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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 June 30, 2007
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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 August 8, 2007, 17,419,019 shares of common stock, par value $.01 per
share, were outstanding.
Page 1 of 31 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
June 30, 2007 (unaudited) and December 31, 2006 4
Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the three and six
months ended June 30, 2007 and 2006 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
six months ended June 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 24
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 3. Defaults Upon Senior Securities 25
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
CERTIFICATIONS 28
- 3 -
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 2007 AND DECEMBER 31, 2006
(in thousands)
At June 30, At December 31,
2007 2006
--------------- --------------
(unaudited)
ASSETS:
Cash and cash equivalents $ 1,569 $ 1,571
Receivables (net of allowance of
$116 and $98, respectively) 5,318 4,631
Inventories, net 2,143 2,918
Other current assets 561 921
Current assets of discontinued operations 19,997 13,551
-------- --------
Total current assets 29,588 23,592
Property, plant and equipment, net 1,084 1,047
Property, plant and equipment, held for sale 5,303 5,485
Due from related parties 973 963
Goodwill, net 1,491 1,491
Other assets, net 2,320 2,337
Non-current assets of discontinued operations 9,503 9,503
-------- --------
Total assets $ 50,262 $ 44,418
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Debt in default $ 42,684 $ 39,957
Trade payables 1,672 1,932
Accrued interest 13,190 11,113
Due to related parties 463 365
Other current liabilities 3,558 4,064
Notes payable - 882
Notes payable - related parties 500 500
Current liabilities of discontinued operations 7,350 4,079
-------- --------
Total current liabilities 69,417 62,892
Other liabilities 785 784
Non-current liabilities of discontinued
Operations 2,793 3,273
-------- --------
Total liabilities 72,995 66,949
Minority interests 385 498
Commitments and contingent liabilities - -
Stockholders' deficit (23,118) (23,029)
-------- --------
Total liabilities and stockholders' deficit $ 50,262 $ 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 SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(in thousands, except per share information)(unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
-------- -------- -------- --------
Sales $ 6,986 $ 6,452 $ 12,597 $ 12,322
Cost of sales 5,708 5,182 10,244 9,756
-------- -------- -------- --------
Gross profit 1,278 1,270 2,353 2,566
Selling, general & administrative 1,234 1,336 2,462 2,670
Other (income), net (4) (2) (3) 3
------- -------- ------- --------
Operating profit(loss) 48 (64) (106) (107)
Gain on debt extinguishments - (4,020) - (4,945)
Interest expense, net 1,941 1,996 3,713 4,156
------- -------- ------- --------
Income (loss) from continuing
operations before income taxes
and minority interests (1,893) 1,960 (3,819) 682
Provision for income taxes 29 32 49 46
------- -------- ------- --------
Income (loss) from continuing
operations before minority
interests (1,922) 1,928 (3,868) 636
Minority interests 128 133 212 192
------- ------- ------- --------
Income (loss) from continuing
operations (2,050) 1,795 (4,080) 444
Discontinued operations, net of tax:
Income from discontinued pressure
vessel operations, net of tax
of $-0- 2,729 1,529 3,965 2,839
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) $ 679 $ 3,324 $ (115) $ 7,763
======= ======= ======= =======
Earnings (loss) applicable to
common stockholders $ 679 $ 3,324 $ (115) $ 7,763
======= ======= ======= =======
- 5 -
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(in thousands, except per share information)(unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
-------- -------- -------- --------
Basic earnings (loss) per share:
Continuing operations $ (0.12) $ 0.11 $ (0.24) $ 0.03
Discontinued operations 0.16 0.09 0.23 0.43
------- ------- ------- -------
Income (loss) per share - basic $ 0.04 $ 0.20 $ (0.01) $ 0.46
======= ======= ======= =======
Weighted average shares
outstanding - basic 17,419 17,067 17,419 16,863
======= ======= ======= =======
Diluted income (loss) per share:
Continuing operations $ (0.12) $ 0.08 $ (0.24) $ 0.02
Discontinued operations 0.16 0.07 0.23 0.33
------ ------- ------- -------
Income (loss) per share - diluted $ 0.04 $ 0.15 $ (0.01) $ 0.35
======= ======= ======= =======
Weighted average shares
outstanding - diluted 17,419 22,171 17,419 22,088
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
- 6 -
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(in thousands)
(unaudited)
Six Months Ended
June 30,
2007 2006
-------- --------
Cash used in operating activities $ (992) $ (3,066)
-------- --------
Cash flow from investing activities:
Capital expenditures (207) (150)
Proceeds from asset sales - 11,273
-------- --------
Cash provided by investing activities (207) 11,123
-------- --------
Cash flow from financing activities:
Net change in revolving credit facility 1,845 (3,119)
Repayments of debt - (4,612)
Proceeds from exercise of warrants - 7
China dividend paid to minority interest (325) (325)
-------- --------
Cash used in financing activities 1,520 (8,049)
-------- --------
Net increase(decrease) in cash and cash equivalents 321 8
Less: Change in cash of discontinued operations (323) -
Cash and cash equivalents, beginning of period 1,571 1,923
-------- --------
Cash and cash equivalents, end of period $ 1,569 $ 1,931
======== ========
Interest paid $ 1,490 $ 1,467
======== ========
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
JUNE 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 six months ended June 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 June 30,
2007, the Company had a deficiency in working capital of $39.8 million, a loss
from continuing operations for the first six months of 2007 of $4.1 million
and a deficiency in assets of $23.1 million. Additionally, at June 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 period. Due to the minimal movement in the rate of
exchange for such functional currency, there was no significant translation
adjustment in the period.
- 8 -
Recent Accounting Pronouncements
In September 2006 the FASB issued Statement No. 157, "Fair Value
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 currently 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 June 30, 2007, the total
amount due and payable on the 13% Senior Notes, including accumulated
interest, was $35.0 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, various letter agreements extended the Loan Agreement and all associated
financing agreements to June 29, 2007, and then to July 30, 2007, and then to
August 10, 2007 and the current extension runs to August 20, 2007.
- 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, after failing to arrive at mutually acceptable
terms for the sale of this pressure vessel business to a foreign company, the
Company entered into a Letter of Intent ("LOI") for the sale of substantially
all of the assets and liabilities of this business to a domestic private
equity group at a price slightly higher than the prior offer from the foreign
company. The Letter of Intent contemplates that the potential buyer will make
a good faith deposit of $3 million into escrow by August 21, 2007 and that the
parties will enter into a definitive asset purchase agreement by August
29,2007. If the parties do not enter into an agreement by that date, the
escrow deposit will be returned to the potential buyer. If the parties do
enter into such an agreement and the potential buyer fails to close "without
cause" (as specified in the LOI), the escrow deposit would be paid over to the
Company. The net proceeds from the sale of this pressure vessel business on
the terms set forth in the LOI would be sufficient to pay off all of the
Company's debt for borrowed money.
NOTE 3: INVENTORIES
Inventories are comprised of the following (in thousands):
At June 30, At December 31,
2007 2006
----------- --------------
(unaudited)
Raw material $ 555 $ 766
Work-in-process 414 337
Finished goods 1,174 1,815
-------- --------
Inventories $ 2,143 $ 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 $193 and $153 at June 30, 2007 and December 31, 2006,
respectively.
NOTE 4: DEBT
At June 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 June 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 June 30, December 31,
2007 2006
--------------- --------------
(unaudited)
Wachovia revolving credit facility $ 10,189 $ 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 $ 42,684 $ 39,957
======== ========
- 10 -
Long-term debt consists of the following (in thousands):
At June 30, December 31,
2007 2006
--------------- --------------
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 June 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 - - (115) - (115)
Stock based compensation 26 26
---- ------- -------- -------- --------
At June 30, 2007 $174 $28,153 $(48,858) $ (2,587) $(23,118)
==== ======= ======== ======== ========
The computations of basic and diluted earnings (loss) per common share,
EPS (LPS), for the three and six month periods ended June 30, 2007 and 2006
are as follows (in thousands, except per share amounts)(unaudited):
Net
Income EPS
(Loss) Shares (LPS)
-------- -------- -------
Three months ended June 30, 2007:
Income applicable to common stockholders,
weighted average shares outstanding
and basic EPS $ 679 17,419 $ 0.04
======
Dilutive effect of stock options and warrants -
-------- --------
Income applicable to common stockholders,
shares outstanding and diluted EPS $ 679 17,419 $ 0.04
======== ======== =======
Three months ended June 30, 2006:
Income applicable to common stockholders,
weighted average shares outstanding
and basic EPS $ 3,324 17,067 $ 0.20
======
Dilutive effect of stock options and warrants 5,104
-------- --------
Income applicable to common stockholders,
shares outstanding and diluted EPS $ 3,324 22,171 $ 0.15
======== ======== =======
- 11 -
Net
Income EPS
(Loss) Shares (LPS)
-------- -------- -------
Six months ended June 30, 2007:
(Loss) applicable to common stockholders,
weighted average shares outstanding
and basic LPS $ (115) 17,419 $ (0.01)
======
Dilutive effect of stock options and warrants -
-------- -------
(Loss) applicable to common stockholders,
shares outstanding and diluted EPS $ (115) 17,419 $ (0.01)
======== ======= =======
Six months ended June 30, 2006:
Income applicable to common stockholders,
weighted average shares outstanding
and basic EPS $ 7,763 16,863 $ 0.46
======
Dilutive effect of stock options and warrants 5,225
-------- --------
Income applicable to common stockholders,
shares outstanding and diluted EPS $ 7,763 22,088 $ 0.35
======== ======== =======
Because the Company had a loss from continuing operations for the three
and six month periods ended June 30, 2007, inclusion of options and warrants
has an anti-dilutive effect. At June 30, 2007 and 2006, the Company's stock
options outstanding totaled 1,444,000 and 1,370,000, respectively. Such
options included a dilutive component of 946,676 and 901,042 shares for the
three and six month periods ended June 30, 2006, respectively. At June 30,
2007 and 2006, outstanding warrants to purchase the Company's common stock
totaled 4,173,489. Such warrants included a dilutive component of 4,157,466
and 4,323,779 shares for the three and six month periods ended June 30, 2006,
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 June 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 June 30, 2007, 280,600 options
remain available for grant under these plans, 1,444,000 options have been
granted and 49,334 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 six months of 2007
The Company recognized approximately $26,000 and $20,000 for the six months
ended June 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.
- 12 -
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 change has been the receipt
in July, 2007, of 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 is currently investigating this latest claim from the EPA and
attempting to determine its validity.
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, 203 new cases have been opened, 302 cases have
been dismissed and 124 cases have been settled for a net reduction of 223
cases during the first half of 2007. The gross cost of the 124 case
settlements was $152,000 and the gross amount of legal fees and costs incurred
during the first half of 2007 was $449,000. The Company's insurance carriers
cover the significant majority of these costs and the Company's total share of
the $601,000 in settlement and other costs in the first half of 2007 was
$86,000.
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
or resolution of prior specifically identified issues. A tabular
reconciliation of the product warranty reserve for the six-month periods ended
June 30, 2007 and 2006 follows (in 000's):
June 30,
Description 2007 2006
------------------------------------------ -------- --------
Beginning balance $ 122 $ 133
Add: Provision for estimated future claims 70 60
Deduct: Cost of claims (41) (55)
-------- --------
Ending balance $ 151 $ 138
======== ========
NOTE 8: OPERATING SEGMENT DISCLOSURES
The following represents the disaggregation of financial data (in
thousands)(unaudited):
- 13 -
Capital Total
Net Sales EBITDA(1) Spending Assets(2)
--------- --------- --------- ---------
Three months ended and
at June 30, 2007:
-------------------------------- At 6/30
Metals: --------
Cylinders $ 4,399 $ 151 $ 84 $ 6,769
Grating 2,587 424 - 4,309
-------- -------- -------- --------
Subtotal 6,986 575 84 11,078
Corporate and other - (479) - 4,381
Discontinued operations - - 12 34,803
-------- -------- -------- --------
Totals $ 6,986 96 $ 96 $ 50,262
======== ======== ========
Depreciation (48)
Interest expense, net (1,941)
--------
Income from continuing operations
before income taxes and
minority interests $ (1,893)
========
Three months ended and
at June 30, 2006:
-------------------------------- At 6/30
Metals: --------
Cylinders $ 4,304 $ 133 $ 18 $ 7,327
Grating 2,148 416 13 4,008
-------- -------- -------- --------
Subtotal 6,452 549 31 11,335
Corporate and other - (570) - 13,766
Discontinued operations - - 25 23,923
-------- -------- -------- --------
Totals $ 6,452 (21) $ 56 $ 49,024
======== ======== ========
Gain on extinguishment of debt 4,020
Depreciation (43)
Interest expense, net (1,996)
--------
Income from continuing operations
before income taxes and
minority interests $ 1,960
========
Six months ended June 30, 2007:
--------------------------------
Metals:
Cylinders $ 8,304 $ 249 $ 132
Grating 4,293 685 9
-------- -------- --------
Subtotal 12,597 934 141
Corporate and other - (945) -
Discontinued operations - - 66
-------- -------- --------
Totals $ 12,597 (11) $ 207
======== ========
Depreciation (95)
Interest expense, net (3,713)
--------
(Loss) from continuing operations
before income taxes and
minority interests $ (3,819)
========
- 14 -
Capital Total
Net Sales EBITDA(1) Spending Assets(2)
--------- --------- --------- ---------
Six months ended June 30, 2006:
--------------------------------
Metals:
Cylinders $ 8,979 $ 559 $ 44
Grating 3,343 604 32
-------- -------- --------
Subtotal 12,322 1,163 76
Corporate and other - (1,183) 1
Discontinued operations - - 73
-------- -------- --------
Totals $ 12,322 (20) $ 150
======== ========
Gain on extinguishment of debt 4,945
Depreciation (87)
Interest expense, net (4,156)
--------
Income from continuing operations
before income taxes and
minority interests $ 682
========
(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 June 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):
June 30 December 31
2007 2006
--------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 327 $ 4
Receivables, net 6,101 4,610
Inventories, net 12,057 8,398
Other current assets 1,512 539
------- -------
Total current assets $ 19,997 $ 13,551
======== ========
CURRENT LIABILITIES:
Trade payables $ 1,102 $ 1,125
Other current liabilities 6,248 2,954
------- -------
Total current liabilities $ 7,350 $ 4,079
======== ========
OTHER ASSETS:
Property, plant and equipment, held
for sale $ 5,303 $ 5,485
Goodwill 9,503 9,503
-------- --------
Total other assets $ 14,806 $ 14,988
======== ========
OTHER LIABILITIES:
Pension and other post retirement
benefit liabilities $ 2,793 $ 3,272
======== ========
- 15 -
Results of discontinued operations for the quarters ended June 30, 2007
and 2006 and for the six months ended June 30, 2007 relate solely to the
pressure vessel business while the results of discontinued operations for six
months ended June 30, 2006 relate both to the pressure vessel business and
Oneida. A summarization of such results is as follows (in thousands):
3-months ended June 30, 2007 3-months ended June 30, 2006
--------------------------------- ---------------------------------
Net sales $10,844 Net sales $ 8,348
Income before taxes 2,729 Income before taxes 1,529
6-months ended June 30, 2007 6-months ended June 30, 2006
--------------------------------- ---------------------------------
Net sales $19,958 Net sales $ 19,282
Income before taxes 3,965 Income before taxes 3,000
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 six month periods ended June 30, 2007
and 2006 (000's)(unaudited):
Pension Postretirement
------------------ ------------------
3-months ended 3-months ended
------------------ ------------------
June 30, June 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
------------------ ------------------
6-months ended 6-months ended
------------------ ------------------
June 30, June 30,
------------------ ------------------
2007 2006 2007 2006
------ ------ ------ -----
Benefits earned during year $ 64 $ 106 $ 44 $ 56
Interest cost 126 120 60 58
Amortization of:
Prior service cost 8 8 - -
Unrecognized net loss (gain) 16 16 22 36
Unrecognized net obligation - - 24 24
Expected return on plan assets (164) (144) - -
------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ 50 $ 106 $ 150 $ 174
====== ====== ====== ======
In May 2007, the Company made a required payment of $540,000 to the
Metals pension plan.
- 16 -
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 six month periods ended June 30, 2007 and 2006
(000's)(unaudited):
Pension Postretirement
------------------ ------------------
3-months ended 3-months ended
------------------ ------------------
June 30, June 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
====== ====== ====== ======
Pension Postretirement
------------------ ------------------
6-months ended 6-months ended
------------------ ------------------
June 30, June 30,
------------------ ------------------
2007 2006 2007 2006
------ ------ ------ ------
Benefits earned during year $ - $ - $ - $ -
Interest cost 114 110 14 16
Amortization of:
Unrecognized net loss (gain) 42 34 - -
Expected return on plan assets (140) (130) - -
------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ 16 $ 14 $ 14 $ 16
====== ====== ====== ======
The Company expects that it will contribute $101,000 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 June 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 June 30, 2007, no
interest related to uncertain tax positions had been accrued.
- 17 -
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.)
RESULTS OF OPERATIONS
Three Months Ended June 30, 2007 Compared to
Three Months Ended June 30, 2006
Net sales, gross margins and EBITDA percentages for the three months
ended June 30, 2007 and 2006 are as follows ($ in thousands):
Net Sales Gross Margin
-------------------- --------------
2007 2006 2007 2006
--------- --------- ------ ------
Cylinders $ 4,399 4,304 13.9% 17.7%
Grating 2,587 2,148 25.8% 27.7%
--------- --------- ------ ------
Totals $ 6,986 $ 6,452 18.3% 19.7%
========= ========= ====== ======
Net sales for the second quarter of 2007 were up 8.3% from the same
quarter of 2006, reflecting a slight increase in cylinder sales and a 20%
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 1.4 percentage points
in the second quarter of 2007 compared to the second quarter of 2006 as a
result of a lower margin percentages in both the cylinder and grating
segments. This decrease in cylinder margin reflects a combination of factors.
One factor relates to the mix of products sold with more sales of lower
standard margin product in the second quarter of 2007 compared to the
comparable period in 2006. Another factor relates to the manufacturing
inefficiencies resulting from this mix of orders in conjunction with the
relatively low volume of business for the size of the plant. The decline in
gross margin percentage in the grating segment results primarily from price
pressures in the China marketplace, a trend that is expected to continue doing
the current year.
- 18 -
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the second quarter
of 2007 were $1.2 million, down $102,000 from the expenses for the second
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 17.7% for the second quarter of 2007 from 20.1% for the second
quarter of 2006. [The Company continues to look for ways to cut costs in all
areas.]
Gain on Debt Extinguishments
There was a $4.0 million gain on debt extinguishment in the second
quarter of 2006 related to the final settlement of the SFSC $4.290 million
judgment and all accrued interest. There was no such gain in the comparable
period in 2007.
Other Income
Other income for the second quarter of 2007 was $4,000, compared to other
income of $2,000 for the second quarter of 2006. There were no significant
offsetting items of other income and expense in either period.
Minority Interests
Minority interests for the second quarter in 2007 and 2006 were $128,000
and $133,000, 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.
Interest Expense
Interest expense for the second quarter of 2007 was $1.9 million compared
to $2.0 million for the second quarter of 2006. This decrease reflects
reductions of $406,000 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 $351,000 primarily resulting
from an increase in interest expense related to the Senior Notes resulting
from the accrual of interest on 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 $737,000 will expire by the end of 2007. Management has concluded that
it is more likely than not that the Company's loss carryforwards will expire
unutilized and has determined to fully reserve for the total amount of net
deferred tax assets.
- 19 -
Six Months Ended June 30, 2007 Compared to
Six Months Ended June 30, 2006
Net sales, gross margins and EBITDA percentages for the six months ended
2007 and 2006 are as follows ($ in thousands):
Net Sales Gross Margin
-------------------- --------------
2007 2006 2007 2006
--------- --------- ------ ------
Cylinders 8,304 8,979 14.3% 17.9%
Grating 4,293 3,343 27.1% 28.7%
--------- --------- ------ ------
Totals $ 12,597 $ 12,322 18.7% 20.8%
========= ========= ====== ======
Net sales were up $275,000 in the first half of 2007 compared to the same
period in 2006 although cylinder sales were down $675,000, approximately 7.5%,
while grating sales were up $950,000, approximately 28%. 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
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 2.1 percentage points
in the first half of 2007 compared to the comparable period of 2006 primarily
reflecting a lower margin percentage in the cylinders segment. This margin
decline primarily reflects margin declines in both the first and second
quarter of 2007 compared to 2006. The decline in the first quarter was
primarily attributable to manufacturing inefficiencies resulting from the
large decrease in volume in the first quarter of 2007 compared to the first
quarter of 2006 while product mix negatively impacted margins in the 2007
second quarter compared to the comparable period in 2006. The slight decrease
in gross margin percentage in grating sales reflects the effects of price
pressures in the China marketplace.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the first half of
2007 were $2.5 million, down $208,000 from the expenses for the first half 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 19.5% for the first half of 2007 from 21.7% for the first half of 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
half 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 six months of 2007.
- 20 -
Other Income
Other income for the first half of 2007 was $3,000, compared to other
expense of $3,000 for the first half of 2006. There were no significant
offsetting items of other income and expense in either period.
Minority Interests
Minority interests for the first half of 2007 and 2006 were $212,000 and
$192,000, 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 half of 2007 was $3.7 million compared to
$4.2 million for the first half of 2006. This decrease reflects reductions of
$935,000 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 $492,000 primarily resulting from an increase
in interest expense related to the Senior Notes resulting from the accrual of
interest on 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.
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.
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
- 21 -
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 June 30, 2007, the total
amount due and payable on the 13% Senior Notes, including accumulated
interest, was $35.0 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, various letter agreements extended the Loan Agreement and all associated
financing agreements to June 29, 2007, and then to July 30, 2007, and then to
August 10, 2007 and the current extension runs to August 20, 2007. Based on
discussions with Wachovia, it is the Company's belief that an additional
extension will be granted through August 31, 2007.
Sale of Business
In late January 2007, management decided that it would actively market
its pressure vessel business in order to provide liquidity to pay off all, or
the majority, of its debt either through a recapitalization of the Company or
the sale of this pressure vessel business. From January 2007 through June 2007
the Company solicited bids for this business from more than 20 potential
buyers. On August 16, 2007, after failing to arrive at mutually acceptable
terms for the sale of this pressure vessel business to a foreign company, the
Company entered into a Letter of Intent ("LOI") for the sale of substantially
all of the assets and liabilities of this business to a private equity group
located in the United States at a price slightly higher than the prior offer
from the foreign company. The LOI contemplates that the potential buyer will
make a good faith deposit of $3 million into escrow by August 21, 2007 and
that the parties will enter into a definitive asset purchase agreement by
August 29,2007. If the parties do not enter into an agreement by that date,
the escrow deposit will be returned to the potential buyer. If the parties do
enter into such agreement and the potential buyer fails to close "without
cause" (as specified in the LOI), the escrow deposit would be paid over to the
Company.
The sale of the pressure vessel business on the terms set forth in the
LOI would provide sufficient liquidity to pay off all of the Company's secured
debt and accrued interest, which was approximately $56 million at August 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 hopes that it will be able to complete this sale of its
pressure vessel business before October 15, 2007. If a definitive asset
purchase agreement is not entered into and/or the sale is not completed, the
Company is aware of several interested other buyers for its pressure vessel
business. The Company would attempt promptly to enter into another agreement
with one of these potential buyers. Absent that scenario, the Company has no
other current plans to meet its debt obligations and failure to accomplish
these plans could have an adverse impact on the Company's liquidity, financial
position and future operations.
- 22 -
SUMMARY OF 2006 ACTIVITIES
Cash and cash equivalents from continuing operations totaled $1.6 million
at June 30, 2007, approximately even with the comparable amount at December
31, 2006. This resulted from the $1.5 million of net cash provided by
financing activities being offset by $1.0 million of net cash used in
operating activities, $0.2 million of cash used in investing activities and a
$0.3 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 used a net $1.0 million in cash in the first half of
2007 resulting from a growth of $5.7 million in receivables, inventories and
other current assets being offset primarily by an increase in accrued interest
and customer deposits.
Investing Activities
Investing activities used $0.2 million in cash in the first half of 2007
as a result of capital expenditures.
Financing Activities
Financing activities provided a net $1.5 million in cash in the first
half of 2007 resulting from a net increase of $1.8 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
The Majority 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
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. With
an Indenture Default, holders of more than 25% of the principal amount of the
Senior Notes may, by written notice to the Company and to the Trustee, declare
the principal of and accrued but unpaid interest on all the Senior Notes to be
immediately due and payable (the "acceleration"). 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 can 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 June 30, 2007, the total amount due and payable
on the 13% Senior Notes, including accumulated interest, was $35.0 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
- 23 -
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 June 30, 2007, the Company
has a deficiency in working capital of $39.8 million, a loss from continuing
operations for the first six months of 2007 of $4.1 million and a deficiency
in assets of $23.1 million. Additionally, at June 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. 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.
- 24 -
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 year.
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.
- 25 -
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
- 26 -
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: August 20, 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)
- 27 -
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: August 20, 2007
/s/ Kimball J. Bradley
-------------------------------------
Chief Executive Officer
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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: August 20, 2007
/s/ John M. Froehlich
-------------------------------------
Chief Financial Officer
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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 June 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 June 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
June 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: August 20, 2007
/s/ Kimball J. Bradley
---------------------------
Chief Executive Officer
- 30 -
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 June 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 June 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
June 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: August 20, 2007
/s/ John M. Froehlich
---------------------------
Chief Financial Officer
- 31 -