received by Mr. Bradley and owed to the Company. Such advance
totaled $58,000 at the time of the refinancing and $29,917 and $2,384 of
guarantee fees have been offset against such advance for the years ended
December 31, 2004 and 2003, respectively. See "Employee Advances" below.
Kimball Bradley Guarantees
To facilitate obtaining new financing with two private investment funds
and the closing of the refinancing of the Company's bank debt with Congress in
December 2003, Kimball Bradley provided personal guarantees totaling $9.2
million, including guarantees of two notes payable totaling $7.7 million and
$1.5 of the revolving credit portion of the new Congress facilities. In
exchange for his guarantees, the Board of Directors approved 2% guarantee fees
to be paid to Kimball Bradley during the time period such guarantees are in
place. Amounts payable under these arrangements are being offset against an
- F-37 -
employee advance previously received by Kimball Bradley and owed to the
Company. Such advance totaled $55,000 at the time of the refinancing. In
addition, Kimball Bradley owed the Company $19,000 for the December 2002
exercise of 95,000 options which had been repriced to $0.20. For the years
ended December 31, 2004 and 2003, guarantee fees totaling $183,878 and
$74,963, respectively, had been incurred by the Company, of which $74,000 was
offset in 2003 against amounts due from Kimball Bradley. The remaining
$184,841 at December 31, 2004 and $963 at December 31, 2003 is included in due
to related parties in the accompanying consolidated balance sheet. See
"Employee Advances" below.
Employee Advances
At December 31, 2004 and 2003, the Company had non-interest bearing
advances due from Mr. Charles E. Bradley. During 2003, the Company also had a
non-interest bearing advance from Mr. Kimball J. Bradley. The highest balance
outstanding during 2004 was $56,000 and during 2003 was $113,000. See "Mr.
Bradley Guarantees" and "Kimball Bradley Guarantees" above.
NOTE 14: COMMITMENTS AND CONTINGENCIES
The Company is and has been involved in a number of lawsuits and
administrative proceedings, which have arisen in the ordinary course of
business of the Company and its subsidiaries. A summary of such legal
proceedings follows.
Asbestos (ORC)
--------------
Since July 10, 2001, various legal actions, some involving multiple
plaintiffs, alleging personal injury/wrongful death from asbestos exposure
have been filed in multiple states, including California, Oregon, Washington,
New York and Mississippi, against a large number of defendants, including
Oneida Rostone Corporation (ORC), pre-merger Reunion's Plastics subsidiary and
the Company's Plastics segment. In October 2001, Allen-Bradley Company, a
former owner of the Rostone business of ORC, accepted Reunion Industries'
tender of its defense and indemnification in the first such lawsuit filed,
pursuant to a contractual obligation to do so. Subsequent to the acceptance
of the tender of defense and indemnification in the first lawsuit, Allen-
Bradley Company has accepted the Company's tender of defense and
indemnification in a total of 135 separate actions, all of which have been
defended by Allen-Bradley Company.
Asbestos (Alliance)
------------------
The Company has been named in approximately 2,400 separate asbestos suits
filed since January 1, 2001 by various plaintiffs' law firms in Michigan,
Pennsylvania, Ohio, Illinois, Maryland, Alabama and W. Virginia. The claims
are primarily directed against over 100 defendants, including Reunion, and
allege that cranes from the Company's former crane manufacturing location in
Alliance, OH were present in various steel mills located in those states and
that those cranes contained asbestos to which plaintiffs were exposed over a
40 year span. Counsel for the Company has filed an answer to each complaint
denying liability by the Company and asserting all alternative defenses
permitted under the various Courts' Case Management Orders. Counsel for the
Company has successfully resolved approximately 500-600 cases with little or
no cost to the Company. The Company denies that it manufactured any products
containing asbestos or otherwise knew or should have known that any component
part manufacturers provided products containing asbestos. It has been further
denied that the Company was otherwise advised by component part manufacturers
that component parts could be hazardous, or otherwise constitute a health
risk. The Company intends to vigorously defend against these lawsuits.
- F-38 -
NAPTech Suit
On or about March 16, 2004, Shaw NAPTech, Inc. ("NAPTech"), as successor
by merger to NAPTech, Inc. and NAPTech PS Corporation, filed a suit against
the Company in state court in Baton Rouge, Louisiana, to collect payment on a
subordinated note (the "NAPTech Note") issued to NAPTech and assumed by the
Company in a January 2001 acquisition. In April, 2005 the trial court in this
case entered a summary judgment in favor of NAPTech in the amount of
$3,145,403 in principal, plus $1,207,760 in unpaid interest through November
30, 2003, plus interest at 15% per annum on the unpaid principal after
November 30, 2003. This judgment does not constitute a new liability, as the
Company has recorded the liability under the NAPTech Note in its consolidated
balance sheets, since January, 2001. The trial court rejected defenses raised
by the Company that the suit is currently barred by a subordination agreement
to which NAPTech is a party and that the court lacks personal jurisdiction
over the Company. The Company intends to appeal from this judgment on the
grounds that the trial court was in error in rejecting its defenses. There is
no assurance that the appeal will be successful. Also named as defendants in
the suit are Charles E. Bradley, Sr. (a director of the Company), as guarantor
of the subordinated note, and KSB Acquisition Corp. and Hanna Investment Corp.
(both of which are affiliates of Mr. Bradley), as pledgors of certain assets
securing the note.
Product Warranties
The Company provides for warranty claims at its cylinders segment.
Amounts accrued are estimates of future claims based on historical claims
experience or a management estimate related to a specifically identified
issue. The Company reevaluates its product warranty reserve quarterly and
adjusts it based on changes in historical experience and identification of new
or resolution of prior specifically identified issues. A tabular
reconciliation of the product warranty reserve follows (in thousands):
Description 2004 2003
--------------------------------------------- -------- --------
Beginning balance $ 211 $ 379
Add: Provision for estimated future claims (2) 83
Deduct: Cost of claims (109) (251)
-------- --------
Ending balance $ 100 $ 211
======== ========
Operating leases
Minimum rental commitments under all noncancellable operating leases in
effect for continuing operations at December 31, 2004, were as follows (in
thousands):
Year ended December 31,
Total 2005 2006 2007 2008 2009 After 2009
------- ------ ------ ------ ------ ------ ----------
$ 9,501 $1,552 $1,151 $1,039 $1,020 $ 969 $3,770
======= ====== ====== ====== ====== ====== ======
Operating lease rental expense related to continuing operations for the
years ended December 31, 2004, 2003 and 2002, amounted to $1,713,000,
$2,885,000 and $2,354,000, respectively.
- F-39 -
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 and cash equivalents, accounts receivable and accounts payable - The
carrying amounts approximate fair value because of the short maturities of
these instruments.
Debt - $15.2 million of the Company's debt has variable rates of interest
and $40.7 million bears interest at fixed rates. Management estimates the
carrying value of variable-rate debt to approximate its fair value as its
stated rate of interest changes with changes in market rates of interest. Of
the $40.7 million of fixed-rate debt, $22.0 million represents the 13% senior
note obligation. Such notes have recently been restructured and there has
been little, if any, trading activity in the Company's senior notes over the
past year. Based on this, the fair value of such notes is not readily
determinable. Of the remaining fixed-rate debt, $0.5 million is to a related
party, for which comparable instruments do not exist, and $18.2 million
relates to debt that bears interest at rates ranging between 10% and 18%.
Given our financial condition, the fair value of such debt is not readily
determinable.
NOTE 16: DISCONTINUED OPERATIONS
In December 2001, the Company classified and began accounting for its
bridges and cranes and materials handling systems businesses 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).
On September 24, 2002, the Company sold Kingway, our discontinued
materials handling systems operations, for cash proceeds of $25.0 million and
a $7.0 million note receivable in amounts of up to $2.333 million in each of
2003, 2004 and 2005. Future proceeds under the note receivable are contingent
upon the combined operations of the buyer's material handling businesses
exceeding certain specified amounts such that EBITDA in excess of $10.0
million in 2003, $12.0 million in 2004 and $14.0 million in 2005 are to be
paid to the Company. In 2003, the EBITDA of the buyer's material handling
businesses did not exceed $10.0 million. The net cash proceeds of $24.12
million after transaction-related expenses were used to reduce borrowings
under our BOA revolving credit facility of $15.96 million, term loan A
facility of $7.11 million and pay overadvance fees of $1.05 million. The
Company realized a net gain of $3.1 million, classified within discontinued
operations, on this transaction. Finalization of this sale was subject to a
post-closing working capital adjustment. The buyer alleged it was owed
approximately $905,000 based on its calculation of working capital on the
closing date. Pursuant to the asset purchase agreement, the Company submitted
this dispute to a mutually agreed-upon independent accounting firm for
resolution in arbitration. The arbitrator for the dispute determined that, of
the $905,000 working capital deficiency claimed by the buyer, $704,000 was not
valid. The Company and the Buyer entered into a payment arrangement for a
total of $200,000 to be paid in $50,000 installments by the Company, which
began in December 2003.
On June 30, 2002, the Company sold the inventory and substantially all of
the property, plant and equipment of Alliance, our discontinued bridges and
cranes operations, for cash proceeds of $3.058 million and the assumption by
the buyer of $242,000 of accrued liabilities. The Company retained all
- F-40 -
receivables, trade payables and certain other liabilities of this discontinued
operation. The net cash proceeds of $3.058 million were used to reduce
borrowings under our then existing Bank of America revolving credit facility
($322,000), term loan A facility ($1.87 million) and capital expenditure
facility ($866,000). The Company realized a loss of $3.9 million, classified
within discontinued operations, on this transaction. The loss on disposal of
the discontinued bridges and cranes operations differed from the 2001 due to
adjustments of the carrying values to net realizable value, primarily
machinery and equipment and receivables, of assets retained from the sale of
the discontinued bridges and cranes operations.
In January, 2005, the Company sold its springs division operations for
cash proceeds of $792,000. Finalization of this sale is subject to a post
closing working capital adjustment which has not yet been determined. Net
cash proceeds of $775,000 after transaction related expenses were received on
January 4, 2005, of which $250,000 was used to reduce borrowings under the
term loan from a private capital fund that is secured by the real property,
$41,000 was used to reduce borrowings under the term loan portion of the
Congress Loan Facility and the remaining balance of $484,000 was used to
reduce borrowings under the Congress revolving credit facility.
In December 2004, the Company classified and began accounting for its
Rostone business as discontinued operations in accordance with FAS 144.
At December 31, 2004 and 2003, the assets and liabilities of discontinued
operations are comprised of the assets and liabilities of the springs and
Rostone businesses. Such assets and liabilities are as follows (in
thousands):
At December 31,
2004 2003
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 71 $ 99
Receivables, net 1,307 1,440
Inventories, net 1,726 1,454
Other current assets 112 215
-------- --------
Total current assets $ 3,216 $ 3,208
======== ========
CURRENT LIABILITIES:
Trade payables $ 827 $ 844
Other current liabilities - 347
-------- --------
Total current liabilities $ 827 $ 1,191
======== ========
OTHER ASSETS:
Property, plant and equipment, held for sale $ 2,911 $ 3,893
Goodwill, net - 13
-------- --------
Total other assets $ 2,911 $ 3,906
======== ========
OTHER LIABILITIES:
Other liabilities $ 916 $ 1,500
======== ========
- F-41 -
Summarized results of discontinued operations for the years ended
December 31, 2004, 2003 and 2002 follow (in thousands):
2004 2003 2002
-------- -------- --------
Net sales $ 12,399 $ 13,456 $ 49,035
Income (loss) before taxes (229) (1,529) (2,379)
The loss from discontinued operations in 2004 includes a loss on disposal
of our springs operation of $0.3 million. The loss from discontinued
operations in 2003 includes $0.9 million related to an evaluation of legacy
healthcare costs and litigation in the discontinued bridges and crane
operation.
Interest expense is allocated to discontinued operations on the basis of
the percentage of total average assets of discontinued operations to gross
total assets for the period presented. The above results of discontinued
operations include actual and allocated interest expense totaling $2.5 million
for the year ended December 31, 2002.
NOTE 17: SEGMENT DISCLOSURES AND RELATED INFORMATION
The Company owns and operates industrial manufacturing operations that
design and manufacture engineered, high-quality products for specific customer
requirements, such as large-diameter seamless pressure vessels, hydraulic and
pneumatic cylinders and precision plastic components.
The Company's customers include original equipment manufacturers and end-
users in a variety of industries, such as transportation, power generation,
chemicals, metals, home electronics, office equipment and consumer goods. The
Company's business units are organized into two major product categories:
* Metals manufactures and markets a broad range of fabricated and machined
industrial metal parts and products including large-diameter seamless pressure
vessels, and hydraulic and pneumatic cylinders.
* Plastics manufactures precision molded plastic parts and provides
engineered plastics services.
Metals includes two reportable segments: Pressure vessels and Cylinders.
Plastics is a single segment.
Excluding its subsidiary in Shanghai, China, Reunion Industries
manufactures its products in the United States and sells its products in the
United States and in foreign countries. The countries to which the Company
exports its products vary from year to year. International sales in 2004 were
primarily in four areas: the Far East; Latin and South America; Western
Europe; and Canada. The majority of international sales in 2004 relate to
pressure vessel sales to customers in Taiwan and the People's Republic of
China. Of Reunion's $59.3 million of consolidated net sales from U.S.
continuing operations for 2004, $7.4 million were export sales, of which $6.0
million related to pressure vessel sales and $1.1 million related to Plastics.
Of the $6.0 million of foreign pressure vessel sales, approximately $4.3
million was in the Far East (principally China and Taiwan) and $1.1 million
was in Canada. Of the $1.1 million of foreign Plastics sales, approximately
$0.4 million was in Mexico, approximately $0.3 was in Canada and approximately
$0.3 was in Western Europe. Foreign cylinder sales for 2004 were
approximately $0.4 million, primarily into Canada. During 2004, no one
customer accounted for more than 10% of the net sales of Reunion. Segment
data, including earnings before interest, taxes, depreciation and amortization
(EBITDA) (in thousands except for related notes):
- F-42 -
Capital Total
Net Sales EBITDA(1) Spending Assets(2)
--------- --------- --------- ---------
2004:
-----
Metals:
Pressure vessels $ 22,921 $ 3,979 $ 218 $ 15,403
Cylinders 18,488 580 202 8,452
Grating 9,306 1,274 70 4,013
-------- -------- -------- --------
Subtotal Metals 50,715 5,833 490 27,868
Plastics 17,935 2,210 183 8,000
Corporate and other (3) - (1,582) 56 14,601
Discontinued Operations - - 51 6,127
-------- -------- -------- --------
Totals $ 68,650 6,461 $ 780 $ 56,596
======== ======== ========
Gain on extinguishment of debt 3,540
Depreciation (1,667)
Interest expense (7,937)
--------
Income from continuing operations
before income taxes and minority
interests $ 397
========
2003:
-----
Metals:
Pressure vessels $ 21,371 $ 3,837 $ - $ 12,351
Cylinders 17,891 353 101 7,877
-------- -------- -------- --------
Subtotal Metals 39,262 4,190 101 20,228
Plastics 15,791 1,216 96 8,458
Corporate and other (4) - (3,440) 3 15,723
Discontinued Operations 82 7,114
-------- -------- -------- --------
Totals $ 55,053 1,966 $ 282 $ 51,523
======== ======== ========
Gain on extinguishment of debt 10,991
Depreciation (1,849)
Interest expense (6,939)
--------
Income from continuing operations
before income taxes $ 4,169
========
2002:
-----
Metals:
Pressure vessels $ 17,317 $ 899 $ 45 $ 12,464
Cylinders 18,087 (286) 92 9,700
-------- -------- -------- --------
Subtotal Metals 35,404 613 137 22,164
Plastics 19,783 2,421 49 9,361
Corporate and other (5) - (3,482) 2 15,357
Discontinued operations - - 314 8,436
-------- -------- -------- --------
Totals $ 55,187 (448) $ 502 $ 55,318
======== ======== ========
Depreciation (2,012)
Interest expense (8,020)
--------
Loss from continuing operations
before income taxes $(10,480)
========
- F-43 -
(1) EBITDA is presented as it is the primary measurement used by management
in assessing segment performance and not as an alternative measure of
operating results or cash flow from operations as determined by
accounting principles generally accepted in the United States, but
because it is a widely accepted financial indicator of a company's
ability to incur and service debt.
(2) Corporate and other assets at December 31, 2004, 2003 and 2002 includes
$8.0 million of goodwill that relates to the Company's pressure vessel and
springs segment. For evaluation purposes under SFAS No. 142, this
goodwill is included in the carrying value of pressure vessels and
springs.
(3) Includes income totaling $0.6 million from reduction in environmental
reserve.
(4) Includes gain of $0.2 million on sale of equipment with no carrying value.
(5) Includes gain of $0.4 million on sale of equipment with no carrying value.
- F-44 -
NOTE 18: QUARTERLY DATA (unaudited)
Results by quarter for 2004 and 2003 follow:
2004 Quarter Ended
--------------------------------------
March 31 June 30 Sept 30 Dec 31
-------- -------- -------- --------
Operating revenue $ 15,820 $ 17,538 $ 17,101 $ 18,191
Operating costs and expenses 11,762 15,672 15,826 17,056
-------- -------- -------- --------
Operating income (loss) $ 4,058 $ 1,866 $ 1,275 $ 1,135
======== ======== ======== ========
Income (loss) from continuing
operations $ 2,181 $ (222) $ (873) $ (960)
Income (loss) from discontinued
operations 168 (180) (60) (157)
-------- -------- -------- --------
Net income (loss) $ 2,349 $ (402) $ (933) $ (1,117)
======== ======== ======== ========
Income (loss) from continuing
operations per common share:
Basic $ 0.14 $ (0.02) $ (0.06) $ (0.07)
======== ======== ======== ========
Diluted $ 0.12 $ (0.02) $ (0.06) $ (0.07)
======== ======== ======== ========
Significant item included in results
of continuing operations which might
affect comparability:
Gain on extinguishment of debt $ 3,070 $ 470 $ - $ -
======== ======== ======== ========
2003 Quarter Ended
--------------------------------------
March 31 June 30 Sept 30 Dec 31
-------- -------- -------- --------
Operating revenue $ 17,086 $ 14,540 $ 11,898 $ 11,529
Operating costs and expenses 15,671 13,901 11,704 2,669
-------- -------- -------- --------
Operating income (loss) $ 1,415 $ 639 $ 194 $ 8,860
======== ======== ======== ========
Loss from continuing operations $ (94) $ (1,273) $ (1,543) $ 7,079
Income (loss) from discontinued
operations 3 (51) (510) (971)
-------- -------- -------- --------
Net income (loss) $ (91) $ (1,324) $ (2,053) $ 6,108
======== ======== ======== ========
Income (loss) from continuing
operations per common share:
Basic $ (0.01) $ (0.08) $ (0.09) $ 0.40
======== ======== ======== ========
Diluted $ (0.01) $ (0.08) $ (0.09) $ 0.37
======== ======== ======== ========
Significant item included in results
of continuing operations which might
affect comparability:
Gain on extinguishment of debt $ - $ - $ - $ 10,991
======== ======== ======== ========
- F-45 -
REUNION INDUSTRIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
(dollars in thousands)
Charged to
Beginning Costs and Ending
Year ended: Balance Expenses Other Deductions Balance
----------- --------- ---------- ------- ---------- -------
December 31, 2004:
Allowance for doubtful
accounts $ 485 $ (36) $ (151)(1) $ 96(2) $ 202
Inventory obsolescence
reserve 560 229 (7)(1) 100(2) 682
Deferred tax valuation
allowance 44,620 - - 17,794(6) 28,826
44,620
Reserve for
restructuring 474 - - 234 240
Product warranty
reserve 211 (2) - 109(5) 100
December 31, 2003:
Allowance for doubtful
accounts $ 300 $ 205 $ - $ 20(2) $ 485
Inventory obsolescence
reserve 1,056 147 (166) 477(3) 560
Deferred tax valuation
allowance 46,955 - - 2,335(6) 44,620
Reserve for
restructuring 861 - (117) 270 474
Product warranty
reserve 379 83 - 251(5) 211
December 31, 2002:
Allowance for doubtful
accounts $ 212 $ 198 $ 50(4) $ 160(2) $ 300
Inventory obsolescence
reserve 1,504 285 - 733(3) 1,056
Deferred tax valuation
allowance 50,475 - - 3,520(6) 46,955
Reserve for
restructuring 1,192 - - 331 861
Product warranty
Reserve 56 457 - 134(5) 379
_________________________
(1) Reduction to beginning balance due to businesses classified as
discontinued operations during the year.
(2) Uncollectible accounts written off, net of recoveries.
(3) Inventory written off.
(4) Transferred from accrued liabilities.
(5) Cost of claims.
(6) Primarily related to reduction in expired net operating losses.
- S-1 -
EXHIBIT INDEX
3.1 Certificate of Incorporation of the Company. Incorporated by
reference to Exhibit 3.1 to Registration Statement on Form S-4
filed on March 4, 1996 (File No. 33-64325).
3.2 Bylaws of the Company. Incorporated by reference to Exhibit 3.2
to Registration Statement on Form S-4 filed on March 4, 1996 (File
No. 33-64325).
3.3 Certificate of Amendment of Certificate of Incorporation of the
Company, dated December 17, 2004. (2)
4.1 Specimen Stock Certificate evidencing the Common Stock, par value
$.01 per share, of Reunion Industries, Inc. Incorporated by
reference to Exhibit 4.1 to Registration Statement on Form S-4
filed on March 4, 1996 (File No. 33-64325).
10.1* Buttes Gas & Oil Co. 1992 Nonqualified Stock Option Plan.
Incorporated by reference to Exhibit 10.35 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992 (File No.
001-07726).
10.2* Form of Stock Option Agreement for options issued pursuant to the
1992 Nonqualified Stock Option Plan. Incorporated by reference to
Exhibit 10.36 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992 (File No. 001-07726).
10.3* Reunion Resources Company 1993 Incentive Stock Plan. Incorporated
by reference to Exhibit 10.34 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993 (File No. 001-
07726).
10.4* Form of Stock Option Agreement for options issued pursuant to the
1993 Incentive Stock Plan. Incorporated by reference to Exhibit
10.35 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993 (File No. 001-07726).
10.5* The 1998 Stock Option Plan of the Company. Incorporated by
reference to Exhibit 2.2 to Registration Statement on Form S-4
filed on June 26, 1998 (File No. 333-56153).
10.6* Form of Stock Option Agreement for options issued pursuant to the
1998 Stock Option Plan of the Company. Incorporated by reference
to Exhibit 10.7 to Reunion Industries' Annual Report on Form 10-K
for the year ended December 31, 1998 (File No. 33-64325).
10.7 -
10.15 Not used.
10.16 Indenture (the "Indenture"), dated as of May 1, 1993, by and
between Chatwins Group, Inc. and The First National Bank of
Boston, as trustee. Incorporated by reference to Exhibit 4.4 to
Chatwins Group, Inc.'s Registration Statement on Form S-1 filed on
July 30, 1993 (File No. 33-63274).
10.17 First Supplemental Indenture and Wavier of Covenants of Indenture
between The First National Bank of Boston, as trustee, and
Chatwins Group, Inc. Incorporated by reference to Exhibit 4.32 to
Chatwins Group, Inc.'s Current Report on Form 8-K dated June 30,
1995 and filed with the Commission on July 3, 1995 (File No. 33-
63274).
- E-1 -
10.18 Second Supplemental Indenture between The First National Bank of
Boston, as trustee, and Chatwins Group, Inc. Incorporated by
reference to Exhibit 4.33 to Chatwins Group, Inc.'s Current Report
on Form 8-K dated June 30, 1995 and filed with the Commission July
3, 1995 (File No. 33-63274).
10.19 Third Supplemental Indenture, dated as of May 28, 1999, between
Chatwins Group, Inc. and State Street Bank and Trust company, as
successor Trustee to The First National Bank of Boston.
Incorporated by reference to exhibit 10.19 in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 (File No.
33-64325).
10.20 Fourth Supplemental Indenture, dated as of March 8, 2000, between
Chatwins Group, Inc. and State Street Bank and Trust Company, as
successor Trustee to The First National Bank of Boston.
Incorporated by reference to exhibit 10.20 in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 (File No.
33-64325).
10.21 Fifth Supplemental Indenture, dated as of March 16, 2000, between
Chatwins Group, Inc., the Company and State Street Bank and Trust
Company, as successor Trustee to The First National Bank of
Boston. Incorporated by reference to Exhibit 10.21 in the
Company's Annual Report on Form 10-K for the year ended December
31, 1999 (File No. 33-64325).
10.22 Memorandum regarding Notice of Consent Solicitation dated November
26, 2003 from the Company to the holders of the Company's 13%
Senior Notes (the "Consent Solicitation"). (2)
10.23 Security Agreement dated December 2, 2003 between the Company and
U.S. Bank, N.A., as successor trustee under the Indenture ("U.S.
Bank, as trustee") for the holders of the Company's 13% Senior
Notes. (2)
10.24 Form of Warrant issued by the Company to the holders of its 13%
Senior Notes who provided consents to its Consent Solicitation.
The Company has reserved a total of 1,771,217 shares of its common
stock for issuance upon exercise of these Warrants. Each such
Warrant is identical to all such other Warrants issued to such
holders, except as to the name of the holder and the number of
shares covered thereby. (2)
10.25 Not used.
10.26 Standstill Agreement regarding Default in Payment of Interest
dated as of February 2, 2005 among Reunion and certain holders of
its 13% Senior Notes. (2)
10.27 Loan and Security Agreement dated as of December 3, 2003 between
the Company and Congress Financial Corporation ("Congress
Financial"). Incorporated by reference to Exhibit 10.46 in the
Company's Annual Report on Form 10-K for the year ended December
31, 2003, as amended by Amendment No. 2 thereto dated and filed
with the Commission on October 6, 2004. (File No. 01-15739)
10.28 Amendment No. 1 to Loan and Security Agreement dated May 19, 2004
between the Company and Congress Financial. (2)
- E-2 -
10.29 Amendment No. 2 to Loan and Security Agreement dated October 18,
2004 between the Company and Congress Financial. (2)
10.30 Amendment No. 3 to Loan and Security Agreement dated November 22,
2004 between the Company and Congress Financial. (2)
10.31 Not used.
10.32 Intercreditor and Subordination Agreement dated December 3, 2003
among Congress Financial, Mercury Capital Corporation ("Mercury
Capital"), LC Capital Masterfund, Ltd. ("LC Capital") and U.S.
Bank, N.A., as trustee, and acknowledged and agreed to by the
Company. (2)
10.33 Not used.
10.34 Not used.
10.35 Merger Agreement dated as of March 30, 1999 among the Company, NPS
Acquisition Corp. and Charles E. Bradley, Sr. Incorporated by
reference to Exhibit 10.35 in the Company's Annual Report on Form
10-K for the year ended December 31, 2000 (File No. 33-64325).
10.36 Forbearance Agreement dated as of January 16, 2001 among NAPTech,
Inc.; NAPTech PS Corporation, the Company, Stanwich Financial
Services Corp. and Charles E. Bradley. Incorporated by reference
to exhibit 10.36 in the Company's Annual Report on Form 10-K for
the year ended December 31, 2000 (File No. 33-64325).
10.37 Reaffirmation of Merger Agreement dated as of December 5, 2000
among the Company, NPS Acquisition Corp. and Charles E. Bradley.
Incorporated by reference to exhibit 10.37 in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000 (File No.
33-64325).
10.38 Subordinated Promissory Note issued by the Company to NAPTECH,
Inc. and NAPTECH PS Corporation (which payees are now known as
Shaw NAPTech, Inc.) in the original amount of $4,860,535.
Incorporated by reference to exhibit 10.38 in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000 (File No.
33-64325).
10.39 ?
10.45 Not used.
10.46 Promissory Note dated November 25, 2003 in the original principal
amount of $4,200,000 issued by the Company to Mercury Capital. (2)
10.47 Option to Purchase dated November 25, 2003 issued by the Company
to Mercury Capital. (2)
10.48 Open-End Mortgage, Assignment of Leases and Rents, Fixture Filing
and Security Agreement dated November 25, 2003 granted by the
Company to Mercury Capital with respect to Reunion's real property
located in Pennsylvania. In November and December 2003, the
Company also granted mortgages to the Other Mortgagees (as defined
below) on this property and to Mercury Capital and the Other
Mortgagees on the Company's other real properties. Such other
mortgages are not being filed as exhibits to this report, because
they are similar to this Exhibit in all material respects, except
as to the location and description of the mortgaged properties,
the names of the mortgagees and/or the debt secured thereby. As
used in this paragraph the term "Other Mortgagees" means Congress
Financial, LC Capital and U.S. Bank, as trustee. (2)
- E-3 -
10.49 Amended and Restated Senior Subordinated Secured Promissory Note
dated December 3, 2003 in the original principal amount of $3.5
million issued by the Company to LC Capital. (2)
10.50 Amended and Restated Security Agreement dated December 3, 2003
between the Company and LC Capital. (2)
10.51 Not used.
10.52 Warrant dated August 11, 2003 issued by the Company to LC Capital.
(2)
10.53 Amendment to Warrant dated December 3, 2003 between the Company
and LC Capital. (2)
10.54 Amendment No. 2 to Warrant dated May 19, 2001 between the Company
and LC Capital. (2)
10.55 Registration Rights Agreement dated August 11, 2003 between the
Company and LC Capital. (2)
10.56 Amendment to Registration Rights Agreement dated December 3, 2003
between the Company and LC Capital. (2)
10.57 Letter Agreement dated May 19, 2004 among the Company, LC Capital
and WebFinancial Corporation ("WebFinancial"). (2)
10.58 Letter Agreement dated December 14, 2004 among the Company, LC
Capital and WebFinancial. (2)
10.59 Warrant dated January 14, 2005 issued by the Company to LC
Capital. (2)
10.60 Warrant dated January 14, 2005 issued by the Company to
WebFinancial. (2)
10.61 Chapter 11 Settlement Agreement dated as of December 1, 2003 among
Stanwich Financial Services Corp., the Other Released Parties, the
Further Released Parties and Bankers Trust. (2)
21.1 List of subsidiaries and jurisdictions of organization.(1)
23.1 Consent of Independent Public Accountants ? Mahoney Cohen &
Company, CPA, P.C.(1)
31.2 Consent of Independent Public Accountants ? Ernst & Young LLP(1)
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.(1)
- E-4 -
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.(1)
32.1 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.(1)
32.2 Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.(1)
(1) - Filed herewith.
(2) - To be filed as an Amendment to this Form 10-K.
* - Compensatory plan or arrangement.
- E-5 -
Exhibit 21.1
REUNION INDUSTRIES, INC.
SUBSIDIARIES AS OF DECEMBER 31, 2004
Company Incorporated Parent
------- ------------ ------
1 Reunion Industries, Inc. Delaware
2 Buttes Drilling-C Company Texas 1
3 Reunion Titan, Inc. Texas 2
4 Reunion Potash Company Delaware 1
5 Shanghai Klemp Metals Products Company Peoples Republic
of China 1 (65.0%)
Inactive Companies
------------------
6 Ocean Phoenix Transport, Inc. District of Columbia 1
7 Reunion Sub I, Inc. Delaware 1
8 Reunion Sub II, Inc. Delaware 1
9 Reunion Sub III, Inc. Delaware 1
10 Asie-Dolphin Drilling SDN BHD Malaysia 2 (49%)
11 Buttes Gas & Oil do Brasil, Ltda. Brazil 1 (49%)
12 Dolphin Titan do Brazil Servicos
de Perfuracoes, Ltd. Brazil 2
13 Monaco Corporation British Virgin Is. 2
14 Ocean Phoenix Holdings, N. V. Netherlands Antilles 1
15 Progress Drilling International, Inc. Panama 2
16 Progress Perfuracoes do Brasil, Ltd. Brazil 15
- E-6 -
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-37702) pertaining to the 1998 Stock Option Plan, the
Registration Statement (Form S-8 No. 333-62074) pertaining to the 1998 Stock
Option Plan, the Registration Statement (Form S-8 No. 33-77232) pertaining to
the 1993 Stock Option Plan, the Registration Statement (Form S-3 No. 33-77566)
pertaining to the registration of 248,500 shares of common stock, the
Registration Statement (Form S-3 No. 333-37368) pertaining to the registration
of 8,269,479 shares of common stock and the Registration Statement (Form S-3
No. 333-41842) pertaining to the registration of 3,245,515 shares of common
stock of Reunion Industries, Inc. and Subsidiaries of our report dated March
18, 2005, with respect to the consolidated financial statements and schedule of
Reunion Industries, Inc. and Subsidiaries included in the Annual Report (Form
10-K) for the year ended December 31, 2004.
/s/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
April 14, 2005
- E-7 -
EXHIBIT 23.2
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-37702) pertaining to the 1998 Stock Option Plan, the
Registration Statement (Form S-8 No. 333-62074) pertaining to the 1998 Stock
Option Plan, the Registration Statement (Form S-8 No. 33-77232) pertaining to
the 1993 Stock Option Plan, the Registration Statement (Form S-3 No. 33-77566)
pertaining to the registration of 248,500 shares of common stock, the
Registration Statement (Form S-3 No. 333-37368) pertaining to the registration
of 8,269,479 shares of common stock and the Registration Statement (Form S-3
No. 333-41842) pertaining to the registration of 3,245,515 shares of common
stock of Reunion Industries, Inc. of our report dated March 14, 2003, with
respect to the consolidated financial statements and schedule of Reunion
Industries, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 2004.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
April 12, 2005
- E-8 -
EXHIBIT 31.1
CERTIFICATION
I, Charles E. Bradley, Sr., certify that:
1. I have reviewed this annual report on Form 10-K of Reunion Industries,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: April 15, 2005
/s/ Charles E. Bradley, Sr.
-------------------------------------
Chief Executive Officer
- E-9 -
EXHIBIT 31.2
CERTIFICATION
I, John M. Froehlich, certify that:
1. I have reviewed this annual report on Form 10-K of Reunion Industries,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: April 15, 2005
/s/ John M. Froehlich
-------------------------------------
Chief Financial Officer
- E-10 -
EXHIBIT 32.1
REUNION INDUSTRIES, INC.
SARBANES-OXLEY ACT SECTION 906 CERTIFICATION
In connection with this annual report on Form 10-K of Reunion Industries, Inc.
for the fiscal year ended December 31, 2004, I, Charles E. Bradley, Sr., Chief
Executive Officer of Reunion Industries, Inc., hereby certify pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 Of the Sarbanes-Oxley
Act of 2002, that:
1. this Form 10-K for the fiscal year ended December 31, 2004 fully complies
with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
2. the information contained in this Form 10-K for the fiscal year ended
December 31, 2004 fairly presents, in all material respects, the financial
condition and results of operations of Reunion Industries, Inc. for the
periods presented therein.
Date: April 15, 2005
/s/ Charles E. Bradley, Sr.
---------------------------
Chief Executive Officer
- E-11 -
EXHIBIT 32.2
REUNION INDUSTRIES, INC.
SARBANES-OXLEY ACT SECTION 906 CERTIFICATION
In connection with this annual report on Form 10-K of Reunion Industries, Inc.
for the fiscal year ended December 31, 2004, I, John M. Froehlich, Chief
Financial Officer of Reunion Industries, Inc., hereby certify pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 Of the Sarbanes-Oxley
Act of 2002, that:
1. this Form 10-K for the fiscal year ended December 31, 2004 fully complies
with the requirements of section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
2. the information contained in this Form 10-K for the fiscal year ended
December 31, 2004 fairly presents, in all material respects, the financial
condition and results of operations of Reunion Industries, Inc. for the
periods presented therein.
Date: April 15, 2005
/s/ John M. Froehlich
---------------------------
Chief Financial Officer
- E-12 -
- 36 -
- F-45 -
- S-1 -
- E-12 -