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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, 2005
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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
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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
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(State of Incorporation) (I.R.S. Employer Identification No.)
11 STANWIX STREET, SUITE 1400
PITTSBURGH, PENNSYLVANIA 15222
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(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
----- -----
At August 1, 2005, 16,656,519 shares of common stock, par value $.01 per
share, were outstanding.
Page 1 of 36 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, 2005 (unaudited) and December 31, 2004 4
Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the three and six
Months ended June 30, 2005 and 2004 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2005 and
2004 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 30
Item 4. Controls and Procedures 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 30
Item 4. Submission of Matters to a Vote of Security
Holders 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
CERTIFICATIONS 33
- 3 -
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 2005 AND DECEMBER 31, 2004
(in thousands)
At June 30, At December 31,
2005 2004
--------------- --------------
(unaudited)
ASSETS:
Cash and cash equivalents $ 1,109 $ 1,146
Receivables (net of allowance of
$223 and $202, respectively) 14,497 12,768
Advances to employees 11 26
Inventories, net 8,894 9,300
Other current assets 1,528 1,832
Current assets of discontinued operations 323 3,216
-------- --------
Total current assets 26,362 28,288
Property, plant and equipment, net 7,516 9,374
Property, plant and equipment, held for sale 3,453 2,911
Due from related parties 904 919
Goodwill, net 10,994 10,994
Other assets, net 3,681 4,110
-------- --------
Total assets $ 52,910 $ 56,596
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current maturities of debt $ 642 $ 645
Revolving credit facilities 13,775 14,485
Trade payables 8,106 9,300
Accrued interest 7,850 5,663
Due to related parties 21 285
Other current liabilities 4,454 5,680
Notes payable 4,161 4,161
Notes payable - related parties 500 500
Current liabilities of discontinued operations 727 827
-------- --------
Total current liabilities 40,236 41,546
Long-term debt 34,314 35,628
Other liabilities 3,509 3,759
Non-current liabilities of discontinued
Operations 916 916
-------- --------
Total liabilities 78,975 81,849
Minority interests 262 330
Commitments and contingent liabilities - -
Stockholders' deficit (26,327) (25,583)
-------- --------
Total liabilities and stockholders' deficit $ 52,910 $ 56,596
======== ========
See accompanying notes to condensed consolidated financial statements.
- 4 -
REUNION INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(in thousands, except per share information)(unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
-------- -------- -------- --------
Sales $ 19,460 $ 17,538 $ 36,756 $ 33,358
Cost of sales 14,612 14,136 29,134 26,728
-------- -------- -------- --------
Gross profit 4,848 3,402 7,622 6,630
Selling, general & administrative 2,373 2,210 4,631 4,529
Gain on debt extinguishments (470) - (3,540)
Other (income), net (4) (204) (13) (283)
------- -------- ------- --------
Operating profit 2,479 1,866 3,004 5,924
Interest expense, net 2,145 1,975 4,264 3,754
------- -------- ------- --------
Income (loss) from continuing
operations before income taxes
and minority interests 334 (109) (1,260) 2,170
Provision for income taxes 11 - 11 -
------- -------- ------- --------
Income (loss) from continuing
operations before minority
interests 323 (109) (1,271) 2,170
Minority interests 71 113 144 211
------- ------- ------- --------
Income (loss) from continuing
operations 252 (222) (1,415) 1,959
Gain on disposal of discontinued
operations, net of tax of $-0- - - 370 -
Income (loss) from discontinued
operations, net of tax of $-0- - (180) (77) (12)
------- ------- ------- --------
Net and comprehensive income (loss) $ 252 $ (402) $ (1,122) $ 1,947
======= ======= ======= =======
Earnings (loss) applicable to
common stockholders $ 252 $ (402) $ (1,122) $ 1,947
======= ======= ======= =======
Basic earnings (loss) per share:
Continuing operations $ 0.02 $ (0.01) $ (0.09) $ 0.12
Discontinued operations - (0.01) 0.02 0.00
------- ------- ------- -------
Income (loss) per share - basic $ 0.02 $ (0.02) $ (0.07) $ 0.12
======= ======= ======= =======
Weighted average shares
outstanding - basic 16,317 16,279 16,298 16,279
======= ======= ======= =======
Diluted income (loss) per share:
Continuing operations $ 0.01 $ (0.01) $ (0.09) $ 0.10
Discontinued operations - (0.01) 0.02 0.00
------ ------- ------- -------
Income (loss) per share - diluted $ 0.01 $ (0.02) $ (0.07) $ 0.10
======= ======= ======= =======
Weighted average shares
outstanding - diluted 19,673 16,279 16,298 18,829
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
- 5 -
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(in thousands)
(unaudited)
Six Months Ended
June 30,
2005 2004
-------- --------
Cash used in operating activities $ (1,423) $ (1,935)
-------- --------
Cash flow from investing activities:
Capital expenditures (216) (588)
Proceeds from asset sales 3,680 -
-------- --------
Cash (used in) provided by investing activities 3,464 (588)
-------- --------
Cash flow from financing activities:
Net change in revolving credit facility (752) 1,024
Issuance of debt - 3,000
Repayments of debt (1,387) (345)
Payments of deferred financing costs - (310)
-------- --------
Cash provided by financing activities (2,139) 3,369
-------- --------
Net increase in cash and cash equivalents (98) 846
Less: Change in cash of discontinued operations 61 (49)
Cash and cash equivalents, beginning of period 1,146 656
-------- --------
Cash and cash equivalents, end of period $ 1,109 $ 1,453
======== ========
Interest paid $ 1,401 $ 1,052
======== ========
Non-cash financing activity:
Debt extinguishments $ - $ 3,540
======== ========
Conversion of guarantee and interest fees to
common stock $ 378 $ -
======== ========
See accompanying notes to condensed consolidated financial statements.
- 6 -
REUNION INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
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,
2005 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, 2004.
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,
2005, the Company had a deficiency in working capital of $13.9 million, a loss
from continuing operations for the six months then ended of $1.4 million and a
deficiency in assets of $26.3 million. 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. The Company is investigating other recapitalization scenarios in an
effort to provide additional liquidity and extinguishments or deferrals of
debt obligations. Although the Company believes that it can accomplish these
plans, no assurances exist that it will. Failure to accomplish these plans
could have an adverse impact on the Company's liquidity, financial position
and future operations. (See Note 2: RECENT DEVELOPMENTS - Sale of Assets and
NapTech Settlement.)
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 123R, "Share Based Payment." SFAS
123R is a revision to SFAS 123 and supersedes APB 25, "Accounting for Stock
Issued to Employees," and amends SFAS 95, "Statement of Cash Flows." This
statement requires a public entity to expense the cost of employee services
received in exchange for an award of equity instruments. This statement also
provides guidance on valuing and expensing these awards, as well as disclosure
requirements of these equity arrangements. This statement is effective for the
first interim reporting period that begins after January 1, 2006.
SFAS 123R permits public companies to choose between the following two
adoption methods:
1. A "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS 123R
for all share-based payments granted after the effective date and (b) based on
the requirements of Statement 123 for all awards granted to employees prior to
the effective date of SFAS 123R that remain unvested on the effective date, or
- 7 -
2. A "modified retrospective" method which includes the requirements of the
modified prospective method described above, but also permits entities to
restate based on the amounts previously recognized under SFAS 123 for purposes
of pro forma disclosures either (a) all prior periods presented or (b) prior
interim periods of the year of adoption
Reunion currently accounts for share-based payments to employees using
APB 25's intrinsic value method and, as such, recognizes no compensation
expense for employee stock options. The impact of the adoption of SFAS 123R on
Reunion cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. There would have been no material
impact on reported results of operations and earnings per share had the
Company applied the fair value provisions of SFAS 123 to share-based payments.
The adoption of SFAS 123R's fair value method may have an impact,
possibly material, on Reunion's future results of operations but no material
impact on overall financial position. SFAS 123R also requires the benefits of
tax deductions in excess of recognized compensation expense, if any, to be
reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement may reduce net operating
cash flows and increase net financing cash flows in the consolidated statement
of cash flows of periods after adoption. Due to timing of the release of SFAS
123R and the choice between the two adoption methods, the Company is still
analyzing the ultimate impact that this new pronouncement may have on its
results of operations.
On March 29, 2005, the Staff of the Securities and Exchange Commission
(SEC or the Staff) issued Staff Accounting Bulletin No. 107, "Share-Based
Payment" (SAB 107). Although not altering any conclusions reached in SFAS
123R, SAB 107 provides the views of the Staff regarding the interaction
between SFAS 123R and certain SEC rules and regulations and, among other
things, provide the Staff's views regarding the valuation of share-based
payment arrangements for public companies. Reunion intends to follow the
interpretative guidance on share-based payment set forth in SAB 107 during the
Company's adoption of SFAS 123R.
Stock Based Compensation
In June, 2005, ten year options to purchase 500,000 shares of the
Company's common stock and five year options to purchase 300,000 shares of the
Company's common stock, all pursuant to the Company's 2004 Stock Option Plan,
were awarded to various officers, employees and directors. One third of such
options vest immediately and the remaining options vest equally over a two
year period. The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for stock options and awards. Accordingly, no
compensation costs for stock options is included in operating results since
all awards were made at exercise prices at or above their fair value on the
dates of grants. If the Company had applied the fair value recognition
provisions of SFAS No. 123R for the three and six month periods ended June 30,
2005, using the Black-Scholes option pricing model assuming a risk free
discount rate of 6%, no dividend yield, expected volatility of 99% and an
expected option life of 3 years, pro forma earnings and per share amounts
would have been as follows (in thousands, except for per share amounts)
(unaudited):
- 8 -
3-Mos. Ended 6-Mos. Ended
--------------- --------------
2005 2004 2005 2004
----- ----- ----- -----
Net income (loss) as reported $ 252 $ (402) $ (1,122) $ 1,947
Deduct: Total stock-based employee
compensation determined under
fair value method for stock
options, net of tax (30) - (30) -
------ ------- -------- -------
Pro forma income (loss) applicable
to common stockholders $ 222 $ (402) $ (1,152) $ 1,947
====== ======= ======== =======
Basic income (loss) per
share, as reported $ 0.02 $ (0.02) $ (0.07) $ 0.12
====== ======= ======== =======
Basic income (loss) per
share, pro forma $ 0.01 $ (0.02) $ (0.07) $ 0.12
====== ======= ======== =======
Diluted income (loss) per
share, as reported $ 0.01 $ (0.02) $ (0.07) $ 0.10
====== ======= ======== =======
Diluted income (loss) per
share, pro forma $ 0.01 $ (0.02) $ (0.07) $ 0.10
====== ======= ======== =======
NOTE 2: RECENT DEVELOPMENTS
NapTech Settlement
On April 26, 2005 a judgment was entered in Louisiana in favor of Shaw
Naptech, Inc. ("Naptech") against various parties, including the Company. On
July 8, 2005, the Company entered into a Settlement Agreement with Naptech
pursuant to which the Company paid NapTech $1.65 million in settlement of the
Company's indebtedness to NapTech of approximately $5.1 million under a
promissory note and the related judgment. As a result of the NapTech
settlement, Reunion will recognize a gain on debt extinguishment of
approximately $3.4 million in the third quarter of 2005.
In connection with the NapTech settlement, Wachovia Bank, National
Association ("Wachovia") made a $3.1 million supplemental loan to Reunion
under its existing $25 million loan facility, thereby increasing the total
amount of the supplemental loan portion of the facility to $6.1 million.
Reunion used $1.65 million of this additional supplemental loan to make the
Reunion Settlement Payment to NapTech and will use the balance of the loan
proceeds for inventory purchases and to support letters of credit that may be
issued for it under the Wachovia facility. Wachovia required, as a condition
to making the additional supplemental loan, that LC Capital Master Fund, Ltd.
("LCC") purchase an additional $3.1 million junior participation interest in
the Wachovia loan facility, and LCC did so, thereby increasing its junior
participation interest in the facility to $6.1 million. LCC in turn
simultaneously sold a 50% interest in its junior participation interest to
WebFinancial Corporation ("Web").
To induce LCC to purchase the additional junior participation interest
in the Wachovia loan facility and to induce Web to purchase a 50% interest in
such junior participation interest, Reunion issued two warrants, one to LCC
and one to Web, to purchase, in each case, 387,500 shares of the Company's
common stock at a price of $0.01 per share. These warrants are exercisable at
anytime until July 12, 2010. The value of these warrants is estimated to be
$85,000 using the Black-Scholes pricing model.
- 9 -
Reunion's indebtedness under the Wachovia loan facility, including the
supplemental loans, is secured by liens on substantially all of Reunion's
assets.
13% Senior Notes
On February 3, 2005, the Company announced that it was unable to make a
$2,928,000 interest payment by February 2, 2005 to the holders of the 13%
Senior Notes. Holders of more than 80% of the principal amount of such Senior
Notes entered into a Standstill Agreement with the Company, pursuant to which
such holders agreed that they would not exercise and will cause the Trustee
not to exercise any remedies provided for in the Indenture under which the
Senior Notes were issued, or any other agreements related to such notes,
with respect to this payment default or with respect to a potential event of
default if the Company fails to make the next scheduled interest payment due
April 1, 2005. In the Standstill Agreement, such holders agreed to defer the
$2,928,000 of interest not paid, plus any interest that is not paid on the
next regularly scheduled due date of April 1, 2005, to December 2006. On
April 1, 2005 the Company was unable to make this scheduled interest payment.
On August 1, 2005 the Company was unable to make the scheduled July 1,
2005 interest payment of $0.7 million to the holders of the Senior Notes and
thus an event of default has 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 a previous Intercreditor and
Subordination Agreement, 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 the acceleration. At this date, neither the Company nor
Wachovia has received written notice of any acceleration.
Defaults and Waivers Under Revolving and Term Loan Credit Facility
On December 3, 2003, the Company entered into a revolving and term loan
credit facility with Wachovia (formerly, Congress Financial Corporation). The
Wachovia facility requires Reunion to comply with financial covenants and
other covenants, including a minimum amount of earnings before interest,
taxes, depreciation and amortization (EBITDA) and a minimum fixed charge
coverage ratio. In November 2004, Wachovia and the Company entered into an
amendment of the revolving and term loan credit facility wherein Wachovia
eliminated the fixed charge coverage ratio and reduced the monthly minimum
EBITDA covenant going forward. Under the November 2004 amendment, the Company
was required to maintain new minimum monthly amounts of EBITDA of $280,000 in
November 2004, $290,000 in December 2004, $350,000 in January 2005, $280,000
in February 2005 and $300,000 per month thereafter. In January 2005, the
Company failed to meet the minimum monthly amount, when it had an EBITDA loss
for the month of $39,000. Wachovia has waived this EBITDA shortfall.
As described above under "Naptech Settlement", in April 2005, Naptech
secured a judgment against the Company. The judgment obtained by Naptech
constituted a cross default under the Wachovia Loan Agreement. Such default
was waived by Wachovia.
As described above under "13% Senior Notes", the Company failed to make
the required July 1, 2005 interest payment to the Senior Note holders. This
failure constituted a cross default under the Wachovia Loan Agreement. Such
default has been waived by Wachovia and the Company is currently not in
default under the Wachovia Loan Agreement
- 10 -
Sale of Assets
The Company's management, having reevaluated the Company's ability to
service its debt and meet future obligations, is investigating the sale of
certain assets in order to generate liquidity. These asset sales may take one
or more forms including, but not limited to, the sale of one or more divisions
or piecemeal sales of assets including real estate, buildings, machinery and
equipment and/or intangibles. The Company's management cannot provide any
assurances that any asset sales will occur or, if asset sales do occur, that
such sales will generate sufficient liquidity for the Company.
During the first quarter of 2005, the Company did sell all of the assets
and liabilities of its leaf spring manufacturing segment, located in Miami,
OK, to an unrelated entity for $792,000. Of this amount, $250,000 was used to
pay down the private capital fund note payable secured by the real property,
$41,000 was used to pay down the Wachovia term loan secured by the machinery
and equipment and the remaining amount was used to reduce the borrowings under
the revolving credit facility. The Company recorded a loss of $318,000 on such
sale which was provided for in the Company's 2004 year.
Additionally, during the first quarter of 2005, the Company sold certain
of the receivables, inventory and intangibles of its thermoset plastics
operation ("Rostone") located in Lafayette, IN, along with certain of its
machinery and equipment. The sale of such assets was accomplished in two
separate transactions, with the sale of certain of the Company's compounding
operation assets being sold to one unrelated entity and the sale of certain of
the Company's molding operation assets being made to a different unrelated
entity. At the time of such sale, the Company entered into tolling or
manufacturing agreements with such buyers under which the Company agreed to
operate the compounding and molding operations at its Lafayette, IN facility
for a limited time until the buyers could move such operations to different
geographical locations. The buyers agreed to reimburse the Company for all
expenses in connection with these activities. The sale of the selected assets
noted above was for approximately $2.9 million. Of this amount, $712,000 was
used to pay down the Wachovia term loan secured by the machinery and equipment
and the remaining amount was used to reduce the borrowings under the revolving
credit facility. The Company recorded a gain of approximately $370,000 on
such sales. The Company plans to sell the remaining assets of the Rostone
business during 2005.
Insurance Receipt
During the second quarter of 2005, the Company received a business
interruption insurance advance payment of approximately $600,000 related to a
plant accident at the pressure vessel segment plant in the first quarter of
2005 which was classified to cost of sales. [An additional final settlement
is expected.]
- 11 -
NOTE 3: LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
At June 30, December 31,
2005 2004
--------------- --------------
(unaudited)
Wachovia revolving credit facility $ 10,898 $ 11,650
Junior participation to revolving credit
Facility (net of warrant value of $123
and $165, respectively) 2,877 2,835
Wachovia term loan 1,405 2,539
Note payable due December 1, 2006 3,950 4,200
Note payable due December 5, 2006 (net of
warrant value of $56 and $71, respectively) 3,445 3,429
13% senior notes (net of warrant value
of $153 and $207, respectively) 21,860 21,806
Notes payable 8,451 8,451
Notes payable - related parties 500 500
Capital leases and other 6 9
-------- --------
Total long-term debt 53,392 55,419
Classified as current (19,078) (19,791)
-------- --------
Long-term debt $ 34,314 $ 35,628
======== ========
Pursuant to EITF 95-22, "Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements that Include both a Subjective
Acceleration Clause and a Lock-Box Arrangement are Deemed to be Current", the
Company has classified its Wachovia revolving credit obligations, including
the junior participation, within current liabilities as the Wachovia agreement
contains language that implies that Wachovia has a subjective acceleration
clause that it could invoke at any time to accelerate the debt and includes a
required lock-box arrangement.
NOTE 4: INVENTORIES
Inventories are comprised of the following (in thousands):
At June 30, At December 31,
2005 2004
----------- --------------
(unaudited)
Raw material $ 3,088 $ 3,760
Work-in-process 2,676 2,775
Finished goods 3,130 2,765
-------- --------
Inventories $ 8,894 $ 9,300
======== ========
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 $889 and $682 at June 30, 2005 and December 31, 2004,
respectively.
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, 2005 (in thousands):
- 12 -
Accum-
Par Capital ulated
Value in Other
of Excess Accum- Compre-
Common of Par ulated hensive
Stock Value Deficit Loss Total
------ ------- -------- -------- --------
At January 1, 2005 $163 $27,866 $(51,710) $ (1,902) $(25,583)
Activity (unaudited):
Stock issuance 4 374 - - 378
Net loss - - (1,122) - (1,122)
---- ------- -------- -------- --------
At March 31, 2005 $167 $28,240 $(52,832) $ (1,902) $(26,327)
==== ======= ======== ======== ========
At the June 21, 2005 Board of Directors meeting, approval was granted
for the Company to enter into settlement agreements with two officers of the
Company. Under such settlement agreements, the officers agreed to forgive
$309,960 of guarantee fees and interest owed to them and to convert an
additional $68,040 of such fees and interest into 378,000 shares of common
stock of the Company. Such conversion added $378,000 to the Company's equity.
The computations of basic and diluted earnings (loss) per common share
EPS (LPS) for the three and six month periods ended June 30, 2005 and 2004 are
as follows (in thousands, except per share amounts)(unaudited):
Net
Income EPS
(Loss) Shares (LPS)
-------- -------- -------
Three months ended June 30, 2005:
Income applicable to common stockholders,
weighted average shares outstanding
and basic LPS $ 252 16,317 $ 0.02
=======
Dilutive effect of stock options and warrants 3,356
-------- --------
Income applicable to common stockholders,
shares outstanding and diluted LPS $ 252 19,673 $ 0.01
======== ======== =======
Three months ended June 30, 2004:
Loss applicable to common stockholders,
Weighted average shares outstanding
and basic EPS $ (402) 16,279 $ (0.02)
=======
Dilutive effect of stock options and warrants -
-------- --------
Loss applicable to common stockholders,
shares outstanding and diluted LPS $ (402) 16,279 $ (0.02)
======== ======== =======
Six months ended June 30, 2005:
Loss applicable to common stockholders,
weighted average shares outstanding
and basic LPS $ (1,122) 16,298 $ (0.07)
=======
Dilutive effect of stock options and warrants -
-------- --------
Loss applicable to common stockholders,
shares outstanding and diluted LPS $ (1,122) 16,298 $ (0.07)
======== ======== =======
- 13 -
Six months ended June 30, 2004:
Income applicable to common stockholders,
Weighted average shares outstanding
and basic EPS $ 1,947 16,279 $ 0.12
=======
Dilutive effect of stock options and warrants 2,550
-------- --------
Income applicable to common stockholders,
shares outstanding and diluted LPS $ 1,947 18,829 $ 0.10
======== ======== =======
At June 30, 2005 and 2004, the Company's stock options outstanding
totaled 1,414,000 and 614,000, respectively. Such options included a dilutive
component of 12,308 and 11,194 shares for the three and six month periods
ended June 30, 2005, respectively, and a dilutive component of 183,577 and
191,133 shares for the three and six month periods ended June 30, 2004,
respectively. At June 30, 2005 and 2004, outstanding warrants to purchase
the Company's common totaled 4,073,249 and 3,929,286, respectively. Such
warrants included a dilutive component of 3,344,217 and 3,369,781 shares for
the three and six month periods ended June 30, 2005, respectively, and a
dilutive component of 2,378,798 and 2,379,787 shares for the three and six
month periods ended June 30, 2004, respectively. Because the Company had a
loss from operations for the six month period ended June 30, 2005 and for the
three month period ended March 31, 2004, inclusion of options and warrants has
an anti-dilutive effect on LPS.
NOTE 6: 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. Other than the Naptech
Settlement as described in Note 2: Recent Developments, there have been no
major changes in such lawsuits from that reported in the Company's Annual
Report on Form 10-K for the year ended December 31, 2004.
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, 2005 and 2004 follows (in 000's):
June 30,
Description 2005 2004
------------------------------------------ -------- --------
Beginning balance $ 100 $ 211
Add: Provision for estimated future claims 76 72
Deduct: Cost of claims (59) (49)
-------- --------
Ending balance $ 117 $ 234
======== ========
- 14 -
NOTE 7: OPERATING SEGMENT DISCLOSURES
The following represents the disaggregation of financial data (in
thousands)(unaudited):
Capital Total
Net Sales EBITDA(1) Spending Assets(2)
--------- --------- --------- ---------
Three months ended and
at June 30, 2005:
------------------------ At 06/30
Metals: --------
Pressure vessels $ 6,803 $ 1,991 $ 22 $ 15,198
Cylinders 5,397 547 12 7,945
Grating 1,963 270 10 3,699
-------- -------- -------- --------
Subtotal Metals 14,163 2,808 44 26,842
Plastics 5,297 682 35 8,365
Corporate and other - (573) - 13,927
Discontinued operations - - - 3,776
-------- -------- -------- --------
Totals $ 19,460 2,917 $ 79 $ 52,910
======== ======== ========
Depreciation (438)
Interest expense, net (2,145)
--------
Income from continuing operations before
income taxes and minority interests $ 334
========
Three months ended June 30, 2004
and at December 31, 2004:
-------------------------------- At 12/31
Metals: --------
Pressure vessels $ 5,872 $ 1,015 $ 200 $ 13,505
Cylinders 4,402 188 119 8,472
Grating 2,582 325 - 645
-------- -------- -------- --------
Subtotal Metals 12,856 1,528 319 23,772
Plastics 4,682 641 119 8,935
Corporate and other - (333) - 15,440
Discontinued operations - - 17 6,105
-------- -------- -------- --------
Totals $ 17,538 1,836 $ 455 $ 54,252
======== ======== ========
Gain on extinguishment of debt 470
Depreciation (440)
Interest expense, net (1,975)
--------
Loss from continuing operations
before income taxes $ (109)
========
- 15 -
Capital
Net Sales EBITDA(1) Spending
--------- --------- ---------
Six months ended June 30, 2005:
------------------------------
Metals:
Pressure vessels $ 12,055 $ 2,380 $ 127
Cylinders 10,659 961 23
Grating 3,814 482 11
-------- -------- --------
Subtotal Metals 26,528 3,823 161
Plastics 10,228 1,214 55
Corporate and other - (1,212) -
Discontinued operations - - -
-------- -------- --------
Totals $ 36,756 3,825 $ 216
======== ========
Depreciation (821)
Interest expense, net (4,264)
--------
Loss from continuing operations before
income taxes and minority interests $ (1,260)
========
Six months ended June 30, 2004:
-------------------------------
Metals:
Pressure vessels $ 10,372 $ 1,884 $ 208
Cylinders 9,277 487 169
Grating 4,643 608 -
-------- -------- --------
Subtotal Metals 24,292 2,979 377
Plastics 9,066 1,135 156
Corporate and other - (851) 11
Discontinued operations - - 44
-------- -------- --------
Totals $ 33,358 3,263 $ 588
======== ========
Gain on extinguishment of debt 3,540
Depreciation (879)
Interest expense, net (3,754)
--------
Loss from continuing operations
before income taxes $ 2,170
========
(1) EBITDA is presented as it is the primary measurement used by management
in assessing segment performance and not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a
widely accepted financial indicator of a company's ability to incur and
service debt.
(2) Corporate and other assets at June 30, 2005 and at December 31, 2004
includes $8.0 million of goodwill that relates to the Company's pressure
vessels segment. For evaluation purposes under SFAS No. 142,
this goodwill is included in the carrying value of the pressure vessels
segment. At June 30, 2005 and December 31, 2004, goodwill of $1.5
million is recorded at each of pressure vessels and cylinders.
- 16 -
NOTE 8: DISCONTINUED OPERATIONS
At June 30, 2005, the assets and liabilities of discontinued operations
are comprised of the remaining assets and liabilities of the Rostone business
and the Company's land and buildings in Milwaukee, WI that are held for sale.
Such assets and liabilities are as follows (in thousands):
CURRENT ASSETS:
Cash and cash equivalents $ 10
Inventories, net 249
Other current assets 64
--------
Total current assets $ 323
========
CURRENT LIABILITIES:
Trade payables $ 602
Other current liabilities 125
--------
Total current liabilities $ 727
========
OTHER ASSETS:
Property, plant and equipment, held for sale $ 3,453
========
OTHER LIABILITIES:
Other liabilities $ 916
========
Results of discontinued operations for the quarter and six months ended
June 30, 2005 relate primarily to Rostone while the results of discontinued
operations for the quarter and six months ended June 30, 2004 include both
Rostone and the Company's springs segment. A summarization of such results is
as follows (in thousands):
3-months ended June 30, 2005 3-months ended June 30, 2004
--------------------------------- ---------------------------------
Net sales $ 1,071 Net sales $ 3,098
Loss before taxes - Loss before taxes (180)
6-months ended June 30, 2005 6-months ended June 30, 2004
--------------------------------- ---------------------------------
Net sales $ 2,909 Net sales $ 6,125
Loss before taxes (77) Loss before taxes (12)
- 17 -
NOTE 9: 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, 2005
and 2004 (000's)(unaudited):
Pension Postretirement
------------------ ------------------
3-months ended 3-months ended
------------------ ------------------
June 30, June 30,
------------------ ------------------
2005 2004 2005 2004
------ ------ ------ ------
Benefits earned during year $ 53 $ 35 $ 27 $ 6
Interest cost 57 52 28 9
Amortization of:
Prior service cost 4 5 - -
Unrecognized net loss (gain) 16 11 18 2
Unrecognized net obligation - - 12 4
Expected return on plan assets (55) (45) - -
------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ 75 $ 58 $ 85 $ 21
====== ====== ====== ======
Pension Postretirement
------------------ ------------------
6-months ended 6-months ended
------------------ ------------------
June 30, June 30,
------------------ ------------------
2005 2004 2005 2004
------ ------ ------ ------
Benefits earned during year $ 106 $ 70 $ 54 $ 12
Interest cost 114 105 56 18
Amortization of:
Prior service cost 8 10 - -
Unrecognized net loss (gain) 32 22 36 4
Unrecognized net obligation - - 24 8
Expected return on plan assets (110) (90) - -
------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ 150 $ 117 $ 170 $ 42
====== ====== ====== ======
In May 2005, the Company made a required payment of $383,602 to the
Metals pension plan.
The following tables present the components of net periodic benefit costs
for Plastics pension and other postretirement plans for the three and six
month periods ended June 30, 2005 and 2004 (000's)(unaudited):
- 18 -
Pension Postretirement
------------------ ------------------
3-months ended 3-months ended
------------------ ------------------
June 30, June 30,
------------------ ------------------
2005 2004 2005 2004
------ ------ ------ ------
Benefits earned during year $ - $ - $ - $ 15
Interest cost 56 56 12 31
Amortization of:
Unrecognized net loss (gain) 15 17 - 4
Expected return on plan assets (71) (43) - -
------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ - $ 30 $ 12 $ 50
====== ====== ====== ======
Pension Postretirement
------------------ ------------------
6-months ended 6-months ended
------------------ ------------------
June 30, June 30,
------------------ ------------------
2005 2004 2005 2004
------ ------ ------ ------
Benefits earned during year $ - $ - $ - $ 30
Interest cost 112 112 24 62
Amortization of:
Unrecognized net loss (gain) 30 34 - 8
Expected return on plan assets (142) (86) - -
------ ------ ------ ------
Defined benefit pension and
total other postretirement
benefits costs $ - $ 60 $ 24 $ 100
====== ====== ====== ======
The Company expects to contribute $363,000 to the Plastics pension plan
in September 2005.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis is provided to assist readers in
understanding financial performance during the periods presented and
significant trends which may impact future performance. It should be read in
conjunction with the consolidated financial statements and accompanying notes
included elsewhere in this Form 10-Q and in conjunction with our annual report
on Form 10-K for the year ended December 31, 2004.
GENERAL
The Company owns and operates industrial manufacturing operations that
design and manufacture engineered, high-quality products for specific customer
requirements, such as large-diameter seamless pressure vessels, hydraulic and
pneumatic cylinders, grating and precision plastic components.
- 19 -
RESULTS OF OPERATIONS
Three Months Ended June 30, 2005 Compared to
Three Months Ended June 30, 2004
Net sales, gross margins and EBITDA percentages for the three months
ended 2005 and 2004 are as follows. The percentages of EBITDA to net sales
exclude corporate and other EBITDA. Including corporate and other EBITDA, the
percentages of consolidated EBITDA to net sales for the three month periods
ended June 30, 2005 and 2004 are 15.0% and 10.5%, respectively ($'s in 000's):
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2005 2004 2005 2004 2005 2004
--------- --------- ------ ------ ------ ------
Pressure vessels $ 6,803 $ 5,872 35.6% 20.5% 29.3% 17.3%
Cylinders 5,397 4,402 19.0% 16.7% 10.1% 4.3%
Grating 1,963 2,582 22.9% 26.3% 13.8% 12.6%
Plastics 5,297 4,682 18.0% 18.6% 12.9% 13.7%
--------- --------- ------ ------ ------ ------
Totals $ 19,460 $ 17,538 24.9% 19.4% 17.9% 12.4%
========= ========= ====== ====== ====== ======
Net sales for the second quarter of 2005 were up 11.0% from the second
quarter of 2004. Such increase reflects sales increases at all of the
domestic operations which offset reduced sales of grating at our Chinese joint
venture. The increase in domestic sales is primarily the result of improving
orders in 2005 over 2004 at all divisions which produced a 50% increase in the
April 1, 2005 combined backlogs over April 1, 2004. The increased April 1,
2005 backlog in the pressure vessel segment not only reflects improving
orders, but also a residual effect from the January 2005 accident discussed in
the first quarter filing that negatively impacted operations in that first
quarter. The decrease in grating sales reflects the impact of additional
competition from local Chinese businesses, [which situation is expected to
continue throughout the year.]
Gross margin as a percentage of sales in the second quarter of 2005
compared to the same quarter in 2004 increased to 24.9% from 19.4%. This
increase reflects gross margin increases in the pressure vessel and cylinders
segments which offset decreases in the grating and plastics segments. Pressure
vessel gross margin as a percentage of sales increased to 35.6% in 2005 from
20.5% in 2004 due primarily to two factors. One was the receipt in the second
quarter of a business interruption insurance advance payment of approximately
$600,000 related to the plant accident noted in the Company's first quarter
filing. The second factor is the 16% increase in pressure vessel sales in 2005
over 2004 which generated improved efficiencies of operation. The increase in
cylinder gross profit margin reflects the benefits in operations as a result
of a 22% increase in cylinder sales in 2005 over 2004. The decrease in gross
margin in the grating segment reflects the negative impact from reduced sales
as noted above. The decrease in the gross margin in the plastics segment is
primarily due to a more favorable product mix in 2004, higher plant
inefficiencies in 2005 related to new molds and higher material costs that
have yet to be passed on to customers.
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation, which is presented, not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a widely
accepted financial indicator of a company's ability to incur and service debt
and due to the close relationship it bears to Reunion's financial covenants in
its borrowing agreements. EBITDA and EBITDA as a percentage of sales was
higher in the second quarter of 2005 compared to 2004 primarily due to the
same factors affecting gross profit margin discussed above. A reconciliation
of EBITDA to operating income for the three months ended June 30, 2005 and
2004 by segment and corporate and other is as follows (000's)(unaudited):
- 20 -
Operating Deprec-
Profit iation EBITDA
--------- --------- ---------
2005:
-----
Pressure vessels $ 1,854 $ 137 $ 1,991
Cylinders 511 36 547
Grating 218 52 270
Plastics 479 203 682
Corporate and other (583) 10 (573)
-------- -------- --------
Totals $ 2,479 $ 438 $ 2,917
======== ======== ========
2004:
-----
Pressure vessels $ 868 $ 147 $ 1,015
Cylinders 138 50 188
Grating 325 - 325
Plastics 408 233 641
Corporate and other (343) 10 (333)
-------- -------- --------
Totals 1,396 $ 440 $ 1,836
======== ========
Gain on debt extinguishment 470
--------
Operating profit $ 1,866
========
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the second quarter
of 2005 were $2.4 million, an increase of $163,000 from the expenses for the
second quarter of 2004. This increase reflects the net of $262,000 in
additional divisional expense offset partially by a reduction of $99,000 in
corporate expense. Of the divisional increase, $190,000 was in the pressure
vessel segment and related primarily to an increase in sales commissions due
to an increase in foreign sales. The majority of the other increase was in the
cylinder segment and reflects additional professional fees for legal and
employment related issues. The decrease in corporate expenses reflects
reductions in both staff and operating expenses. As a percentage of sales,
SGA expenses decreased to 12.2% for the second quarter of 2005 compared to
12.6% for the second quarter of 2004 as overall expenses increased slower than
the overall increase in sales. [The Company continues to look for ways to cut
costs in all areas.]
Gain on Debt Extinguishments
There were no gains on debt extinguishments in the second quarter of
2005. There were $470,000 of such gains in the second quarter of 2004. Of
this amount, $262,000 was related to the SFSC Settlement and $208,000 was
related to the 13% Senior Note second Consent Solicitation, all as more fully
described in the Company's December 31, 2004 annual filing on Form 10-K.
[The Company is currently investigating other recapitalization scenarios
that include, among other things, the use of additional private capital fund
financing to repurchase at discounts some portion or all of our senior and
unsecured subordinated notes payable. See Note 2: Recent Developments -
Naptech Settlement.]
Other Income, net
Other income, net for the second quarter of 2005 was $4,000, compared to
other income, net of $204,000 for the second quarter of 2004. There were no
significant offsetting items of other income and expense in the 2005 period.
- 21 -
Significant items in the 2004 period included other income of $331,000,
relating to an adjustment of the Louisiana environmental reserve, and other
expense of $171,000, related to the costs to complete the consolidation of the
cylinder operations into one facility in Libertyville, IL. There were no other
individually significant items in the second quarter of 2004.
Minority Interests
Minority interests for the second quarter in 2005 and 2004 was $71,000
and $113,000, 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. From a balance sheet perspective, minority
interest was reduced by the minority ownership of the 2005 declared dividend.
Interest Expense
Interest expense for the second quarter of 2005 was $2.145 million
compared to $1.975 million for the second quarter of 2004. The significant
interest increases were $108,000 for interest accrued on the Senior Note
interest that the Company was not able to make in January of 2005, as
discussed earlier under Note 2 to the financial statements "RECENT
DEVELOPMENTS", $100,000 for a higher level of amortization of deferred
financing costs and estimated warrant value and $62,000 for interest expensed
in connection with the May 2004 supplemental loan to the Wachovia credit
facility as described in Company's December 31, 2004 filing on form 10-K.
Offsetting a portion of these increases was a $108,000 decrease in interest
expense as a result of the SFSC Settlement as referred to above in the caption
"Gain on Debt Extinguishments". The remaining net increase in expense is due
to an increase in interest rates in the 2005 period over the 2004 period.
Income Taxes
There was a tax provision of $11,000 in the second quarter of 2005
compared to no tax provision in the second quarter of 2004. This provision is
at the Company's Chinese subsidiary, whose tax holiday ended in April, 2005.
The Company has net operating loss carryforwards for federal tax return
reporting purposes totaling $64.1 million at December 31, 2004. The years in
which such net operating losses expire are as follows (000's):
Year ending December 31:
------------------------------
2007 $ 6,067
2008 609
2009 3,235
2010 2,520
After 2010 51,666
[The Company may be able to utilize its loss carryforwards against
possible increased future profitability.] However, management has determined
to fully reserve for the total amount of net deferred tax assets as of June
30, 2005 [and to continue to do so during 2005 until management can conclude
that it is more likely than not that some or all of our loss carryforwards can
be utilized.]
Six Months Ended June 30, 2005 Compared to
Six Months Ended June 30, 2004
Net sales, gross margins and EBITDA percentages for the six months ended
2005 and 2004 are as follows. The percentages of EBITDA to net sales excludes
corporate and other EBITDA. Including corporate and other EBITDA, the
percentages of consolidated EBITDA to net sales for the six month periods
ended June 30, 2005 and 2004 are 10.4% and 9.8%, respectively ($'s in 000's):
- 22 -
Net Sales Gross Margin EBITDA
-------------------- -------------- --------------
2005 2004 2005 2004 2005 2004
--------- --------- ------ ------ ------ ------
Pressure vessels $ 12,055 $ 10,372 25.7% 20.5% 19.7% 18.2%
Cylinders 10,659 9,277 17.4% 17.6% 9.0% 5.2%
Grating 3,814 4,643 24.1% 23.8% 12.6% 13.1%
Plastics 10,228 9,066 17.1% 17.7% 11.9% 12.5%
--------- --------- ------ ------ ------ ------
Totals $ 36,756 $ 33,358 20.7% 19.9% 13.7% 12.3%
========= ========= ====== ====== ====== ======
Net sales for the first half of 2005 were up 10.2% from the first half of
2004. Such increase reflects sales increases at all of the domestic
operations which offset reduced sales of grating at our Chinese joint venture.
The increased domestic sales primarily is the result of the 54% increase in
the domestic backlog going into the 2005 year over the backlog that existed
going into the 2004 year and increased orders in the first half of 2005 over
the first half of 2004. Pressure vessels sales would have been even higher in
the first half were it not for a plant accident in January 2005 that crippled
that plant's heat treating operation, preventing this division from completing
and shipping product for a period in excess of five weeks, which negatively
impacted the division's ability to take on additional new business. The
decrease in grating sales reflects the impact of additional competition from
local Chinese businesses, [which situation is expected to continue throughout
the year.]
Gross margin as a percentage of sales in the first half of 2005 compared
to the first half of 2004 increased to 20.7% from 19.9%. This increase
primarily reflects the gross margin increase in the pressure vessel segment,
while the other segments approximated the prior year margins. Pressure vessel
gross margin as a percentage of sales increased to 25.7% in 2005 to 20.5% in
2005 due primarily to two factors. One was the receipt in the second quarter
of a business interruption insurance advance payment of approximately $600,000
related to the plant accident noted in the Company's first quarter filing. The
second factor is the 16% increase in pressure vessel sales in 2005 over 2004
which generated improved efficiencies of operation. Cylinder gross margin
decreased slightly as a percentage of sales from 17.6% in 2004 to 17.4% in
2005 due primarily to a more favorable product mix in 2004 and plant
inefficiencies in 2005 combined with higher material costs that have yet to be
passed on to customers. Plastics gross margin decreased from 17.7 % in 2004 to
17.1% in 2005 due primarily to a more favorable product mix in 2004, higher
plant inefficiencies in 2005 related to new molds and higher material costs
that have yet to be passed on to customers. Grating gross margins increased
to 24.1% in 2005 from 23.8% in 2004 as the division focused more on profitable
job opportunities as opposed to sales revenue dollars.
Management evaluates the Company's segments based on EBITDA, a measure of
cash generation, which is presented, not as an alternative measure of
operating results or cash flow from operations as determined by accounting
principles generally accepted in the United States, but because it is a widely
accepted financial indicator of a company's ability to incur and service debt
and due to the close relationship it bears to Reunion's financial covenants in
its borrowing agreements. EBITDA and EBITDA as a percentage of sales was
higher in the first half of 2005 compared to 2004 primarily due to the same
factors affecting gross profit margin discussed above. A reconciliation of
EBITDA to operating income for the six months ended June 30, 2005 and 2004 by
segment and corporate and other is as follows (000's)(unaudited):
- 23 -
Operating Deprec-
Profit iation EBITDA
--------- --------- ---------
2005:
-----
Pressure vessels $ 2,108 $ 272 $ 2,380
Cylinders 891 70 961
Grating 427 55 482
Plastics 811 403 1,214
Corporate and other (1,233) 21 (1,212)
-------- -------- --------
Totals $ 3,004 $ 821 $ 3,825
======== ======== ========
2004:
-----
Pressure vessels $ 1,590 $ 294 $ 1,884
Cylinders 388 99 487
Grating 608 - 608
Plastics 670 465 1,135
Corporate and other (872) 21 (851)
-------- -------- --------
Totals 2,384 $ 879 $ 3,263
======== ========
Gain on debt extinguishment 3,540
--------
Operating profit $ 5,924
========
Selling, General and Administrative
Selling, general and administrative (SGA) expenses for the first half of
2005 were $4.6 million, up $102,000 from the expenses for the first half of
2004. This increase reflects the net of $211,000 in additional divisional
expense offset partially by a reduction of $109,000 in corporate expense. Of
the divisional increase, $203,000 was in the pressure vessel segment and
related primarily to an increase in sales commissions due to an increase in
foreign sales. The decrease in corporate expenses reflects reductions in both
staff and operating expenses. As a percentage of sales, SGA expenses decreased
to 12.6% for the first half of 2005 compared to 13.6% for the first half of
2004 as, even with higher sales, the majority of the Company's domestic
divisions recorded lower expenses in 2005 than in 2004. [The Company continues
to look for ways to cut costs in all areas.]
Gain on Debt Extinguishments
There were no gains on debt extinguishments in the first half of 2005.
There were $3.5 million of such gains in the first half of 2004. Of this
amount, $3.3 million was related to the SFSC Settlement and $0.2 million was
related to the 13% Senior Note second Consent Solicitation, all as more fully
described in the Company's December 31, 2004 annual filing on Form 10-K.
[The Company is currently investigating other recapitalization scenarios
that include, among other things, the use of additional private capital fund
financing to repurchase at discounts some portion or all of our senior and
unsecured subordinated notes payable. See Note 2: Recent Developments -
Naptech Settlement.]
Other Income
Other income for the first half of 2005 was $13,000, compared to other
income of $283,000 for the first half of 2004. There were no significant
offsetting items of other income and expense in the 2005 period.
Significant items in the 2004 period included other income of $331,000,
- 24 -
relating to an adjustment of the Louisiana environmental reserve, and other
expense of $288,000, related to the costs to complete the consolidation of the
cylinder operations into one facility in Libertyville, IL. There were no other
individually significant items in the second half of 2004.
Minority Interests
Minority interests for the first half of 2005 and 2004 were $144,000 and
$211,000, 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 of the 2005 declared dividend.
Interest Expense
Interest expense for the first half of 2005 was $4.264 million compared
to $3.754 million for the first half of 2004. The significant interest
increases were $238,000 for a higher level of amortization of deferred
financing costs and estimated warrant value, $199,000 for interest accrued on
the Senior Note interest that the Company was not able to make in January of
2005, as discussed earlier under Note 2 to the financial statements "RECENT
DEVELOPMENTS", and $175,000 for interest related to the May 2004 supplemental
loan to the Wachovia credit facility as described in Company's December 31,
2004 filing on form 10-K. Offsetting a portion of these increases was a
$110,000 decrease in interest expense as a result of the SFSC Settlement as
referred to above in the caption "Gain on Debt Extinguishments". The remaining
net increase in expense is due to an increase in interest rates in the 2005
period over the 2004 period.
Income Taxes
There was a tax provision of $11,000 in the first half of 2005 compared
to no tax provision in the first half of 2004. This provision is at the
Company's Chinese subsidiary, whose tax holiday ended in April, 2005. The
Company has net operating loss carryforwards for federal tax return reporting
purposes totaling $64.1 million at December 31, 2004. The years in which such
net operating losses expire are as follows (000's):
Year ending December 31:
------------------------------
2007 $ 6,067
2008 609
2009 3,235
2010 2,520
After 2010 51,666
[The Company may be able to utilize its loss carryforwards against
possible increased future profitability.] However, management has determined
to fully reserve for the total amount of net deferred tax assets as of June
30, 2005 [and to continue to do so during 2005 until management can conclude
that it is more likely than not that some or all of our loss carryforwards can
be utilized.]
- 25 -
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
NapTech Settlement
On April 26, 2005 a judgment was entered in Louisiana in favor of Shaw
Naptech, Inc. ("Naptech") against various parties, including the Company. On
July 8, 2005, the Company entered into a Settlement Agreement with Naptech
pursuant to which the Company paid NapTech $1.65 million in settlement of the
Company's indebtedness to NapTech of approximately $5.1 million under a
promissory note and the related judgment. As a result of the NapTech
settlement, Reunion will recognize a gain on debt extinguishment of
approximately $3.4 million in the third quarter of 2005.
In connection with the NapTech settlement, Wachovia Bank, National
Association ("Wachovia") made a $3.1 million supplemental loan to Reunion
under its existing $25 million loan facility, thereby increasing the total
amount of the supplemental loan portion of the facility to $6.1 million.
Reunion used $1.65 million of this additional supplemental loan to make the
Reunion Settlement Payment to NapTech and will use the balance of the loan
proceeds for inventory purchases and to support letters of credit that may be
issued for it under the Wachovia facility. Wachovia required, as a condition
to making the additional supplemental loan, that LC Capital Master Fund, Ltd.
("LCC") purchase an additional $3.1 million junior participation interest in
the Wachovia loan facility, and LCC did so, thereby increasing its junior
participation interest in the facility to $6.1 million. LCC in turn
simultaneously sold a 50% interest in its junior participation interest to
WebFinancial Corporation ("Web").
To induce LCC to purchase the additional junior participation interest
in the Wachovia loan facility and to induce Web to purchase a 50% interest in
such junior participation interest, Reunion issued two warrants, one to LCC
and one to Web, to purchase, in each case, 387,500 shares of the Company's
common stock at a price of $0.01 per share. These warrants are exercisable at
anytime until July 12, 2010.
Reunion's indebtedness under the Wachovia loan facility, including the
supplemental loans, is secured by liens on substantially all of Reunion's
assets.
13% Senior Notes
On February 3, 2005, the Company announced that it was unable to make a
$2,928,000 interest payment by February 2, 2005 to the holders of the 13%
Senior Notes. Holders of more than 80% of the principal amount of such Senior
Notes agreed to enter into a Standstill Agreement with the Company, pursuant
to which such holders agreed that they would not exercise and will cause the
Trustee not to exercise any remedies provided for in the Indenture under which
the Senior Notes were issued, or any other agreements related to such notes,
with respect to this payment default or with respect to a potential event of
default if the Company fails to make the next scheduled interest payment due
April 1, 2005. In the Standstill Agreement, such holders agreed to defer the
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$2,928,000 of interest not paid, plus any interest that is not paid on the
next regularly scheduled due date of April 1, 2005, to December 2006. On
April 1, 2005 the Company was unable to make this scheduled interest payment.
On August 1, 2005 the Company was unable to make the scheduled July 1,
2005 interest payment of $0.7 million to the holders of the Senior Notes and
thus an event of default has 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 a previous Intercreditor and
Subordination Agreement, 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 the acceleration. At this date, neither the Company nor
Wachovia has received written notice of any acceleration.
Defaults and Waivers Under Revolving and Term Loan Credit Facility
On December 3, 2003, the Company entered into a revolving and term loan
credit facility with Wachovia (formerly, Congress Financial Corporation). The
Wachovia facility requires Reunion to comply with financial covenants and
other covenants, including a minimum amount of earnings before interest,
taxes, depreciation and amortization (EBITDA) and a minimum fixed charge
coverage ratio. In November 2004, Wachovia and the Company entered into an
amendment of the revolving and term loan credit facility wherein Wachovia
eliminated the fixed charge coverage ratio and reduced the monthly minimum
EBITDA covenant going forward. Under the November 2004 amendment, the Company
was required to maintain new minimum monthly amounts of EBITDA of $280,000 in
November 2004, $290,000 in December 2004, $350,000 in January 2005, $280,000
in February 2005 and $300,000 per month thereafter. In January 2005, the
Company failed to meet the minimum monthly amount, when it had an EBITDA loss
for the month of $39,000. Wachovia has waived this EBITDA shortfall.
As described above under "Naptech Settlement", in April 2005, Naptech
secured a judgment against the Company. The judgment obtained by Naptech
constituted a cross default under the Wachovia Loan Agreement. Such default
was waived by Wachovia.
As described above under "13% Senior Notes", the Company failed to make
the required July 1, 2005 interest payment to the Senior Note holders. This
failure constituted a cross default under the Wachovia Loan Agreement. Such
default has been waived by Wachovia and the Company is currently not in
default under the Wachovia Loan Agreement
Sale of Assets
The Company's management, having reevaluated the Company's ability to
service its debt and meet future obligations, is investigating the sale of
certain assets in order to generate liquidity. These asset sales may take one
or more forms including, but not limited to, the sale of one or more divisions
or piecemeal sales of assets including real estate, buildings, machinery and
equipment and/or intangibles. The Company's management cannot provide any
assurances that any asset sales will occur or, if asset sales do occur, that
such sales will generate sufficient liquidity for the Company.
During the first quarter of 2005, the Company did sell all of the assets
and liabilities of its leaf spring manufacturing segment, located in Miami,
OK, to an unrelated entity for $792,000. Of this amount, $250,000 was used to
pay down the private capital fund note payable secured by the real property,
$41,000 was used to pay down the Wachovia term loan secured by the machinery
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and equipment and the remaining amount was used to reduce the borrowings under
the revolving credit facility. The Company recorded a loss of $318,000 on such
sale which was provided for in the Company's 2004 year.
Additionally, during the first quarter of 2005, the Company sold certain
of the receivables, inventory and intangibles of its thermoset plastics
operation ("Rostone") located in Lafayette, IN, along with certain of its
machinery and equipment. The sale of such assets was accomplished in two
separate transactions, with the sale of certain of the Company's compounding
operation assets being sold to one unrelated entity and the sale of certain of
the Company's molding operation assets being made to a different unrelated
entity. At the time of such sale, the Company entered into tolling or
manufacturing agreements with such buyers under which the Company agreed to
operate the compounding and molding operations at its Lafayette, IN facility
for a limited time until the buyers could move such operations to different
geographical locations. The buyers agreed to reimburse the Company for all
expenses in connection with these activities. The sale of the selected assets
noted above was for approximately $2.9 million. Of this amount, $712,000 was
used to pay down the Wachovia term loan secured by the machinery and equipment
and the remaining amount was used to reduce the borrowings under the revolving
credit facility. The Company recorded a gain of approximately $370,000 on
such sales. The Company plans to sell the remaining assets of the Rostone
business during 2005.
SUMMARY OF 2005 ACTIVITIES
Cash and cash equivalents totaled $1.1 million at both June 30, 2005 and
2004 as cash from investing activities of $3.5 million basically offset cash
used in operating and financing activities. Cash and cash equivalents at the
end of a period generally represents lockbox receipts from customers. The
domestic portion of the cash, $0.7 million, will be applied to our Wachovia
revolving credit facility as the funds clear the banking system.
Operating Activities
Operating activities used $1.4 million in cash in the first half of 2005
as an increase of $1.7 million in receivables from continuing operations and
the payment of trade payables were only partially funded by amortization and
an increase in other liabilities.
Investing Activities
Investing activities generated $3.5 million as the sales of the springs
segment and Rostone, as described above, were offset by capital expenditures
of $0.2 million.
Financing Activities
The Company made scheduled repayments of the Wachovia term loan totaling
$318,000. Additionally, in connection with the sale of the springs segment
and the Rostone business, as described above, the Company paid an additional
$1.1 million on its existing non-revolving credit debt. Revolving credit
facility borrowings decreased $0.8 million during the first half of 2005,
primarily the result of the asset sales described above.
FACTORS THAT COULD AFFECT FUTURE RESULTS
Reunion's vendors may restrict credit terms
We have corrected many vendor-related problems with liquidity generated
from the refinancing and from asset sales. However, another period of tight
liquidity could result in key vendors restricting or eliminating the extension
of credit terms to us. If this would happen, our ability to obtain raw
materials would be strained significantly and our ability to manufacture
products would be reduced.
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Reunion's bank financing is subject to financial covenants
We are currently not in default on our bank financing and senior notes.
However, our bank financing is subject to monthly financial and other
covenants, and we have failed to meet such covenants on several occasions, for
which we were able to obtain default waivers. If our operations do not
improve during 2005, we may fail to meet one or more financial or other
covenants. If this would happen, we would be in default on our bank
obligations and, subject to the terms of the loan and security agreement, all
of our bank loans would be due and payable. Although it may be possible to
negotiate additional waivers of defaults, no assurances can be given that we
would be able to do so.
Reunion operates in highly competitive mature, niche markets
Our products are sold in highly competitive mature, niche markets and we
compete with companies of varying size, including divisions and subsidiaries
of larger companies that have financial resources that exceed ours. This
combination of competitive and financial pressures could cause us to lose
market share or erode prices, which could negatively impact our financial
position and results of operations.
Reunion's past performance could impact future prospects
Because of losses suffered by the Company over the past several years,
potential or current customers may decide not to do business with us. If this
were to happen, our sales may not increase or may decline. If sales do not
increase, or we experience a decline in sales, our ability to cover costs
would be further reduced, which could negatively impact our financial position
and results of operations.
Reunion is a going concern
The financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. At June 30, 2005, the Company
has a deficiency in working capital of $13.9 million, a loss from continuing
operations for the six months then ended of $1.4 million and a deficiency in
assets of $26.3 million. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the outcome of this uncertainty.
We successfully refinanced our bank debt in December 2003 and have
extinguished a significant portion of our obligations under various debt
instruments over the past year. These steps have improved liquidity and
deferred the principal maturities on a significant portion of our debt.
However, on February 3, 2005, we announced that we were unable to make a
$2,928,000 interest payment by February 2, 2005 to the holders of the Senior
Notes. Holders of more than 80% of the principal amount of the Senior Notes
agreed to enter into a Standstill Agreement with the Company. Pursuant to
such Standstill Agreement, holders agreed that they would not exercise and
will cause the Trustee not to exercise any remedies provided for in the
Indenture under which the Senior Notes were issued, or any other agreements
related to the Senior Notes, with respect to this payment default or with
respect to a potential Event of Default if the Company fails to make the next
scheduled interest payment due April 1, 2005. In the Standstill Agreement,
such holders agreed to defer payment of the interest not paid by February 2,
2005, and any interest that is due April 1, 2005 and not paid, to December
2006. However, on July 1, 2005, the Company was again unable to make a
required interest payment to the holders of the Senior Notes as more fully
described in Note 2: Recent Developments - 13% Senior Notes.
- 29 -
The Company is investigating other recapitalization scenarios in an
effort to provide additional liquidity and extinguishments or deferrals of
debt obligations. Although we believe we can accomplish these plans, no
assurances exist that we will. Failure to accomplish these plans could have
an adverse impact on the Company's liquidity, financial position and future
operations.
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 4. Controls and Procedures
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
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. Based on that evaluation,
corrective action has been initiated in the Plastics operations to address the
deterioration of controls noted in the Company's latest annual report filing
on Form 10-K. No other deterioration or changes were noted.
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company in involved in various legal proceedings and environmental
matters. See "Item 1. Financial Statements, Note 6: Commitments and
Contingent Liabilities."
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On June 21, 2005, the Board of Directors approved settlement agreements
between the Company and two officers of the Company. In such settlement
agreements, the officers agreed to forgive $309,960 of guarantee fees and
interest owed to them and to convert an additional $68,040 of such fees and
interest into 378,000 shares of common stock of the Company. No cash was
involved in this conversion.
The issuance of such shares is exempt from registration under Section
4(2) of the Securities Act of 1933 and Rule 506 of Regulation D promulgated by
the Securities and Exchange Commission under such Act, based on the following:
(1) this transaction is a private placement, (2) each officer has had access
to the same kind of information about the Company that would be included in a
registration statement covering the shares issued, (3) each officer has
represented to the Company that he is an "accredited investor" with the
meaning of Rule 501(a) of Regulation D and (4) the shares issued may not be
sold or transferred in the absence of an effective registration statement
under the Act covering such securities or an applicable exemption from such
registration.
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Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting held on June 21, 2005, the stockholders
elected seven directors for a term ending at the next Annual Meeting. The
votes, in thousands of shares, on the election of directors were as follows:
Nominee Voted For Withheld
-------------------- --------- --------
Thomas N. Amonett 14,134 116
Charles E. Bradley, Sr. 14,115 134
Kimball J. Bradley 14,133 116
Thomas L. Cassidy 14,125 124
David E. Jackson 14,136 113
Joseph C. Lawyer 14,135 114
John G. Poole 14,135 114
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
-------------------
Company filed a Current Report on Form 8-K dated and filed on
July 13, 2005 to announce that the Company had entered into a
Settlement Agreement with Shaw Naptech, Inc regarding the
Company's indebtedness to Shaw Naptech, Inc. in the approximate
amount of $5.1 million under a promissory note and related
judgment.
Company filed a Current Report on Form 8-K dated and filed on
August 3, 2005 to announce that the Company had failed to make a
required interest payment of $715,423 to the holders of its 13%
Senior Notes.
(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
- 31 -
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 12, 2005 REUNION INDUSTRIES, INC.
----------------- (Registrant)
By: /s/ Charles E. Bradley, Sr.
-------------------------------
Charles E. Bradley, Sr.
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)
- 32 -
EXHIBIT 31.1
CERTIFICATION
I, Charles E. Bradley, Sr., 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)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 12, 2005
/s/ Charles E. Bradley, Sr.
-------------------------------------
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)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 12, 2005
/s/ John M. Froehlich
-------------------------------------
Chief Financial Officer
- 34 -
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, 2005, I, Charles E. Bradley, Sr., Chief
Executive Officer of Reunion Industries, Inc., hereby certify pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 Of the Sarbanes-Oxley
Act of 2002, that:
1. this Form 10-Q for the quarter ended June 30, 2005 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, 2005 fairly presents, in all material respects, the financial
condition and results of operations of Reunion Industries, Inc. for the
periods presented therein.
Date: August 12, 2005
/s/ Charles E. Bradley, Sr.
---------------------------
Chief Executive Officer
- 35 -
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, 2005, 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, 2005 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, 2005 fairly presents, in all material respects, the financial
condition and results of operations of Reunion Industries, Inc. for the
periods presented therein.
Date: August 12, 2005
/s/ John M. Froehlich
---------------------------
Chief Financial Officer
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