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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number 01-15739
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REUNION INDUSTRIES, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 06-1439715
------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
11 STANWIX STREET, SUITE 1400
PITTSBURGH, PENNSYLVANIA 15222
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(412) 281-2111
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the Registrant is a
Large accelerated filer Accelerated filer Non-accelerated filer X
--- --- ---
Indicate by check mark whether the Registrant is a shell company Yes No X
--- ---
At November 8, 2007, 17,419,019 shares of common stock, par value $.01 per
share, were outstanding.
Page 1 of 32 pages.
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FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
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.
- 2 -
REUNION INDUSTRIES, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 2007 (unaudited) and December 31, 2006 4
Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the three and nine
months ended September 30, 2007 and 2006 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2007 and 2006 (unaudited) 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 3. Defaults Upon Senior Securities 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
CERTIFICATIONS 29
- 3 -
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
(in thousands)
At September 30, At December 31,
2007 2006
--------------- --------------
(unaudited)
ASSETS:
Cash and cash equivalents $ 2,811 $ 1,571
Receivables (net of allowance of
$71 and $98, respectively) 5,367 4,631
Inventories, net 2,293 2,918
Other current assets 1,286 921
Current assets of discontinued operations 17,827 13,551
-------- --------
Total current assets 29,584 23,592
Property, plant and equipment, net 1,096 1,047
Property, plant and equipment, held for sale 5,201 5,485
Due from related parties 1,032 963
Goodwill, net 1,491 1,491
Other assets, net 2,257 2,337
Non-current assets of discontinued operations 9,503 9,503
-------- --------
Total assets $ 50,164 $ 44,418
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Debt in default $ 41,582 $ 39,957
Trade payables 1,809 1,932
Accrued interest 14,597 11,113
Due to related parties 511 365
Other current liabilities 3,288 4,064
Notes payable - 882
Notes payable - related parties 500 500
Current liabilities of discontinued operations 7,538 4,079
-------- --------
Total current liabilities 69,825 62,892
Other liabilities 747 784
Non-current liabilities of discontinued
Operations 2,859 3,273
-------- --------
Total liabilities 73,431 66,949
Minority interests 544 498
Commitments and contingent liabilities - -
Stockholders' deficit (23,811) (23,029)
-------- --------
Total liabilities and stockholders' deficit $ 50,164 $ 44,418
======== ========
See accompanying notes to condensed consolidated financial statements.
- 4 -
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(in thousands, except per share information)(unaudited)
Three Months Ended Nine Months Ended
Sept.30, Sept.30, Sept.30, Sept.30,
2007 2006 2007 2006
-------- -------- -------- --------
Sales $ 7,145 $ 6,739 $ 19,742 $ 19,061
Cost of sales 5,959 5,553 16,203 15,309
-------- -------- -------- --------
Gross profit 1,186 1,186 3,539 3,752
Selling, general & administrative 1,291 1,334 3,753 4,004
Other (income), net 1 - (2) 3
------- -------- ------- --------
Operating loss (106) (148) (212) (255)
Gain on debt extinguishments - - - (4,945)
Interest expense, net 2,266 2,029 5,979 6,185
------- -------- ------- --------
Loss from continuing
operations before income taxes
and minority interests (2,372) (2,177) (6,191) (1,495)
Provision for income taxes 36 41 85 87
------- -------- ------- --------
Loss from continuing
operations before minority
interests (2,408) (2,218) (6,276) (1,582)
Minority interests 159 175 371 367
------- ------- ------- --------
Loss from continuing
operations (2,567) (2,393) (6,647) (1,949)
Discontinued operations, net of tax:
Income from discontinued pressure
vessel operations, net of tax
of $-0- 1,871 1,820 5,836 4,659
Gain on disposal of discontinued
plastics operations, net of tax
of $-0- - - - - - 4,319
Income from discontinued plastics
operations, net of tax of $-0- - - - 161
------- ------- ------- --------
Net and comprehensive income (loss) $ (696) $ (573) $ (811) $ 7,190
======= ======= ======= =======
Earnings (loss) applicable to
common stockholders $ (696) $ (573) $ (811) $ 7,190
======= ======= ======= =======
- 5 -
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(in thousands, except per share information)(unaudited)
Three Months Ended Nine Months Ended
Sept.30, Sept.30, Sept.30, Sept.30,
2007 2006 2007 2006
-------- -------- -------- --------
Basic earnings (loss) per share:
Continuing operations $ (0.15) $ (0.14) $ (0.38) $ (0.11)
Discontinued operations 0.11 0.11 0.33 0.53
------- ------- ------- -------
Income (loss) per share - basic $ (0.04) $ (0.03) $ (0.05) $ 0.42
======= ======= ======= =======
Weighted average shares
outstanding - basic 17,419 17,436 17,419 17,059
======= ======= ======= =======
Diluted income (loss) per share:
Continuing operations $ (0.15) $ (0.14) $ (0.38) $ (0.11)
Discontinued operations 0.11 0.11 0.33 0.53
------ ------- ------- -------
Income (loss) per share - diluted $ (0.04) $ (0.03) $ (0.05) $ 0.42
======= ======= ======= =======
Weighted average shares
outstanding - diluted 17,419 17,436 17,419 17,059
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
- 6 -
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(in thousands)
(unaudited)
Nine Months Ended
September 30,
2007 2006
-------- --------
Cash provided by(used in) operating activities $ 1,331 $ (5,184)
-------- --------
Cash flow from investing activities:
Capital expenditures (290) (493)
Proceeds from asset sales - 11,157
-------- --------
Cash provided by(used in) investing activities (290) 10,664
-------- --------
Cash flow from financing activities:
Net change in revolving credit facility 743 (912)
Repayments of debt - (4,612)
Proceeds from exercise of warrants - 7
China dividend paid to minority interest (325) (325)
-------- --------
Cash provided by(used in) financing activities 418 (5,842)
-------- --------
Net increase(decrease) in cash and cash equivalents 1,459 (362)
Less: Change in cash of discontinued operations (219) -
Cash and cash equivalents, beginning of period 1,571 1,923
-------- --------
Cash and cash equivalents, end of period $ 2,811 $ 1,561
======== ========
Interest paid $ 2,349 $ 1,989
======== ========
Non-cash financing activities:
Debt extinguishment, including accrued interest $ - $ 4,945
======== ========
See accompanying notes to condensed consolidated financial statements.
- 7 -
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007
NOTE 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all normal recurring adjustments
considered necessary for a fair statement of the results of operations have
been included. The results of operations for the nine months ended September
30, 2007 are not necessarily indicative of the results of operations for the
full year. When reading the financial information contained in this Quarterly
Report, reference should be made to the financial statements, schedule and
notes contained in Reunion's Annual Report on Form 10-K for the year ended
December 31, 2006 ("Form 10-K").
Going Concern
These condensed consolidated 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 September
30, 2007, the Company had a deficiency in working capital of $40.2 million, a
loss from continuing operations for the first nine months of 2007 of $6.6
million and a deficiency in assets of $23.8 million. Additionally, at
September 30,2007, the Company was in default on substantially all of its
debt. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. These condensed consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Over the past several years, the Company has taken steps to improve its
liquidity and defer the principal maturities of a significant portion of its
debt. During 2006, the Company sold the remaining portion of its plastics
segment and recognized a gain of $4.3 million on this sale. Additionally,
during 2006, the Company effected a settlement with the holder of a $1.017
million note payable from the Company wherein the Company recognized a gain
from this debt settlement of $925,000. The Company is currently pursuing the
sale of its pressure vessel business in an effort to provide additional
liquidity to pay off its debt obligations. (See NOTE 2: RECENT DEVELOPMENTS -
Sale of Business.) No assurances exist that the Company will be successful in
its effort and failure to accomplish this plan could have an adverse impact on
the Company's liquidity, financial position and future operations.
Foreign Currency Translation
The financial statements of the Company's 65% owned joint venture in
China are measured using the local currency as the functional currency.
Assets and liabilities of this entity are translated into U.S. dollars at the
exchange rate in effect at the end of each reporting period. Income and
expense items are translated into U.S. dollars at the weighted average
exchange rates for the periods. Due to the minimal movement in the rate of
exchange for such functional currency, there was no significant translation
adjustment in the period.
Recent Accounting Pronouncements
In September 2006 the FASB issued Statement No. 157, "Fair Value
- 8 -
Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a
framework for measuring fair value under GAAP, and expands disclosures about
fair value measures. SFAS 157 is effective for fiscal years beginning after
November 15, 2007, with early adoption encouraged. The provisions of SFAS 157
are to be applied on a prospective basis, with the exception of certain
financial instruments for which retrospective application is required. The
adoption of SFAS 157 is not expected to materially affect the Company's
financial position or results of operations.
In February 2007 the FASB issued Statement No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities-Including an Amendment
of FASB Statement No. 115" ("SFAS 159"). SFAS 159 permits an entity to choose
to measure many financial instruments and certain other items at fair value.
Most of the provisions of SFAS 159 are elective, however, the amendment of
SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities",
applies to all entities with available for sale or trading securities. SFAS
159 is elective as of the beginning of an entity's first fiscal year beginning
after November 15, 2007. The Company is evaluating the impact adoption may
have on the financial statements.
NOTE 2: RECENT DEVELOPMENTS
13% Senior Notes
The Company's tender offer for its Senior Notes was not accepted by a
holder of approximately 72% of the outstanding Senior Notes. As a result, the
tender offer was terminated and withdrawn on January 10, 2007. The 13%
restructured Senior Notes and accumulated interest, which totaled $30.8
million at December 31, 2006, became due and payable on January 3, 2007. The
Company did not make such payment and thus continued to be in default under
the Indenture under which the Senior Notes were issued. However, under an
Intercreditor and Subordination Agreement entered into in December 2003 among
Wachovia Bank, the holders of the Senior Notes and certain other lenders, the
Senior Note holders cannot commence any action to enforce their liens on any
collateral for a 180 day period beginning after the date of receipt by
Wachovia, the senior secured lender, of a written notice from the Senior Note
holders informing Wachovia of its demand for payment. On February 2, 2007,
Wachovia received written notice of such demand for payment. The standstill
period thus expired as of August 2, 2007. As of September 30, 2007, the total
amount due and payable on the 13% Senior Notes, including accumulated
interest, was approximately $36.4 million.
Wachovia Loan Agreement
On January 22, 2007, the Company and Wachovia entered into a letter
agreement to extend the term of the existing Loan Agreement and all other
associated financing agreements from January 22, 2007 until April 23, 2007. On
April 23, 2007, the Company and Wachovia entered into a letter agreement to
extend the term of the existing Loan Agreement and all other associated
financing agreements from April 23, 2007 until June 15, 2007. Since June 15,
2007, seven various letter/forbearance agreements extended the Loan Agreement
and all associated financing agreements to October 1, 2007. Wachovia did not
grant the Company any additional extension of the existing Loan Agreement
until October 26, 2007 immediately subsequent to the Company's entering into
an agreement for the sale of its pressure vessel business as described below.
At that time, Wachovia agreed to extend the loan facility until November 5,
2007. On November 7, 2006, Wachovia again extended the loan facility until
November 30, 2007 subject to certain conditions related to the sale of the
Company's pressure vessel business. As described below, the sale of this
business was terminated and, as a result, the Wachovia extension of the loan
facility also was terminated. The Company is currently discussing all of its
options with Wachovia.
- 9 -
Sale of Business
In late January 2007, management decided that it would actively market
its pressure vessel business and, as a result, has presented the assets,
liabilities and operations of the pressure vessel business as a discontinued
operation. (See NOTE 9.) The Company intends to provide liquidity to pay off
all, or the majority, of its debt through the sale of this pressure vessel
business. On August 16, 2007, an agreement to sell this business to a foreign
company was terminated. Thereafter, the Company continued its active
marketing of the business and, on October 25, 2007, the Company entered into
an Asset Purchase Agreement ("APA") with CPI Industries, Inc., an affiliate of
H.I.G. Capital, LLC, to sell substantially all of the assets and operating
liabilities of its pressure vessel business for consideration, subject to
adjustment, of $56 million to be paid at the time of closing and $2 million in
deferred payments. The sale was scheduled to close on December 15, 2007,
subject to the satisfaction of certain conditions precedent. On November 12,
2007, CPI Industries, Inc. informed the Company that it was terminating the
APA. The Company is currently discussing the sale of this business with other
interested buyers.
NOTE 3: INVENTORIES
Inventories are comprised of the following (in thousands):
At September 30, At December 31,
2007 2006
----------- --------------
(unaudited)
Raw material $ 523 $ 766
Work-in-process 438 337
Finished goods 1,332 1,815
-------- --------
Inventories $ 2,293 $ 2,918
======== ========
Inventories are valued at the lower of cost or market, cost being
determined on the first-in, first-out method. The above amounts are net of
inventory reserves of $245 and $153 at September 30, 2007 and December 31,
2006, respectively.
NOTE 4: DEBT
At September 30, 2007 and December 31, 2006, the Company was in default
on its Wachovia bank financing (including the junior participation portion
thereof), its note payable to a private capital fund and its 13% senior notes.
At September 30, 2007, the Company was also in default on a Note payable to
another private capital fund that was due June 1, 2007.
Debt in default consists of the following (in thousands):
At September 30, December 31,
2007 2006
--------------- --------------
(unaudited)
Wachovia revolving credit facility $ 9,087 $ 8,344
Junior participation portion of the
revolving credit facility 6,100 6,100
Note payable due December 5, 2006 3,500 3,500
13% senior notes 22,013 22,013
Note payable due June 1, 2007 882 -
-------- -------
Total debt in default $ 41,582 $ 39,957
======== ========
- 10 -
At September 30, December 31,
2007 2006
--------------- --------------
(unaudited)
Long-term debt consists of the following (in thousands):
Note payable due June 1, 2007 $ - $ 882
Note payable - related party 500 500
-------- --------
Total long-term debt 500 1,382
Classified as current (500) (1,382)
-------- --------
Long-term debt $ - $ -
======== ========
NOTE 5: STOCKHOLDERS' DEFICIT AND EARNINGS PER SHARE
The following represents a reconciliation of the change in stockholders'
deficit for the six month period ended September 30, 2007 (in thousands):
Accum-
Par Capital ulated
Value in Other
of Excess Accum- Compre-
Common of Par ulated hensive
Stock Value Deficit Loss Total
------ ------- -------- -------- --------
At January 1, 2007 $174 $28,127 $(48,743) $ (2,587) $(23,029)
Activity (unaudited):
Net loss - - (811) - (811)
Stock based compensation 29 29
---- ------- -------- -------- --------
At September 30,
2007 (unaudited) $174 $28,156 $(49,554) $ (2,587) $(23,811)
==== ======= ======== ======== ========
The computations of basic and diluted earnings (loss) per common share,
EPS (LPS), for the three and nine month periods ended September 30, 2007 and
2006 are as follows (in thousands, except per share amounts)(unaudited):
Net
Income EPS
(Loss) Shares (LPS)
-------- -------- -------
Three months ended September 30, 2007:
(Loss) applicable to common stockholders,
weighted average shares outstanding
and basic LPS $ (696) 17,419 $ (0.04)
======
Dilutive effect of stock options and warrants -
-------- --------
(Loss) applicable to common stockholders,
shares outstanding and diluted LPS $ (696) 17,419 $ (0.04)
======== ======== =======
Three months ended September 30, 2006:
(Loss) applicable to common stockholders,
weighted average shares outstanding
and basic LPS $ (573) 17,436 $ (0.03)
======
Dilutive effect of stock options and warrants -
-------- --------
(Loss) applicable to common stockholders,
shares outstanding and diluted LPS $ (573) 17,436 $ (0.03)
======== ======== ======
- 11 -
Net
Income EPS
(Loss) Shares (LPS)
-------- -------- -------
Nine months ended September 30, 2007:
(Loss) applicable to common stockholders,
weighted average shares outstanding
and basic LPS $ (811) 17,419 $ (0.05)
======
Dilutive effect of stock options and warrants -
-------- -------
(Loss) applicable to common stockholders,
shares outstanding and diluted LPS $ (811) 17,419 $ (0.05)
======== ======= =======
Nine months ended September 30, 2006:
Income applicable to common stockholders,
weighted average shares outstanding
and basic EPS $ 7,190 17,059 $ 0.42
======
Dilutive effect of stock options and warrants -
-------- --------
Income applicable to common stockholders,
shares outstanding and diluted EPS $ 7,190 17,059 $ 0.42
======== ======= ======
Because the Company had a loss from continuing operations for the three
and nine month periods ended September 30, 2006 and 2007, inclusion of options
and warrants has an anti-dilutive effect. At September 30, 2007 and 2006, the
Company's stock options outstanding totaled 1,444,000 and 1,470,000,
respectively. At September 30, 2007 and 2006, outstanding warrants to
purchase the Company's common stock totaled 4,173,489 and 4,156,568,
respectively.
NOTE 6: STOCK BASED COMPENSATION ARRANGEMENTS
The Company accounts for its stock-based employee compensation
arrangements under SFAS No. 123 (revised 2004), "Share Based Payment" ("SFAS
123R"), which requires companies to recognize the cost of employee services
received in exchange for awards of equity instruments, based on the grant date
fair value of those awards, in the financial statements.
At September 30, 2007, the Company had two stock option plans,
stockholder approved, that permit the grants of share options and shares to
its key employees, directors and consultants. As of September 30, 2007,
280,600 options remain available for grant under these plans, 1,444,000
options have been granted and 24,667 of the granted options are unvested. The
Company believes that such awards better align the interests of its key
employees, directors and consultants with those of its stockholders. Option
awards are generally granted with an exercise price equal to the market value
of the Company's stock on the date of grant, generally vest over a two to
three year period and have exercise terms ranging from five to ten years.
There were no stock options granted during the first nine months of 2007.
The Company recognized approximately $29,000 and $32,000 for the nine months
ended September 30, 2007 and 2006, respectively, of non-cash compensation
expense for the fair value of options granted to employees in prior years for
the adoption of SFAS 123R.
NOTE 7: COMMITMENTS AND CONTINGENT LIABILITIES
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. Since the Company's Annual
Report filing on Form 10-K, the only significant changes are as follows:
- 12 -
EPA Claim
In July, 2007, the Company received a Request for Payment of the United
States Environmental Protection Agency ("EPA") Costs. This request is for
$490,400.67 and relates to costs incurred by the EPA at the Gambonini Mercury
Site ("Site") in Petaluma, California from May 2004 through February 2007.
This Site, which was leased by Buttes Gas & Oil, a predecessor by merger to
the Company, and used for mining purposes and operated as a mercury mine from
1965 to 1970 was the subject of a prior settlement agreement in 2003 between
the Company and the EPA. Under that prior agreement, the Company agreed to
pay $100,000, plus interest, to settle all past environmental response costs
under the Comprehensive Environmental Response, Compensation and Liability
Act. The Company has been, and continues to be, in discussions with the EPA in
an attempt to determine the validity of, and arrive at a settlement for, such
costs. Management believes that it is probable that some cost contingency
exists in this matter and, based on the prior settlement noted above, has
provided an accrual of $20,000 in the third quarter of 2007 for such costs.
Suit by Steel Partners
On August 21, 2007 Steel Partners II, L.P. ("Steel") sued the Company in
the Supreme Court for New York County, New York to collect payment of a $3.5
million promissory note issued by the Company. In the suit, Steel also
requests that the court order the Company, in preparation for foreclosure, to
marshal all of its assets in which Steel has a security interest and that the
court enter a judgment of foreclosure. The court denied Steel's request for a
temporary restraining order and preliminary injunction to prevent the Company
from selling any assets other than in the ordinary course of business. The
Company has filed an Answer asserting several defenses to Steel's claims,
including, among others, unconscionable and commercially unreasonable conduct
by Steel and the restrictions on remedies set forth in the Intercreditor
Agreement among the Company's secured lenders, including Steel. The Answer
also contains counterclaims by the Company alleging fraud, breach of fiduciary
duty and breach of an implied duty of good faith and fair dealing, in that
Steel and certain other current or former lenders to the Company engaged in an
improper conspiracy to use their position as creditors to take over ownership
and control of the Company to the exclusion of the Company's existing
stockholders.
Asbestos (ORC)
Since the end of 2006, there have been no new claims presented to the
Company. All previously presented actions in which the Company has been named
have been tendered to and accepted by Rockwell Automation. The Company has
incurred no costs in these matters and is unaware of the number of such
actions settled or dismissed.
Asbestos (Alliance)
Since the end of 2006, 306 new cases have been opened, 398 cases have
been dismissed and 179 cases have been settled for a net reduction of 271
cases during the first nine months of 2007. The gross cost of the 179 case
settlements was $225,000 and the gross amount of legal fees and costs incurred
during the first nine months of 2007 was $699,000. The Company's insurance
carriers cover the significant majority of these costs and the Company's total
share of the $924,000 in settlement and other costs in the first nine months
of 2007 was $132,000.
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
- 13 -
or resolution of prior specifically identified issues. A tabular
reconciliation of the product warranty reserve for the nine-month periods
ended September 30, 2007 and 2006 follows (in 000's):
September 30,
Description 2007 2006
------------------------------------------ -------- --------
Beginning balance $ 122 $ 133
Add: Provision for estimated future claims 102 90
Deduct: Cost of claims (80) (78)
-------- --------
Ending balance $ 144 $ 145
======== ========
NOTE 8: OPERATING SEGMENT DISCLOSURES
The following represents the disaggregation of financial data (in
thousands)(unaudited):
Capital Total
Net Sales EBITDA(1) Spending Assets
--------- --------- --------- ---------
Three months ended and
at September 30, 2007:
------------------------ At 9/30
Metals: --------
Cylinders $ 4,016 $ (22) $ 50 $ 6,645
Grating 3,129 457 13 4,555
-------- -------- -------- --------
Subtotal 7,145 435 63 11,200
Corporate and other - (481) - 6,433
Discontinued operations - - 20 32,531
-------- -------- -------- --------
Totals $ 7,145 (46) $ 83 $ 50,164
======== ======== ========
Depreciation (60)
Interest expense, net (2,266)
--------
(Loss) from continuing operations
before income taxes and
minority interests $ (2,372)
========
Three months ended September 30, 2006 and
at December 31, 2006:
------------------------ At 12/31
Metals: --------
Cylinders $ 3,949 $ (67) $ 217 $ 6,825
Grating 2,790 506 20 4,565
-------- -------- -------- --------
Subtotal 6,739 439 227 11,390
Corporate and other - (538) - 4,489
Discontinued operations - - 106 28,539
-------- -------- -------- --------
Totals $ 6,739 (99) $ 343 $ 44,418
======== ======== ========
Depreciation (49)
Interest expense, net (2,029)
--------
(Loss) from continuing operations
before income taxes and
minority interests $ (2,177)
========
- 14 -
Capital
Net Sales EBITDA(1) Spending
--------- --------- ---------
Nine months ended September 30, 2007:
-------------------------------------
Metals:
Cylinders $ 12,320 $ 227 $ 182
Grating 7,422 1,142 22
-------- -------- --------
Subtotal 19,742 1,369 204
Corporate and other - (1,426) -
Discontinued operations - - 86
-------- -------- --------
Totals $ 19,742 (57) $ 290
======== ========
Depreciation (155)
Interest expense, net (5,979)
--------
(Loss) from continuing operations
before income taxes and
minority interests $ (6,191)
========
Capital
Net Sales EBITDA(1) Spending
--------- --------- ---------
Nine months ended September 30, 2006:
-------------------------------------
Metals:
Cylinders $ 12,928 $ 492 $ 261
Grating 6,133 1,109 52
-------- -------- --------
Subtotal 19,061 1,601 313
Corporate and other - (1,721) 1
Discontinued operations - - 179
-------- -------- --------
Totals $ 19,061 (120) $ 493
======== ========
Gain on extinguishment of debt 4,945
Depreciation (135)
Interest expense, net (6,185)
--------
(Loss) from continuing operations
before income taxes and
minority interests $ (1,495)
========
(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.
NOTE 9: DISCONTINUED OPERATIONS
At September 30, 2007 and December 31, 2006, the assets and liabilities
of discontinued operations are comprised primarily of the assets and
liabilities of the pressure vessel business plus the remaining assets and
liabilities of the Rostone business. Such assets and liabilities are as
follows (in thousands):
- 15 -
September 30 December 31
2007 2006
------------ -----------
CURRENT ASSETS:
Cash and cash equivalents $ 223 $ 4
Receivables, net 4,522 4,610
Inventories, net 11,843 8,398
Other current assets 1,239 539
------- -------
Total current assets $ 17,827 $ 13,551
======== ========
CURRENT LIABILITIES:
Trade payables $ 1,089 $ 1,125
Other current liabilities 6,449 2,954
------- -------
Total current liabilities $ 7,538 $ 4,079
======== ========
OTHER ASSETS:
Property, plant and equipment, held
for sale $ 5,201 $ 5,485
Goodwill 9,503 9,503
-------- --------
Total other assets $ 14,704 $ 14,988
======== ========
OTHER LIABILITIES:
Pension and other post retirement
benefit liabilities $ 2,859 $ 3,272
======== ========
Results of discontinued operations for the quarters ended September 30,
2007 and 2006 and for the nine months ended September 30, 2007 relate solely
to the pressure vessel business while the results of discontinued operations
for the nine months ended September 30, 2006 relate both to the pressure
vessel business and Oneida. A summarization of such results is as follows (in
thousands):
3-months ended September 30, 2007 3-months ended September 30, 2006
--------------------------------- ---------------------------------
Net sales $ 9,518 Net sales $ 8,971
Income before taxes 1,871 Income before taxes 1,820
9-months ended September 30, 2007 9-months ended September 30, 2006
--------------------------------- ---------------------------------
Net sales $29,476 Net sales $ 28,253
Income before taxes 5,836 Income before taxes 4,820
NOTE 10: COMPONENTS OF BENEFIT COSTS
The following tables present the components of net periodic benefit costs
for Metals pension and Metals and Corporate Executive Payroll other
postretirement plans for the three and nine month periods ended September 30,
2007 and 2006 (000's)(unaudited):
- 16 -
Pension Postretirement
------------------ ------------------
3-months ended 3-months ended
------------------ ------------------
September 30, September 30,
------------------ ------------------
2007 2006 2007 2006
------ ------ ------ -----
Benefits earned during year $ 32 $ 53 $ 22 $ 28
Interest cost 63 60 30 29
Amortization of:
Prior service cost 4 4 - -
Unrecognized net loss (gain) 8 8 11 18
Unrecognized net obligation - - 12 12
Expected return on plan assets (82) (72) - -
------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ 25 $ 53 $ 75 $ 87
====== ====== ====== ======
Pension Postretirement
------------------ ------------------
9-months ended 9-months ended
------------------ ------------------
September 30, September 30,
------------------ ------------------
2007 2006 2007 2006
------ ------ ------ -----
Benefits earned during year $ 96 $ 159 $ 66 $ 84
Interest cost 189 180 90 87
Amortization of:
Prior service cost 12 12 - -
Unrecognized net loss (gain) 24 24 33 54
Unrecognized net obligation - - 36 36
Expected return on plan assets (246) (216) - -
------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ 75 $ 159 $ 225 $ 261
====== ====== ====== ======
In May 2007, the Company made a required payment of $540,000 to the
Metals pension plan.
The following tables present the components of net periodic benefit
costs for the discontinued plastics operation pension and other postretirement
plans for the three and nine month periods ended September 30, 2007 and 2006
(000's)(unaudited):
Pension Postretirement
------------------ ------------------
3-months ended 3-months ended
------------------ ------------------
September 30, September 30,
------------------ ------------------
2007 2006 2007 2006
------ ------ ------ ------
Benefits earned during year $ - $ - $ - $ -
Interest cost 57 55 7 8
Amortization of:
Unrecognized net loss (gain) 21 17 - -
Expected return on plan assets (70) (65) - -
------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ 8 $ 7 $ 7 $ 8
====== ====== ====== ======
- 17 -
Pension Postretirement
------------------ ------------------
9-months ended 9-months ended
------------------ ------------------
September 30, September 30,
------------------ ------------------
2007 2006 2007 2006
------ ------ ------ ------
Benefits earned during year $ - $ - $ - $ -
Interest cost 171 165 21 24
Amortization of:
Unrecognized net loss (gain) 63 51 - -
Expected return on plan assets (210) (195) - -
------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ 24 $ 21 $ 21 $ 24
====== ====== ====== ======
The Company was not required to make any contribution to the
discontinued plastics operation pension plan in 2007.
NOTE 11: INCOME TAXES
The Company currently files an income tax return in the U.S. federal
jurisdiction as well as in Pennsylvania, Illinois and Indiana. Tax returns
for the years 2004 through 2006 remain open for examination in various tax
jurisdictions in which it operates or operated.
The Company adopted the provisions of FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes-An Interpretation of FASB
Statement No. 109, Accounting for Income Taxes" ("FIN 48"), on January 1,
2007. As a result of the implementation of FIN 48, the Company recognized no
material adjustment in the liability for unrecognized income tax benefits. At
the adoption date of January 1, 2007, and at September 30, 2007, there were no
unrecognized tax benefits. Interest and penalties related to uncertain tax
positions will be recognized in income tax expense. As of September 30, 2007,
no interest or penalties related to uncertain tax positions had been accrued.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis is provided to assist readers in
understanding financial performance during the periods presented and
significant trends which may impact future performance. It should be read in
conjunction with the consolidated financial statements and accompanying notes
included elsewhere in this Form 10-Q and in conjunction with our annual report
on Form 10-K for the year ended December 31, 2006.
GENERAL
The Company owns and operates industrial manufacturing operations that
design and manufacture engineered, high-quality products for specific customer
requirements, such as hydraulic and pneumatic cylinders and metal bar grating.
Prior to 2007, the Company's continuing operations' products also included
large-diameter seamless pressure vessels. Such pressure vessel business was
reclassified to discontinued operations effective January 1, 2007. (See NOTE
2: Recent Events ? Sale of Business.)
- 18 -
RESULTS OF OPERATIONS
Three Months Ended September 30, 2007 Compared to
Three Months Ended September 30, 2006
Net sales and gross margin percentages for the three months ended
September 30, 2007 and 2006 are as follows ($ in thousands):
Net Sales Gross Margin
-------------------- --------------
2007 2006 2007 2006
--------- --------- ------ ------
Cylinders $ 4,016 3,949 11.6% 11.2%
Grating 3,129 2,790 23.0% 26.6%
--------- --------- ------ ------
Totals $ 7,145 $ 6,739 16.6% 17.6%
========= ========= ====== ======
Net sales for the third quarter of 2007 were up 6.0% from the same
quarter of 2006, reflecting a slight increase in cylinder sales and a 12%
increase in grating sales. The slight increase in cylinder sales reflects
primarily period to period increases and decreases to existing customers due
to a variety of reasons with no discernible tread. The increase in grating
sales continues to reflect the improving business environment in China.
Gross margin as a percentage of sales decreased by 1.0 percentage point
in the third quarter of 2007 compared to the comparable quarter of 2006 as a
result of a lower margin percentage in the grating segment. This decrease from
the prior year in the grating segment margin results primarily from price
pressures in the China marketplace, a trend that is expected to continue
during the current year. The increase in gross margin percentage in the
cylinder segment mainly reflects a more favorable product mix in 2007 compared
to 2006.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the third quarter
of 2007 were $1.3 million, down $43,000 from the expenses for the third
quarter of 2006. This decrease in expense reflects a decrease in SGA expenses
in the cylinder segment and at corporate offset somewhat by an increase in
marketing expense in the grating business in connection with the increase in
sales in that segment. The reductions in SGA expense in the cylinder business
and at corporate are partially related to reductions in staff and partially
related to other expense reductions. As a percentage of sales, SGA expenses
decreased to 18.0% for the third quarter of 2007 from 19.8% for the third
quarter of 2006. [The Company continues to look for ways to cut costs in all
areas.]
Other Income/Expense
Other expense for the third quarter of 2007 was $1,000, compared to a net
zero income/expense for the third quarter of 2006. There were no significant
offsetting items of other income and expense in either period.
Minority Interests
Minority interests for the third quarter in 2007 and 2006 were $159,000
and $175,000, respectively. These amounts represent the income during the
quarter 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.
- 19 -
Interest Expense
Interest expense for the third quarter of 2007 was $2.3 million compared
to $2.0 million for the third quarter of 2006. This increase reflects an
increase of $0.6 million in interest expense related primarily to (i) the
Senior Notes resulting from the accrual of interest at the default interest
rate of 15% on both the principal balance as well as on the missed interest
payments and (ii) the Wachovia revolver due to a higher revolver balance in
2007 over 2006 and increased financing fees related to such facility, offset
somewhat by interest expense reductions of approximately $0.3 million,
primarily resulting from the completion in December 2006 of the amortization
of the deferred financing expenses originally recorded in connection with the
Wachovia loan agreement in December 2003.
Income Taxes
The tax provision in 2007 and 2006 relates solely to the Company's China
joint venture. The Company has net operating loss carryforwards for federal
tax return reporting purposes totaling $61.5 million at December 31, 2006, of
which $737,000 will expire by the end of 2007. Management has concluded that
it is more likely than not that the Company's loss carryforwards will expire
unutilized and has determined to fully reserve for the total amount of net
deferred tax assets.
Nine Months Ended September 30, 2007 Compared to
Nine Months Ended September 30, 2006
Net sales and gross margin percentages for the nine months ended
September 30, 2007 and 2006 are as follows ($ in thousands):
Net Sales Gross Margin
-------------------- --------------
2007 2006 2007 2006
--------- --------- ------ ------
Cylinders 12,320 12,928 13.4% 15.9%
Grating 7,422 6,133 25.4% 27.7%
--------- --------- ------ ------
Totals $ 19,742 $ 19,061 17.9% 19.7%
========= ========= ====== ======
Net sales were up 3.6% during the first nine months of 2007 compared to
the same period in 2006 reflecting a decrease of 4.7% in cylinder segment
sales being more than offset by a 21.0% increase in grating segment sales.
The decrease in cylinder sales reflects the comparative decline that occurred
in the first quarter of 2007 resulting from both a general weakness in the
hydraulic and double welded cylinder product lines as well as the financial
weakness of several customers that caused a hold to be put on shipments to
them. Second and third quarter sales in 2007 were slightly better than
comparable cylinder sales in 2006. The increase in grating sales reflects an
improving business environment in China somewhat reflecting the Chinese
government's five year planning cycle that began last year.
Gross margin as a percentage of sales decreased by 1.8 percentage points
in the first nine months of 2007 compared to the comparable period of 2006
reflecting lower margin percentages in both segments. The decline in the
cylinder segment margin primarily reflects the effects of manufacturing
inefficiencies resulting from the large decrease in volume in the first half
of 2007 compared to the comparable period of 2006 with a product mix that
negatively impacted margins in 2007 compared to 2006. This decline in gross
margin reversed slightly in the third quarter of 2007. The decrease in gross
margin percentage in grating sales has occurred in all three quarters of 2007
compared to the same periods in 2006 and reflects the effects of price
pressures in the China marketplace. This trend is expected to continue for the
remainder of the year.
- 20 -
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the first nine
months of 2007 were $3.7 million, down $251,000 from the expenses for the
comparable period in 2006. This decrease in expense reflects a decrease in
SGA expenses in the cylinder segment and at corporate offset somewhat by an
increase in marketing expense in the grating business in connection with the
increase in sales in that segment. The reductions in SGA expense in the
cylinder business and at corporate are partially related to reductions in
staff and partially related to other expense reductions. As a percentage of
sales, SGA expenses decreased to 19.0% for the first nine months of 2007 from
21.0% for the comparable period in 2006. [The Company continues to look for
ways to cut costs in all areas.]
Gain on Debt Extinguishments
There were $4.9 million of gains on debt extinguishment during the first
nine months of 2006. Of this amount, $4.0 million related to the settlement
of the SFSC debt and $0.9 million related to the settlement of a $1.017
million note payable. There were no such settlements in the first nine months
of 2007.
Other Income
Other income for the first nine months of 2007 was $2,000, compared to
other expense of $3,000 for the comparable period in 2006. There were no
significant offsetting items of other income and expense in either period.
Minority Interests
Minority interests for the first nine months of 2007 and 2006 were
$371,000 and $367,000, respectively. These amounts represent the income
during the period 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. From a balance sheet
perspective, minority interest was reduced by the minority ownership's share
of the 2007 dividend that was declared in the first quarter of the year.
Interest Expense
Interest expense for the first nine months of 2007 was $6.0 million
compared to $6.2 million for the comparable period in 2006. This decrease
reflects reductions of $1.3 million, primarily resulting from decrease in
amortization of deferred financing expenses originally recorded in connection
with the Wachovia loan agreement whose initial term expired in December 2006
and a reduction in interest expense resulting from the payments and
settlements of debt in the first half of 2006 as a result of the liquidity
provided by the sale of Oneida offset somewhat by increases of $1.2 million
primarily resulting from an increase in interest expense related to the Senior
Notes resulting from the accrual of interest at the default interest rate of
15% on both the principal balance as well as on the missed interest payments
and higher interest expense due to a higher revolver balance in 2007 and
increased financing fees.
Income Taxes
The tax provision in 2007 and 2006 relates solely to the Company's China
joint venture. The Company has net operating loss carryforwards for federal
tax return reporting purposes totaling $61.5 million at December 31, 2006, of
which $737,000 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 fully reserve for the total amount of net
deferred tax assets.
- 21 -
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 is used to repay borrowings under a revolving
credit arrangement that is part of the Loan Agreement with Wachovia, as well
as other uses (e.g. corporate headquarters expenses, debt service, capital
expenditures, etc.). Conversely, cash required for group operating activities
is provided from funds available under the same revolving credit arrangement.
Recent Events
13% Senior Notes
The Company's tender offer for its Senior Notes was not accepted by a
holder of approximately 72% of the outstanding Senior Notes. As a result, the
tender offer was terminated and withdrawn on January 10, 2007. The 13%
restructured Senior Notes and accumulated interest, which totaled $30.8
million at December 31, 2006, became due and payable on January 3, 2007. The
Company did not make such payment and thus continued to be in default under
the Indenture under which the Senior Notes were issued. However, under an
Intercreditor and Subordination Agreement entered into in December 2003 among
Wachovia, the holders of the Senior Notes and certain other lenders, the
Senior Note holders cannot commence any action to enforce their liens on any
collateral for a 180 day period beginning after the date of receipt by
Wachovia, the senior secured lender, of a written notice from the Senior Note
holders informing Wachovia of its demand for payment. On February 2, 2007,
Wachovia received written notice of such demand for payment. The standstill
period thus expired as of August 2, 2007. As of September 30, 2007, the total
amount due and payable on the 13% Senior Notes, including accumulated
interest, was approximately $36.4 million.
Wachovia Loan Agreement
On January 22, 2007, the Company and Wachovia entered into a letter
agreement to extend the term of the existing Loan Agreement and all other
associated financing agreements from January 22, 2007 until April 23, 2007. On
April 23, 2007, the Company and Wachovia entered into a letter agreement to
extend the term of the existing Loan Agreement and all other associated
financing agreements from April 23, 2007 until June 15, 2007. Since June 15,
2007, seven various letter/forbearance agreements extended the Loan Agreement
and all associated financing agreements to October 1, 2007. Wachovia did not
grant the Company any additional extension of the existing Loan Agreement
until October 26, 2007 immediately subsequent to the Company's entering into
an agreement for the sale of its pressure vessel business as described below.
At that time, Wachovia agreed to extend the loan facility until November 5,
2007. On November 7, 2007, Wachovia again extended the loan facility until
November 30, 2007 subject to certain conditions related to the sale of the
Company's pressure vessel business. As described below, the sale of this
business was terminated and, as a result, the Wachovia extension of the loan
facility also was terminated. The Company is currently discussing all of its
options with Wachovia.
Sale of Business
In late January 2007, management decided that it would actively market
its pressure vessel business and, as a result, has presented the assets,
liabilities and operations of the pressure vessel business as a discontinued
operation. (See NOTE 9.) The Company intends to provide liquidity to pay off
all, or the majority, of its debt through the sale of this pressure vessel
business. On August 16, 2007, an agreement to sell this business to a foreign
company was terminated. Thereafter, the Company continued its active
- 22 -
marketing of the business and, on October 25, 2007, the Company entered into
an Asset Purchase Agreement ("APA") with CPI Industries, Inc., an affiliate of
H.I.G. Capital, LLC, to sell substantially all of the assets and operating
liabilities of its pressure vessel business for consideration, subject to
adjustment, of $56 million to be paid at the time of closing and $2 million in
deferred payments. The sale was scheduled to close on December 15, 2007,
subject to the satisfaction of certain conditions precedent. . On November 12,
2007, CPI Industries, Inc. informed the Company that it was terminating the
APA. The Company is currently discussing the sale of this business with other
interested buyers.
The sale of the pressure vessel business on the terms set forth in the
now terminated APA would have provided sufficient liquidity to pay off all of
the Company's secured debt and accrued interest, which was approximately $53.5
million at November 1, 2007. Such a scenario, although producing a virtually
debt free entity, would leave the Company with much fewer assets and far less
EBITDA in its continuing cylinder and grating businesses.
The Company is still hopeful that it will be able to work with its
existing secured lenders and complete a sale of its pressure vessel business
within the next three months. Absent this occurring, the Company's ability to
take other actions to meet its debt obligations would be severely limited and
would have an adverse impact on the Company's liquidity, financial position
and future operations.
SUMMARY OF 2007 ACTIVITIES
Cash and cash equivalents from continuing operations totaled $2.8 million
at September 30, 2007, $1.2 million higher than the comparable amount at
December 31, 2006. This resulted from the $1.3 million of net cash provided
by operating activities and $0.4 million of net cash provided by financing
activities being offset somewhat by $0.3 million of net cash used in investing
activities and a $0.2 million change in cash from discontinued operations.
Cash and cash equivalents at the end of a period represent U.S. lockbox
receipts from customers to be applied to our Wachovia revolving credit
facility in the following one to two business days as well as foreign cash
resident in our Chinese joint venture.
Operating Activities
Operating activities provided a net $1.3 million in cash in the nine
month period ended September 30, 2007 resulting primarily from an increase of
$3.5 million in accrued interest being offset by (i) the use of $1.2 million
in the growth of continuing operations working capital, (ii) the use of $0.6
million in the growth of discontinued operations working capital and (iii) the
net use of $0.4 million, mainly resulting from the net loss for the period.
Investing Activities
Investing activities used $0.3 million in cash in the nine month period
ended September 30, 2007 as a result of capital expenditures.
Financing Activities
Financing activities provided a net $0.4 million in cash in the nine
months ended September 30, 2007 resulting from a net increase of $0.7 million
in borrowings under the Wachovia revolving credit facility offset by a $0.3
million use of cash in the payment of the Chinese joint venture dividend that
went to the minority partner.
FACTORS THAT COULD AFFECT FUTURE RESULTS
All of Reunion's debt for borrowed money is in default
Since 2001, the Company has not been able to make any of the scheduled
interest payments on the Senior Notes and has not been able to make any
- 23 -
payments of principal on such currently matured Senior Notes. Additionally,
the principal amount of the restructured Senior Notes matured on January 3,
2007 and was not paid. As a result, events of default have occurred under the
Indenture ("Indenture Default") under which the Senior Notes were issued.
According to an Intercreditor and Subordination Agreement entered into in
December 2003 among Wachovia, the holders of the Senior Notes and certain
other lenders, the Senior Note holders could not commence any action to
enforce their liens on any collateral for a 180 day period beginning after the
date of receipt by Wachovia, the senior secured lender, of a written notice
from the Senior Note holders informing Wachovia of such Indenture Default and
demanding acceleration or immediate payment. On February 2, 2007, Wachovia
received written notice of such demand for payment. The standstill period thus
expired as of August 2, 2007. As of September 30, 2007, the total amount due
and payable on the 13% Senior Notes, including accumulated interest, was $36.4
million.
Additionally, a $3.5 million subordinated promissory note payable to a
private capital fund matured on December 5, 2006 and is in default and a
secured promissory note payable, in the current amount of $0.9 million, to
another private capital fund, whose maturity was extended to June 2007, is now
currently due and in default. The defaults under the Senior Notes and the
notes to the two private capital funds have triggered cross default provisions
in the Wachovia Bank loan agreement and therefore the Company' bank debt is
also in default.
Although the Company is attempting to sell its pressure vessel business
in an effort to pay off its debt obligations and provide liquidity (See above:
Recent Developments - Sale of Business), no assurances exist that the Company
will be successful in its efforts and failure to accomplish the sale could
have an adverse impact on the Company's liquidity, financial position and
future operations.
Reunion's vendors may restrict credit terms
We have corrected many vendor-related problems with liquidity generated
from the refinancing of debt and from asset sales. However, with all of the
Company's debt now in default, key vendors may begin further 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 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 as 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 September 30, 2007, the
Company has a deficiency in working capital of $40.2 million, a loss from
continuing operations for the first nine months of 2007 of $6.6 million and a
deficiency in assets of $23.8 million. Additionally, at September 30,2007, the
Company was in default on substantially all of its debt. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. These condensed consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Over the past several years, the Company has taken steps to improve its
liquidity and defer the principal maturities of a significant portion of its
- 24 -
debt. Although the Company is attempting to sell its pressure vessel business
in an effort to pay off its debt obligations and provide liquidity (See above:
Recent Developments - Sale of Business), no assurances exist that the Company
will be successful in its efforts and failure to accomplish the sale could
have an adverse impact on the Company's liquidity, financial position and
future operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in the market risk factors which
affect the Company since the end of the preceding fiscal year.
Item 4T. Controls and Procedures
Management is responsible for establishing and maintaining adequate
internal controls over financial reporting. As required by Rule 13a-15(b) of
the Securities Exchange Act of 1934, as amended, Reunion's management,
including its 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
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 its Chief
Executive Officer and Chief Financial Officer, also conducted an evaluation of
Reunion's internal control over financial reporting as defined in Rule 13a-
15(f) to determine whether any changes occurred during the quarter that have
materially affected, or are reasonably likely to materially affect, Reunion's
internal control over financial reporting. Management has concluded that no
material decline in internal controls has occurred.
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.
This management evaluation report does not include an attestation report
of the Company's registered public accounting firm regarding internal control
over financial reporting as this report is not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various legal proceedings and environmental
matters. There have been no significant changes in such proceedings or
matters since the end of the preceding fiscal years, except as follows:
EPA Claim
In July, 2007, the Company received a Request for Payment of the United
States Environmental Protection Agency ("EPA") Costs. This request is for
$490,400.67 and relates to costs incurred by the EPA at the Gambonini Mercury
Site ("Site") in Petaluma, California from May 2004 through February 2007.
This Site, which was leased by Buttes Gas & Oil, a predecessor by merger to
the Company, and used for mining purposes and operated as a mercury mine from
1965 to 1970 was the subject of a prior settlement agreement in 2003 between
the Company and the EPA. Under that prior agreement, the Company agreed to
pay $100,000, plus interest, to settle all past environmental response costs
under the Comprehensive Environmental Response, Compensation and Liability
Act. The Company has been, and continues to be, in discussions with the EPA in
- 25 -
an attempt to determine the validity of, and arrive at a settlement for, such
costs. Management believes that it is probable that some cost contingency
exists in this matter and, based on the prior settlement noted above, has
provided a reserve of $20,000 in the third quarter of 2007 for such costs.
Suit by Steel Partners
On August 21, 2007 Steel Partners II, L.P. ("Steel") sued the Company in
the Supreme Court for New York County, New York to collect payment of a $3.5
million promissory note issued by the Company. In the suit, Steel also
requests that the court order the Company, in preparation for foreclosure, to
marshal all of its assets in which Steel has a security interest and that the
court enter a judgment of foreclosure. The court denied Steel's request for a
temporary restraining order and preliminary injunction to prevent the Company
from selling any assets other than in the ordinary course of business. The
Company has filed an Answer asserting several defenses to Steel's claims,
including, among others, unconscionable and commercially unreasonable conduct
by Steel and the restrictions on remedies set forth in the Intercreditor
Agreement among the Company's secured lenders, including Steel. The Answer
also includes a counter claim by the Company against Steel, which asserts the
same claims as are made by the Company against Steel in the separate suit
described in the next paragraph.
On September 21, 2007 the Company filed suit against Steel and LC
Capital Master Fund, Ltd. (collectively, the "Steel Parties") in the Court of
Common Pleas for Allegheny County, Pennsylvania. In this suit the Company
alleges fraud in the inducement, fraud in the administration of loans to the
Company, breach of an implied duty of good faith and fair dealing, in that
Steel Parties engaged in an improper conspiracy to use their position as
creditors to take over ownership and control of the Company to the exclusion
of the existing stockholders. The defendants have not yet filed an Answer in
this suit.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously
referred to in Item 1A to Part I of the Company's Annual Report on Form 10-K
for the year ended December 31, 2006.
Item 3. Defaults Upon Senior Securities
The information contained in Notes 2 and 4 of Notes to Condensed
Consolidated Financial Statements in Item 1 of Part I of this Report
concerning defaults under the Company's debt for borrowed money is
incorporated by reference into this Item.
- 26 -
Item 6. Exhibits
(c) Exhibits
--------
Exhibit No. Exhibit Description
----------- -------------------
31.1 Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- 27 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
Date: November 14, 2007 REUNION INDUSTRIES, INC.
----------------- (Registrant)
By: /s/ Kimball J. Bradley
-------------------------------
Kimball J. Bradley
Chairman and Chief
Executive Officer
By: /s/ John M. Froehlich
-------------------------------
John M. Froehlich
Executive Vice President, Finance
and Chief Financial Officer
(chief financial and accounting officer)
- 28 -
EXHIBIT 31.1
CERTIFICATION
I, Kimball J. Bradley, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) 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) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial accounting principles:
(c) 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
(d) 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: November 14, 2007
/s/ Kimball J. Bradley
-------------------------------------
Chief Executive Officer
- 29 -
EXHIBIT 31.2
CERTIFICATION
I, John M. Froehlich, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) 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) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial accounting principles:
(c) 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
(d) 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: November 14, 2007
/s/ John M. Froehlich
-------------------------------------
Chief Financial Officer
- 30 -
EXHIBIT 32.1
REUNION INDUSTRIES, INC.
SARBANES-OXLEY ACT SECTION 906 CERTIFICATION
In connection with this quarterly report on Form 10-Q of Reunion Industries,
Inc. for the quarter ended September 30, 2007, I, Kimball J. Bradley, 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-Q for the quarter ended September 30, 2007 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-Q for the quarter ended
September 30, 2007 fairly presents, in all material respects, the financial
condition and results of operations of Reunion Industries, Inc. for the
periods presented therein.
Date: November 14, 2007
/s/ Kimball J. Bradley
---------------------------
Chief Executive Officer
- 31 -
EXHIBIT 32.2
REUNION INDUSTRIES, INC.
SARBANES-OXLEY ACT SECTION 906 CERTIFICATION
In connection with this quarterly report on Form 10-Q of Reunion Industries,
Inc. for the quarter ended September 30, 2007, 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-Q for the quarter ended September 30, 2007 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-Q for the quarter ended
September 30, 2007 fairly presents, in all material respects, the financial
condition and results of operations of Reunion Industries, Inc. for the
periods presented therein.
Date: November 14, 2007
/s/ John M. Froehlich
---------------------------
Chief Financial Officer
- 32 -