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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
|X|ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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 333-100581-04
REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC
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(Exact name of registrant as specified in its charter)
Delaware 35-2194249
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3770 Embassy Parkway, Akron, Ohio 44333-8367
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(Address of Principal Executive Offices)
(330) 670-3000
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(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-X is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
There is currently no public market for the registrant's common equity.
APPLICABLE ONLY TO REGISTRANT'S INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes |X| No | |
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
ITEM PAGE
- ---- ----
1. Business 3
2. Properties 19
3. Legal Proceedings 19
4. Submission of Matters to a Vote of Security Holders 20
5. Market for the Registrant's Common Equity and Related Stockholder Matters 20
6. Selected Financial Data 21
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 21
7A. Quantitative and Qualitative Disclosures about Market Risk 34
8. Financial Statements and Supplementary Data 35
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35
10. Directors and Executive Officers of the Registrant 35
11. Executive Compensation 41
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 43
13. Certain Relationships and Related Party Transactions 45
14. Controls and Procedures 46
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 46
Signatures 50
Certifications 51
Independent Auditors' Report 53
Republic Engineered Products Holdings LLC and Subsidiaries
Consolidated Statement of Operations for the Period from August 16, 2002
to December 31, 2002 and Republic Technologies International Holdings, LLC
and Subsidiaries (Debtor-in-Possession) Consolidated Statement of Changes
in Net Liabilities in Liquidation (Liquidation Basis) for the Period from
January 1, 2002 to August 15, 2002 and Consolidated Statements of Operations
(Going Concern Basis) for the Years Ended December 31, 2001 and 2000 54
Republic Engineered Products Holdings LLC and Subsidiaries
Consolidated Balance Sheet at December 31, 2002 and Republic Technologies
International Holdings, LLC and Subsidiaries (Debtor-in-Possession)
Consolidated Balance Sheet (Going Concern Basis) at December 31, 2001 55
Republic Engineered Products Holdings LLC and Subsidiaries
Consolidated Statement of Member's Interest for the Period from August 16, 2002 to
December 31, 2002 and Republic Technologies International Holdings, LLC and Subsidiaries
(Debtor-in-Possession) Consolidated Statements of Members' Interest (Going Concern Basis)
for the Years Ended December 31, 2000 and 2001 and the Consolidated Statement of Members'
Interest (Liquidation Basis) for the Period from January 1, 2002 to August 15, 2002 57
Republic Engineered Products Holdings LLC and Subsidiaries
Consolidated Statement of Cash Flows for the Period from August 16, 2002
to December 31, 2002 and Republic Technologies International Holdings, LLC
and Subsidiaries (Debtor-in-Possession) Consolidated Statement of Cash Flows
(Liquidation Basis) for the Period from January 1, 2002 to August 15, 2002
and Consolidated Statements of Cash Flows (Going Concern Basis) for the
Years Ended December 31, 2001 and 2000 58
Notes to Consolidated Financial Statements 59
Schedule II- Valuation and Qualifying Accounts 89
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PART I
ITEM 1. BUSINESS
We are the largest domestic producer of special bar quality steel products
("SBQ"). Special bar quality steel products are high quality hot-rolled and
cold-finished carbon and alloy steel bar and rod used primarily in critical
applications in automotive and industrial equipment. Special bar quality steel
products are sold to customers who require precise metallurgical content and
quality characteristics. Special bar quality steel products generally contain
more alloys, and sell for substantially higher prices, than merchant and
commodity steel bar and rod products. We produce a wide range of special bar
quality steel products and supply a diverse customer base that includes leading
automobile and industrial equipment manufacturers and their first tier
suppliers. We have aggregate annual steel melting capacity of approximately 2.4
million tons, hot-rolling production capacity of approximately 1.1 million tons
and cold-finishing production capacity of approximately 0.2 million tons.
Our performance since December 2002 has been below expectations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Our Liquidity and Capital Resources" for a discussion of the
factors which have negatively affected our results and that raise
substantial doubt about our ability to continue as a going concern and the
actions being taken and our plans to address our liquidity situation.
FORMATION OF OUR COMPANY
Our company commenced operations in August 2002 after it acquired a
substantial portion of the operating assets of Republic Technologies
International, LLC and its subsidiaries (Republic Technologies) in a sale of
assets under Section 363 of the United States Bankruptcy Code. Republic
Technologies has been in bankruptcy since April 2, 2001, when it and its
immediate parent, Republic Technologies International Holdings, LLC, and its
subsidiaries, Bliss & Laughlin LLC, and RTI Capital Corp., filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court in the Northern District of Ohio,
Eastern Division, or the "Bankruptcy Court".
We acquired the assets pursuant to the terms of an asset purchase
agreement, dated June 7, 2002 and amended on August 16, 2002, which we refer to
as the "Asset Purchase Agreement". In accordance with bankruptcy procedures and
the bidding procedures order of the Bankruptcy Court, an auction was held
through which other parties were invited to submit higher or better bids to
acquire the assets of Republic Technologies. No other party submitted a bid that
qualified under the bidding procedures order, and a sale hearing was held before
the Bankruptcy Court on July 9, 2002 and July 11, 2002. Holders of more than a
majority of the aggregate principal amount of Republic Technologies' 13 3/4%
senior secured notes objected to the sale of the assets to us, and asserted that
they had the right to take the assets of Republic Technologies that secured
their notes. We agreed to a stipulated settlement with these noteholders, and
the Bankruptcy Court included the stipulated settlement as part of its order
authorizing the sale of Republic Technologies' assets to us pursuant to the
terms of the Asset Purchase Agreement. The Bankruptcy Court order was entered on
July 11, 2002 and amended on July 23, 2002.
We selected the assets and properties of Republic Technologies according
to our management team's plan to create a more efficient, higher quality network
of production facilities operated by a smaller and more flexible workforce. Of
the 12 steel-making and finishing facilities owned and operated by Republic
Technologies at August 16, 2002, we acquired all or
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part of the property and assets associated with five facilities and an option to
acquire the property and assets of the Hamilton, Ontario facility, which is
owned by Canadian Drawn Steel Company, Inc., a wholly-owned subsidiary of
Republic Technologies. We hired approximately 2,400 of Republic Technologies'
approximately 3,700 employees, and we negotiated a new labor agreement with the
United Steelworkers of America, AFL-CIO/CLC, or the "USWA," which reduces
operating costs. See "Employees". Substantially the entire management team of
Republic Technologies is now employed with our company.
The steel industry has been characterized by production overcapacity, weak
demand for steel products and high labor costs. To address these problems, our
business plan seeks to create a more efficient, higher quality network of
production facilities operated by a smaller and more flexible workforce. By
acquiring the assets of only five of Republic Technologies 12 operating
steel-making and finishing facilities, we hope to align our production capacity
with anticipated demand for our products, particularly the higher margin
segments of specialty bar quality steel products on which we intend to focus.
Our company also is making capital expenditures to improve the productivity of
our facilities.
We believe that our labor agreement with the USWA will allow our company
to achieve a more efficient staffing of our facilities, reduce our labor costs
through a competitive wage increase scale over the next five years, lower
healthcare costs and cap our pension and retirement benefits costs to the amount
of the contributions we are required to make to the USWA and an employee
benefits trust to be established by the union. We believe that our pension and
retirement benefits costs will be significantly lower over the next two to five
years than companies with defined benefit pension plans and longer operating
histories.
The following table provides comparative information with respect to
Republic Technologies at June 30, 2002 on a historical basis and our company at
December 31, 2002.
REPUBLIC TECHNOLOGIES OUR COMPANY
AT JUNE 30, 2002 AT DECEMBER 31, 2002
---------------- --------------------
PROPERTIES: PROPERTIES:
Melt Shops/Caster Facilities: Melt Shops/Caster Facilities:
Canton, Ohio Canton, Ohio
Lorain, Ohio Lorain, Ohio
Johnstown, Pennsylvania (idled) -
Hot-Rolling and Processing Mills: Hot-Rolling and Processing Mills:
Lorain, Ohio (three mills) Lorain, Ohio (two mills)
Lackawanna, New York Lackawanna, New York
Massillon, Ohio (Oberlin Road) -
Canton, Ohio Canton, Ohio
Chicago, Illinois -
Cold-Finishing Facilities: Cold-Finishing Facilities:
Harvey, Illinois -
Massillon, Ohio (Rose Avenue) Massillon, Ohio (Rose Avenue)
Gary, Indiana (Dunes Highway) Gary, Indiana (Dunes Highway)
Gary, Indiana (Seventh Avenue) -
Hamilton, Ontario, Canada - (1)
Beaver Falls, Pennsylvania -
Willimantic, Connecticut (idled) -
Cartersville, Georgia -
Corporate offices: Corporate offices:
Akron, Ohio Akron, Ohio
PRODUCTION CAPACITY: PRODUCTION CAPACITY:
(in million of tons) (in millions of tons)
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Steel Melting................. 2.4 Steel Melting.................. 2.4
Hot-Rolled Production......... 2.0 Hot-Rolled Production.......... 1.1
Cold-Finishing................ 0.3 Cold-Finishing................. 0.2
EMPLOYEES: EMPLOYEES:
Hourly........................ 3,156 Hourly......................... 2,017
Salaried...................... 605 Salaried....................... 477
FINANCIAL DATA: FINANCIAL DATA:
(in thousands) (in thousands)
Net property, plant Net property, plant
and equipment............. $167,708 and equipment.............. $144,009
Total assets.................. 543,143 Total assets .................. 474,398
Total Liabilities............. 1,716,685 (2) Total Liabilities ..... 443,209 (3)
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(1) 2011448 Ontario Limited, our wholly owned Canadian subsidiary, holds an
option to purchase the property and assets of the Hamilton, Ontario
facility on or prior to August 16, 2003.
(2) As a result of Republic Technologies' Chapter 11 filings, events of
default had occurred with respect to all of its secured and unsecured
debt. Republic Technologies has classified the secured debt as a current
liability and the undersecured and unsecured debt as liabilities subject
to compromise. Total liabilities include $452.0 million of liabilities
not subject to compromise (including $312.6 million outstanding under
Republic Technologies' debtor-in-possession credit facility) and $1,274.0
million of liabilities subject to compromise (including $425.0 million
aggregate principal amount of Republic Technologies' 13 3/4% senior
secured notes).
(3) Includes $80.0 million aggregate principal amount of our notes, $268.4
million outstanding under our credit facility and $1.0 million to be paid
for the benefit of the holders of Republic Technologies' 13 3/4 % senior
secured notes under the terms of the Transition Services Agreement.
We paid Republic Technologies, as consideration for the assets sold to us
under the Asset Purchase Agreement, $10.0 million in cash, issued $80.0 million
of the notes and assumed certain liabilities. In addition, we borrowed $301.9
million under our credit facility, the proceeds of which were used to repay
Republic Technologies' debtor-in-possession credit facility. We immediately paid
down the outstanding amount to $269.7 million. The liabilities that our company
assumed include obligations under the contracts that we purchased from Republic
Technologies, up to $32.0 million of trade payables Republic Technologies and
its subsidiaries had incurred after they filed for bankruptcy protection and up
to $2.6 million of other current liabilities that Republic Technologies and its
subsidiaries had incurred after they filed for bankruptcy protection. In
addition, we agreed to reimburse Republic Technologies for up to $29.5 million
of wages, withholding taxes, vacation benefits, management performance
incentives, health insurance benefits incurred but not reported and workers'
compensation to the extent that these liabilities had been accrued by Republic
Technologies prior to the closing under the Asset Purchase Agreement and are not
otherwise covered by insurance or welfare benefit funds maintained by Republic
Technologies. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Our Liquidity and Capital Resources".
In order to facilitate the orderly transfer of the special bar quality
steel product business from Republic Technologies to our company, we have
entered into a transition services agreement with Republic Technologies, its
subsidiaries, and The Bank of New York, as trustee under the indenture governing
Republic Technologies' 13 3/4% senior secured notes due 2009. We refer to this
agreement as the "Transition Services Agreement". Under the Transition Services
Agreement, Republic Technologies provided us with the ability to maintain an
interim supply of certain inventory to sell to customers while we modernized our
Lorain facility. Specifically, Republic Technologies continued to operate
certain facilities that we did not acquire. These facilities included the
12"mill at Lorain until September 2002, the finishing operation at Canton until
October 2002 and the Massillon 18' mill until December 2002. Republic
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Technologies' railroad company, Nimishillen & Tuscarawas, LLC, operated until
December 31, 2002, at which time its operations were acquired by Republic
Engineered Products LLC ("Republic"). Canadian Drawn Steel Company, Inc.
("Canadian Drawn"), a subsidiary of Republic Technologies, continues to operate
under the Transition Services Agreement (see Legal Proceedings). In addition,
the parties supply other services to each other to ensure the smooth transition
of Republic Technologies' business to our company and the wind down of Republic
Technologies' bankruptcy estate. The Transition Services Agreement was to expire
on March 16, 2003, but has been extended for a two-month period in order to
allow Republic Technologies to continue operations at Canadian Drawn. The
agreement can be extended under its terms for an additional two-month period.
We reimburse Republic Technologies for costs it incurs in providing the
transition services to us, including the costs of operating the assets, costs
associated with materials owned or acquired that are necessary to provide the
services and the costs of the employees (including funding of the Canadian
Drawn's defined benefit plan) involved in providing the services. Other costs,
including those related to environmental compliance, are the sole responsibility
of Republic Technologies. In addition to other payments we make under the
Transition Services Agreement, we agreed to pay a fee of $5.0 million to
compensate Republic Technologies for its operation of assets it retained after
the acquisition. This fee was paid in five $1.0 million monthly installments
commencing on September 15, 2002. The final installment was paid on January 16,
2003. Under the terms of the Transition Services Agreement, we paid these fees
to The Bank of New York for the benefit of the holders of Republic Technologies'
13 3/4% senior secured notes.
AVAILABLE INFORMATION
Our corporate headquarters is located at 3770 Embassy Parkway, Akron, Ohio
44333-8367 and our telephone number at that location is (330) 670-3000. Our
Internet address is www.republicengineered.com. Republic Engineered Products
LLC's annual reports on Form 10-K, quarterly reports on Form 10-Q, and other
documents which have been filed with the Securities and Exchange Commission are
available upon request.
THE RESTRUCTURING
Our company effected a restructuring so that the presentation of
consolidated financial statements of Republic Holdings will satisfy the
financial reporting obligations of each of the issuers and guarantors of our
notes under federal securities laws. As part of the restructuring, Blue Bar,
L.P., a Delaware limited partnership and the former parent company of Republic,
merged with and into Republic Holdings. In addition, the indenture governing our
notes was amended so that the guarantee of Republic Holdings, as successor by
merger of Blue Bar, L.P., is full and unconditional. The indenture has also been
amended to permit Republic Holdings to satisfy our company's reporting
obligations under the indenture so long as Republic Holdings holds 100% of
Republic's membership interests and has no material business operations, assets
or liabilities of its own.
OUR PREDECESSOR
Republic Technologies was formed in a combination completed on August 13,
1999. The combination was completed through a series of mergers, asset transfers
and related steps as set forth in a Master Restructuring Agreement among Bar
Technologies Inc., Republic Engineered Steels, Inc., USS/Kobe Steel Company and
various of their affiliates.
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Bar Technologies was formed in September 1994 to acquire and restart
specific melt shop and hot-rolling assets of the former Bar, Rod and Wire
Division of Bethlehem Steel Corporation. In April 1996, Blackstone Capital
Partners II Merchant Banking Fund L.P. acquired control of Bar Technologies
concurrently with Bar Technologies' acquisition of Bliss and Laughlin
Industries, Inc., one of the largest processors of cold-finished special bar
quality steel in North America. Republic Engineered Steels was a leading U.S.
manufacturer of special bar quality steel products, which was formed in 1989 to
own and operate the former assets of the Bar Division of LTV Steel Company, Inc.
In September 1998, Blackstone and other investors acquired control of Republic
Engineered Steels through RES Holding Corporation with the intention of
combining it with Bar Technologies. USS/Kobe Steel Company was the special bar
quality steel production facilities and related operations division of USS/Kobe
Steel Company, a 50/50 joint venture formed in July 1989 between subsidiaries of
USX Corporation, and Kobe Steel, Ltd. The aforementioned companies joined to
become Republic Technologies after the combination on August 13, 1999.
THE SPECIAL BAR QUALITY STEEL PRODUCTS INDUSTRY
The production of special bar quality steel products is a segment of the
overall steel market. The special bar quality products segment is further
divided into three categories which are delineated by the quality and the end
use of the bar product: (i) reinforcing bar, (ii) merchant quality bar and (iii)
hot-rolled engineered bar. Hot-rolled engineered bar is the highest quality
segment of the bar product market. We produce various grades and sizes of
finished hot-rolled engineered bar and rod products and intend to operate in the
higher quality end of the hot-rolled engineered bar and rod market. Special bar
quality steel products sell for higher prices per net ton than merchant or
commodity grade steel products as they generally contain more alloys than
merchant and commodity grade products and are sold to customers who require
precise metallurgical content and compliance with rigorous quality
specifications.
THE STEEL MANUFACTURING PROCESS
The manufacturing process for our hot-rolled and cold-finished special bar
quality steel products involves a number of steps that are outlined below.
MELTING. Our production of steel begins at our electric furnace melt shop
in Canton, Ohio and our blast furnaces in Lorain, Ohio. The Canton melt shop
operates electric arc furnaces, which consume ferrous scrap as the primary raw
material. Premium grade steel scrap is transported from a scrap yard to the
Canton melt shop, where it is melted in two 220-ton electric arc furnaces. After
the scrap reaches a molten state, it is poured from the furnace into ladles and
further processed in a ladle refining furnace, where alloys, carbon and other
materials are added to create the desired chemical, metallurgical and physical
properties. During the scrap melting and refining process, impurities are
removed from the molten steel. In addition, as part of the refining process, the
molten steel is further processed in a vacuum degasser, which removes oxygen,
hydrogen and nitrogen to produce clean, high-quality steel.
At our Canton, Ohio facility, the molten steel is formed into
semi-finished bars in our continuous casting and rolling facility. The molten
steel is poured into a four-strand continuous bloom caster where it is formed
and solidified in molds to produce a solid semi-finished bar called a bloom. The
blooms are cut to length, then rolled to a smaller cross-sectioned bar referred
to as a billet. Blooms are square, rectangular, or round semi-finished shapes
greater than 100 square inches in cross-sectional area and billets are less than
100 square inches in cross-sectional area. These semi-finished billets, having
been produced to a specified chemical composition, size
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and quality, are then cooled and sent to our rolling mills for further
processing into finished products or sold as semi-finished products.
Unlike our Canton electric furnace melt shop that relies on steel scrap,
our Lorain, Ohio facility produces iron in a blast furnace, and later converts
the iron to steel in a basic oxygen furnace by adding scrap. The primary raw
materials used in our Lorain blast furnace are (i) taconite pellets, which are a
concentrated form of iron ore, (ii) coke, which is a product produced by baking
specific types of coal at high temperature, and (iii) limestone or other
cleansing materials, which are necessary to remove impurities in the material.
In addition, scrap material is often used in place of iron ore and pulverized
coal is often used in place of coke. We purchase the taconite pellets and coke
from United States Steel Corporation ("U.S. Steel"), and the other materials
are either produced at the facility or purchased from third parties.
Currently, we operate one of two blast furnaces at our Lorain facility.
Within the refractory brick-lined blast furnace chamber, the iron material
consisting of taconite or other ores, the carbon material consisting of coke and
pulverized coal and the cleansing or "flux" material are heated to temperatures
in excess of 2,500 degrees Fahrenheit. The high temperature causes a chemical
reaction between the iron and carbon creating pig iron or hot metal. The flux
material combines with impurities to create a by-product called slag.
Special rail vehicles then transfer the hot metal in liquid form to the
Lorain melt shop, which operates two 220-ton basic oxygen furnaces. Sulfur is
removed from the hot metal and the hot metal is mixed with high quality scrap.
This mixture is injected with oxygen that causes another chemical reaction that
converts the pig iron or hot metal into molten steel, which is then poured into
ladles. The ladles are transported to a ladle metallurgy facility where alloying
agents and other refining materials may be added and blended into the steel. In
addition, for some applications, the molten steel may be processed in a vacuum
degasser to reduce oxygen, hydrogen and nitrogen.
The molten steel is then poured into either a five-strand continuous bloom
caster or a six-strand billet caster through which the steel flows and cools.
The cooled blooms or billets solidify, then are cut to length before further
processing. The casters produce round blooms and billets that are feedstock for
hot-rolled seamless tube products or rectangular blooms or square billets that
are transported to one of three bar mills that convert the blooms or billets
into finished cut-length or coiled bars for the marketplace.
OUR PRODUCTS
HOT-ROLLED PRODUCTS. Our hot-rolled products are manufactured from steel
or iron melted in our steel production facilities, which is cast into blooms or
direct cast into billets. Blooms and billets are processed into hot-rolled
products by changing the internal physical properties, size, and shape of the
steel. As a direct cast billet or bloom cast billet is reduced in size, the
strength and integrity of the resulting bar or rod product is increased. The
completed hot-rolled products are coiled or are placed on a cooling bed and then
cut into required lengths. Then the items are stacked into coils or bundles and
placed in warehouses from which they are shipped directly to the customer or to
one of the Company's cold-finishing mills for further processing.
Since blooms have a larger cross-sectional area than billets, a greater
reduction to size occurs. Accordingly, a hot-rolled product rolled from a bloom
cast billet is generally stronger than a direct cast billet hot-rolled product
of the same size and metallurgical content. Typically
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customers concerned about product quality and strength as related to reduction
of area require bloom-based hot-rolled bar products.
Direct cast billet products are generally used for smaller special bar
quality product sizes and for less demanding end-use applications. Our Canton,
Ohio Caster and Continuous Rolling Facility and Lorain, Ohio melt shop
facilities cast bloom-based products in a 10" by 13" or 12.5" by 14" size.
The following table displays the major end-market applications of our
hot-rolled products by size and shape:
MAJOR END-MARKET APPLICATIONS BY PRODUCT SIZES AND SHAPES
SIZE ROUNDS SQUARES HEXAGONS
---- ------ ------- --------
7/32"-3/4"................... Auto fasteners Not Applicable Hose couplings
Tire cord Converters
Specialty springs
3/4"-3 1/4".................... Bearings Not Applicable Hose couplings
Spindles Converters
Steering columns
Gears
Constant velocity
joints
Hubs
Axles
3 1/4"+...................... Crankshafts Off-highway Not Applicable
Axles equipment
Hydraulic Agricultural
cylinders equipment
Machine parts Converters
converters
COLD-FINISHED PRODUCTS. We produce our cold-finished special bar quality
steel products by improving the physical properties of hot-rolled products
through value-added processes at our cold-finishing plants.
Cold-finishing processes produce products with more precise size and
straightness tolerances as well as a surface finish that provide customers with
a more efficient means of producing a number of end products by often
eliminating the first processing step in the customer's process. The four basic
cold-finishing processes are the following:
PROCESS DESCRIPTION
------- -----------
Cold Drawing Hot-rolled products that have been descaled by blasting the surface with
hardened steel shot or pickling with acid are (1) drawn or pulled through a
tungsten carbide die, which compresses the surface, elongates the product and
makes it smooth and shiny, and (2) straightened.
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Turning and Polishing Removing the surface of hot-rolled products with a revolving cutting tool,
which is the turning process, then rotating the turned product through rollers
that polish the surface and straighten the product.
Turning, Grinding and Polishing The same processes as turning and polishing products, with the addition of a
grinding process that yields very fine tolerances.
Drawing, Turning, Grinding and The same processes as turning, grinding and polishing products, with the
Polishing addition of a drawing process to add physical strength.
After the cold-finished products are cut to length, they are stacked in
bundles and transported to warehouses from which they are shipped to customers.
The following table displays the major end-market applications of our
cold-finished products by shape without references to product size, which is
less important for determining the end use of cold-finished steel products:
MAJOR END-MARKET APPLICATIONS BY SHAPES
ROUNDS HEXAGONS SQUARES FLATS
------ -------- ------- -----
Constant velocity joints Hose fittings Agricultural equipment Machine tool fixtures
Hydraulic hose couplings Spark plug shells Office furniture
Steering rack gears Nuts Exercise equipment
Fractional horsepower motor Agricultural equipment
shafts
Engine valves and fuel
injector parts
Hydraulic cylinders for
off-highway and
agricultural equipment
Shafts and gears for
appliance industry
Previously, Republic Technologies purchased a portion of its hot-rolled
bar requirements for its cold-finishing operations from third-party suppliers.
During the period from January 1, 2002 to August 15, 2002 and the years ended
December 31, 2001 and 2000, Republic Technologies purchased approximately 10%,
16% and 24%, respectively, of its hot-rolled bar requirements from third-party
suppliers. During the period from August 16, 2002 to December 31, 2002, we
purchased approximately 11% of these requirements from third parties.
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SEAMLESS TUBE ROUNDS. In connection with a supply arrangement with USX
Corporation and its affiliate, Lorain Tubular Company LLC, we produce
semi-finished rounds at our Lorain, Ohio facility for purchase by Lorain Tubular
and by USX's Fairfield, Alabama facility under specified circumstances.
Depending on the desired end-use application for Lorain Tubular, these products
are either cast to sizes of 10.5", 12.25" or 13.5" or cast to size and then
rolled at our primary rolling mill to sizes of 6" or 10.5". For the Fairfield
facility, we produce semi-finished product in rounds at 11.6". Seamless tubes
are used in oil and gas drilling and exploration applications.
SEMI-FINISHED STEEL PRODUCTS. In addition to our hot-rolled and
cold-finished products and seamless tube rounds, we sell semi-finished products
produced by our melt shop casters that have not been processed further at our
rolling mill facilities. These products are typically sold to rolling mills
operated by competitors that do not have melt shop facilities or to steel
service centers or distributors, for further processing before they reach the
ultimate end user. These products are sold in sizes ranging from 5"-14".
SEASONALITY
Our business is subject to some degree of seasonality. The primary end
markets for our products are the automotive and industrial equipment industries.
Consequently, the special bar quality industry, including our company, typically
experiences higher shipment volumes and revenues in the first and second
quarters due to seasonality of the automotive and industrial equipment
industries.
RAW MATERIALS
SCRAP METAL. The major raw material for our electric arc furnace melt
shops is ferrous scrap metal, which is generated principally from industrial,
automotive, demolition and railroad sources. The long-term demand for scrap
metal and the importance of scrap metal to the domestic steel industry is
expected to increase as steelmakers continue to expand scrap metal-based
electric furnace capacity, with additions to, or replacements of, existing
integrated steel manufacturing facilities that use iron ore, coke and limestone
as their principal raw materials. The high quality of our products requires the
use of premium grades of scrap metal, the supply of which is more limited.
Prices for scrap metals vary based on numerous factors including quality,
availability, freight costs, speculation by scrap brokers and other conditions
beyond our control. However, we generally have not had difficulty purchasing
adequate scrap metal of the required quality. We believe that adequate supplies
of scrap metal will continue to be available in sufficient quantities for the
foreseeable future. We seek to reduce our exposure to fluctuations in the price
of scrap metal by charging where possible scrap metal surcharges based on the
increase in the price of scrap metal above specified levels. For other
customers, adjustments are made in selling prices if the price of scrap exceeds
or drops below specified levels. These surcharges and price adjustments are
determined on a monthly or quarterly basis.
We purchase scrap in the open market through a number of brokers and
dealers or by direct purchase. We do not purchase more than 15% of our scrap
requirements from any single supplier. However, depending on the supply, price,
terms and availability of scrap, we may change our purchase methods in the
future by, for example, purchasing more scrap from fewer suppliers.
COKE AND IRON ORE PELLETS. Iron ore pellets and coke are the principal raw
materials used in our blast furnaces. We have entered into long term agreements
with U.S. Steel
11
Corporation which will supply the iron ore pellets and coke that are the raw
material inputs for the blast furnace/basic oxygen process route at our Lorain,
Ohio facility. We expect that these agreements will provide us, during the term
of the contracts, with a consistent supply of quality materials at prices that
will be favorable as compared to market prices due to "most favorable nations"
pricing terms, which guarantee our company a price matching the lowest price
offered by U.S. Steel to like customers under like circumstances.
ALLOYS AND FLUXES. We purchase various materials such as nickel, chrome,
molybdenum, vanadium, manganese, silicon, aluminum, titanium, sulphur, lead,
lime and fluorspar for use as alloying agents and fluxing, or cleansing,
materials. Historically, prices of many of these materials have fluctuated
dramatically. From time to time, we have used price surcharges for alloys such
as nickel and molybdenum in an attempt to protect their profit margins from the
effects of fluctuating prices on these commodities.
HOT-ROLLED BARS. Historically, Republic Technologies purchased hot rolled
bar from other steelmakers for use in production at its cold finishing
facilities. We have continued this practice. We purchase from several suppliers
and expect that grades of bar that we choose not to produce will be available
for purchase.
ENERGY SOURCES
Our manufacturing facilities consume large amounts of electricity and
natural gas. Republic did not have difficulty in obtaining adequate sources of
electricity and natural gas in the past and we do not foresee any significant
difficulties in the future. However, we anticipate higher natural gas prices in
2003, which could adversely affect our future operating results.
Our primary use of electricity is at our electric arc furnace melt shop in
Canton, Ohio and at our basic oxygen process melt shop facility in Lorain, Ohio.
We currently have a long-term electricity contract in place for the Canton
facility that expires in December 2005. We recently entered into an electric
contract for the Lorain facility. The rest of our facilities purchase their
electricity from local utilities under various contracts and terms. Our
electricity costs are competitive with other steel manufacturers.
The principal use of natural gas in our operations is for the billet
reheating operations at our Lorain, Ohio and Lackawanna, New York hot-rolling
mills and at the blast furnace and primary mill at our Lorain, Ohio melt shop
facility. We purchase natural gas based on our anticipated requirements in the
monthly futures market. We also have negotiated distribution contracts, storage
contracts, primary firm transportation contracts and secondary firm
transportation contracts where necessary, for cost effective, reliable natural
gas deliveries. Each facility's delivery arrangement has been negotiated
separately for the specific needs of that facility.
Our Lackawanna, New York facility relies on natural gas distribution
systems and electrical equipment and other rights owned by Bethlehem Steel
Company ("Bethlehem"). The right to utilize these systems is essential to the
operation of the Lackawanna facility. We are currently negotiating a contractual
agreement with Bethlehem for the right to use this equipment. The International
Steel Group, Inc. has made an offer in bankruptcy court to acquire the assets of
Bethlehem. If this pending transaction closes we expect this agreement to
continue under substantially the same basis.
12
CUSTOMERS
We primarily market our products to consumers of higher quality, critical
application special bar quality steel products. Customers in these targeted
market segments require higher quality special bar quality steel products for
use in hot and cold metal-forming operations such as cold forge/extrusion, warm
forge, hot forge and hot/cold heading processes, rather than traditional
machining processes. Penetration of these targeted market segments is dependent
upon various factors, including the ability to achieve precise chemistry and
manufacturing tolerances. Additionally, producers must meet pre-qualification
requirements to become approved suppliers for potential customers.
For customers in the automobile manufacturing industry and their
suppliers, the most important form of certification is the Quality System
Requirement standard, or "QS-9000" certification, which is a quality system
standard established by The Chrysler, Ford and General Motors Quality
Requirement Task Force, which sets forth a standard set of quality requirements
for components and materials suppliers to the automotive industry. Certification
requirements vary in scope and generally take between three and twelve months
for a supplier to achieve. Frequently, the qualification process requires a
producer to supply one or more trial heats of special bar quality steel products
for customer evaluation, although some customers have longer pre-qualification
requirements. Because of the high costs incurred by suppliers and customers and
significant time that may be required to obtain qualifications, the
qualification processes can create strong bonds and commitments between
suppliers and customers. All of our facilities have received QS-9000
certifications.
Our company is in the process of obtaining ISO 14001 certification at the
Lorain, Lackawanna and Gary production facilities as well as the machine shop in
Massillon. Certification of these facilities is anticipated to occur in the
second quarter of 2003. The Canton and Massillon cold-finished plants are
currently ISO 14001 certified. ISO 14001 is the international standard defining
the organizational structure, responsibilities, procedures, processes and
resources for implementing environmental management systems. This standard,
however, does not specify environmental performance criteria. Most of our
automotive customers require that we have this certification.
Our major customers include leading automobile and industrial equipment
manufacturers such as General Motors, Ford, Honda and Caterpillar, first tier
suppliers to automobile and industrial equipment manufacturers such as American
Axle & Manufacturing, Delphi Automotive Systems, IT Spring, Metaldyne, TRW,
forgers such as Jernberg Industries, and service centers such as AM Castle, EM
Jorgensen and Ryerson Tull.
Republic Technologies' five largest customers accounted for 30.2%, 30.5%
and 29.1% of its total sales in the period from January 1, 2002 to August 15,
2002 and the years ended December 31, 2001 and 2000, respectively. Lorain
Tubular was the only customer that accounted for 10% or more of Republic
Technologies' total sales during these periods. It accounted for 12.0%, 10.7%
and 14.6% during the period from January 1, 2002 to August 15, 2002 and the
years ended December 31, 2001 and 2000, respectively. Our five largest customers
account for 30.6% of our total sales in the period from August 16, 2002 to
December 31, 2002. American Axle & Manufacturing (10.4%) was the only customer
that accounted for 10% or more of our total sales during this period.
13
DISTRIBUTION
We market our special bar quality steel products through a staff of
professional sales representatives and sales technicians located in the major
manufacturing centers of the Midwest, Great Lakes and Southeast regions of the
United States.
Our facilities are strategically located to serve the majority of
consumers of special bar quality steel products in the United States. We ship
products between our mills and finished products to our customers by rail and
truck. Customer needs and location dictate the type of transportation we use for
deliveries. The proximity of our rolling mills and cold-finishing plants to our
customers allows us to provide competitive rail and truck freight rates and
flexible deliveries in order to satisfy just-in-time and other customer
manufacturing requirements. We believe that the ability to meet the product
delivery requirements of our customers in a timely and flexible fashion is a key
to attracting and retaining customers as more and more special bar quality steel
product consumers reduce their in-plant raw material inventory. We optimize
freight costs by using our significantly greater scale of operations to maintain
favorable transportation arrangements, continuing to combine orders in shipments
whenever possible and utilizing "back-hauling" of scrap and other raw materials.
COMPETITION
The domestic steel industry is highly competitive. We compete with other
special bar quality steel producers including the following:
- integrated mills, which make steel by processing iron ore and other
raw materials in a blast furnace; and
- mini-mills, which make steel by melting scrap metals in an electric
arc furnace.
Our primary competition for hot-rolled bar products are both large
domestic steelmakers and specialized mini-mills. Our major competitors in the
hot-rolled bar market include Ispat Inland, Mac Steel, North Star and Timken.
Many of the large steelmakers have greater financial resources and utilize
modern technologies similar to some of the equipment and processes we currently
employ. There are over 20 cold-finishers in the domestic market at present, the
largest being Niagara, LaSalle and Nucor. In addition, foreign competition can
be significant in segments of the special bar quality steel market, particularly
where certifications are not required, and during periods when the U.S. dollar
is strong as compared with foreign currencies. This competition is exerting
significant downward pressure on the price level of some of our products.
The principal areas of competition in our markets are product quality and
range, delivery reliability, service and price. Special chemistry and precise
processing requirements characterize special bar quality steel products.
Maintaining high standards of product quality while keeping production costs
competitive is essential to our ability to compete in our markets. We believe
that we have the widest selection of product grades and sizes in our industry.
The ability of a manufacturer to respond quickly to customer orders currently
is, and is expected to remain, important as customers continue to reduce their
in-plant raw material inventory.
BACKLOG
We do not believe that our backlog is a meaningful indicator of future
sales activity. Orders are generally filled within three to 14 weeks of the
order, depending on the product,
14
customer needs and other production requirements. Customer orders are generally
cancelable without penalty prior to finish size rolling, and depend on
customers' changing production schedules.
PATENTS, TRADEMARKS AND TRADE NAMES
We have the patents, trademarks and trade names necessary for the
operation of our business as now conducted. The loss of any or all of these
patents, trademarks and trade names would not have a material adverse effect on
our business. However, we consider these intellectual property rights important
to our business and intend to actively defend and enforce them as necessary.
EMPLOYEES
In connection with our acquisition of assets from Republic Technologies,
we entered into a new labor agreement with the USWA that covers the vast
majority of our hourly employers. This labor agreement expires on August 15,
2007. We had 2,017 hourly employees and 477 salaried employees at December 31,
2002.
Wage and benefit provisions under this collective bargaining agreement are
specified until expiration of the agreement and will be subject to negotiations
at that time. The labor agreement also provides for the creation of a benefits
trust. We made an initial contribution of $3.0 million and contribute $3.00 for
every hour worked by an employee who is covered by the new labor agreement. A
portion of these contributions will be directed to the benefits trust. In year
three of the labor agreement, our contribution increases to $3.50 for every hour
worked and in years four and five it increases to $3.80 for every hour worked.
The funds will be directed by the USWA to provide pension benefits and/or
retiree medical coverage for future eligible employees of our company and/or
medical coverage for retirees of Republic Technologies. However, no
contributions may be used for the purpose of providing medical coverage for the
retirees of Republic Technologies if they create, or result in, any liability
whatsoever on the part of our company for any obligation of Republic
Technologies, or any independent obligation to the retirees of Republic
Technologies. Our contributions to the benefits trust constitute our company's
sole obligation with respect to providing these benefits.
The labor agreement also provides that the USWA has the right to appoint
one managing director to our board of managers so long as the USWA represents
any of our hourly employees.
As compared to the labor agreement between Republic Technologies and the
USWA, we expect that the new labor agreement will enhance our ability to
maximize workforce flexibility, while reducing costs and allowing us to focus on
attaining our business plan objectives by:
- Eliminating guarantees regarding minimum pay or hours of work.
Management is free to schedule production to fit the operating needs
of our company, and to adjust the workforce accordingly. Employees
are paid for actual hours worked without any artificial or fixed
hours or cost burden.
- Reducing supplemental benefits costs payable to laid off employees.
Under the new labor agreement, laid off employees receive only state
unemployment benefits, compared to state unemployment and
company-provided supplemental unemployment benefits under Republic
Technologies' labor agreement with the USWA.
15
- Potentially reducing overtime costs. The new labor agreement permits
10 hour or 12 hour scheduled shifts as compared to the maximum 8
hour shifts allowed under the labor agreement with Republic
Technologies without incurring overtime. Overtime is payable only in
excess of the scheduled hours per day or 40 hours per week.
- Establishing a cost competitive health care program. The new labor
agreement provides for preferred provider organization coverage
only, as compared to the costly traditional indemnity plan under the
old labor agreement, with cost sharing by the employees. The new
health care program provides comprehensive benefits with a better
cost control structure.
- Maintaining competitive wages. The new labor agreement provides for
$.50 per hour wage increases in years three, four and five. We
expect these base wage scales will allow us to remain competitive.
The new labor agreement also calls for the establishment of a profit
sharing plan to which the Company will contribute 15% of its quarterly pre-tax
income, as defined in the labor agreement, over $12.5 million. Twenty-five
percent of these contributions will be divided among USWA-represented employees
who are covered by the new labor agreement based on the numbers of hours worked
and the remaining 75% will be contributed to the benefits trust described above.
Contributions, if any, will be distributed to employees and the benefits trust
within 45 days of the end of each fiscal quarter.
In addition, the new labor agreement includes clear and definitive
management's rights provisions to prevent disputes and provide better guidance
and support. There are no carryover local agreements and no provisions for
establishing binding local working conditions as a result of repeated similar
actions. Finally, under the new labor agreement, we have the opportunity to
create an entirely new incentive system that is tied to performance criteria set
forth in our business plan. We expect this incentive system will encourage
employees to work together to meet common, clearly stated performance goals, as
opposed to individual targets of measure that have no relation to the financial
success of a plant or our overall business.
ENVIRONMENTAL MATTERS
The domestic steel industry is subject to a broad range of environmental
laws and regulations, including those governing the following:
- discharges into the air and water;
- the handling and disposal of solid and hazardous wastes;
- the remediation of soil and groundwater contamination by petroleum
products or hazardous substances and wastes; and
- the health and safety of its employees.
We continuously monitor our compliance with these environmental laws and
regulations and believe that we currently are in substantial compliance with
them.
16
As is the case with most steel producers, we could incur significant costs
related to environmental issues in the future, in particular those arising from
remediation costs for historical waste disposal practices at our facilities,
acquired in August 2002 from Republic Technologies. We currently believe that
these costs are likely to be in the range of $3.9 million to $8.4 million over
the lives of our facilities. Our reserve to cover probable environmental
liabilities, including the matters discussed below, was approximately $5.6
million as of December 31, 2002. Except as noted below, we are not otherwise
aware of any significant environmental compliance and remediation costs with
respect to our facilities for which the establishment of a reserve would be
appropriate at this time. To the extent we incur any such remediation costs,
these costs will most likely be incurred over a number of years; however, future
regulatory action regarding historical disposal practices at our facilities, as
well as continued compliance with environmental requirements, may require us to
incur significant costs that may have a material adverse effect on our future
financial performance.
Under the terms of the Asset Purchase Agreement, Republic Technologies
agreed to indemnify us for a period of one year following the sale against any
liabilities incurred as a result of any breach of Republic Technologies'
representations, warranties or covenants contained in the agreement. The
indemnification is capped at $5.0 million and will be paid from an escrow fund
into which Republic Technologies will deposit any available cash other than cash
received from us as consideration in the asset purchase transaction. This
limited indemnification would only apply to liabilities arising from matters not
disclosed to us in the Asset Purchase Agreement. In addition, Republic
Technologies agreed to assist us in obtaining the benefits of indemnifications
given Republic Technologies under previous transactions with U.S. Steel, LTV
Steel and Bethlehem Steel for certain of the properties included in our purchase
of various Republic Technologies assets. However, these Republic Technologies
indemnifications may be of limited value because Republic Technologies did not
file a proof of claim in either of the recent bankruptcy proceedings involving
LTV Steel or Bethlehem Steel, and may not itself be able to obtain any
indemnification coverage. The U.S. Steel indemnification is very limited in
scope and is only triggered after the expenditure of significant funds.
Therefore, it is unlikely that any potential environmental liabilities
associated with the purchased Republic Technologies assets will be offset by
contributions from U.S. Steel, LTV Steel or Bethlehem Steel required under
contractual agreements with Republic Technologies.
The U.S. Environmental Protection Agency has identified a number of solid
waste management units, or "SWMUs," at the Hot-Rolled Bar Plant in Canton, Ohio,
operated by our predecessor, Republic Technologies. On June 16, 1999, Republic
Technologies entered into an Administrative Consent Order with the U.S. EPA to
investigate these SWMUs and propose appropriate remedial measures. Several
significant areas of the former Republic Technologies facility were excluded
from our purchase of the Canton Hot-Rolled Bar Plant, and are no longer included
in the areas for which we may have future remedial obligations. This segregation
of liability for the purchased and excluded portions of the Canton facility, as
well as similar segregations of liability for the purchased and excluded areas
of the Lorain Plant, was recognized by the United States Bankruptcy Court for
the Northern District of Ohio in the August 16, 2002 order authorizing our
purchase of certain of Republic Technologies' assets. We anticipate that we will
use a portion of our reserve to cover the cost of completing the investigation
of the purchased areas of the Canton facility during the next few years,
although the precise scheduling of these expenditures cannot be predicted at
this time. Furthermore, we are currently unable to predict precisely the amount
or timing of the costs we may be required to incur to investigate and,
ultimately, to remediate these acquired properties in total, and acknowledge
that the costs could exceed the amount currently in reserve.
17
In 1996, Republic Technologies closed certain hazardous waste areas at the
Massillon Cold-Finished Bar facility, one of the facilities acquired by us.
These actions were taken under state law following earlier inspections and
assessments by the Ohio EPA and the U.S. EPA regarding these areas. In October
2001, the U.S. EPA visited the site and requested an update on the nature of the
closure, as part of an internal review on potential applicability of Resource
Conservation and Recovery Act corrective action. The U.S. EPA continues to
review this matter. We are unable to predict the nature, cost or timing of any
future remedial obligations at this facility, but continue to allocate a portion
of the reserve to this matter.
Our Lorain, Ohio facility has been in continuous operation by us, as well
as by our predecessors, Republic Technologies, USS/Kobe, U.S. Steel and others
for over 100 years. In 1997, the U.S. EPA conducted a multimedia inspection of
the Lorain Plant, which was then owned by USS/Kobe. As a result of the
inspection, the United States alleged past violations of the Clean Air Act, the
Clean Water Act and the Resource Conservation and Recovery Act relating to the
Lorain Plant, including the unpermitted treatment, storage or disposal of
baghouse dust from the No. 2 Ladle Metallurgical Facility, which is one of the
Republic Technologies assets recently purchased by us. The United States filed a
proof of claim in the Republic Technologies bankruptcy proceeding based on these
claims. Republic Technologies addressed the substantive issues raised by the
United States, but Republic Technologies did not enter into any settlement
agreement or consent order regarding those claims. The U.S. EPA could
potentially seek additional resolution or satisfaction of this matter from us in
the future, as the current owner of these portions of the Lorain facility. We
are unaware of any other pending enforcement issues at the Lorain facility.
Although environmental regulators have not required corrective action at this
facility, we could incur investigation and remediation costs in the future.
However, we are currently unable to predict the amount or timing of any other
costs that we may be required to incur relating to areas of potential
contamination at the Lorain facility.
Bethlehem Steel is conducting or has conducted remedial investigation
activities relating to a SWMU located on a portion of our Lackawanna, New York
facility historically used for mill scale storage, which was identified as
requiring corrective action by the U.S. EPA pursuant to an Administrative Order
on Consent issued to Bethlehem Steel in 1990. We are not aware of the current
status of this effort. Although Bethlehem Steel is ultimately liable for
compliance with the Administrative Order on Consent, due to Bethlehem Steel's
Chapter 11 filing there can be no assurance that Bethlehem Steel will meet its
obligations. In the event that Bethlehem Steel does not satisfy its obligations
with respect to this SWMU on our property, it is possible that the U.S. EPA may
look to us as the owner of that SWMU for investigation and possibly for
remediation. However, we are unable to predict the nature, cost, or timing of
any future obligations at this facility.
Various federal, state and local laws, regulations and ordinances govern
the removal, encapsulation or disturbance of asbestos-containing materials, or
"ACMs". These laws and regulations may impose liability for the release of ACMs
and may provide for third parties to seek recovery from owners or operators of
facilities at which ACMs were or are located for personal injury associated with
exposure to ACMs. We are aware of the presence of ACMs at our facilities, but we
believe that such materials are in acceptable condition at this time. While no
assurances can be given, we believe that any future costs related to remediation
of ACMs at these sites will not be material, either on an individual basis or in
the aggregate.
The Ohio Environmental Protection Agency ("Ohio EPA") has issued a Notice
of Violation to the Company alleging violations of certain state hazardous waste
regulations at the Lorain plant. The alleged violations relate to waste
evaluation, personnel training, contingency
18
planning, emergency equipment, manifests, labeling for universal waste, and
labeling for used oil storage. The Ohio EPA has also raised a number of concerns
that were not identified in the Notice of Violation as alleged violations. A
number of alleged violations occurred prior to the Company's acquisition of the
Lorain plant in August 2002. The Company has submitted a written response to the
Ohio EPA and the Ohio EPA has not pursued formal enforcement activity at this
time. The Company is working with the agency to resolve the issues presented in
the Notice of Violation.
The Ohio EPA has also issued a Notice of Violation to the Company alleging
violations arising out of lancing operations to remove iron from several torpedo
cars. Iron had been placed in the torpedo cars on an emergency basis as a result
of an unplanned shutdown of the #3 blast furnace at our Lorain facility, and had
subsequently solidified (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Our Liquidity and Capital Resources"). The
Company has submitted a written response to the Ohio EPA and the Ohio EPA has
not pursued formal enforcement activity at this time. The Company is working
with the agency to resolve the issues presented in this Notice of Violation as
well.
ITEM 2. PROPERTIES
We own five manufacturing locations and lease our corporate offices. The
following table shows the locations, square footage and production capacity as
of December 31, 2002:
APPROXIMATE SIZE PRODUCTION CAPACITY (1)
LOCATION (SQUARE FEET IN THOUSANDS) (TONS IN THOUSANDS)
-------- -------------------------- -------------------
Melt Shops/Caster Facilities:
Canton, Ohio ................ 1,595 896
Lorain, Ohio ................ 688 1,491
Hot-Rolling and Processing Mills:
Lorain, Ohio (two mills) .... 1,247 432
Lackawanna, New York ........ 1,020 588
Cold-Finishing Facilities:
Massillon, Ohio (Rose Avenue) 553 96
Gary, Indiana (Dunes Highway) 266 78
Corporate offices ................ 33 --
- ----------
(1) Stated tons represent the production capacity of the individual facility
only and do not represent our production capacity as a whole.
We own all property relating to our manufacturing facilities. In addition,
we maintain operating leases for our corporate office, various sales offices and
a machine shop in Massillon, Ohio.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal proceedings occurring in the ordinary
course of business. It is the opinion of management, after consultation with
legal counsel, that these matters will not materially affect our consolidated
financial position, results of operations or cash flows.
19
In connection with the closing of the asset purchase transaction with
Republic Technologies, the USWA took the position that our new labor agreement
did not apply to the unionized employees of Canadian Drawn Steel Company, Inc.,
a Canadian subsidiary of Republic Technologies. In light of the USWA's position
and rather than delay consummation of the entire transaction, the parties
negotiated the first amendment to the Asset Purchase Agreement, which among
other matters included the inventory and receivables of Canadian Drawn Steel in
the assets we acquired and gave us a one-year option to purchase the other
assets of Canadian Drawn Steel for nominal additional consideration, without
adjustment to the overall purchase price. Under the option, if the business of
Canadian Drawn Steel is sold to a third party, Republic Technologies will pay
the net proceeds of that sale to us.
On August 30, 2002, the USWA filed a motion with the Bankruptcy Court
seeking to compel the sale to our company of substantially all of the assets of
Canadian Drawn Steel. On September 17, 2002, we and Republic Technologies filed
separate objections to the USWA's motion, asserting, among other things, that
the USWA had breached the agreement with Republic Technologies with respect to
the unionized employees of Canadian Drawn Steel and was attempting to force our
company to assume additional liabilities for legacy costs which we did not agree
to assume under the Asset Purchase Agreement. In addition, Republic Technologies
asserted various procedural defenses against the USWA and we objected to several
of the factual assumptions underlying the USWA's proposed orders.
The USWA withdrew its motion described above and on October 21, 2002 filed
a complaint with the Bankruptcy Court seeking similar relief as in the motion.
The complaint alleged, among other things, that because we did not purchase
substantially all of the assets of Canadian Drawn Steel, (i) Republic
Technologies breached a shutdown agreement with the USWA, (ii) our company
breached a letter agreement with the USWA, (iii) our company breached the Asset
Purchase Agreement and (iv) our company and Republic Technologies violated an
order of the Bankruptcy Court which approved the sale of assets by Republic
Technologies to our company. In the complaint, the USWA requested the Bankruptcy
Court to compel the sale to our company of substantially all of the assets of
Canadian Drawn Steel. On December 4, 2002, we and Republic Technologies filed
separate answers to the USWA's complaint in which we and Republic Technologies
denied the principal allegations of the USWA and asserted various defenses and
counterclaims. Our company expects to vigorously pursue this litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is currently no public trading market for our common equity, which
on February 20, 2003 was held by approximately fifteen record owners. We have
not made any distributions on our common equity since inception, and any such
distributions are restricted by our credit facility and note indenture. For
information regarding our amended and restated operating agreement's provisions
relating to distributions, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Our Liquidity and Capital
Expenditures."
20
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED AND COMBINED FINANCIAL INFORMATION
OUR
COMPANY PREDECESSOR - CONSOLIDATED PREDECESSOR - COMBINED
------- --------------------------------------------------- -------------------------
FROM PERIOD FROM PERIOD FROM
PERIOD FROM JANUARY 1, YEAR YEAR AUGUST 13, JANUARY 1,
AUGUST 16, 2002 2002 TO ENDED ENDED 1999 TO 1999 TO YEAR ENDED
TO DECEMBER 31, AUGUST 15, DECEMBER DECEMBER DECEMBER AUGUST 12, DECEMBER
2002 2002 31, 2001 31, 2000 31, 1999 1999 31, 1998
----------- ----------- ---------- ----------- ----------- ----------- -----------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
STATEMENT OF OPERATIONS
DATA:
Net sales .............. $ 300,131 $ 611,983 $ 993,707 $ 1,265,401 $ 527,580 $ 525,326 $ 484,864
Operating loss ......... (12,260) (39,760) (109,997) (152,440) (137,273) (70,648) (70,333)
Net loss from continuing
operations ......... (20,811) (59,903) (182,098) (270,403) (183,024) (114,913) (113,558)
Net loss before
extraordinary item . (20,811) (59,903) (182,555) (287,234) (189,402) (114,913) (113,558)
Extraordinary item ..... -- -- -- -- (23,874) -- --
Net loss ............... (20,811) (59,903) (182,555) (287,234) (213,276) (114,913) (113,558)
BALANCE SHEET DATA:
Total assets ........... 474,398 1,049,559 1,197,084 1,415,257 888,065
Long-term debt ......... 80,000 512,377 502,254 481,062 422,483
Redeemable members'
interest/preferred
stock .................. -- 3,700 3,800 5,500 5,500
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Accounting estimates are an integral part
of the financial statements prepared by management and are based on management's
current judgments. Those judgments are based on knowledge and experience about
past and current events and on assumptions about future events.
We believe the following to be our critical accounting policies because
they are both important to the portrayal of our financial condition and results
of operations and they require critical management judgments and estimates about
matters that are uncertain. If actual results or events differ materially from
those contemplated by us in making these estimates, our report of operations for
future periods could be materially affected.
Acquisition
We are required to allocate the purchase price of the acquisition of
assets from Republic Technologies to the tangible and intangible assets acquired
and liabilities assumed based on their estimated fair values. We engaged a
third-party appraisal firm to assist us in determining the fair
21
values of the property, plant and equipment acquired. Such valuations and the
determination of the fair values of other tangible and intangible assets
acquired and liabilities assumed require management to make significant
estimates and assumptions. Our initial assessment of the purchased intangible
assets, including the option to purchase Republic Technologies' Hamilton,
Ontario cold-finishing facility as well as patented and unpatented technology,
customer contracts and trademarks, is that they have no fair value separate from
goodwill. This estimate and other estimates associated with the accounting for
the acquisition may change, as additional information becomes available
regarding the assets acquired and liabilities assumed.
Revenue Recognition
Sales are recognized upon shipment where there is a contract or purchase
order, the sales price is fixed or determinable and collectability of the
resulting receivable is reasonably assured. Sales are made with no rights to
return product, other than for defective materials. Reserves for rebates,
relating to marketing programs entered into with our customers, are recorded as
direct reductions of revenue and accounts receivable based on the terms of the
customer contracts. A claims reserve is also established for returns of
defective materials. This reserve is recorded as a percentage of sales based on
historical experience. The adequacy of reserve estimates are periodically
reviewed by comparison to actual experience. Rebates, claims and other sales
allowances in any future period could differ from our estimates, which would
impact the net revenue we report.
Allowances for Doubtful Accounts
We evaluate the collectability of our receivables based on a combination
of factors. We regularly analyze our significant customer accounts, and, when we
become aware of a specific customer's inability to meet its financial
obligations to us, such as in the case of bankruptcy filings or deterioration in
the customer's operating results or financial position, we record a specific
reserve for bad debt to reduce the related receivable to the amount we
reasonably believe is collectible. We also record reserves for bad debt for all
other customers based on a variety of factors including the length of time the
receivables are past due, the financial health of the customer and historical
experience. If circumstances related to specific customers change, our estimates
of the recoverability of receivables could be further adjusted.
Inventories
Our company establishes obsolescence reserves for slow-moving and inactive
inventories. Obsolescence reserves reduce the carrying value of slow-moving and
inactive inventories to their estimated net realizable value, which generally
approximates the recoverable scrap value. Our company also periodically
evaluates its inventory carrying value to ensure that the amounts are stated at
the lower of cost or market. If actual market conditions are less favorable than
those projected by management, additional inventory write-downs may be required.
Goodwill
Goodwill has arisen from the acquisition of a substantial portion of the
operating assets of Republic Technologies. Goodwill is not amortized, but is
periodically reviewed for impairment. Our company is required to test goodwill
for impairment on an annual basis and whenever changes in circumstances indicate
that the carrying amount of goodwill may be impaired. Impairment charges are
recorded, if necessary, based on management's review and analysis of the
22
estimated fair value as compared to the carrying amount of goodwill. The
Company intends to use July 1 (first day of the third quarter) as its annual
measurement date. If our company's anticipated operating results or economic
outlook declines, our assessment of the carrying amount of goodwill may change.
Impairment of Long-Lived Assets
We evaluate long-lived assets used in operations, consisting of property,
plant and equipment and intangible assets, when indicators of impairment, such
as reductions in demand or significant economic factors are present. A review is
performed to determine whether the carrying value of an asset is impaired based
on a comparison to the undiscounted estimated future cash flows from the asset.
If the comparison indicates that there is impairment, the impaired asset is
written down to fair value, which is typically calculated using estimated future
cash flows and a discount rate based upon our weighted average cost of capital.
Impairment is based on the excess of the carrying amount over the fair value of
those assets. Significant management judgment is required in the forecast of
future operating results that is used in the preparation of discounted estimated
future cash flows. It is reasonably foreseeable that actual future net revenues
and the remaining estimated economic life of the assets could differ from the
estimates used to assess the recoverability of these assets. In that event,
additional impairment charges or shortened useful lives of certain long-lived
assets could be required.
Environmental Costs
Our company and other steel companies have in recent years become subject
to increasingly stringent environmental laws and regulations. It is the policy
of our company to endeavor to comply with applicable environmental laws and
regulations. Our company established a liability for an amount which management
believes is adequate, based on information currently available, to cover costs
of remedial actions it will likely be required to take to comply with existing
environmental laws and regulations.
The recorded amounts represent an estimate of the environmental
remediation costs associated with future events triggering or confirming the
costs that, in management's judgment, are likely to occur. This estimate is
based on currently available facts, existing technology, and presently enacted
laws and regulations, and it takes into consideration the likely effects of
inflation and other societal and economic factors. The precise timing of such
events cannot be reliably determined at this time due to absence of any
deadlines for remediation under the applicable environmental laws and
regulations pursuant to which such remediation costs will be expended. No claims
for recovery are netted against the stated amount. It is reasonably possible
that actual future environmental costs could differ from the estimates used to
establish our recorded liability. Additional liabilities may be recorded if this
situation arises.
GENERAL
We are the largest domestic producer of special bar quality steel
products. Special bar quality steel products are high quality hot-rolled and
cold-finished carbon and alloy steel bars and rods used primarily in critical
applications in automotive and industrial equipment. Special bar quality steel
products are sold to customers who require precise metallurgical content and
quality characteristics. Special bar quality steel products generally contain
more alloys, and sell for substantially higher prices, than merchant and
commodity steel bar and rod products. We produce a wide range of special bar
quality steel products and supply a diverse customer base that includes leading
automobile and industrial equipment manufacturers and their first tier
suppliers.
23
Our company commenced operations in August 2002 after it acquired a
substantial portion of the operating assets of Republic Technologies in a sale
of assets under Section 363 of the United States Bankruptcy Code. We selected
the assets and properties of Republic Technologies according to our management
team's plan to create a more efficient, higher quality network of production
facilities operated by a smaller and more flexible workforce. The assets and
properties we acquired represent the core operating assets associated with
Republic Technologies' steel melting and hot-rolled and cold-finishing
production. The acquired operating assets accounted for all of Republic
Technologies' steel melting capacity, over one-half of its hot-rolling capacity
and approximately two-thirds of its cold-finishing production capacity.
Specifically, we acquired Republic Technologies' melt shops at Canton and
Lorain, Ohio, its hot-rolling and processing mills at Canton and Lorain, Ohio
and Lackawanna, New York, its cold-finishing facilities at Massillon, Ohio and
Gary, Indiana (Dunes Highway) and certain assets at the machine shop in
Massillon, Ohio. We did not acquire Republic Technologies' idled melt shop at
Johnstown, Pennsylvania; its hot-rolling and processing mills at Massillon, Ohio
and Chicago, Illinois; or its cold-finishing facilities at Harvey, Illinois;
Gary, Indiana (Seventh Avenue); Beaver Falls, Pennsylvania; Willimantic,
Connecticut (idled); and Cartersville, Georgia. Republic Technologies'
Willimantic and Cartersville facilities previously had been sold to third
parties at the time we acquired the assets from Republic Technologies. We
believe the assets we acquired will enable us to better align our rolling
capabilities with our steel producing ability as compared to Republic
Technologies. We also acquired the following property: assets located on the
premises of Republic Technologies' corporate headquarters located in Akron,
Ohio; all permits used in the business in conjunction with the purchased assets;
all intellectual property used in connection with the business; certain
contracts; books, files and records used in the business; all inventory wherever
located; all accounts receivable; and an option to purchase the assets
associated with Republic Technologies' cold-finishing plant located in Hamilton,
Ontario on or prior to August 16, 2003 for nominal consideration and the
assumption of certain liabilities.
Our company hired approximately 2,400 of the approximately 3,700 employees
of Republic Technologies. Of the approximately 2,400 employees we hired,
approximately 1,900 are hourly employees and approximately 500 are salaried
employees. We hired substantially all of the employees that had previously been
employed by Republic Technologies at the facilities that we acquired. At these
acquired facilities, we did not hire approximately 100 employees as a result of
revised staffing levels, work eliminations and other factors. We purchased a
substantial part, but not all, of Republic Technologies' facilities in Canton
and Lorain, Ohio. Employees previously engaged by Republic Technologies at the
parts of the Canton and Lorain facilities that we did not purchase were not
hired.
We entered into a new labor agreement with the USWA, which covers most of
our hourly employees and has a five-year term. Compared to the labor agreement
between Republic Technologies and the USWA, our new labor agreement reduces the
number of employees and employment costs and provides us with increased staffing
flexibility to match our changing operating requirements. It removes several
significant items of fixed cost, which will permit improved scheduling
flexibility and eliminate legacy costs. Legacy costs that have been eliminated
consist of costs associated with non-employees, including retirees and future
retirees, under defined benefit retirement plans and retiree medical and life
insurance plans to which Republic Technologies contributed. These plans, which
had burdened the cash flow and balance sheet of Republic Technologies, are not a
part of the new labor agreement. We also expect the new labor agreement to
provide a better connection between the business plan performance and variable
compensation through the profit sharing plan and the performance based incentive
plan for unionized employees that are contemplated under the new labor
agreement. In addition, the
24
new labor agreement will simplify labor administration, which we expect to
contribute to the success of our business. See "Business-Employees".
The transaction eliminated significant liabilities that had been
associated with the business acquired from Republic Technologies, including $425
million in principal amount of Republic Technologies' 13 3/4% senior secured
notes, approximately $219.6 million of trade accounts payable, approximately
$134.7 million in revenue bonds and loans from governmental entities and
approximately $453.4 million of retiree pension and health benefits costs. We
purchased the assets free and clear of any liabilities pursuant to the order of
the Bankruptcy Court, except for those liabilities that we explicitly assumed
pursuant to the terms of the Asset Purchase Agreement. These assumed liabilities
include obligations under the contracts that we purchased from Republic
Technologies; up to $32.0 million of trade payables incurred by Republic
Technologies after it filed for bankruptcy protection; up to $2.6 million of
accrued freight, utilities and other miscellaneous current liabilities of
Republic Technologies; up to $3.6 million of taxes incurred by Republic
Technologies in the ordinary course of business after it filed for bankruptcy
protection; all liabilities arising after the closing of the acquisition from or
under the purchased assets; certain environmental clean-up obligations of
Republic Technologies under a U.S. Environmental Protection Agency corrective
action order that may arise after the closing of the acquisition relating to
real property that we purchased at the Canton, Ohio facility. In addition, we
agreed to reimburse Republic Technologies for up to $29.5 million of wages,
withholding taxes, vacation benefits, management performance incentives, and
health insurance benefits incurred but not reported to the extent that these
liabilities had been accrued by Republic Technologies prior to the closing of
the transaction and are not otherwise covered by any insurance or welfare
benefit fund maintained by Republic Technologies.
We incurred significant indebtedness in connection with the consummation
of the acquisition, including $80.0 million aggregate principal amount of the
notes and borrowings of $301.9 million under our credit facility. We also agreed
to pay $5.0 million to the holders of Republic Technologies' 13 3/4 % senior
notes under the terms of a transition service agreement with Republic
Technologies. See "Business-Formation of Our Company".
RESULTS OF OPERATIONS OF OUR COMPANY AND OUR PREDECESSOR
The historical consolidated financial information of Republic Technologies
International Holdings, LLC and our company may not be entirely comparable and
may be of limited value in evaluating our financial and operating results.
Year ended December 31, 2002 compared with Year ended December 31, 2001
The following discussion provides a comparison of the results of
operations of our company and Republic Technologies on a combined basis for the
year ended December 31, 2002 with the historical results of operations of
Republic Technologies for the year ended December 31, 2001. The discussion is
provided for comparative purposes only, but the value of such a comparison may
be limited. The results of operations for the year ended December 31, 2002
combines the results of operations for Republic Technologies for the period from
January 1, 2002 to August 15, 2002 with the results of operations of our company
for the period from August 16, 2002 to December 31, 2002. Such combined
financial information does not reflect the results of operations that either our
company or Republic Technologies would have achieved during the period. The
combined financial information for the year ended December 31, 2002 is merely
additive and does not give pro forma effect to our acquisition of assets of
Republic Technologies and the related transactions. In addition, although we
acquired a substantial portion of the assets
25
of Republic Technologies and we hired virtually all of its managers, our company
operates fewer production facilities, employs fewer hourly employees under more
flexible work rules, and has significantly fewer although new and different
liabilities than Republic Technologies. You should not interpret the combined
financial information for the year ended December 31, 2002 as the results of
operations that our company would have achieved had the acquisition occurred
prior to January 1, 2002.
Net sales on a combined basis for the year ended December 31, 2002 totaled
$912.1 million on shipments of approximately 1,828,805 net tons on a combined
basis compared with Republic Technologies' net sales of $993.7 million for the
year ended December 31, 2001 on shipments of approximately 1,979,629 net tons.
The decrease in net sales and tons shipped resulted from decreased tubular round
requirements and reduced cold-finished bar sales due to the sale or idling by
Republic Technologies of four cold-finished facilities. Net sales for the year
ended December 31, 2002 were comprised of $749.5 million of hot-rolled net sales
and $162.6 million of cold-finished net sales on a combined basis, compared with
Republic Technologies' hot-rolled net sales of $779.9 million and cold-finished
net sales of $213.8 million for year ended December 31, 2001.
Cost of sales totaled $882.7 million, or 96.8% of net sales, on a combined
basis for the year ended December 31, 2002, compared with Republic Technologies'
cost of sales of $985.6 million, or 99.2% of net sales, for the year ended
December 31, 2001. Cost of sales for the year ended December 31, 2002 consisted
of $717.1 million on hot-rolled products and $165.5 million on cold-finished
products on a combined basis, compared with $775.3 million on hot-rolled
products and $210.3 million on cold-finished products for the year ended
December 31, 2001. The overall decrease in cost of sales is primarily related to
the reduction of sales caused by decreased tubular round and cold-finished bar
shipments. Cost of sales as a percentage of net sales decreased primarily due to
an improved product mix and the benefit of reduced manufacturing overhead
resulting from the idling of cold-finished facilities.
Selling, general and administrative expenses were $39.0 million, or 4.3%
of net sales, on a combined basis for the year ended December 31, 2002, compared
with $44.4 million, or 4.5% of net sales, for the year ended December 31, 2001.
The overall decrease in selling, general and administrative expenses is due in
part to a $3.6 million reduction in salary and benefits due to a smaller
workforce in 2002, a $2.5 million reduction in information technology spending
and a $1.3 million reduction in professional fees and other items. These
reductions were offset by a $3.0 million increase in the cost of property
insurance in 2002 as compared with 2001. There was also a $1.0 million
monitoring fee recorded in the year ended December 31, 2001 compared to $0.4
million recorded in the year ended December 31, 2002.
Depreciation and amortization expense was $30.9 million for the year ended
December 31, 2002 on a combined basis, compared with $56.8 million for the year
ended December 31, 2001. The decrease in the current period was primarily
related to the Republic Technologies' change to the liquidation basis of
accounting as of June 30, 2002. Since property, plant and equipment and
intangible assets are stated at fair value under this method of accounting,
Republic Technologies recorded no depreciation expense for the period from July
1, 2002 to August 15, 2002. Our company reported $2.6 million of depreciation
for the period from August 16, 2002 to December 31, 2002 related to the assets
acquired from Republic Technologies. This reduction in depreciation and
amortization results from the change in basis of fixed assets and intangible
assets to fair market value of fixed assets acquired.
26
Special charges, recorded by Republic Technologies, were $10.5 million for
the year ended December 31, 2002, compared with $11.6 million for the year ended
December 31, 2001. The 2002 charges included $8.8 million relating to 43
voluntary early retirement buyouts being accepted during 2002. The remaining
2002 charges consisted of $1.9 million of severance-related costs for
administrative staff reductions and $0.6 million of miscellaneous facility
closure costs. A gain of $0.8 million as a result of Republic Technologies'
Willimantic plant sale and the reversal of a substantial portion of Republic
Technologies' related shutdown reserve offset these charges. Workforce reduction
charges were $8.0 million from pension and other post-retirement benefits
curtailment charges related to early retirement buyouts during the year ended
December 31, 2001. Also during the year ended December 31, 2001, Republic
Technologies shut down its Willimantic, Connecticut cold-finishing facility as
part of a continued attempt to reduce costs and improve efficiency. As a result
of this action, net of adjustments to previously recorded reserves, Republic
Technologies recorded restructuring charges of $3.6 million during 2001.
Net interest expense was $26.3 million for the year ended December 31,
2002 on a combined basis compared with Republic Technologies' net interest
expense of $56.1 million for the year ended December 31, 2001. The decrease is
primarily due to Republic Technologies' Chapter 11 filings suspending the
accrual of interest expense as of April 2, 2001 on all debt other than Republic
Technologies' debtor-in-possession credit facility and the industrial revenue
bond held with the Development Authority of Cartersville, Georgia.
Reorganization items represent costs relating to Republic Technologies'
Chapter 11 proceedings. These costs amounted to $2.4 million and $16.0 million
for the year ended December 31, 2002 and 2001, respectively. The amounts are
primarily incurred for various consulting and legal fees that are related to the
bankruptcy proceedings. Our company did not incur any such expenses.
The results of operations of our company and Republic Technologies on a
combined basis indicate a net loss of $80.7 million for the year ended December
31, 2002 compared with Republic Technologies' net loss of $182.6 million for the
year ended December 31, 2001.
Year ended December 31, 2001 compared with the year ended December 31, 2000
Republic Technologies' net sales for the year ended December 31, 2001
totaled $993.7 million on shipments of approximately 1,979,629 net tons compared
with net sales of $1,265.4 million for the year ended December 31, 2000 on
shipments of approximately 2,525,194 net tons. Net sales for the year ended
December 31, 2001 were comprised of $779.9 million for hot-rolled and $213.8
million for cold-finished, compared with hot-rolled net sales of $984.8 million
and cold-finished net sales of $280.6 million for the year ended December 31,
2000. Weak demand in the automotive and service center markets and reduced
market share negatively affected the 2001 results causing the decrease in net
sales and tons shipped.
Republic Technologies' cost of goods sold totaled $985.6 million, or 99.2%
of net sales, for the year ended December 31, 2001 compared with cost of goods
sold of $1,140.8 million, or 90.1% of net sales, for the year ended December 31,
2000. Cost of goods sold for the year ended December 31, 2001 consisted of
$775.3 million on hot-rolled products and $210.3 million on cold-finished
products compared with $885.9 million on hot-rolled products and $254.9 million
on cold-finished products for the year ended December 31, 2000. The loss of
efficiencies due to the decrease in sales volume from 2000 to 2001 caused cost
of goods sold to increase as a percentage of net sales in 2001.
27
Republic Technologies incurred selling, general, and administrative
expenses of $44.4 million, or 4.5% of net sales, for the year ended December 31,
2001 compared with $58.7 million, or 4.3% of net sales, for the year ended
December 31, 2000. The reduction in selling, general, and administrative
expenses was due to continuing staff reductions during the year ended December
31, 2001.
Depreciation and amortization expense for Republic Technologies was $56.8
million for the year ended December 31, 2001 compared with $61.5 million for the
year ended December 31, 2000. The decrease was primarily related to the
reduction of goodwill amortization following the impairment charge taken in the
fourth quarter of 2000.
Workforce reduction charges were $8.0 million for the year ended December
31, 2001 compared with $0.8 million for the year ended December 31, 2000. The
increase in workforce reduction charges resulted from pension and other
post-retirement benefits curtailment charges related to early retirement buyouts
incurred by Republic Technologies during the year ended December 31, 2001.
During the year ended December 31, 2001, Republic Technologies shut down
its Willimantic, Connecticut cold-finishing facility as part of a continued
attempt to reduce costs and improve efficiency. As a result of this action, net
of adjustments to previously recorded reserves, Republic Technologies recorded
restructuring charges of $3.6 million during 2001. During 2000, the Predecessor
recorded $74.6 million of charges relating to the shutdown of its Johnstown and
Willimantic facilities. A goodwill impairment charge of $79.6 million was also
recorded in the year ended December 31, 2000.
Net interest expense was $56.1 million for the year ended December 31,
2001 compared with $117.5 million for the year ended December 31, 2000. The
decrease is primarily due to the Chapter 11 filings suspending the accrual of
interest expense on all debt other than the DIP credit facility and the
industrial revenue bond held with the Development Authority of Cartersville,
Georgia.
Reorganization items recorded in the year ended December 31, 2001 related
to a $7.4 million write-down of deferred financing costs, as well as $8.6
million of professional fees and administrative items.
The provision for income taxes for the years ended December 31, 2001 and
2000 consisted of currently payable income taxes, primarily foreign income taxes
owed by Canadian Drawn Steel Company, Inc.
The loss from disposition of discontinued operations of $0.5 million and
$16.8 million in the years ended December 31, 2001 and 2000, respectively,
relates to the disposition of the Predecessor's Specialty Steel division.
As a result, Republic Technologies reported a net loss of $182.6 million
for the year ended December 31, 2001 compared with a net loss of $287.2 million
for the year ended December 31, 2000.
OUR LIQUIDITY AND CAPITAL RESOURCES
Going Concern Matters
The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or to amounts
and classification of liabilities that may be necessary should the Company be
unable to continue as a going concern. The Company's
28
performance since December 2002 has been below expectations, negatively
affecting liquidity. The Company's liquidity position has also been negatively
impacted by an unplanned outage at the Lorain #3 blast furnace resulting from
property damage and greater than expected increases in the cost of natural gas
during the first quarter of 2003. The Company's net availability on its
revolving credit facility at March 28, 2003 was $11.8 million. These factors
raise substantial doubt about the Company's ability to continue as a going
concern and, therefore, the Company may be unable to realize its assets and
discharge its liabilities in the normal course of business.
Management has sought to improve the Company's liquidity position by
taking a number of actions, including reducing its planned capital expenditures
from $20 million to $6 million for 2003, pursuing additional financing from the
State of Ohio, seeking reimbursement from business interruption and property
insurance for damage incurred to the #3 blast furnace at the Lorain facility,
and seeking to negotiate possible extensions to June 30, 2003 contractual
reductions in borrowing capacity under its senior revolving credit facility (see
Note 8). There can be no assurance that any of such actions will be successful.
Notwithstanding these efforts, the Company may need to obtain additional
financing to meet its cash flow requirements, including financing through the
sale of additional debt or equity securities. In light of the Company's
liquidity, its ability to raise additional capital is negatively impacted.
Restrictive covenants included in revolving credit facility and senior secured
notes limit the Company's ability to incur additional indebtedness or sell
assets (all of which are pledged), and may otherwise limit the operational and
financial flexibility of the Company.
Liquidity
Our company's sources of liquidity include cash and cash equivalents, cash
from operations and amounts available under our credit facility. Our primary
liquidity needs relate to working capital and capital expenditures.
Capital Expenditures
Republic Technologies invested $8.2 million and $3.6 million in capital
expenditures during the period from January 1, 2002 to August 15, 2002 and the
year ended December 31, 2001, respectively. Republic Engineered Products LLC
invested $17.3 million in capital expenditures during the period from August 16,
2002 to December 31, 2002. The capital expenditures limit under the Company's
credit facility was $24.0 million for the period from August 16, 2002 to
December 31, 2002. Current planned capital expenditures for 2003 are $6.0
million, and are expected to be funded using cash from operations, borrowings
under the credit facility, and borrowing under loans from the State of Ohio.
Capital expenditures for 2003 are limited under our credit facility to $20.0
million.
Debt Service Requirements
We incurred an aggregate of $381.9 million of debt obligations in
connection with the acquisition of the assets of Republic Technologies,
including $301.9 million of borrowings under our credit facility and the
issuance of $80.0 million of notes. We have significant debt repayment
obligations under our credit facility and our notes.
We entered into a credit facility with Fleet Capital Corporation and other
lenders on August 16, 2002. Our credit facility consists of a senior revolving
credit facility with a commitment of up to $336.0 million. We borrowed a total
of $301.9 million upon the closing of
29
the acquisition transaction and immediately paid down the outstanding amount to
$269.7 million. At December 31, 2002, we had $268.4 million outstanding under
the credit facility. The total commitment of $336.0 million will automatically
reduce by $5.0 million on the first day of each quarter commencing the fiscal
quarter that begins on July 1, 2003 until such time as the total commitment is
reduced to $275.0 million. The amount available to be borrowed at any time is
limited by a borrowing base, and the amount available under the credit facility
was approximately $15.2 million and $11.8 million at December 31, 2002 and March
28, 2003, respectively. We are entitled to draw amounts under the credit
facility to finance working capital and capital expenditures and for other
general corporate purposes.
Our borrowings under our credit facility are secured by a first priority
perfected security interest in the capital stock and other equity interests of
each direct and indirect subsidiary of Republic Holdings, other than 2011448
Ontario Limited, which collateral also secures our senior secured notes on an
equal and ratable basis, and all presently owned and subsequently acquired
inventory, accounts, intellectual property and related assets of Republic and
the guarantors (other than Republic Holdings) and the real estate and fixed
assets comprising, and the intellectual property relating to, our Canton, Ohio
Caster and Continuing Rolling Facility ("Canton CR(TM)"). The obligations under
the credit facility are secured and are unconditionally and irrevocably
guaranteed jointly and severally by Republic Holdings and each of Republic's
subsidiaries other than 2011448 Ontario Limited. Republic Holdings' guarantee is
limited in recourse to all of our membership interests owned by Republic
Holdings, which have been pledged to secure the guarantee.
Borrowings under the credit facility bear interest, at our option, at
either a base rate equal to the higher of the "prime rate" announced from time
to time by Fleet National Bank at its office in Boston, Massachusetts or the
weighted average of rates on overnight federal funds transactions with members
of the Federal Reserve System arranged by federal funds brokers, plus the
applicable margin; or a Eurodollar rate on deposits for one, two, three or six
month periods, plus the applicable margin. The applicable margin on base rate
loans initially is 1.25% and on Eurodollar loans is 3.00%. The applicable margin
on base rate and Eurodollar loans may be reduced to as low as 0.25% and 2.00%,
respectively, if we achieve specified reduced leverage ratios. As of December
31, 2002, borrowings under the credit facility are accruing interest at the rate
of 5.50% per year for base rate loans and 4.41% per year for Eurodollar loans.
Our credit facility contains negative covenants and provisions that
restrict, among other things, our ability to incur additional indebtedness or
guarantee the obligations of others, grant liens, make investments, pay
dividends, repurchase stock or make other forms of restricted payments, merge,
consolidate and acquire assets or stock, engage in sale and leaseback
transactions or dispose of assets, make capital expenditures in excess of
specified annual amounts, engage in transactions with our affiliates, and prepay
or amend our senior secured notes. The credit facility also requires us and our
subsidiaries to meet financial covenants and ratios, particularly a minimum
fixed charge coverage ratio based on operating cash flow to total debt service
to be tested quarterly commencing on March 31, 2004.
We issued $80.0 million aggregate principal amount of our notes to
Republic Technologies as partial consideration for the assets acquired. Republic
Technologies directed our company to issue the notes to the Republic Liquidating
Trust, a trust established by Republic Technologies for the benefit of the
holders of Republic Technologies' 13 3/4% senior secured notes.
30
Our notes require quarterly interest payments on March 31, June 30,
September 30 and December 31 of each year. The indenture governing the notes
requires us to redeem the notes with certain proceeds from asset sales of any
collateral that secures the notes and contains significant affirmative and
negative covenants including separate provisions imposing restrictions on
additional borrowings, certain investments, certain payments, sale or disposal
of assets, payment of dividends and change of control provisions, in each case,
subject to certain exceptions. The notes are secured, subject to exceptions and
limitations, by (1) a first priority lien on, and security interest in,
substantially all of the existing assets of Republic and its subsidiaries other
than the Canton CR(TM) facility, inventory, accounts receivable and intellectual
property and related assets, and (2) a first priority interest in the capital
stock and other equity interests of each direct and indirect subsidiary of
Republic Holdings, other than 2011448 Ontario Limited. Our obligations under the
notes are unconditionally and fully guaranteed jointly and severally on a senior
secured basis by Republic Holdings and each direct and indirect subsidiary of
Republic Holdings other than 2011448 Ontario Limited.
Tax Distributions
Republic is a limited liability company treated as a partnership for
income tax purposes and, accordingly, is not an income tax-paying entity.
Republic Holdings is also a limited liability company and therefore is also not
an income tax-paying entity. Pursuant to the amended and restated limited
liability company agreement of Republic Holdings, we are required to make cash
distributions to our members to the extent necessary to satisfy tax obligations
regarding their investment in our company. To the extent that Republic Holdings
is required to make tax distributions to its members, Republic will be required
to make equivalent cash distributions to its parent company, Republic Holdings.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets". ("SFAS No. 142") SFAS No. 142 eliminates the amortization of
goodwill and certain intangible assets upon adoption and also requires an
initial goodwill impairment assessment in the year of adoption and annual
impairment tests thereafter. Republic Technologies adopted this accounting
standard effective January 1, 2002 and has reported accordingly for the
consolidated financial statements included herein.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which requires recognition of the fair value of
liabilities associated with the retirement of long-lived assets when a legal
obligation to incur such costs arises as a result of the acquisition,
construction, development and/or the normal operation of a long-lived asset.
Upon recognition of the liability, a corresponding asset is recorded and
depreciated over the remaining life of the long-lived asset. SFAS No. 143
defines a legal obligation as one that a party is required to settle as a result
of an existing or enacted law, statute, ordinance, or written or oral contract
or by legal construction of a contract under the doctrine of promissory
estoppel. SFAS No. 143 is effective for fiscal years beginning after December
15, 2002. The Company anticipates an immaterial impact, if any, of SFAS No. 143
on its financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment
or Disposals of Long-Lived Assets". This statement establishes a single
accounting model for long-lived assets to be disposed of by sale and provides
additional implementation guidance for assets
31
to be held and used and assets to be disposed of other than by sale. There was
no financial statement implication related to the adoption of this Statement
by Republic Technologies effective January 1, 2002.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses significant
issues regarding the recognition, measurement and reporting of costs that are
associated with exit and disposal activities, including restructuring
activities. The scope of SFAS No. 146 includes (1) costs to terminate contracts
that are not capital leases; (2) costs to consolidate facilities or relocate
employees; and (3) termination benefits provided to employees who are
involuntarily terminated under the terms of a one-time benefit arrangement that
is not an ongoing benefit arrangement or an individual deferred-compensation
contract. The provisions of this Statement will be effective for exit or
disposal activities initiated after December 31, 2002, with early application
encouraged. The Company anticipates an immaterial impact, if any, of SFAS No.
146 on its financial statements.
COMMITMENTS AND CONTINGENCIES
The Company, in the ordinary course of business, is the subject of or
party to various pending or threatened legal and environmental actions. The
Company provides for the costs related to these matters when a loss is probable
and the amount is reasonably estimable. Based on information presently known to
the Company, management believes that any ultimate liability resulting from
these actions will not have a material adverse affect on its consolidated
financial position, results of operations or cash flows.
In connection with the closing of the asset purchase transaction with
Republic Technologies, the USWA took the position that the Company's new labor
agreement did not apply to the unionized employees of Canadian Drawn Steel. In
light of the USWA's position and rather than delay consummation of the entire
transaction, the parties negotiated the first amendment to the Asset Purchase
Agreement which among various other matters, included the inventory and
receivables of Canadian Drawn Steel in the assets the Company acquired and gave
the Company a one-year option to purchase the other assets of Canadian Drawn
Steel for nominal additional consideration, without adjustment to the overall
purchase price. Under the option, if the business of Canadian Drawn Steel is
sold to a third party, Republic Technologies will pay the net proceeds of that
sale to the Company.
On August 30, 2002, the USWA filed a motion with the Bankruptcy Court
seeking to compel the sale to the Company of substantially all of the assets of
Canadian Drawn Steel. On September 17, 2002, the Company and Republic
Technologies filed separate objections to the USWA's motion, asserting, among
other things, that the USWA had breached the agreement with Republic
Technologies with respect to the unionized employees of Canadian Drawn Steel and
was attempting to force the Company to assume additional liabilities for legacy
costs which the Company did not agree to assume under the Asset Purchase
Agreement. In addition, Republic Technologies asserted various procedural
defenses against the USWA and the Company objected to several of the factual
assumptions underlying the USWA's proposed orders.
The USWA withdrew its motion described above and on October 21, 2002 filed
a complaint with the Bankruptcy Court seeking similar relief as in the motion.
The complaint alleged, among other things, that because we did not purchase
substantially all of the assets of Canadian Drawn Steel, (i) Republic
Technologies breached a shutdown agreement with the USWA, (ii) the Company
breached a letter agreement with the USWA, (iii) the Company breached the Asset
Purchase Agreement and (iv) the Company and Republic Technologies
32
violated an order of the Bankruptcy Court which approved the sale of assets by
Republic Technologies to the Company. In the complaint, the USWA requested the
Bankruptcy Court to compel the sale to the Company of substantially all of the
assets of Canadian Drawn Steel. On December 4, 2002, the Company and Republic
Technologies filed separate answers to the USWA's complaint in which the Company
and Republic Technologies denied the principal allegations of the USWA and
asserted various defenses and counterclaims. The Company expects to vigorously
pursue this litigation.
The following table summarizes our contractual obligations at December 31,
2002, and the effect of such obligations are expected to have on our liquidity
and cash flow in future periods.
2004 2006
THROUGH THROUGH
TOTAL 2003 2005 2007 BEYOND 2007
----- ---- ---- ---- -----------
Revolving credit facility (a) ... $268,378 $268,378 -- -- --
Long-term debt (a) .............. 80,000 -- -- -- $ 80,000
Operating leases (b) ............ 24,496 9,334 $ 9,658 $ 3,835 1,669
Transition services agreement (c) 1,000 1,000 -- -- --
-------- -------- -------- -------- --------
Total contractual obligations ... $373,874 $278,712 $ 9,658 $ 3,835 $ 81,669
======== ======== ======== ======== ========
(a) See Note 8 to the Consolidated Financial Statements.
(b) Includes various lease agreements necessary for maintaining
operations.
(c) See Note 1 to the Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
All statements other than statements of historical fact included in this
report, including statements under "Business," "Legal Proceedings,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Quantitative and Qualitative Disclosures About Market Risk,"
regarding our future financial position, results of operations, business
strategy, budgets, projected costs and plans and objectives for future
operations, are forward-looking statements. In addition, these forward-looking
statements generally can be identified by the use of forward-looking terms such
as "may," "will," "expect," "intend," "estimate," "anticipate," "foresee,"
"project," "plan" or "believe" or the negative of these words or variations on
these words or similar phrases. We have based these forward-looking statements
on our current assumptions, expectations and projections about future events,
which are subject to risks and uncertainties. We caution you that a variety of
factors could cause business conditions and results to differ materially from
what is contained in the forward-looking statements, including the following:
- We are a new enterprise, and the financial information regarding our
predecessor's business may be limited and may not be fully
comparable.
- If we do not achieve the operating synergies and cost savings that
we expect from our business plan, we may not be able to service our
debt.
- Delays and disruptions in the implementation of our business plan
will reduce cash flow and may harm customer relationships.
33
- If we are unable to obtain or maintain quality certifications for
our facilities, we may loss existing customers and be hampered in
our efforts to attract new customers.
- We operate only in the steel industry, and we are substantially
dependent upon the automotive industry; both these industries are
cyclical in nature, and continue to be adversely affected by general
economic conditions, weak demand, foreign competition, lack of
consumer confidence and other factors beyond our control.
- The continued operation of our Lackawanna, New York facility depends
upon our ability to finalize an agreement continuing a complex
interrelationship of shared systems, equipment and rights.
- Our environmental compliance costs could be greater than presently
anticipated.
- Raw materials and energy costs continue to be volatile, and higher
costs often cannot be recaptured through price surcharges to our
customers.
- Our credit facility and indenture impose significant operating and
financial restrictions.
Ownership of our notes is subject to risks relating to our ability to
service our debt, possibly inadequate collateral and priority in any bankruptcy,
lack of liquidity and other risks discussed herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our interest expense is sensitive to changes in the general level of
interest rates in the United States. At December 31, 2002, we had $80.0 million
aggregate principal amount of the notes outstanding and $268.4 million
outstanding under our credit facility. Our notes bear interest at a fixed rate
of 10% per year, but the interest rate on additional borrowings under our credit
facility may vary. As a result, our primary exposure to market risk for changes
in interest rates relates to our credit facility. Borrowings under the credit
facility bear interest, at our option, at either (1) a base rate equal to the
higher of the "prime rate" announced from time to time by Fleet National Bank at
its office in Boston, Massachusetts or the weighted average of rates on
overnight federal funds transactions with members of the Federal Reserve System
arranged by federal funds brokers, plus the applicable margin; or (2) a
Eurodollar rate on deposits for one, two, three or six month periods, plus the
applicable margin. As of December 31, 2002, borrowings under the credit facility
are accruing interest at the rate of 5.50% per year for base rate loans and
4.41% per year for Eurodollar loans. If the average interest rate for our
borrowings under the credit facility were to increase by 100 basis points, our
interest expense on average borrowings of $278.8 million would increase by
approximately $2.8 million and reduce our net earnings, if any.
Almost all of our transactions are denominated in U.S. dollars, and, as a
result, we do not have material exposure to currency exchange-rate risks.
We do not currently engage in any interest rate, foreign currency exchange
rate or commodity price hedging transactions, although we may do so in the
future.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this
report following the signature page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with the Company's accountants on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of the Company's accountants, would have caused it to make
reference to such disagreement in connection with its report.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Republic Holdings is a limited liability company which manages Republic,
its wholly-owned subsidiary. The board of managers of Republic Holdings directs
the management of Republic and the day-to-day operation of Republic is managed
by officers who are appointed by the board of managers of Republic Holdings. The
following table sets forth the name, position and age of each of the managers
and executive officers of Republic Holdings and Republic and each of the
directors and executive officers of Blue Steel Capital, Inc. as of March 14,
2003. N&T Railway, a limited liability company, has no directors or officers and
is managed by Republic, its sole member.
NAME POSITION AGE
- ---- -------- ---
Joseph F. Lapinsky President and Chief Executive Officer of Republic, Republic 53
Holdings and Blue Steel Capital and Managing Director of
Republic Holdings
John G. Asimou Executive Vice President, Technology and Quality 57
Assurance of Republic
James T. Thielens, Jr. Vice President, Marketing of Republic 44
Charles T. Cochran Vice President, Sales of Republic 48
Noel J. Huettich Vice President, Hot-Roll Bar Operations of Republic 57
Joseph Kaczka Chief Financial Officer, Vice President, Finance and 55
Controller, and Secretary of Republic, Republic Holdings
and Blue Steel Capital
James T. Kuntz Vice President and General Manager, Lorain Operations and 64
Corporate Transportation of Republic
John B. George Vice President, Purchasing and Integrated Supply Chain 56
Management of Republic
John Willoughby Vice President, Human Resources of Republic 55
Eugene J. Keilin Managing Director of Republic Holdings 60
Michael G. Psaros Chairman of the Board of Managers and 35
Managing Director of Republic Holdings and director of
Blue Steel Capital
David Shapiro Managing Director of Republic Holdings 40
Stephen Presser Managing Director of Republic Holdings and director of 43
Blue Steel Capital
Philip A. Arra, Jr. Managing Director of Republic Holdings and director of 32
Blue Steel Capital
Kelby Hagar Managing Director of Republic Holdings and director of 32
Blue Steel Capital
Lynn Williams Managing Director of Republic Holdings 78
35
Joseph F. Lapinsky has over 29 years of experience in the steel industry.
Mr. Lapinsky joined our company in August 2002 and currently serves as President
and Chief Executive Officer of Republic, Republic Holdings and Blue Steel
Capital and as a managing director of Republic Holdings. Prior to joining our
company, Mr. Lapinsky held several positions at Republic Technologies and its
predecessors. He became President and Chief Operating Officer of Bar
Technologies Inc. and Republic Engineered Steels, Inc. in October 1998. Mr.
Lapinsky also became a director of Republic Engineered Steels, Inc. at that
time. Mr. Lapinsky became Chief Executive Officer and a director of Republic
Technologies International Holdings, LLC in February 2000. Mr. Lapinsky served
as a corporate Vice President and President of Republic Engineered Steels's
Hot-Rolled Bar Division from January 1997 to September 1998. Prior to that time
he served as General Manager of Republic Engineered Steels, Inc.'s hot-rolled
bar operations from September 1995 to January 1997. Prior to that time he was
Executive Vice President of Autumn Industries, Inc. from September 1991 to
September 1995 and Executive Vice President of CSC Industries, Inc. from
December 1987 to September 1991. Mr. Lapinsky was a director and executive
officer of Republic Technologies at the time Republic Technologies, its
immediate parent company and certain of its subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code.
John G. Asimou has over 34 years of experience in the steel industry. Mr.
Asimou joined our company in August 2002 and currently serves as Executive Vice
President, Technology and Quality Assurance of Republic. Prior to joining our
company, Mr. Asimou held several positions at Republic Technologies and its
predecessors. Mr. Asimou joined Republic Technologies in August 1999 and served
as Executive Vice President and General Manager - Cold-Finished Operations. In
October 1996 joined Bar Technologies Inc. and served as Executive Vice President
of Technology and Development until September 1998. Mr. Asimou served as
Executive Vice President and General Manager, Cold-Finished Bar Division of
Republic Engineered Steels from October 1998 to August 1999. From 1993 to 1996,
Mr. Asimou was Vice President - Quality & Technology for Birmingham Steel
Corporation. From 1986 to 1993, Mr. Asimou served as General Manager - Quality
and Technology of American Steel & Wire Corporation. From 1984 to 1986, Mr.
Asimou was Metallurgical Service Engineer for Bethlehem Steel Corporation. From
1968 to 1984, Mr. Asimou served in various SBQ bar and rod assignments for
United States Steel Corporation, a fully integrated steel producer. Mr. Asimou
was an executive officer of Republic Technologies at the time Republic
Technologies, its immediate parent company and certain of its subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code.
James T. Thielens, Jr. has over 22 years of experience in the steel
industry. Mr. Thielens joined our company in August 2002 and currently serves as
Vice President, Marketing of Republic. Mr. Thielens had been employed by
Republic Technologies prior to joining our company. Mr. Thielens joined Republic
Technologies in 1989 and served as Vice President, Marketing. Mr. Thielens
served as Vice President, Commercial Hot-Rolled Bar Division from October 1998
to February 2001, and Vice President, Sales and Marketing, of Republic
Engineered Steels's Hot-Rolled Bar Division from March 1997 until September
1998. He served as General Manager of Marketing for Republic Engineered Steels
from March 1995 to March 1997 and as a Regional Sales Manager of Republic
Engineered Steels's Bar Products Division from April 1994 to March 1995. Prior
to that time he held various sales and marketing positions at Republic
Engineered Steels since its formation in 1989. Mr. Thielens was an executive
officer of Republic Technologies at the time Republic Technologies, its
immediate parent company and certain of its subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code.
36
Charles T. Cochran has over 24 years of experience in the steel industry.
Mr. Cochran joined our company in August 2002 and currently serves as Vice
President, Sales of Republic. Mr. Cochran had been employed by Republic
Technologies prior to joining our company. Mr. Cochran joined Republic
Technologies in August 1999 and served as Vice President, Commercial,
Cold-Finished until February 2001 at which time he was promoted to Vice
President Sales. He served as Vice President, Commercial, Cold-Finished Bar
Division for Bar Technologies Inc. and Republic Engineered Steels from October
1998 to August 1999. Mr. Cochran served as Vice President, Sales and Marketing,
of Republic Engineered Steels's Cold-Finished Bar Division from January 1997 to
September 1998. He served as Vice President, Sales and Marketing of Republic
Engineered Steels's Bar Products Division from January 1995 to January 1997.
From May 1994 to January 1995 he was Republic Engineered Steels's General
Manager, Cold-Finished Bar Division. Prior to that time he held various regional
sales positions at Republic Engineered Steels since its formation in 1989. Mr.
Cochran was an executive officer of Republic Technologies at the time Republic
Technologies, its immediate parent company and certain of its subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code.
Noel J. Huettich has over 32 years of experience in the steel industry.
Mr. Huettich joined our company in August 2002 and currently serves as Vice
President, Hot-Roll Bar Operations of Republic. Mr. Huettich had been employed
by Republic Technologies prior to joining our company. He became Vice President,
Hot-Rolled Bar Operations for Republic Technologies in November 2000. Prior to
this appointment, Mr. Huettich was the general manager for the Lorain plant,
after having served as manager for both the Canton and Massillon facilities. In
his 29 years at Republic Engineered Steels Mr. Huettich has held positions of
increasing responsibility including manager of process metallurgy, manager of
the Canton No. 4 melt shop and manager of the Canton Bloom Cast facility, where
he was part of the successful start-up. Mr. Huettich was an executive officer of
Republic Technologies at the time Republic Technologies, its immediate parent
company and certain of its subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code.
Joseph Kaczka joined our company in August 2002 and currently serves as
Chief Financial officer, Vice President, Finance and Controller, and Secretary
of Republic, Republic Holdings and Blue Steel Capital. Mr. Kaczka had been
employed by Republic Technologies prior to joining our company. He became Vice
President of Finance and Controller for Republic Technologies International, LLC
in September 1999. Mr. Kaczka joined Republic Technologies after 32 years of
service with USS/Kobe Steel Company and its predecessor companies. He most
recently served as Treasurer and Controller for USS/Kobe Steel Company, which he
had held since 1997. From 1995 through 1997, Mr. Kaczka held the position of
Treasurer for USS/Kobe Steel Company and from 1989 through 1995 he served as
Controller for USS/Kobe Steel Company. Prior to 1989, he held various positions
at USX Corporation locations in Pennsylvania, Alabama and Ohio. Mr. Kaczka was
an executive officer of Republic Technologies at the time Republic Technologies,
its immediate parent company and certain of its subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code.
James T. Kuntz joined our company in August 2002 and currently serves Vice
President and General Manager, Lorain Operations and Corporate Transportation of
Republic. Mr. Kuntz had been employed by Republic Technologies prior to joining
our company. He was named Vice President and General Manager, Lorain Operations
and Corporate Transportation of Republic in January 2003. Mr. Kuntz previously
served as Vice President, Purchasing and Supply Chain Management at Republic
Technologies. Prior to joining Republic, Mr. Kuntz was Vice President
37
of Global Indirect Purchasing at the former TRW, Inc. in Lyndhurst, Ohio, a
global technology, manufacturing and service company. Prior to that, Mr. Kuntz
served in purchasing management positions at AMTRAN in Conway, Arkansas, and
Southwest Mobile Systems in West Plains, Missouri.
John B. George has over 33 years of experience in the steel industry. Mr.
George joined our company in August 2002 and currently serves as Vice President,
Purchasing and Integrated Supply Chain Management of Republic. Mr. George had
been employed by Republic Technologies and its predecessors prior to joining our
company. He became Vice President of Finance and Treasurer for Bar Technologies
Inc. and Republic Engineered Steels in October 1998. He was also appointed
Secretary in December 1998. Prior to joining Republic Technologies, Mr. George
previously served as Treasurer of Republic Engineered Steels, since April 1991.
From November 1989 to April 1991, he was Assistant Treasurer for Republic
Engineered Steels. Mr. George was an executive officer of Republic Technologies
at the time Republic Technologies, its immediate parent company and certain of
its subsidiaries filed voluntary petitions for reorganization under Chapter 11
of the United States Bankruptcy Code.
John Willoughby joined our company in August 2002 and currently serves as
Vice President, Human Resources of Republic. He joined Republic Technologies in
June 2000 and served as Vice President, Human Resources. Mr. Willoughby was most
recently Vice President of Human Resources at RHI Refractories America, a
Pittsburgh-based company. Mr. Willoughby was also Chief Human Resources and
Communications Executive at North American Refractories for more than two years.
Previously, Mr. Willoughby had spent nearly 20 years at Republic Engineered
Steels's predecessor companies. He was General Supervisor of Labor Relations for
six years at Republic Engineered Steels, and served in Labor Relations and
Public Affairs positions with LTV Steel Company's bar group and with Republic
Steel Corporation's Cleveland headquarters. Mr. Willoughby was an executive
officer of Republic Technologies at the time Republic Technologies, its
immediate parent company and certain of its subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code.
Eugene J. Keilin was appointed as a managing director of Republic in
August 2002 and was appointed as a managing director of Republic Holdings in
January 2003. Mr. Keilin co-founded KPS Special Situations Fund, L.P. a Delaware
limited partnership ("KPS"), a private equity fund focused on constructive
investing in restructurings, turnarounds and other special situations, in 1998,
and Keilin & Co. LLC, an investment banking firm specializing in providing
financial advisory services in connection with mergers, acquisitions and
turnaround situations, in 1990. Mr. Keilin serves on the board of directors of
several companies, including Blue Ridge Paper Products Inc., a manufacturer of
envelope grade paper and board used in liquid packaging ("Blue Ridge"); Blue
Heron Paper Company, a manufacturer of newsprint and groundwood paper products
("Blue Heron"); DeVlieg Bullard II, Inc., a machine tool manufacturer
("DeVlieg"); United Road Services Inc., a public company and leading national
provider of a broad array of motor vehicle transport, towing and recovery
services ("United Road Services"); Curtis Papers, Inc, a producer of specialty
and premium papers ("Curtis"); Genesis Worldwide II, Inc., a capital goods
manufacturer servicing all segments of the metals industry ("Genesis"); and New
Flyer Industries, Ltd., a maker of transit buses ("New Flyer"). Mr. Keilin
previously served on the board of directors of Weirton Steel Corporation. Prior
to founding KPS and co-founding Keilin & Co., Mr. Keilin was a General Partner
of Lazard Freres & Co.
Michael G. Psaros was appointed as a managing director of Republic and a
director of Blue Steel Capital in July 2002 and was appointed Chairman of the
Board of Managers of
38
Republic in October 2002. Mr. Psaros was appointed as a managing director and
Chairman of the Board of Republic Holdings in January 2003 in connection with
the restructuring. Mr. Psaros is a founding and Managing Principal of KPS. Mr.
Psaros serves on the Board of Directors of the following KPS portfolio
companies: Blue Ridge, Blue Heron, DeVlieg, United Road Services, Curtis,
Genesis and New Flyer. Mr. Psaros is also a Managing Principal of Keilin & Co.,
which he joined in 1991. Prior to joining Keilin & Co., Mr. Psaros was an
investment banker with Bear, Stearns & Co., Inc.
David Shapiro was appointed as a managing director of Republic in August
2002 and was appointed as a managing director of Republic Holdings in January
2003 in connection with the restructuring. Mr. Shapiro co-founded KPS and is
currently a Managing Principal of KPS and Keilin & Co. Mr. Shapiro joined Keilin
& Co. in 1991. Mr. Shapiro serves on the board of directors of the following KPS
portfolio companies: Blue Ridge, Blue Heron, DeVlieg, United Road Services,
Curtis, Genesis and New Flyer. Prior to joining Keilin & Co., Mr. Shapiro was an
investment banker with Drexel Burnham Lambert and Dean Witter Reynolds.
Stephen Presser was appointed as a managing director of Republic and a
director of Blue Steel Capital in July 2002 and was appointed as a managing
director of Republic Holdings in January 2003 in connection with the
restructuring. Mr. Presser joined KPS and Keilin & Co. in 1998 and is currently
a Principal of KPS and Keilin & Co. Mr. Presser serves on the board of directors
of the following KPS portfolio companies: Blue Ridge, Blue Heron, DeVlieg and
United Road Services. Prior to joining KPS and Keilin & Co., Mr. Presser was a
partner in the law firm of Cohen, Weiss and Simon of New York.
Philip A. Arra, Jr. was appointed as a managing director of Republic and a
director of Blue Steel Capital in July 2002 and was appointed as a managing
director of Republic Holdings in January 2003 in connection with the
restructuring. Since 2001, Mr. Arra has been employed as a Vice President by
Hunt Investment Group, L.P., a private equity investment group. Prior to joining
Hunt, Mr. Arra worked in J.P. Morgan & Co.'s Mergers and Acquisitions, Consumer
Products and Financial Sponsors practices from June 1999. In addition, Mr. Arra
worked in the Acquisitions Group of KSL Fairways, a leveraged build-up in the
recreation industry sponsored by Kohlberg Kravis Roberts & Co. from March 1995
through July 1997.
Kelby Hagar was appointed as a managing director of Republic and a
director of Blue Steel Capital in July 2002 and was appointed as a managing
director of Republic Holdings in January 2003 in connection with the
restructuring. Since 2001, Mr. Hagar has been employed as a Vice President by
Hunt Investment Group, L.P. Prior to joining Hunt, Mr. Hagar founded
GroceryWorks.com, Inc., a vertically integrated online home grocery business.
Mr. Hagar served as the President of GroceryWorks from its founding in 1999
until the purchase of GroceryWorks by Safeway, Inc. and Tesco, plc. in 2001.
From 1995 to 1999, Mr. Hagar served as an attorney with Gibson, Dunn & Crutcher,
LLP's Corporate and Taxation sections.
Lynn Williams was appointed as a managing director of Republic in August
2002 and was appointed as a managing director of Republic Holdings in January
2003 in connection with the restructuring. Mr. Williams has been retired since
1994. From 1983 until his retirement, Mr. Williams served as President of the
United Steelworkers of America. Mr. Williams was a director of Republic
Technologies at the time Republic Technologies, its immediate parent company and
certain of its subsidiaries filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code.
39
COMPOSITION OF BOARD OF MANAGERS
Republic Holdings' Amended and Restated Limited Liability Company
Agreement provides that the board of managers will consist of nine individuals
appointed from time to time as follows. Blue Bar Holdings, L.P., a Delaware
limited partnership and the sole member of Republic Holdings, or any transferee
of more than 50% of Blue Bar Holdings' membership interest in Republic Holdings,
is entitled to designate and appoint six managing directors and to remove and
replace such individuals at any time and from time to time, with or without
cause. The USWA is entitled to designate and appoint one managing director and
to remove and replace such individual at any time and from time to time, with or
without cause. The person serving as chief executive officer of Republic
Holdings, currently Mr. Lapinsky, will serve as a managing director for so long
as he or she serves as the chief executive officer of Republic Holdings or until
removed by the board of managers, with or without cause, or until his or her
resignation or death. The board of managers will from time to time designate a
duly appointed officer of our company in addition to the chief executive officer
to serve as a managing director, and such officer shall serve as a managing
director until removed by the board of managers, with or without cause, or until
his or her resignation or death.
The managing directors of Republic Holdings, which is a Delaware limited
liability company, are elected in a different manner than the directors of a
Delaware corporation, a more common form of business entity. In general,
directors of a Delaware corporation are elected by its shareholders, typically
at an annual meeting. Nominees for director are typically designated by the then
constituted board of directors of the corporation and shareholders are asked to
vote on whether each nominee should be elected as a director. By contrast, the
selection of managing directors of Republic Holdings is governed by its Amended
and Restated Limited Liability Company Agreement, one of its governing
documents. That agreement, as noted above, provides for a board of nine managing
directors, of which six are designated by Blue Bar Holdings, one is designated
by the USWA, one is the chief executive officer of Republic Holdings and one is
an officer chosen by the chief executive officer. The agreement does not provide
for a meeting of equity holders or a vote of equity holders on the selection of
managing directors.
COMMITTEES OF BOARD OF MANAGERS
The board of managers of Republic Holdings is authorized to delegate
authority to committees. The entire board of managers will perform the functions
of an audit committee until such time as an audit committee is established. None
of our executive officers has served as a member of the compensation committee,
a similar committee or the board of directors of another entity, one of whose
executive officers served on our board of managers.
40
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth compensation information for the chief
executive officer of Republic Holdings and each of the four other most highly
compensated executive officers of Republic Holdings and our wholly-owned
subsidiaries, Republic, Blue Steel Capital and N&T Railway, for the fiscal year
ended December 31, 2002.
SUMMARY COMPENSATION TABLE
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(a) BONUS COMPENSATION(b)
--------------------------- ---- --------- ----- ---------------
Joseph F. Lapinsky
President and Chief Executive Officer of
Republic Holdings, Republic and Blue Steel
Capital 2002 $575,000 $ 56,250 $ 4,862
John G. Asimou
Executive Vice President,
Technology and Quality Assurance of Republic 2002 $236,250 $ -- $ --
Noel J. Huettich
Vice President, Hot-Bar Roll Operations of
Republic 2002 $213,370 $ -- $ --
Joseph A. Kaczka
Chief Financial Officer, Vice President,
Finance and Controller of Republic Holdings,
Republic and Blue Steel Capital 2002 $180,000 $ -- $ --
James T. Kuntz
Vice President, Purchasing and Material
Management of Republic 2002 $180,000 $ -- $ --
- ----------
(a) The salaries for Messrs. Lapinsky, Asimou, Huettich, Kaczka and Kuntz are
shown on an annualized basis. Because we did not commence operations until
August 16, 2002, the actual salaries for these officers for the period
ended December 31, 2002 were as follows: Mr. Lapinsky - $215,625; Mr.
Asimou - $88,594; Mr. Huettich - $78,972; Mr. Kaczka - $66,667; and Mr.
Kuntz - $67,500.
(b) The amount set forth in this column for Mr. Lapinsky primarily includes a
lease of an automobile and spousal travel fees.
The following table sets forth compensation information for our
predecessor's chief executive officer and each of its four most highly
compensated executive officers for the fiscal years ended December 31, 2001 and
2000.
41
SUMMARY COMPENSATION OF PREDECESSOR
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (b)
--------------------------- ---- ------ ----- ----------------
Joseph F. Lapinsky 2001 $460,755 $375,000 $ 98,500
Chief Executive Officer, President & 2000 $394,145 $125,000 $ 29,023
Chief Operating Officer (a)
Thomas N. Tyrrell 2001 N/A $150,000 $101,000
Former Chief Executive Officer (a) 2000 $ 66,667 $187,500 $735,448
John G. Asimou 2001 $212,625 $ 75,000 $ 28,011
Executive Vice President and General 2000 $225,346 $ 93,750 $ 3,619
Manager, Cold-Finished Bar Division
Noel J. Huettich 2001 $149,370 $ 20,000 $ 31,255
Vice President, Vice President, Hot- 2000 $132,140 -- $ 6,921
Rolled Bar Operations
Stephen Graham 2001 $176,926 $ 75,000 $ 57,976
Former Executive Vice President & 2000 $230,000 $ 20,000 $ 33,431
Chief Financial Officer (a)
Charles T. Cochran 2001 $157,056 $ 25,000 $ 11,520
Vice President, Commercial Cold- 2000 $160,246 $ 31,250 $ 10,341
Finished
(a) Mr. Tyrrell resigned from the Predecessor in February 2000. Mr. Lapinsky
was named Chief Executive Officer at that time. Mr. Graham joined the
Predecessor in February 2000, and resigned from the Predecessor in October
2001.
(b) The amounts set forth in this column for Messrs. Lapinsky, Asimou,
Huettich, Graham, and Cochran primarily include amounts of annual premiums
paid by the Predecessor under group term life insurance for such officers.
The life insurance carried a maximum value of four times base salary for
Mr. Lapinsky (beginning in 2000), and two times base salary for each other
officer, and has no cash surrender value. This column also includes
relocation costs for Mr. Graham who joined the Predecessor in 2000 and
severance dollars received by Mr. Tyrrell who resigned from the
Predecessor in February 2000.
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Mr. Lapinsky which became
effective as of August 16, 2002. This agreement will continue in effect until
December 31, 2004, unless either Mr. Lapinsky or our company gives the other
party written notice of termination on or before September 30th of any given
year during such term. If no such notice is given, the agreement automatically
extends for an additional 12-month period ending December 31. Mr. Lapinsky's
annual base salary is initially, and will not be less than, $575,000, subject to
annual increases as determined by our board of managers. Mr. Lapinsky is also
entitled to receive an annual bonus of not less than $150,000. Mr. Lapinsky's
employment agreement also entitles him to receive, subject to a vesting
schedule, an equity appreciation interest with respect to 4.5% of Republic's
equity, fully diluted as of August 16, 2002. Mr. Lapinsky's employment agreement
will be amended to provide that he will receive equity in Republic Holdings
rather than Republic.
42
During Mr. Lapinsky's employment, our company will provide Mr. Lapinsky
with: term life insurance in an amount equal to four times his base salary;
payment of fees at one social, dining, athletic or country club that the board
of managers has approved for use by Mr. Lapinsky for priority business
entertainment purposes; the right to participate in our 401(k) plan; long-term
disability coverage providing a monthly benefit of $22,500; a $1,000 annual
allowance for tax return preparation expenses; a one-time $1,000 allowance for
legal fees incurred in reviewing Mr. Lapinsky's employment agreement; and a two
year renewable automobile lease. Our company will also reimburse Mr. Lapinsky
for all reasonable expenses incurred by Mr. Lapinsky in carrying out his duties.
Our company or Mr. Lapinsky may terminate Mr. Lapinsky's employment at any
time for any reason by written notice. If Mr. Lapinsky's employment is
terminated (i) by our company for any reason other than cause, disability or
death or (ii) by Mr. Lapinsky for good reason, our company will continue to pay
Mr. Lapinsky's base salary for the remainder of the term of employment. In
addition, Mr. Lapinsky will, during the period that he continues to be
compensated, continue participation and benefits under our company's health,
dental, life insurance and long term disability plans. Notwithstanding anything
to the contrary, Mr. Lapinsky will not be entitled to payment of his base salary
and benefits for more than 36 months following any such termination.
MANAGEMENT INCENTIVE PLAN
Under the Asset Purchase Agreement, we are obligated to adopt an
equity-based incentive plan for senior management of our company. We expect that
participants in the plan will receive grants of equity appreciation interests in
Republic Holdings with the terms, conditions and amounts of the grants to be
determined by our board of managers. The equity appreciation interests will be
with respect to up to 9% of Republic Holdings' equity, fully diluted as of
August 16, 2002, which includes the 4.5% equity appreciation interest we agreed
to grant to Mr. Lapinsky under his employment agreement.
Our company intends to develop a severance plan for salaried employees,
which will provide severance consideration to all employees. Currently, this
plan is expected to provide severance from two weeks to one year depending on a
particular employee's service and position. In addition, our company plans to
provide life insurance benefits similar to such benefits provided previously by
Republic Technologies with any necessary modifications to comply with recent
changes in the law that restrict loans to executive officers.
COMPENSATION OF MANAGING DIRECTORS
The board of managers of Republic Holdings is authorized to fix the
compensation of managing directors. The managing directors may be reimbursed for
their expenses, if any, of attendance at each meeting of the board of managers
and may be paid either a fixed sum for attendance at each meeting of the board
of managers or a stated salary as a managing director. Members of any committees
formed by the board of managers may be allowed like compensation for attending
committee meetings. The board of managers has not established the compensation
arrangements for its members.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Republic is a limited liability company which is managed by Republic
Holdings, its sole member. Republic Holdings is a Delaware limited liability
company. Except as indicated below,
43
the following table sets forth information at January 31, 2003 as to the
approximate beneficial ownership of the voting securities of Republic Holdings
by: (i) owners of more than 5% of the outstanding equity, (ii) our company's
named executive officers and Republic Holdings' managing directors, and (iii)
all of such executive officers and managing directors as a group.
The USWA holds one voting unit, which entitles it to appoint one managing
director to Republic Holdings' board of managers for so long as it maintains its
position as the collective bargaining representative for any employees of our
company and its subsidiaries. The voting unit held by the USWA is not a
membership interest in our company and does not entitle the union to share in
the profits or losses of our company. Except as indicated in the footnotes to
this table, our company believes that the persons named in the table have sole
voting and investment power with respect to all equity interests shown as
beneficially owned by them. Unless otherwise indicated below, the address for
each of our beneficial owners is c/o Republic Engineered Products LLC, 3770
Embassy Parkway, Akron, Ohio 44333-8367.
OWNERSHIP OF REPUBLIC ENGINEERED
PRODUCTS HOLDINGS LLC
----------------------------------
Name and Address NUMBER OF UNITS PERCENTAGE OWNED
--------------- ----------------
Blue Bar Holdings, L.P. (1)(2) ............... 1,000 100%
c/o Blue Steel Corporation
200 Park Avenue
New York, New York 10166
Joseph F. Lapinsky ........................... -- --
Eugene J. Keilin (1)(3) ...................... -- --
David Shapiro (1)(3) ......................... -- --
Michael G. Psaros (1)(3) ..................... -- --
Stephen Presser (1)(3) ....................... -- --
Philip A. Arra, Jr. (2)(4) ................... -- --
Kelby Hagar (2)(4) ........................... -- --
Lynn R. Williams ............................. -- --
John G. Asimou ............................... -- --
Noel J. Heuttich ............................. -- --
John B. George ............................... -- --
Joseph A. Kaczka ............................. -- --
James T. Kuntz ............................... -- --
All managing directors and named executive
officers as a group (13 persons) (1)(2) ...... -- --
(1) KPS Special Situations Fund, L.P., a Delaware limited partnership ("KPS"),
together with certain of its affiliates may be deemed to beneficially own
the membership interests held of record by Blue Bar Holdings, L.P. ("Blue
Bar Holdings"). KPS controls Blue Steel Corporation, a Delaware
corporation and the sole general partner and a limited partner of Blue Bar
Holdings As of January 31, 2003, Blue Steel Corporation held an 80.8%
economic interest in Blue Bar Holdings The general partner of KPS is KPS
Investors, LLC, a Delaware limited liability company ("KPS Investors").
KPS Investors is controlled by Messrs. Keilin, Psaros and Shapiro, each of
whom is a managing director of our company. Mr. Keilin is a principal of
KPS and a member and manager of KPS Investors. Mr. Psaros is the President
and a director of Blue Steel Corporation, a principal of KPS and a member
and manager of KPS Investors. Mr. Shapiro is a principal of KPS and a
member and manager of KPS Investors. Mr. Presser is the Treasurer and
Secretary and a director of Blue Steel Corporation and a principal of KPS.
Each of Messrs. Klein, Psaros, Presser, and
44
Shapiro disclaim beneficial ownership of the membership interests held of
record by Blue Bar Holdings
(2) Hunt Investment Group. L.P., a Delaware limited partnership ("Hunt"),
together with certain of its affiliates, may be deemed to beneficially own
the membership interests held of record by Blue Bar Holdings Hunt,
together with its affiliates, control HIG-Steel Investors, L.P., a
Delaware limited partnership and a limited partner of Blue Bar Holdings At
January 31, 2003, HIG-Steel Investors held a 19.2% economic interest in
Blue Bar Holdings Hunt and its affiliates may be deemed to beneficially
own the membership interests held of record by Blue Bar Holdings because
the limited partnership agreement of Blue Bar Holdings provides that
certain extraordinary actions may not be taken without the consent of all
the partners of Blue Bar Holdings See "--Control by Blue Bar Holdings and
Affiliates". HIG-Steel GP, L.L.C., a Delaware limited liability company,
is the general partner and a limited partner of HIG-Steel Investors, L.P.
and Hunt is a limited partner of HIG-Steel Investors, L.P. Hunt is
ultimately controlled by members of the Ray L. Hunt family. Philip Arra
and Kelby Hagar are Vice Presidents of Hunt and each disclaims beneficial
ownership of the membership interests held of record by Blue Bar Holdings
(3) The address for each of Messrs. Keilin, Psaros, Presser, and Shapiro is
c/o KPS Special Situations Fund, L.P., 200 Park Avenue, New York, New York
10166.
(4) The address for each of Messrs. Arra and Hagar is c/o HIG - Steel
Investors, L.P., Fountain Place, 1445 Ross at Field, Dallas, Texas 75202.
CONTROL BY BLUE BAR HOLDINGS AND AFFILIATES
Blue Bar Holdings was formed for the purpose of investing in and acquiring
a majority of the membership interests in Republic Holdings, which is the sole
member of Republic. Blue Bar Holdings is governed by its limited partnership
agreement, to which Blue Steel Corporation and HIG - Steel Investors, L.P. are
parties. Blue Steel Corporation is the sole general partner and a limited
partner of Blue Bar Holdings HIG - Steel Investors, L.P. is a limited partner of
Blue Bar Holdings At January 31, 2003, Blue Steel Corporation held an
approximately 81% economic interest in Blue Bar Holdings, and HIG - Steel
Investors, L.P. held an approximately 19% economic interest in Blue Bar Holdings
Pursuant to Republic Holdings' amended and restated limited liability
company agreement, Blue Bar Holdings is entitled to appoint six members to
Republic Holdings' board of managers. Pursuant to Blue Bar Holdings's limited
partnership agreement, of those six members, four are to be appointed by Blue
Steel Corporation and two are to be appointed by HIG-Steel Investors, L.P. In
addition, Blue Bar Holdings's limited partnership agreement requires the
approval of all partners before the membership interests in Republic Holdings
held by Blue Bar Holdings are disposed of or Blue Bar Holdings or its
representatives consent to Republic Holdings taking certain extraordinary
actions, including the sale of all or substantially all of our company's assets.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Our company is party to a Management Services Agreement between Blue Bar,
L.P. and Republic, pursuant to which Blue Bar, L.P. provides certain ongoing
advisory and management services to Republic as requested by our company from
time to time. Our company pays Blue Bar, L.P. a quarterly fee of $250,000 for
such services and reimburses Blue Bar, L.P. and its affiliates for all
reasonable costs and expenses incurred by them in providing such advisory and
management services. Our company's obligation to make such payments will
terminate upon the first to occur of (i) August 16, 2012, or (ii) the end of the
fiscal year in which Blue Bar, L.P., or
45
any of its affiliates, directly or indirectly, ceases to own any membership
interests in our company. As part of the restructuring described in "Business -
The Restructuring," Blue Bar, L.P. assigned to Blue Bar Holdings its interests
and obligations under the Management Services Agreement.
On August 16, 2002, we paid one-time transaction fees of $3.2 million to
an affiliate of KPS and $0.8 million to an affiliate of Hunt. These transaction
fees were paid out of the proceeds of the capital contribution made by Blue Bar
L.P., the predecessor of Republic Holdings, to our company contemporaneously
with our acquisition of assets from Republic Technologies.
For information concerning the related party transactions of our
Predecessor. See Note 16 to the consolidated financial statements appearing
elsewhere in this report.
ITEM 14. CONTROLS AND PROCEDURES
Based on their most recent evaluation, which was completed within 90 days
of the filing of this Form 10-K, the Company's President and Chief Executive
Officer and Chief Financial Officer believe the Company's disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are
effective in timely alerting the Company's management to material information
required to be included in this Form 10-K and other filings under the Securities
Exchange Act of 1934.
There were no significant changes in the Company's internal controls or
other factors that could significantly affect these controls subsequent to the
date of their evaluation and there were no significant deficiencies or material
weaknesses which required corrective actions.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of the Company
and the Predecessor are included in a separate section of this
report following the signature page:
Independent Auditors' Report
Republic Engineered Products Holdings LLC and Subsidiaries
Consolidated Statement of Operations for the Period from
August 16, 2002 to December 31, 2002 and Republic Technologies
International Holdings, LLC and Subsidiaries
(Debtor-in-Possession) Consolidated Statement of Changes in
Net Liabilities in Liquidation (Liquidation Basis) for the
Period from January 1, 2002 to August 15, 2002 and
Consolidated Statements of Operations (Going Concern Basis)
for the Years Ended December 31, 2001 and 2000
Republic Engineered Products Holdings LLC and Subsidiaries
Consolidated Balance Sheet at December 31, 2002 and Republic
Technologies International Holdings, LLC and Subsidiaries
(Debtor-in-Possession) Consolidated Balance Sheet (Going
Concern Basis) at December 31, 2001
Republic Engineered Products Holdings LLC and Subsidiaries
Consolidated Statement of Member's Interest for the Period
from August 16, 2002 to December 31, 2002 and Republic
Technologies International Holdings, LLC and Subsidiaries
(Debtor-in-Possession) Consolidated Statements of Members'
Interest (Going Concern Basis) for the Years Ended December
31,
46
2000 and 2001 and the Consolidated Statement of Members'
Interest (Liquidation Basis) for the Period from January 1,
2002 to August 15, 2002
Republic Engineered Products Holdings LLC and Subsidiaries
Consolidated Statement of Cash Flows for the Period from
August 16, 2002 to December 31, 2002 and Republic Technologies
International Holdings, LLC and Subsidiaries
(Debtor-in-Possession) Consolidated Statement of Cash Flows
(Liquidation Basis) for the Period from January 1, 2002 to
August 15, 2002 and Consolidated Statements of Cash Flows
(Going Concern Basis) for the Years Ended December 31, 2001
and 2000
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule
The following consolidated financial statement schedule of the
Company is included in a separate section of this report
following the signature page:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been
omitted.
(a)(3) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3.1* Certificate of Formation of the Company filed with the Secretary of State of the State of
Delaware on June 4, 2002 (together with Amendment to Certificate of Formation filed
with the Secretary of State of the State of Delaware on July 26, 2002)
3.2* Amended and Restated Limited Liability Company Agreement of the Company by
Republic Engineered Products Holdings LLC
3.3* Certificate of Formation of Republic Holdings filed with the Secretary of State of the
State of Delaware on January 28, 2003
3.4* Amended and Restated Limited Liability Company Agreement of Republic Holdings by
Blue Bar Holdings, L.P.
3.5* Certificate of Formation of N&T Railway Company LLC filed with the Secretary of State
of the State of Delaware on August 8, 2002
3.6* Limited Liability Company Agreement of N&T Railway Company LLC dated as of
August 8, 2002 by Republic Engineered Products LLC
3.7* Certificate of Incorporation of Blue Steel Capital Corp. filed with the Secretary of State of
the State of Delaware on August 8, 2002
3.8* Amendment to Certificate of Incorporation of Blue Steel Capital Corp. filed with the
Secretary of State of the State of Delaware on August 14, 2002
3.9* Bylaws of Blue Steel Capital Corp.
47
4.1* Indenture dated as of August 16, 2002 by and among the Company, Blue Bar, L.P., N&T
Railway Company LLC, Blue Steel Capital Corp., and LaSalle Bank National Association
4.2* Form of 10% Senior Secured Note due 2009 (included in Exhibit 4.1)
4.3* Security Agreement dated as of August 16, 2002 among the Company, N&T Railway
Company LLC, Blue Steel Capital Corp. and Fleet Capital Corporation
4.4* Pledge Agreement dated as of August 16, 2002 by and among the Company, Blue Bar,
L.P. and Fleet Capital Corporation
4.5* Pledge Intercreditor Agreement dated as of August 16, 2002 between Fleet Capital
Corporation, LaSalle Bank National Association, the Company, Blue Bar, L.P., N&T
Railway Company LLC and Blue Steel Capital Corp.
4.6* Access Intercreditor Agreement dated as of August 16, 2002 between Fleet Capital
Corporation, LaSalle Bank National Association, the Company, Blue Bar, L.P., N&T
Railway Company LLC and Blue Steel Capital Corp.
4.7* Mortgage, Assignment of Leases, Security Agreement and Fixture Filing dated as of
August 16, 2002 made by the Company in favor of LaSalle Bank National Association
relating to premises located in Lorain County, Ohio
4.8* Mortgage, Assignment of Leases, Security Agreement and Fixture Filing dated as of
August 16, 2002 made by the Company in favor of LaSalle Bank National Association
relating to premises located in Lake County, Indiana
4.9* Amended and Restated Mortgage, Assignment of Leases, Security Agreement and Fixture
Filing dated as of August 16, 2002 made by the Company in favor of LaSalle Bank
National Association relating to premises located in Erie County, New York
4.10* Mortgage, Assignment of Leases, Security Agreement and Fixture Filing dated as of
August 16, 2002 made by the Company in favor of LaSalle Bank National Association
relating to premises located in Stark County, Ohio (Massillon)
4.11* Mortgage, Assignment of Leases, Security Agreement and Fixture Filing dated as of
August 16, 2002 made by the Company in favor of LaSalle Bank National Association
relating to premises located in Stark County, Ohio (Hot-Roll)
4.12* First Supplemental Indenture by and among the Company, N&T Railway Company LLC,
Blue Steel Capital Corp., Republic Holdings and LaSalle Bank National Association
4.13* Amendment No. 1 to Security Agreement by the Company, Republic Holdings, N&T
Railway LLC and LaSalle Bank National Association
4.14* Amendment No. 1 to Pledge Agreement by the Company, Republic Holdings and LaSalle
Bank National Association
10.1* Asset Purchase Agreement, dated as of June 7, 2002, by and among Republic Engineered
Products LLC (f/k/a RT Acquisition LLC), as Purchaser, and Republic Technologies
International, LLC, Nimishillen & Tuscarawas, LLC, Bliss & Laughlin, LLC, Republic
Technologies International Holdings, LLC and RTI Capital Corp., as Sellers (together
with Amendment dated as of August 16, 2002)
10.2* Revolving Credit Agreement dated as of August 16, 2002 by and among Republic
Engineered Products LLC, Blue Bar, L.P., Blue Steel Capital Corp., N&T Railway
Company LLC, Fleet Capital Corporation, Bank of America, N.A., JP Morgan Chase
Bank, Foothill Capital Corporation, GE Capital CFE, Inc. and the other Lenders thereto
48
10.3* Modified Successor Labor Agreement effective as of August 16, 2002 between the
Company and the United Steelworkers of America
10.4* Open-End Mortgage, Security Agreement, Assignment of Rents, Income and Proceeds
dated as of August 16, 2002 from the Company to Fleet Capital Corporation in
connection with the Canton Cast Roll with Melt Shop
10.5* Open-End Mortgage, Security Agreement, Assignment of Rents, Income and Proceeds
dated as of August 16, 2002 from N&T Railway Company LLC to Fleet Capital
Corporation in connection with the Rail Easements
10.6* Employment Agreement dated as of August 15, 2002 between the Company and Joseph
F. Lapinsky
10.7* Transition Services Agreement dated as of August 16, 2002 by and among Republic
Technologies International, LLC, Nimishillen & Tuscarawas, LLC, Republic
Technologies International Holdings, LLC, Bliss & Laughlin, LLC, the Company and The
Bank of New York
10.8* Management Services Agreement dated as of August 16, 2002 between Blue Bar, L.P.
and the Company
10.9* Patent Collateral Assignment and Security Agreement dated as of August 16, 2002
between the Company and Fleet Capital Corporation
10.10* Trademark Collateral Assignment Agreement dated as of August 16, 2002 between the
Company and Fleet Capital Corporation
10.11* Coke Supply Agreement dated as of August 16, 2002 by and between the Company and
United States Steel Corporation (Portions of this exhibit have been omitted pursuant to a
confidential treatment request submitted under C.F.R. Sections 200.80(b)(4), 200.83 and
230.406)
10.12* Pellet Supply Agreement dated as of August 16, 2002 by and between the Company and
United States Steel Corporation (Portions of this exhibit have been omitted pursuant to a
confidential treatment request submitted under C.F.R. Sections 200.80(b)(4), 200.83 and
230.406)
10.13* Rounds Supply Agreement dated as of August 16, 2002 among the Company, Lorain Pipe
Mills and United States Steel Corporation (Portions of this exhibit have been omitted
pursuant to a confidential treatment request submitted under C.F.R. Sections 200.80(b)(4),
200.83 and 230.406)
21.1* Subsidiaries of the Registrant
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 for Joseph F. Lapinsky, Chief Executive Officer and
Managing Director of Republic Engineered Products LLC
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 for Joseph A. Kaczka, Chief Financial Officer, Vice
President, Finance and Controller and Treasurer of Republic Engineered Products LLC
(*) Filed as an exhibit to the Registration Statement on Form S-1 (File No.
333-100581) of Republic Engineered Products Holdings LLC.
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES
Date: March 31, 2003 By: /s/Joseph F. Lapinsky
---------------------
Joseph F. Lapinsky
President, Chief Executive Officer and
Managing Director
Date: March 31, 2003 By: /s/Joseph A. Kaczka
-------------------
Joseph A. Kaczka
Chief Financial Officer, Vice President, Finance
and Controller, Treasurer and Secretary
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Joseph F. Lapinsky, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any or all amendments or supplements
to this report and to file the same with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 31, 2003.
/s/ Joseph F. Lapinsky /s/ Eugene J. Keilin
- ----------------------------- ------------------------------------
Joseph F. Lapinsky, President Eugene J. Keilin, Managing Director
Chief Executive Officer and
Managing Director /s/ David Shapiro
------------------------------------
David Shapiro, Managing Director
/s/ Michael G. Psaros ------------------------------------
- ----------------------------- Stephen Presser, Managing Director
Michael G. Psaros, Chairman of the
Board of Managers /s/ Philip A. Arra
------------------------------------
Philip A. Arra, Managing Director
------------------------------------
John J. Murphy, Managing Director
/s/ Lynn Williams
------------------------------------
Lynn Williams, Managing Director
50
CERTIFICATIONS
I, Joseph F. Lapinsky, certify that:
1. I have reviewed this annual report on Form 10-K of Republic Engineered
Products Holdings LLC (the "Company");
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Company as of, and for, the periods presented in this annual report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the Company's Board
of Managers:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to
record, process, summarize and report financial data and have
identified for the Company's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
6. The Company's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003 By: /s/Joseph F. Lapinsky
Joseph F. Lapinsky
President, Chief Executive Officer and
Managing Director
51
CERTIFICATIONS
I, Joseph Kaczka, certify that:
1) I have reviewed this annual report on Form 10-K of Republic Engineered
Products Holdings LLC (the "Company");
2) Based on my knowledge, this annual 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 annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Company as of, and for, the periods presented in this annual report;
4) The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the Company's Board
of Managers:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to
record, process, summarize and report financial data and have
identified for the Company's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
6. The Company's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003 By: /s/Joseph A. Kaczka
-------------------
Joseph A. Kaczka
Chief Financial Officer, Vice President, Finance
and Controller, Treasurer and Secretary
52
INDEPENDENT AUDITORS' REPORT
Board of Managers
Republic Engineered Products Holdings LLC
We have audited the accompanying consolidated balance sheet of Republic
Engineered Products Holdings LLC and subsidiaries (the "Company") as of December
31, 2002, and the related consolidated statements of operations, member's
interest, and cash flows for the period from August 16, 2002 to December 31,
2002. We have also audited the consolidated balance sheet of the Predecessor,
Republic Technologies International Holdings, LLC and subsidiaries
(Debtor-in-Possession) as of December 31, 2001(going concern basis), the related
consolidated statement of changes in net liabilities in liquidation, members'
interest, and cash flows for the period from January 1, 2002 to August 15, 2002
(liquidation basis), and the related consolidated statements of operations,
members' interest, and cash flows for the years ended December 31, 2001 and 2000
(going concern basis). Our audits also included the financial statement schedule
for the period from August 16, 2002 to December 31, 2002, the period from
January 1, 2002 to August 15, 2002, and the years ended December 31, 2001 and
2000, listed in the index at Item 15 a(2). These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2002, and the consolidated results of its operations and its cash flows for the
period from August 16, 2002 to December 31, 2002, and the financial position of
the Predecessor as of December 31, 2001, and the results of its operations and
its cash flows for the period from January 1, 2002 to August 15, 2002 and the
years ended December 31, 2001 and 2000, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule for the period from August 16, 2002 to December 31,
2002, the period from January 1, 2002 to August 15, 2002, and the years ended
December 31, 2001 and 2000, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's net losses from operations and
the Company's limited available liquidity from existing credit resources raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are described in Note 1. The Company's
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
March 31, 2003
53
REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM AUGUST 16, 2002 TO DECEMBER 31, 2002 AND
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CHANGES IN NET LIABILITIES IN LIQUIDATION (LIQUIDATION BASIS)
FOR THE PERIOD FROM JANUARY 1, 2002 TO AUGUST 15, 2002 AND
CONSOLIDATED STATEMENTS OF OPERATIONS (GOING CONCERN BASIS)
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN THOUSANDS OF DOLLARS)
THE COMPANY THE PREDECESSOR
----------- ----------------------------------------------------------
Period From Period From
August 16, 2002 January 1, 2002 Year Ended Year Ended
to December 31, to August 15, December 31, December 31,
2002 2002 2001 2000
----------- ----------- ----------- -----------
(Liquidation Basis) (Going Concern Basis) (Going Concern Basis)
Net sales $ 300,131 $ 611,983 $ 993,707 $ 1,265,401
Cost of goods sold 293,824 588,841 985,640 1,140,750
----------- ----------- ----------- -----------
Gross profit 6,307 23,142 8,067 124,651
Selling, general and administrative expense 15,558 23,401 44,440 58,709
Depreciation and amortization expense 2,586 28,345 56,846 61,475
Special charges (Notes 7 & 10) -- 10,541 11,633 155,019
Other operating expense, net 423 615 5,145 1,888
----------- ----------- ----------- -----------
Operating loss (12,260) (39,760) (109,997) (152,440)
Interest expense, net 8,551 17,721 56,052 117,495
Reorganization items - expense, net (Note 9) -- 2,377 16,031 --
----------- ----------- ----------- -----------
Loss before income taxes (20,811) (59,858) (182,080) (269,935)
Provision for income taxes -- 45 18 468
----------- ----------- ----------- -----------
Loss from continuing operations (20,811) (59,903) (182,098) (270,403)
Loss from disposition of discontinued
operations (Note 15) -- -- 457 16,831
----------- ----------- ----------- -----------
Net loss $ (20,811) (59,903) $ (182,555) $ (287,234)
=========== =========== ===========
Net liabilities at January 1, 2002 (going
concern basis) (671,132)
Adjustment to liquidation basis (Note 2) (458,371)
Foreign currency translation adjustment 230
-----------
Net liabilities in liquidation at
August 15, 2002 $(1,189,176)
===========
The accompanying notes are an integral part of these statements.
54
REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AT
DECEMBER 31, 2002 AND
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEET (GOING CONCERN BASIS) AT
DECEMBER 31, 2001
(IN THOUSANDS OF DOLLARS)
THE COMPANY THE PREDECESSOR
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,107 $ 5,745
Accounts receivable, less allowances of $10,875
and $17,234, respectively 82,984 100,768
Inventories (Note 5) 170,282 207,864
Assets held for sale (Note 15) -- 9,013
Prepaid expenses and other current assets 14,134 14,139
----------- -----------
Total current assets 269,507 337,529
Property, plant and equipment:
Land and improvements 4,326 14,356
Buildings and improvements 22,247 35,218
Machinery and equipment 95,704 723,387
Construction-in-progress 24,318 6,142
----------- -----------
Total property, plant and equipment 146,595 779,103
Accumulated depreciation (2,586) (153,774)
----------- -----------
Net property, plant and equipment 144,009 625,329
Assets held for sale (Note 15) -- 2,355
Intangible assets, net of accumulated amortization
of $48 and $24,453, respectively (Note 6) 1,144 67,133
Goodwill (Note 7) 58,680 --
Other assets 1,058 17,213
----------- -----------
Total assets $ 474,398 $ 1,049,559
=========== ===========
The accompanying notes are an integral part of these statements.
55
REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AT
DECEMBER 31, 2002 AND
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEET (GOING CONCERN BASIS) AT
DECEMBER 31, 2001
(IN THOUSANDS OF DOLLARS)
THE COMPANY THE PREDECESSOR
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
LIABILITIES AND MEMBERS' INTEREST
Current liabilities:
Revolving credit facility (Note 8) $ 268,378 $ 326,016
Current maturities of long-term debt (Note 8) -- 3,600
Accounts payable 43,276 45,350
Accrued compensation and benefits 25,101 37,737
Accrued interest 1,434 3,031
Other accrued liabilities 19,688 38,760
----------- -----------
Total current liabilities 357,877 454,494
Long-term debt (Note 8) 80,000 --
Other postretirement benefits (Note 13) -- 3,398
Accrued environmental liabilities (Note 18) 5,332 16,311
Other liabilities -- 7,278
----------- -----------
Total liabilities not subject to compromise 443,209 481,481
Liabilities subject to compromise (Note 9) -- 1,239,210
----------- -----------
Total liabilities 443,209 1,720,691
----------- -----------
Manditory redeemable members' interest - Class A Units -- 3,700
Members' interest:
Member's interest 31,189 --
Predecessor members' interest:
Class B Units -- (618,715)
Class C Units -- 32,500
Accumulated other comprehensive loss -- (88,617)
----------- -----------
Total members' interest 31,189 (674,832)
----------- -----------
Total liabilities and members' interest $ 474,398 $ 1,049,559
=========== ===========
The accompanying notes are an integral part of these statements.
56
REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBER'S INTEREST
FOR THE PERIOD FROM AUGUST 16, 2002 TO DECEMBER 31, 2002 AND
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF MEMBERS' INTEREST (GOING CONCERN BASIS)
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001 AND
CONSOLIDATED STATEMENT OF MEMBERS' INTEREST (LIQUIDATION BASIS)
FOR THE PERIOD FROM JANUARY 1, 2002 TO AUGUST 15, 2002
(IN THOUSANDS OF DOLLARS)
THE COMPANY THE PREDECESSOR
----------- --------------------------------------------------------------------------
Member's
Interest Members' Interest Accumulated
-------- ------------------------- Other Total
Class B Class C Comprehensive Members' Comprehensive
Units Units Income (Loss) Interest Income (Loss)
--------- --------- ------------- ---------- -------------
Balance, January 1, 2000 $(146,594) $ 30,625 $ (673) $(116,642)
Accrual of preferred return (1,861) 1,500 -- (361)
Net loss (287,234) -- -- (287,234) $(287,234)
Other comprehensive income:
Foreign currency translation
adjustment -- -- (383) (383) (383)
Minimum pension liability
adjustment -- -- (1,593) (1,593) (1,593)
----------- --------- --------- ------------ ---------
Balance, December 31, 2000 (435,689) 32,125 (2,649) (406,213) $(289,210)
=========
Accrual of preferred return (471) 375 -- (96)
Net loss (182,555) -- -- (182,555) $(182,555)
Other comprehensive income: --
Foreign currency translation --
adjustment -- -- (861) (861) (861)
Minimum pension liability
adjustment -- -- (85,107) (85,107) (85,107)
----------- --------- --------- ------------ ---------
Balance, December 31, 2001 (618,715) 32,500 (88,617) (674,832) $(268,523)
=========
Accrual of preferred return -- -- -- --
Net loss (59,903) -- -- (59,903) $ (59,903)
Other comprehensive income: --
Foreign currency translation --
adjustment -- -- 230 230 230
Adjustment to liquidation bases (Note 2) (458,371) -- -- (458,371) (458,371)
----------- --------- --------- ------------ ---------
Balance, August 15, 2002 $(1,136,989) $ 32,500 $ (88,387) $(1,192,876) $(518,044)
=========== ========= ========= =========== =========
Capital contribution, August 16, 2002 $ 52,000
Net loss (20,811)
---------
Balance, December 31, 2002 $ 31,189
=========
The accompanying notes are an integral part of these statements.
57
REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASHFLOWS
FOR THE PERIOD FROM AUGUST 16, 2002 TO DECEMBER 31, 2002 AND
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CASHFLOWS (LIQUIDATION BASIS)
FOR THE PERIOD FROM JANUARY 1, 2002 TO AUGUST 15, 2002 AND
CONSOLIDATED STATEMENTS OF CASHFLOWS (GOING CONCERN BASIS)
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN THOUSANDS OF DOLLARS)
THE COMPANY THE PREDECESSOR
----------- ----------------------------------------------------------
PERIOD FROM PERIOD FROM
AUGUST 16, 2002 JANUARY 1, 2002 YEAR ENDED YEAR ENDED
TO DECEMBER 31, TO AUGUST 15, DECEMBER 31, DECEMBER 31,
2002 2002 2001 2000
----------- ----------- ----------- -----------
(LIQUIDATION BASIS) (GOING CONCERN BASIS) (GOING CONCERN BASIS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (20,811) $ (59,903) $(182,555) $(287,234)
Adjustments to reconcile net cash provided
by (used in) operating activities:
Depreciation and amortization 2,586 28,345 56,846 61,475
Amortization of deferred financing cost 48 2,607 5,352 4,114
Gain on sale of fixed assets -- (4,190) (1,782) (4,790)
Restructuring charges -- 687 3,650 74,658
Goodwill impairment charge -- -- -- 79,608
Accretion of original issue discount -- -- 693 2,604
Reorganization items -- 2,377 16,031 --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 24,355 (5,294) 28,510 27,888
(Increase) decrease in inventory 15,842 37,872 63,290 12,681
(Increase) decrease in prepaid and other
assets (10,355) 5,815 (2,750) (3,482)
Increase (decrease) in accounts payable 11,269 (6,901) 29,699 38,761
Increase (decrease) in accrued
compensation and benefits (5,826) (328) (573) (11,852)
Increase (decrease) in defined benefit
pension obligations -- 19,422 24,829 (7,212)
Increase (decrease) in other postretirement
benefits -- 6,550 (2,754) 10,863
Increase (decrease) in accrued
environmental liabilities -- (103) (3,060) (1,807)
Increase (decrease) in other current
liabilities 6,709 (15,733) (22,462) (20,406)
Other -- 6,666 (5,092) 13,723
--------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 23,817 17,889 7,872 (10,408)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (17,297) (8,180) (3,589) (13,065)
Acquisition, net of $1,972 cash acquired (323,599) -- -- --
Disposition of property, plant and equipment -- 7,005 5,913 9,009
--------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (340,896) (1,175) 2,324 (4,056)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments)/proceeds under revolving
credit facilities 268,378 (17,118) (3,382) (6,999)
Proceeds from long-term debt -- -- 2,000 30,000
Repayments of long-term debt -- (3,600) (289) (2,485)
Redemption of class A members' interest -- -- (100) (1,700)
Payment of preferred return -- -- (73) (450)
Financing costs (1,192) -- (3,541) (6,361)
Proceeds from capital contributions 52,000 -- -- --
--------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 319,186 (20,718) (5,385) 12,005
--------- --------- --------- ---------
Effect of exchange rate changes on cash -- 231 (861) (383)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 2,107 (3,773) 3,950 (2,842)
Cash and cash equivalents - beginning of period -- 5,745 1,795 4,637
--------- --------- --------- ---------
Cash and cash equivalents - end of period $ 2,107 $ 1,972 $ 5,745 $ 1,795
========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 6,537 $ 11,150 $ 58,000 $ 95,964
========= ========= ========= =========
Cash paid for income taxes $ -- $ -- $ 619 $ 1,075
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
58
REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES
AND
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC
AND SUBSIDIARIES (DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT AS OTHERWISE NOTED)
NOTE 1. NATURE OF OPERATIONS, ORGANIZATION AND OTHER RELATED INFORMATION
Republic Engineered Products Holdings LLC, a Delaware limited liability
company ("Republic Holdings", and together with its subsidiaries, the "Company")
produces special bar quality steel products. Special bar quality steel products
are high quality hot-rolled and cold-finished carbon and alloy steel bars and
rods used primarily in critical applications in automotive and industrial
equipment. Special bar quality steel products are sold to customers who require
precise metallurgical content and quality characteristics. Special bar quality
steel products generally contain more alloys, and sell for substantially higher
prices, than merchant and commodity steel bar and rod products. The Company
produces a wide range of special bar quality steel products and supplies a
diverse customer base that includes leading automobile and industrial equipment
manufacturers and their first tier suppliers.
Republic Holdings holds all of the outstanding membership interests of
Republic Engineered Products LLC ("Republic"). Blue Steel Capital Corp., N&T
Railway Company LLC and 2011448 Ontario Limited are wholly owned subsidiaries of
Republic. Blue Steel Capital Corp. is a Delaware corporation formed for the sole
purpose of issuing notes (see Note 8) and holds no assets. N&T Railway Company
LLC is a Delaware limited liability company and operates the railroad assets
located at the Canton and Lorain, Ohio facilities. 2011448 Ontario Limited is an
Ontario corporation and its sole asset is an option to acquire the assets and
properties associated with Republic Technologies' Hamilton, Ontario
cold-finishing facility.
KPS Special Situations Fund, L.P., a Delaware limited partnership ("KPS"),
together with certain of its affiliates, may be deemed to beneficially own the
membership interests in Republic held of record by Republic Holdings. Blue Steel
Corporation, a Delaware corporation controlled by KPS, is the sole general
partner and a limited partner of Blue Bar Holdings, L.P., a Delaware limited
partnership and the sole member of Republic Holdings ("Blue Bar Holdings"), and
holds an 80.8% economic interest in such partnership. Hunt Investment Group.
L.P., a Delaware limited partnership ("Hunt"), together with certain of its
affiliates, may be deemed to beneficially own the membership interests held of
record by Republic Holdings. HIG-Steel Investors, L.P., a Delaware limited
partnership, is a limited partner of Blue Bar Holdings and holds a 19.2%
economic interest in such partnership.
The Company commenced operations on August 16, 2002 after it acquired a
substantial portion of the operating assets of Republic Technologies
International, LLC and its subsidiaries ("Republic Technologies" or "the
Predecessor") in a sale of assets under Section 363 of the United States
Bankruptcy Code. The acquired operating assets accounted for all of Republic
Technologies' steel melting capacity, over one-half of its hot-rolling capacity
and approximately two-thirds of its cold-finishing production capacity.
Management plans to create a more efficient, higher quality network of
production facilities operated by a smaller and more flexible workforce. The
transaction eliminated significant liabilities that had been associated with the
business acquired from Republic Technologies. The Company also acquired an
option to purchase the
59
assets associated with Republic Technologies' cold-finishing plant located in
Hamilton, Ontario on or prior to August 16, 2003 for nominal consideration and
the assumption of certain liabilities. The Company incurred significant
indebtedness in connection with the consummation of the acquisition, including
$80.0 million aggregate principal amount of senior secured notes and borrowings
of $301.9 million under the credit facility (see Note 8).
The Company hired approximately 2,400 of the approximately 3,700 employees
of Republic Technologies and entered into a new labor agreement with the United
Steelworkers of America ("USWA"), which covers most of the hourly employees and
has a five-year term. In comparison to the labor agreement between Republic
Technologies and the USWA, the new labor agreement reduces the number of
employees and employment costs and provides increased staffing flexibility.
In order to facilitate the orderly transfer of the special bar quality
steel product business from Republic Technologies to the Company, Republic
Technologies entered into a transition services agreement with the Company (the
"Transition Services Agreement"). Under the Transition Services Agreement,
Republic Technologies provided the Company with the ability to maintain an
interim supply of certain inventory to sell to customers while the Company
modernized its Lorain facility. Specifically, Republic Technologies continued to
operate certain facilities that the Company did not acquire. These facilities
included the operation of the 12"mill at Lorain until September 2002, the
finishing operation at Canton until October 2002 and the Massillon 18' mill
until December 2002. Republic Technologies' railroad company, Nimishillen &
Tuscarawas, LLC, operated until December 31, 2002, at which time it's operations
were acquired by Republic. Canadian Drawn Steel Company, Inc., a subsidiary of
Republic Technologies, continues to operate under the Transition Services
Agreement (Note 16). In addition, the parties supplied other services to each
other to ensure the smooth transition of Republic Technologies' business to the
Company and the wind down of the Republic Technologies' bankruptcy estate. The
Company was also obligated to pay $5.0 million to Republic Technologies for its
operation of assets it retained. This fee was paid in five $1.0 million monthly
installments which commenced on September 15, 2002. The final payment was paid
on January 16, 2003. Under the terms of the Transition Services Agreement, the
Company paid these fees to The Bank of New York for the benefit of the holders
of Republic Technologies 13 3/4 % senior secured notes.
The Company reimburses Republic Technologies for costs it incurs from
providing the services under the terms of the Transition Services Agreement,
including the costs of operating the assets, costs associated with materials
owned or acquired that are necessary to provide the services and costs of the
employees involved in providing the services. Other costs, including those
related to environmental compliance, are the sole responsibility of Republic
Technologies.
The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or to amounts
and classification of liabilities that may be necessary should the Company be
unable to continue as a going concern. The Company's performance since December
2002 has been below expectations, negatively affecting liquidity. The Company's
liquidity position has also been negatively impacted by an unplanned outage at
the Lorain #3 blast furnace resulting from property damage and greater than
expected increases in the cost of natural gas during the first quarter of 2003.
The Company's net availability on its revolving credit facility at March 28,
2003 was $11.8 million. These factors raise substantial doubt about the
Company's ability to continue as a going concern and,
60
therefore, the Company may be unable to realize its assets and discharge its
liabilities in the normal course of business.
Management has sought to improve the Company's liquidity position by
taking a number of actions, including reducing its planned capital expenditures
from $20 million to $6 million for 2003, pursuing additional financing from the
State of Ohio, seeking reimbursement from business interruption and property
insurance for damage incurred to the #3 blast furnace at the Lorain facility,
and seeking to negotiate possible extensions to June 30, 2003 contractual
reductions in borrowing capacity under its senior revolving credit facility (see
Note 8). There can be no assurance that any of such actions will be successful.
Notwithstanding these efforts, the Company may need to obtain additional
financing to meet its cash flow requirements, including financing through the
sale of additional debt or equity securities. In light of the Company's
liquidity, its ability to raise additional capital is negatively impacted.
Restrictive covenants included in revolving credit facility and senior secured
notes limit the Company's ability to incur additional indebtedness or sell
assets (all of which are pledged), and may otherwise limit the operational and
financial flexibility of the Company.
NOTE 2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements contain results for
Republic Holdings for the period from August 16, 2002 to December 31, 2002 and
Republic Technologies International Holdings, LLC for the period from January 1,
2002 to August 15, 2002, which reflects the transition to the liquidation basis
of accounting as of June 30, 2002, and for the years ended December 31, 2001 and
2000, which have been prepared under the going concern basis of accounting.
On July 11, 2002, the Predecessor received U.S. Bankruptcy Court approval
to sell a substantial portion of its assets to the Company and liquidate the
remaining assets. Accordingly, the accompanying consolidated financial
statements for the period from January 1, 2002 to August 15, 2002 were prepared
to reflect the transition to the liquidation basis of accounting as of June 30,
2002. Under this basis of accounting, assets and liabilities are stated at their
net realizable value, and estimated costs through the liquidation date are
provided to the extent reasonably determinable. The liquidation basis of
accounting requires the determination of significant estimates and judgments.
Adjustments to report certain assets and liabilities at net realizable value
have been recorded based on actual information derived from the asset purchase
agreement between Republic Technologies and the Company and independent
appraisals. All assets and liabilities were revalued to liquidation value with
the exception of certain liabilities, primarily consisting of liabilities
subject to compromise, which as described in Note 9, will continue to be subject
to further adjustment in the bankruptcy proceedings of the Predecessor. Members'
interest has been eliminated to be consistent with the reporting requirements
under the liquidation basis of accounting, as all members' interest is now
classified as "net liabilities in liquidation". The amount of accrued costs to
liquidate the Predecessor is not material. Actual liquidation values may differ
from the amounts estimated. The Predecessor's adjustment required to convert
from the going concern (historical cost) basis to the liquidation basis of
accounting includes:
Decrease to reflect net realizable value of property, plant and
equipment .................................................... $433,748
Write-off of deferred financing costs .............................. 22,192
Decrease to reflect the net realizable value of goodwill ........... 2,431
--------
Net decrease in carrying value ......................... $458,371
========
61
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with maturities at the
date of purchase of three months or less to be cash equivalents.
INVENTORIES
Inventories are carried at the lower of cost or market (net realizable
value). Cost is determined using the first-in, first-out (FIFO) method.
The Company establishes obsolescence reserves for slow-moving and inactive
inventories. Obsolescence reserves reduce the carrying value of slow-moving and
inactive inventories to their estimated net realizable value, which generally
approximates the recoverable scrap value. The Company also periodically
evaluates its inventory carrying value to ensure that the amounts are stated at
lower of cost or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and include improvements
that significantly extend the useful lives of existing plant and equipment. The
Company and its Predecessor provides for depreciation of property, plant and
equipment on the straight-line method based upon the estimated useful lives of
the assets. The range of estimated useful lives of the Company's and its
Predecessor's assets are as follows:
Buildings and improvements ............................ 15 - 40 years
Land improvements ..................................... 10 - 20 years
Machinery and equipment ............................... 3 - 30 years
Repairs and maintenance costs are expensed as incurred. Capital
expenditures that cannot be put into use immediately are included in
construction-in-progress. As these projects are completed, they are transferred
to depreciable assets. Net gains or losses related to asset dispositions are
recognized in the Company's operating results in the period in which the
disposition occurs.
GOODWILL
Goodwill has arisen from the acquisition of a substantial portion of the
operating assets of Republic Technologies. Goodwill is not amortized, but is
periodically reviewed for impairment. The Company is required to test goodwill
for impairment on an annual basis and whenever changes in circumstances indicate
that the carrying amount of goodwill may be impaired. The Company intends to use
July 1 (first day of the third quarter) as its annual measurement date.
Impairment charges are recorded, if necessary, based on management's review and
analysis of the estimated fair value as compared to the carrying amount of
goodwill. Goodwill of $58,680 has been assigned to the hot-rolled and
cold-finishing segments in the amounts of $52,812 and $5,868, respectively.
62
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, consisting of property, plant and equipment and
intangible assets, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the recovery amount or fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less cost to sell.
INCOME TAXES
The Company is a limited liability company that is treated similar to a
partnership for U.S. federal and state income tax purposes and, accordingly, has
no income tax provision or deferred income tax assets or liabilities related to
these jurisdictions.
The Predecessor was a limited liability company that was treated similar
to a partnership for U.S. federal and state income tax purposes and,
accordingly, had no income tax provision or deferred income tax assets or
liabilities related to those jurisdictions. Amounts for income taxes consisted
primarily of a provision for foreign taxes relating to the Predecessor's
Canadian subsidiary, Canadian Drawn Steel Company, Inc.
ENVIRONMENTAL COSTS
The Company and other steel companies have in recent years become subject
to increasingly stringent environmental laws and regulations. It is the policy
of the Company to endeavor to comply with applicable environmental laws and
regulations. The Company established a liability for an amount which the Company
believes is adequate, based on information currently available, to cover costs
of remedial actions it will likely be required to take to comply with existing
environmental laws and regulations.
The recorded amounts represent an estimate of the environmental
remediation costs associated with future events triggering or confirming the
costs that, in management's judgment, are likely to occur. This estimate is
based on currently available facts, existing technology and presently enacted
laws and regulations, and it takes into consideration the likely effects of
inflation and other societal and economic factors. The precise timing of such
events cannot be reliably determined at this time due to the absence of any
deadlines for remediation under the applicable environmental laws and
regulations pursuant to which such remediation costs will be expended. No claims
for recovery are netted against the stated amount.
MEMBERS' INTEREST
Republic Holdings is a Delaware limited liability company with one class
of member interests consisting of 1,000 units.
Republic Technologies had three classes of member interest units: Class A,
Class B and Class C. Class A units, which were mandatorily redeemable and
initially consisted of 1,100 units, had a stated value of $5,000 per unit and
carried a preferred return of $350 per unit, which was paid quarterly. Class B
units, consisting of 1,000 units, had no stated value and were allocated all net
income/loss after preferred returns had been allocated. Class C units,
consisting of 30,000
63
units had a stated value of $1,000 per unit and carried a preferred return of 5%
of stated value which was payable in kind or cash at the Predecessor's option.
The accumulated and unpaid preferred return was $3.1 million at April 2, 2001,
the date on which the Predecessor filed for bankruptcy protection (the "Petition
Date"). The Predecessor ceased accruing preferred return at the Petition Date.
Both Class A and C units had distribution and dissolution preferences ahead of
Class B units. The mandatory redemption feature of the Class A units caused it
to be classified in the consolidated balance sheets outside of the members'
interest section. During 2001 and 2000, Republic Technologies redeemed $0.1
million and $1.7 million of Class A members' interest, respectively.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment where there is a contract or
purchase order, the sales price is fixed or determinable and collectability of
the resulting receivable is reasonably assured. The Company's customers have no
rights to return product, other than for defective materials. As sales are
recognized, reserves for defective materials are recorded as a percentage of
sales. This percentage is based on historical experience. The adequacy of
reserve estimates is periodically reviewed by comparison to actual experience.
ALLOWANCES FOR DOUBTFUL ACCOUNTS
Allowances for doubtful accounts are maintained to provide for estimated
losses resulting from the inability of customers to make required payments. If
the financial condition of these customers deteriorates, resulting in their
inability to make payments, additional allowances may be required. Claims
reserves are maintained to provide for known and estimated customer claims for
defective materials.
FOREIGN CURRENCY TRANSLATION
Asset and liability accounts of Republic Technologies' foreign operations
are translated into U.S. dollars using current exchange rates in effect at the
balance sheet date and for revenue and expense accounts using a weighted average
exchange rate during the period. Translation adjustments are reflected as a
component of members' interest.
Transaction gains and losses are included in the consolidated statements
of operations as incurred. These amounts were not significant in all periods
presented.
USE OF ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The consolidated financial statements included herein were prepared with
the use of estimates. The Company has made significant accounting estimates with
respect to the allocation of the purchase price of the acquisition of assets
from Republic Technologies, the allowance for doubtful accounts, claims
reserves, inventory market and obsolescence reserves, impairment of goodwill and
other long-lived assets, and accrued environmental liabilities. The Predecessor
used estimates for, among other things, defined benefit pension obligations,
other postretirement
64
benefit obligations, environmental remediation, shutdown reserves, liabilities
subject to compromise, impairment of long-lived assets, and loss from
disposition of discontinued operations, all of which are significant to the
consolidated financial statements taken as a whole.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). SFAS No. 142 eliminates the amortization of
goodwill and certain intangible assets upon adoption and also requires an
initial goodwill impairment assessment in the year of adoption and annual
impairment tests thereafter. Republic Technologies adopted this accounting
standard effective January 1, 2002 and has reported accordingly for the
consolidated financial statements included herein.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which requires recognition of the fair value of
liabilities associated with the retirement of long-lived assets when a legal
obligation to incur such costs arises as a result of the acquisition,
construction, development and/or the normal operation of a long-lived asset.
Upon recognition of the liability, a corresponding asset is recorded and
depreciated over the remaining life of the long-lived asset. SFAS No. 143
defines a legal obligation as one that a party is required to settle as a result
of an existing or enacted law, statute, ordinance, or written or oral contract
or by legal construction of a contract under the doctrine of promissory
estoppel. SFAS No. 143 is effective for fiscal years beginning after December
15, 2002. The Company anticipates an immaterial impact, if any, of SFAS No. 143
on its financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment
or Disposals of Long-Lived Assets". This statement establishes a single
accounting model for long-lived assets to be disposed of by sale and provides
additional implementation guidance for assets to be held and used and assets to
be disposed of other than by sale. There was no financial statement implication
related to the adoption of this Statement by Republic Technologies effective
January 1, 2002.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses significant
issues regarding the recognition, measurement and reporting of costs that are
associated with exit and disposal activities, including restructuring
activities. The scope of SFAS No. 146 includes (1) costs to terminate contracts
that are not capital leases; (2) costs to consolidate facilities or relocate
employees; and (3) termination benefits provided to employees who are
involuntarily terminated under the terms of a one-time benefit arrangement that
is not an ongoing benefit arrangement or an individual deferred-compensation
contract. The provisions of this Statement will be effective for exit or
disposal activities initiated after December 31, 2002, with early application
encouraged. The Company anticipates an immaterial impact, if any, of SFAS No.
146 on its financial statements.
NOTE 4. ACQUISITION
On August 16, 2002, Republic acquired a substantial portion of the
operating assets of Republic Technologies and its subsidiaries. The total
purchase price was $410.6 million, which consists of $10.0 million paid to
Republic Technologies, $13.7 million in acquisition fees and expenses, and
indebtedness totaling $386.9 million, which included $301.9 million under a
senior revolving credit facility, the issuance of $80.0 million in senior
secured notes, and $5.0 million under a transition services agreement between
the Company and its Predecessor. The total
65
purchase price was allocated to the assets acquired and liabilities assumed,
based on a preliminary estimate of their respective fair values. The final
purchase accounting adjustment of the Company to reflect the fair value of the
assets acquired and liabilities assumed, will be based upon appraisals by
independent parties and other estimates of fair values that are still in
progress, and are subject to change.
As a result of the acquisition of a substantial portion of the operating
assets from Republic Technologies, the Company has become the largest domestic
producer of special bar quality steel products. In connection with the
acquisition, the Company was able to select the assets and properties of
Republic Technologies and negotiate a modified successor labor contract that it
expects will enable it to create a more efficient, higher quality network of
production facilities operated by a smaller and more flexible workforce.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at August 16, 2002, as determined based on
independent appraisals, and also reflects subsequent adjustments to the
estimated fair values through December 31, 2002. As the fair values are
estimates, the allocation of the purchase price is subject to adjustment while
Republic finalizes plans and assumptions relating to the transaction.
Current assets $299,898
Property, plant and equipment 129,298
Goodwill 58,680
Other assets 376
--------
Total assets 488,252
Current liabilities 72,059
Long-term liabilities 5,622
--------
Total liabilities 77,681
--------
Net assets acquired $410,571
========
As discussed in Note 1, the Company also acquired an option to purchase
the assets associated with Republic Technologies' cold-finishing plant located
in Hamilton, Ontario on or prior to August 16, 2003 for nominal consideration
and the assumption of certain liabilities. If the Company decides to purchase
the cold-finishing plant, the purchase price allocation will be adjusted
accordingly.
NOTE 5. INVENTORIES
The components of inventories are as follows:
THE COMPANY THE PREDECESSOR
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
Raw materials ........................ $ 14,368 $ 11,352
Semi-finished and finished goods ..... 155,914 196,512
-------- --------
Total ................................ $170,282 $207,864
======== ========
Inventories are reported net of obsolescence reserves of $5.6 million and
$10.1 million at December 31, 2002 and 2001, respectively. Inventories acquired
from Republic Technologies were revalued to fair value on August 16, 2002.
During the period from August 16, 2002 to December 31, 2002, $10.3 million of
the fair value purchase accounting adjustment increased cost of goods sold as
this inventory was relieved.
66
NOTE 6. INTANGIBLE ASSETS
Intangible assets consist of the following:
THE COMPANY THE PREDECESSOR
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
Deferred loan and bond fees, net of accumulated amortization
of $48 and $11,487, respectively ...................... $ 1,144 $24,799
Patented and unpatented technology, net of accumulated
amortization of $7,499 ................................ -- 31,401
Assembled workforce, net of accumulated
amortization of $5,467 ................................ -- 10,933
------- -------
Total ...................................................... $ 1,144 $67,133
======= =======
NOTE 7 - GOODWILL
The Company has recorded goodwill of $58.7 million in connection with the
acquisition of a substantial portion of the operating assets of Republic
Technologies (See Note 4).
During the fourth quarter of 2000, the Predecessor recognized a non-cash
impairment charge of $79.6 million related to the write-off of its unamortized
goodwill balance. The industry-wide market conditions and the Predecessor's high
level of indebtedness adversely impacted operations and the ability to implement
its consolidation plan. These factors lead to the need to significantly revise
the operating plan and related financial forecast. Based on the Predecessor's
capital structure and the revised operating plan, the corresponding anticipated
future operating cash flows less anticipated capital expenditures were expected
to be insufficient to recover the unamortized goodwill balance. Accordingly, the
carrying value of the Predecessor's goodwill balance was reduced to zero.
NOTE 8. REVOLVING CREDIT FACILITIES AND LONG-TERM DEBT
THE COMPANY
On August 16, 2002, Republic entered into a credit facility, which matures
on June 30, 2007, with Fleet Capital Corporation, as administrative agent, and
other lenders. The credit facility consists of a senior revolving credit
facility with a total commitment of up to $336.0 million. This total commitment
will automatically reduce by $5.0 million on the first day of each quarter
commencing the fiscal quarter that begins on July 1, 2003 until such time as the
total commitment is reduced to $275.0 million. Availability under the credit
facility is limited to a borrowing base as defined in the credit facility. The
borrowing lease equals 85% of eligible accounts receivable plus the sum of 70%
of the net bond value of eligible inventory plus the eligible fixed asset
component which is currently $100.0 million. Under the current contractual
terms of the senior revolving credit facility the borrowing base, effective June
30, 2003, will be reduced to 85% of eligible accounts receivable plus the sum of
60% of the net bond value of the eligible inventory plus the eligible fixed
asset component which will be $92.0 million. The Company is seeking to negotiate
possible extensions to this contractual reduction to the borrowing base. The
Company borrowed an aggregate of $301.9 million in connection with the closing
of the acquisition of assets of Republic Technologies, and the Company is
entitled to draw amounts under the new credit facility to finance working
capital and capital expenditures, and for other general corporate purposes. The
availability under the credit facility at December 31, 2002 was $15.2 million.
The borrowings under the credit facility are secured by a first priority
perfected security interest in the capital stock and other equity interests of
each direct and indirect subsidiary of Republic Holdings and all of the
Company's presently owned and subsequently acquired inventory, accounts
receivable, intellectual property and related assets (other than those of
67
Republic Holdings) and the real estate and fixed assets comprising, and the
intellectual property relating to, the Canton, Ohio Caster and Continuing
Rolling Facility, or Canton CR(TM).
Borrowings under the credit facility bear interest, at the Company's
option, at either a base rate equal to the higher of the "prime rate" by Fleet
National Bank, the weighted average of rates on overnight federal funds
transactions with members of the Federal Reserve System arranged by federal
funds brokers, plus the applicable margin, or a Eurodollar rate on deposits for
one, two, three or six month periods, plus the applicable margin. The Company's
credit facility balance as of December 31, 2002 was $268.4 million and the
average interest rate for the Company's credit facility for the period from
August 16, 2002 to December 31, 2002 was approximately 4.76%.
The credit facility contains negative covenants and provisions that
restrict, among other things, the ability to incur additional indebtedness or
guarantee the obligations of others, grant liens, make investments, pay
dividends, repurchase stock or make other forms of restricted payments, merge,
consolidate and acquire assets or stock, engage in sale and leaseback
transactions or dispose of assets, make capital expenditures in excess of
specified annual amounts, engage in transactions with the affiliates, and prepay
or amend the senior secured notes. The credit facility also requires the Company
to meet financial covenants and ratios, particularly a minimum fixed charge
coverage ratio based on operating cash flow to total debt service to be tested
quarterly commencing on March 31, 2004.
The outstanding notes are senior secured obligations of the issuers,
aggregating $80.0 million of principal amount, and will mature on August 16,
2009. Interest on the notes accrues at the rate of 10% per annum and is payable
quarterly in cash on each March 31, June 30, September 30 and December 31,
commencing September 30, 2002.
The notes were issued under an indenture dated as of August 16, 2002 among
Republic and Blue Steel Capital Corp., as issuers, N&T Railway Company LLC and
Blue Bar, L.P., as guarantors, and LaSalle Bank National Association, as
trustee. As described in Note 19, the indenture was amended pursuant to the
First Supplemental Indenture among Republic, Blue Steel Capital Corp., N&T
Railway Company LLC, Republic Holdings and LaSalle Bank National Association.
The indenture governing the notes requires the Company to secure the notes and
contains significant affirmative and negative covenants including separate
provisions imposing restrictions on additional borrowings, certain investments,
certain payments, sale or disposal of assets, payment of dividends and change of
control provisions, in each case, subject to certain exceptions. The notes are
secured, subject to exceptions and limitations, by (1) a first priority lien on,
and security interest in, substantially all of the existing assets of the
Company and its subsidiaries, other than the Canton CR(TM), inventory, accounts
receivable and intellectual property and related assets, and (2) a first
priority interest in the capital stock and other equity interests of each direct
and indirect subsidiary of Republic Holdings, other than 2011448 Ontario
Limited. Each of Republic Holdings and N&T Railway Company LLC has jointly and
severally guaranteed the notes on a senior secured basis, and each guarantee is
full and unconditional. 2011448 Ontario Limited does not currently guarantee the
notes, but it must become a guarantor of the notes in order to exercise its
option to acquire the assets and properties associated with the Hamilton,
Ontario cold-finishing plant owned by Canadian Drawn Steel Company, Inc., a
subsidiary of Republic Technologies. Any domestic subsidiary that Republic may
form or acquire in the future will guarantee the notes on a joint and several
and full and unconditional basis. See Notes 19 and 21.
68
The expression of substantial doubt about the Company's ability to
continue as a going concern in the Independent Auditor's Report, for the period
ended December 31, 2002, constitutes a covenant violation and a default under
our revolving credit facility which would result in an event of default on April
15, 2003.
During March, 2003 the Company notified the Agents and the lenders that
the Company will not comply with the requirements of the senior revolving credit
facility with respect to the annual audited financial statements for the fiscal
year ended December 31, 2002 as a result of an expression of uncertainty about
the Company's ability to continue as a going concern. Failure to comply
constitutes a default and following a fifteen day grace period, an Event of
Default. The Company has received a limited waiver to permit non-compliance of
this requirement until April 30, 2003.
THE PREDECESSOR
On April 3, 2001, the Predecessor entered into a Debtor-in-Possession
Revolving Credit Agreement ("DIP Credit Agreement") with Fleet Capital
Corporation ("Fleet Capital") and other lenders who were parties thereto to
provide secured debtor-in-possession financing to the Predecessor through
December 15, 2002. The maximum borrowings under the DIP Credit Agreement
initially were $420 million in the aggregate and included a sub-facility of $50
million for the issuance of letters of credit. The proceeds of the DIP Credit
Agreement were used to repay the amounts outstanding under the Predecessor's
previous senior revolving credit facility entered into on August 13, 1999 and
restructured on July 17, 2000.
The DIP Credit Agreement granted a security interest in accounts
receivable, inventory, intellectual property and related assets of the
Predecessor, and the real estate and fixed assets comprising the Canton CR(TM),
including the related melt shop. The DIP Credit Agreement also contained certain
restrictive covenants which, among other things, restricted the Predecessor's
ability to incur additional indebtedness or guarantee the obligations of others,
change its line of business, merge, consolidate and acquire or sell assets or
stock, pay dividends, or prepay or amend the notes or any of its subordinated
indebtedness. The Predecessor was also required to maintain minimum cumulative
EBITDA, as defined in the DIP Credit Agreement and limit its net capital
expenditures. The average interest rate for the Predecessor's credit facility
for the period from January 1, 2002 to August 15, 2002 was approximately 5.47%.
The Predecessor violated the minimum cumulative EBITDA, as defined,
covenant in the DIP Credit Agreement during 2001. On September 28, 2001, the
Predecessor was granted an amendment and limited waiver. The amendment further
limited maximum borrowings, and a weekly minimum liquidity covenant was added.
During November of 2001, the Predecessor notified the lenders that it was
in violation of the weekly minimum liquidity covenant. On November 30, 2001, the
Predecessor entered into a forbearance agreement with the lenders under an
amendment to the DIP Credit Agreement. The forbearance agreement restricted the
lenders' ability to exercise their remedies under the DIP Credit Agreement for
certain defaults through January 11, 2002. As a result of this amendment, the
Predecessor was granted temporary increases in maximum borrowing limits,
amendments to the minimum liquidity amount and weekly liquidity covenants, and a
2% interest penalty applied to all borrowings.
On January 11, 2002, the Predecessor continued to be in default of the
minimum cumulative EBITDA, as defined, covenant, and the minimum liquidity
covenants. Accordingly, the Predecessor entered into a second forbearance
agreement with the lenders under a third amendment to the DIP Credit Agreement.
The second forbearance agreement restricted the lender's ability to exercise
their remedies under the DIP Credit Agreement for certain defaults through May
31, 2002. As a result of this amendment, the Predecessor was granted temporary
increases in maximum borrowing limits, an amendment to the minimum liquidity
covenant, a new minimum sales covenant, and continuation of the 2% interest
penalty applied to all borrowings.
69
PREDECESSOR LONG-TERM DEBT
Long-term debt of the Predecessor was as follows:
DECEMBER 31, 2001
-----------------
SECURED DEBT
Industrial Revenue Bond ("IRB"), interest rate is variable, calculated weekly,
representing minimum rate required to sell bonds in a secondary market, due
December 1, 2018 ................................................................. $ 3,600
UNDERSECURED AND UNSECURED DEBT
133/4% Senior Secured Notes, due July 15, 2009 ................................... 425,000
Johnstown Enterprise Grant, interest rate at 3%, due on various dates
through November 15, 2009 ..................................................... 381
Financial Restructuring Notes, interest rate at 9.5%, due August 1, 2010 ........ 30,000
Ohio Development Loan, interest rate at 3%, due December 1, 2003 ................. 2,000
9% Solid Waste Revenue Bonds, Series 1996, due June 1, 2021 ...................... 53,700
81/4% Solid Waste Revenue Bonds, Series 1994, due October 1, 2014 ................ 20,200
Business Infrastructure Development ("BID") Program, interest rate at 3.0%, due on
various dates through April 1, 2001 ........................................... 2,049
Economic Development Partnership ("EDP I"), interest rate at 3.0%, due on various
dates through October 1, 2009 ................................................. 5,048
Economic Development Partnership ("EDP II"), interest rate at 3.0%, due on various
dates through July 1, 2010 .................................................... 1,163
Economic Development Partnership ("EDP III"), interest rate at 3.0% due on
various dates through October 1, 2010 ......................................... 2,691
Community Development Block Grant Program ("CDBG"), interest rate at 3.0%, due on
various dates through July 1, 2010 ............................................ 556
Housing and Urban Development 108 ("HUD") Bonds, interest rates between 6.6% and
8.2%, due on various dates through September 26, 2003 ......................... 3,150
Environmental Bonds:
1984 Series, interest due monthly at a variable rate based on the average of
thirty-day yield evaluations at par of not less than twenty issuers of
tax-exempt securities, principal due December 1, 2001 ......................... 9,000
1995 Series, variable rate tax-exempt securities, principal due November 16, 2015 4,745
---------
563,283
Original issue discount ............................................................. (47,306)
Amounts classified as current ....................................................... (3,600)
Amounts classified as subject to compromise ......................................... (512,377)
---------
Long-term debt ...................................................................... $ --
=========
On April 2, 2001, the Predecessor and substantially all of its filed
voluntary petitions for reorganization under Chapter 11 of the Federal
Bankruptcy Code in the United States Bankruptcy Court in the Northern District
of Ohio, Eastern Division.
The Predecessors' filing for protection under Chapter 11 represented an
Event of Default under each of its debt instruments. As a result, all secured
debt (the Development Authority of Cartersville, Georgia industrial revenue bond
and the DIP credit facility) was classified as current
70
at December 31, 2001, while all undersecured and unsecured debt was classified
as liabilities subject to compromise.
NOTE 9. LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS
The accompanying consolidated balance sheet at December 31, 2001 for the
Predecessor segregates liabilities subject to compromise, such as unsecured
claims, in the amount of $1,239.2 million from liabilities not subject to
compromise and liabilities arising subsequent to the Petition Date. These
amounts represented the Predecessor's best estimate of known or potential claims
that were to be resolved in connection with the Chapter 11 cases. Liabilities
subject to compromise at December 31, 2001 were as follows:
DECEMBER 31, 2001
-----------------
Accounts payable ................................. $ 219,160
Accrued interest ................................. 20,370
Other postretirement benefits .................... 227,262
Defined benefit pension obligations .............. 199,879
Accrued compensation ............................. --
Other accrued expenses ........................... 23,738
Long-term deferred payables ...................... 36,424
Long-term debt ................................... 512,377
----------
Total (a) ....................................... $1,239,210
==========
(a) Excludes a net intercompany payable in the amount of $5.9
million to the Predecessor's subsidiary, Nimishillen &
Tuscarawas, LLC, which is not included in the bankruptcy
proceedings.
The Predecessor's reorganization items consist of expenses directly
incurred or realized as a result of the Chapter 11 cases and have been
segregated from normal operations. Reorganization expense included in the
Predecessor's consolidated statements of operations includes the following:
PERIOD FROM
JANUARY 1, 2002 YEAR ENDED
TO AUGUST 15, DECEMBER 31,
2002 2001
------- -------
Professional fees and administrative items, net ........ $ 2,377 $ 8,652
Write-down of deferred financing costs related
to the revolving credit facility .................. -- 7,379
------- -------
Total .................................................. $ 2,377 $16,031
======= =======
NOTE 10. SPECIAL CHARGES
The Predecessor maintained a Master Collective Bargaining Agreement and
settlement agreement (collectively, the "Master CBA") with employees represented
by the USWA which required Republic Technologies to offer Early Retirement
Buyouts ("ERBs") to at least 1,000 employees and permitted Republic Technologies
International, LLC to offer a Voluntary Severance Plan ("VSP"). The purpose of
these programs was to reduce the hourly workforce by a net reduction of over
1,900 hourly employees over four years. These programs were substantially
voluntary in nature. Accordingly, the costs associated with these workforce
reductions were being recognized as the offers were accepted by the employees
and intended to be awarded by the
71
Predecessor. During the period from January 1, 2002 to August 15, 2002 there
were 43 ERB's accepted amounting to $8.8 million. In the years ended December
31, 2001 and 2000 there were 64 ERB's amounting to $8.0 million and 31 ERB's
amounting to $ 0.8 million, respectively.
As an outcome of restructuring activities, Republic Technologies took
several actions resulting in the need to record certain asset impairments and
restructuring reserves, including shutting down the Johnstown, Pennsylvania melt
shop facility, the Canton, Ohio 12" rolling mill facility, and the Willimantic,
Connecticut cold-finishing facility. As a result of these actions, the
Predecessor recorded restructuring charges of $3.6 million and $74.7 during the
years ended December 31, 2001 and 2000, respectively. The $3.6 million of
charges for the year ended December 31, 2001 includes $0.9 million for severance
costs relating to administrative staff reductions, $1.5 million related to
employment security provisions in the labor agreement with the USWA, $0.3
million in environmental remediation required as a result of the Willimantic
facility closure, and $1.2 million related to facility closure costs in
Johnstown. These charges were offset in 2001 by a $0.3 million reduction to
previously recorded reserves. The $74.7 million of charges for the year ended
December 31, 2000 includes $4.6 million for severance costs relating to
administrative staff reductions, $1.4 million related to employment security
provisions in the labor agreement with the USWA, $3.5 million in connection with
the Willimantic facility closure, and $66.5 million related to facility closure
costs in Johnstown. These charges were offset in 2000 by a $1.4 million
reduction to previously recorded reserves. During the period from January 1,
2002 to August 15, 2002, the Predecessor recorded $1.9 million of
severance-related costs for administrative staff reductions and $0.6 million of
miscellaneous facility closure costs. A gain of $0.8 million as a result of the
Predecessor's Willimantic plant sale and the reversal of the Predecessor's
related shutdown reserve offset these charges.
The activity impacting the Predecessor's accruals for restructuring during
the years ended December 31, 2001 and 2000 based on available information, is
summarized in the table below:
ASSET WRITE- LABOR AND FACILITY
DOWNS SEVERANCE CLOSURE COSTS TOTAL
-------- --------- ------------- --------
JANUARY 1, 2000 .................................. $ 764 $ 1,445 $ 2,209
Provision ................................... $ 43,739 22,851 9,502 76,092
Amount utilized ............................. -- (5,047) (2,476) (7,523)
Adjustments ................................. -- -- (1,434) (1,434)
Charged against inventory ................... -- -- (652) (652)
Charged against property, plant and equipment (43,739) -- -- (43,739)
-------- -------- -------- --------
DECEMBER 31, 2000 ................................ -- 18,568 6,385 24,953
-------- -------- -------- --------
Provision ................................... -- 2,353 300 2,653
Amount utilized ............................. -- (5,609) (2,500) (8,109)
Charged against defined benefit obligation .. -- (7,223) (7,223)
Adjustments ................................. -- (203) 2,745 2,542
-------- -------- -------- --------
DECEMBER 31, 2001 ................................ $ -- $ 7,886 $ 6,930 $ 14,816
======== ======== ======== ========
NOTE 11 - BENEFIT PLANS
In connection with the Company's acquisition of assets from Republic
Technologies, it entered into a new labor agreement with the USWA that covers
the vast majority of the Company's hourly employees. This labor agreement
expires on August 15, 2007.
72
Wage and benefit provisions under this collective bargaining agreement are
specified until expiration of the agreement and will be subject to negotiations
at that time. The labor agreement also provides for the creation of a benefits
trust. The Company made an initial contribution of $3.0 million and will
contribute $3.00 for every hour worked by an employee who is covered by the new
labor agreement. In year three of the labor agreement, the contribution
increases to $3.50 for every hour worked and in years four and five it increases
to $3.80 for every hour worked. The allocation of the funds is directed by the
USWA to provide pension benefits and/or retiree medical coverage for future
eligible employees of the Company and/or medical coverage for retirees of
Republic Technologies. However, no contributions may be used for the purpose of
providing medical coverage for the retirees of Republic Technologies if they
create, or result in, any liability whatsoever on the part of the Company for
any obligation of Republic Technologies, or any independent obligation to the
retirees of Republic Technologies. The Company's contributions to the benefits
trust constitute its sole obligation with respect to providing these benefits.
The Company recorded $4.3 million of expense and made contributions of $2.3
million related to this provision in the labor agreement during the period from
August 16, 2002 to December 31, 2002.
The new labor agreement also calls for the establishment of a profit
sharing plan to which the Company will contribute 15% of its quarterly pre-tax
income, as defined in the labor agreement, over $12.5 million. Twenty-five
percent of these contributions will be divided among USWA-represented employees
who are covered by the new labor agreement based on the numbers of hours worked
and the remaining 75% will be contributed to the benefits trust described above.
Contributions, if any, will be distributed to employees and the benefits trust
within 45 days of the end of each fiscal quarter. During the period from August
16, 2002 to December 31, 2002, the Company did not meet the criteria discussed
above and was not required to make a contribution under this agreement.
The Company has a defined contribution retirement plan that covers
substantially all salary and non-union hourly employees. Contributions to the
plan are based on age and compensation. The Company funds contributions to this
plan as accrued. Contributions to this plan by the Company were $0.8 million for
the period from August 16, 2002 to December 31, 2002.
NOTE 12 - PREDECESSOR'S DEFINED CONTRIBUTION BENEFIT PLANS
The Predecessor had a defined contribution retirement plan that covered
substantially all salary and non-union hourly employees. Contributions to the
plan were based on age and compensation. Prior to March 1, 2001, the Predecessor
provided a defined contribution retirement plan for the former Bar Technologies
Inc. United Steel Worker's of America ("USWA") employees. The Predecessor
contribution was seventy cents for every hour worked. This plan was discontinued
March 1, 2001 and the participants merged into the defined benefit plan (see
Note 13). The former Republic Engineered Steels, Inc. USWA employees were
covered under a defined contribution retirement plan, which was discontinued
September 8, 1998 under the terms of the Master CBA and the assets merged into
the defined benefit plan (see Note 13). The Predecessor funded contributions to
these plans as accrued. Contributions to these plans by the Predecessor were
$3.4 million and $4.4 million for the years ended December 31, 2001 and 2000,
respectively.
The Predecessor had a profit sharing plan covering all of its USWA
employees. Amounts provided to the profit sharing pool were based on percentages
of the consolidated
73
excess cash flows of the Company, as defined in the Master CBA. There was no
expense relating to this plan for any of the periods presented.
NOTE 13. PREDECESSOR'S DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT BENEFITS
The Master CBA covering all of the former Republic Engineered Steels,
Inc., Bar Technologies and USS/Kobe facilities with employees represented by the
USWA was entered into with the USWA. The Master CBA provided for improvements in
the existing defined benefit pension plans covering employees at former Republic
Engineered Steels, Inc. facilities, former USS/Kobe facilities and the former
Bliss & Laughlin Harvey, Illinois facility, and the creation of a defined
benefit pension plan obligation covering employees at former Bar Technologies
facilities. The Master CBA was modified by the Modified Labor Agreement ("MLA"),
effective January 1, 2002. On January 24, 2002 the USWA ratified the MLA
modifying the Master CBA. The MLA provided interim support designed to permit
the Predecessor to continue operating at its current level while working to
secure the financing necessary to emerge from Bankruptcy. Under the terms of the
MLA all employee wages were reduced 15% for the period of January 1, 2002 to May
31, 2002. Other modifications included immediate elimination of 125 jobs and
modifications to the employment security plan allowing the Predecessor to layoff
employees as business conditions and operational requirements dictated.
The following is a general description of the Predecessor's defined
benefit plans.
REPUBLIC ENGINEERED STEELS, INC.
The Predecessor maintained a defined benefit "floor offset" plan, which
covered all former Republic Engineered Steels, Inc. USWA employees. The plan,
when combined with benefits from an LTV Steel Defined Benefit Pension Plan,
provided a minimum level of pension benefits for USWA employees. Benefits were
based on a combination of employees' age and years of service. The Predecessor's
policy was to fund this plan based on legal requirements and tax considerations.
As a result of the Chapter 11 filing, the Predecessor has not funded this plan
since the Petition Date.
The Predecessor entered into a memorandum of understanding with the PBGC
on November 2, 1998, pursuant to which (1) the PBGC agreed to forebear from
instituting proceedings to terminate the USWA Defined Benefit Plan as a result
of the acquisition of Republic Engineered Steels, Inc. or the prospective
combination with Bar Technologies Inc., (2) in January 1999, Republic Engineered
Steels, Inc. funded the pension plan with an approximate $27.0 million initial
contribution and (3) Republic Engineered Steels, Inc. made an additional
contribution to such pension plan in the amount of $20.0 million on July 1,
1999. The agreement with the PBGC contemplated additional quarterly
contributions commencing October 1, 1999 in accordance with the following
schedule: $7.5 million per quarter for the first four payments, $7.625 million
per quarter for the next four payments, $9.075 million per quarter for the next
four payments and $8.475 million per quarter for the final four payments.
The Predecessor amended the memorandum of understanding with the PBGC on
July 14, 2000. According to this Amendment, the Predecessor agreed to the
following terms with PBGC:
(a) During the year 2000, the Predecessor was to pay $2.0 million of the
$7.5 million required contribution, due in January, April and July, deferring
the balance of the contributions.
74
(b) During the year 2000, the Predecessor was to pay $2.0 million of the
$7.625 million required contribution, due in October, deferring the balance of
the contribution.
(c) During the year 2001, the Predecessor was to pay $2.0 million of the
$7.625 million required contribution, due in January, April and July, deferring
the balance of the contribution.
(d) During the year 2001, the Predecessor was to pay $2.0 million of the
$9.075 million required contribution, due in October, deferring the balance of
the contribution.
(e) The Predecessor was to pay the total deferred amount of approximately
$46.1 million (items a thru d above) in eight equal quarterly installments
commencing on January 1, 2002 and continuing through October 1, 2003. The amount
of each deferred installment of the required contributions was to be added to
the amount of each of the required contributions the Predecessor was obligated
to make in the years 2002 and 2003.
As a result of the Chapter 11 filings, the Predecessor defaulted on the
required pension funding for this plan.
The Predecessor also sponsored postretirement plans for health care and
life insurance that cover most full-time employees. The plans pay stated
percentages of most necessary medical expenses incurred by retirees, after
subtracting payments by Medicare or other providers and after a stated
deductible has been met. Hourly employees became eligible for benefits after
completing 15 years of service and reaching age 60. Salary employees became
eligible for benefits if they retired after reaching age 65.
BAR TECHNOLOGIES INC.
Bliss & Laughlin ("BLI") maintained a defined benefit pension plan
covering substantially all hourly employees of its Harvey, Illinois plant. As of
January 1, 2000, the plan and covered employees were merged into the pension
plan described above. Employees at the Cartersville, Georgia plant were
non-union hourly employees and were not covered under a defined benefit pension
plan. Canadian Drawn Steel Corporation ("CDSC") maintained pension plans
covering substantially all employees. Benefits for the CDSC salaried employees'
plans were based on an average salary for the five most recent years prior to
retirement. Benefits for the CDSC bargaining unit employees' plans were based on
years of service. Republic Technologies' policy was to fund pension cost in
accordance with the requirements of the Employee Retirement Income Security Act
of 1974 in the United States and local regulations in Canada.
CDSC also sponsored postretirement plans for health care and life
insurance that covered most full-time employees. The plans paid stated
percentages of most necessary medical expenses incurred by retirees, after
subtracting payments by other providers and after a stated deductible has been
met. Participants became eligible for benefits if they retired from CDSC after
reaching age 55 with 10 or more years of service. BLI employees at its Harvey,
Illinois plant were covered under the Republic Engineered Steels, Inc
post-retirement plan for health and life insurance.
USS/KOBE
The Predecessor sponsored two noncontributory defined benefit plans
covering substantially all former USS/Kobe employees. Benefits under these plans
were based upon years of service and final average pensionable earnings, or a
minimum benefit based upon years of
75
service, whichever was greater. Assets held by the plans were invested
primarily in corporate equity and debt securities and interest bearing cash
accounts. In addition, pension benefits from USS/Kobe's two defined contribution
plans, which covered participating employees, were based upon years of service
and career earnings.
Republic Technologies International, LLC agreed with the PBGC to maintain
a specified level of funding for the USS/Kobe Union Eligible Pension Plan, a
defined benefit plan for union employees, based on statutory funding
requirements. The agreement with the PBGC with respect to this plan contemplated
that contributions would be made as follows: for the year 2000, an amount
necessary to avoid an accumulated funding deficiency plus $4.0 million; for
2001, an amount so that the December 31, 2001 credit balance equaled that of
December 31, 2000 with interest plus $2.0 million; for 2002, an amount so that
the December 31, 2002 credit balance equaled that of December 2001 with interest
plus $2.0 million; and for 2003, an amount so that the December 31, 2003 credit
balance equaled that of December 31, 2002 with interest plus $2.0 million. The
agreement with the PBGC further contemplated that, beginning with 2004, the
Predecessor would make contributions to maintain the December 31, 2003 credit
balance with interest. As security for such obligation, Republic Technologies
International, LLC provided the PBGC with a $5.0 million letter of credit. As a
result of the Chapter 11 filings, the Predecessor defaulted on the required
pension funding. The PBGC accordingly presented the letter of credit for
payment.
During the period from January 1, 2002 to August 15, 2002, the Predecessor
recorded net periodic pension costs of $13.2 million. The components of the
Predecessor's net periodic pension costs for the years ended December 31, 2001
and 2000 are summarized as follows:
Year ended Year ended
December 31, December 31,
2001 2000
-------- --------
Service cost $ 10,230 $ 9,527
Interest cost on projected benefit obligations 21,479 20,517
Expected return on plan assets (18,598) (19,222)
Amortization of prior service cost 100 102
Recognized net actuarial (gain)/loss 56 (327)
Curtailment (gain) (66) (338)
-------- --------
$ 13,201 $ 10,259
======== ========
Net periodic pension cost
During the period from January 1, 2002 to August 15, 2002, the Predecessor
recorded net periodic postretirement benefit costs of $13.1 million. The
components of the Predecessor's net periodic postretirement benefit cost for the
years ended December 31, 2001 and 2000 included the following components:
Year ended Year ended
December 31, December 31,
2001 2000
-------- --------
Service cost of benefit earned $ 1,707 $ 2,198
Interest on accumulated postretirement benefit
obligations 15,843 17,013
Amortization of prior service cost 6 11
Recognized net actuarial (gain) -- (5)
-------- --------
Net periodic postretirement cost $ 17,556 $ 19,217
======== ========
76
The change in benefit obligation, change in plan assets, funded status and
amounts recognized in the consolidated balance sheets related to the
Predecessor's pension plans and other postretirement benefits are as follows:
Pension Plans Other Postretirement Benefits
------------- -----------------------------
December 31, December 31,
2001 2001
------------- -----------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 299,270 $ 238,294
Service cost 10,230 1,707
Interest cost 21,480 15,844
Amendments 3,613 24,534
Foreign currency exchange rate change (654) (223)
Actuarial (gain) loss 57,071 (11,972)
Curtailment loss 15,424 2,593
Plan transfers 257 --
Benefits paid (30,774) (13,651)
--------- ---------
Benefit obligation at end of year 375,917 257,126
--------- ---------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year 214,626 --
Actual return on plan assets (10,962) --
Employer contribution 4,748 13,651
Foreign currency exchange rate change (765) --
Benefits paid (30,776) (13,651)
Plan transfers 257 --
Assets transferred out -- --
--------- ---------
Fair value of plan assets at end of year 177,128 --
--------- ---------
Funded status-underfunded (198,789) (257,126)
Unrecognized net actuarial (gain) loss 85,987 1,815
Unrecognized prior service cost 4,677 24,651
--------- ---------
Net amount recognized $(108,125) $(230,660)
========= =========
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost $ 5,054 $ --
Accrued benefit liability (199,879) (230,660)
Accumulated other comprehensive loss 86,700 --
--------- ---------
Accrued benefit costs $(108,125) $(230,660)
========= =========
WEIGHTED AVERAGE ASSUMPTIONS:
Discount rate 7.18% 7.19%
Expected return on plan assets 8.98%
Rate of compensation increase 0.92%
The accumulated benefit obligation, projected benefit obligation, and fair
value of plan assets for the Predecessor's pension plans with accumulated
benefit obligations in excess of plan assets are summarized as follows:
77
2001
--------
Accumulated benefit obligation $362,916
Projected benefit obligation 364,539
Plan assets at fair value 163,778
For measurement purposes, a weighted average annual rate of increase in
the per capita cost of covered health care claims of 6.5% was assumed for fiscal
2001; the rate assumed to decrease by approximately 0.5% per year to 4.5% for
fiscal 2004, and remain at that level thereafter.
To illustrate the health care cost trend on amounts reported, changing the
assumed health care cost trend rates by one percentage point in each year would
have the following effects as of and for the fiscal year ended December 31,
2001:
One Percentage Point
--------------------
Increase Decrease
-------- --------
Effect on total service and interest cost components $ 1,622 $ (1,426)
Effect on accumulated postretirement benefit obligation 20,418 (17,972)
NOTE 14. SEGMENT INFORMATION
The Company operates in two reportable segments: hot-rolled and
cold-finished. The Predecessor operated its Specialty Steel division as a third
segment, however, as discussed in Note 15, the Specialty Steel division was
accounted for as a discontinued operation. As such the following information
related to the Predecessor does not reflect the Specialty Steel division as a
reportable segment. The Company manages the reportable segments as separate
strategic business units. Differences between the segments include manufacturing
techniques and equipment, competition and end-users. The Company measures
segment performance based on earnings before net interest expense, income taxes,
and depreciation and amortization expense ("EBITDA"). The Predecessor measured
segment performance based on earnings before interest, taxes, depreciation and
amortization, other postretirement benefits ("OPEB"), workforce reduction
charges, restructuring charges, monitoring fees, gain or loss from the sale of
fixed assets, and reorganization items ("EBITDA, as defined").
HOT-ROLLED
Hot-rolled bars and rods are processed from blooms and billets on rolling
mills to change the internal physical properties, size or shape of the steel.
Desirable characteristics of hot-rolled products include internal soundness,
uniformity of chemical composition and freedom from surface imperfection. The
Company's hot-rolled products include rounds, squares and hexagons, in both cut
lengths and coils. Customers for hot-rolled products include manufacturers of
automotive parts, industrial equipment, independent forgers, steel service
centers, and converters. The Company's hot-rolled products are used in the
manufacture of end-use products such as automotive drivetrains, engine and
transmission parts, bearings and tractor components.
COLD-FINISHED
Cold-finishing is a value-added process which improves the physical
properties of hot-rolled bars and rods. Cold-finished products are produced from
hot-rolled bars by cold-drawing, turning, grinding, thermal treating or a
combination of these processes. The manufacturing process allows for production
of products with more precise size and straightness tolerances, as
78
well as improved strength and surface finish, that provides customers with a
more efficient means of producing a number of end products by often eliminating
processing steps in the customers' use of the products. The Company's
cold-finished products include rounds, squares, hexagons, and flats, all of
which can be further processed by turning, grinding or polishing, or a
combination thereof. Customers for cold-finished products include manufacturers
of automotive parts, industrial equipment, steel service centers and
distributors. The Company's cold-finished products are used in the manufacture
of end-use products such as automotive steering assemblies, electrical motor
shafts, ball and roller bearings, valves and hand tools.
Inter-segment sales are made at an agreed upon transfer cost which is
adjusted quarterly and are eliminated in consolidation. Selling, general and
administrative and other costs are allocated 90% to hot-rolled and 10% to
cold-finished for the Company and 80% to hot-rolled and 20% to cold-finished for
the Predecessor. Pension costs are allocated by the Predecessor based on the
amount of payroll incurred by each segment.
THE COMPANY FOR THE PERIOD FROM AUGUST 16, 2002 TO DECEMBER 31, 2002
--------------------------------------------------------------------------------------
COLD- TOTAL INTER-SEGMENT
HOT-ROLLED FINISHED SEGMENTS ELIMINATION/OTHER CONSOLIDATED
---------- --------- --------- ----------------- ------------
Net sales ................... $ 288,237 $ 44,736 $ 332,973 $ (32,842) $ 300,131
Depreciation and amortization 2,341 245 2,586 -- 2,586
Segment (loss) (EBITDA) ..... (5,843) (3,831) (9,674) -- (9,674)
Capital expenditures ........ 17,195 101 17,297 -- 17,297
Segment Assets .............. $ 420,091 $ 54,307 $ 474,398 -- $ 474,398
THE PREDECESSOR FOR THE PERIOD FROM JANUARY 1, 2002 TO AUGUST 15, 2002
--------------------------------------------------------------------------------------
COLD- TOTAL INTER-SEGMENT
HOT-ROLLED FINISHED SEGMENTS ELIMINATION/OTHER CONSOLIDATED
---------- --------- --------- ----------------- ------------
Net sales ................... $ 558,290 $ 117,863 $ 676,153 $ (64,170) $ 611,983
Depreciation and amortization 25,840 2,505 28,345 -- 28,345
Segment profit (loss) (EBITDA,
as defined) ............... 17,456 (9,276) 8,180 -- 8,180
Capital expenditures ........ $ 7,253 -- $ 7,253 -- $ 7,253
THE PREDECESSOR FOR THE YEAR ENDED DECEMBER 31, 2001
--------------------------------------------------------------------------------------
COLD- TOTAL INTER-SEGMENT
HOT-ROLLED FINISHED SEGMENTS ELIMINATION/OTHER CONSOLIDATED
---------- --------- --------- ----------------- ------------
Net sales ................... $ 896,249 $ 213,845 $1,110,094 $(116,387) $ 993,707
Depreciation and amortization 51,815 5,031 56,846 -- 56,846
Segment profit (loss) (EBITDA,
as defined) ............... (20,850) (4,165) (25,015) -- (25,015)
Capital expenditures ........ 3,257 332 3,589 -- 3,589
Segment assets .............. $ 918,943 $ 115,244 $1,034,187 $ 15,372 $1,049,559
THE PREDECESSOR FOR THE YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------------------------------------------
COLD- TOTAL INTER-SEGMENT
HOT-ROLLED FINISHED SEGMENTS ELIMINATION/OTHER CONSOLIDATED
---------- --------- --------- ----------------- ------------
Net sales ................... $1,114,833 $ 280,615 $1,395,448 $(130,047) $1,265,401
Depreciation and amortization 55,273 6,202 61,475 -- 61,475
Segment profit (EBITDA,
as defined) ............... 68,123 13,779 81,902 -- 81,902
Capital expenditures ........ $ 11,977 $ 1,088 $ 13,065 -- $ 13,065
79
A reconciliation of EBITDA of the Company and EBITDA, as defined for the
Predecessor to loss before income taxes is as follows:
THE PREDECESSOR
THE COMPANY ----------------------------------------
PERIOD FROM PERIOD FROM
AUGUST 16, JANUARY 1,
2002 TO 2002 TO YEAR ENDED YEAR ENDED
DECEMBER 31, AUGUST 15, DECEMBER 31, DECEMBER 31,
2002 2002 2001 2000
--------- --------- --------- ---------
Segment profit (loss) (EBITDA for the Company
and EBITDA, as defined, for the Predecessor) ... $ (9,674) $ 7,998 $ (25,015) $ 81,902
Depreciation and amortization expense .......... 2,586 28,345 56,846 61,475
Interest expense ............................... 8,551 17,721 56,052 117,495
Special charges ................................ -- 10,541 11,633 155,019
OPEB expense ................................... -- 13,062 17,285 18,638
Monitoring fees ................................ -- -- 1,000 4,000
Gain from sale of fixed assets ................. -- (4,190) (1,782) (4,790)
Reorganization items ........................... -- 2,377 16,031 --
--------- --------- --------- ---------
Loss before income taxes ....................... $ (20,811) $ (59,858) $(182,080) $(269,935)
========= ========= ========= =========
NOTE 15. DISCONTINUED OPERATIONS
The Predecessor historically reported its Specialty Steel division as a
discontinued operation. Certain assets of the Baltimore plant were sold in
January 2001. The assets of the Canton plant, representing a substantial portion
of the remaining assets, were sold on September 5, 2002.
A reserve for the estimated operating losses of the Specialty Steel
division was made as part of the accounting for the discontinued operations and
periodically revised as part of the periodic reassessment of the carrying values
of the net assets relating to the discontinued operations. In the period from
January 1, 2002 to August 15, 2002, no provision was recorded for any gain or
loss from the disposition of the discontinued operations. The Predecessor
recorded an additional provision of approximately $0.5 million in 2001. In the
year ended December 31, 2000, an additional provision of $16.8 million was made,
including a charge of $7.0 million taken for the permanent shutdown of the
Baltimore Specialty facility.
Sales and related losses for the discontinued operations were as follows
(net loss on discontinued operations were reflected in the Predecessor's
financial statements as a reduction in the accrual for losses on the
discontinued operations that was provided as part of the estimated loss on
disposition):
80
PERIOD FROM
JANUARY 1, 2002 TO YEAR ENDED YEAR ENDED
AUGUST 15, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
--------------- ----------------- -----------------
Net sales ...................... $ 10,111 $ 23,696 $ 44,556
Gross loss ..................... (6,243) (2,525) (7,645)
Loss before income taxes ....... (6,672) (3,459) (12,614)
Provision for income taxes ..... -- -- --
-------- -------- --------
Net loss ....................... $ (6,672) $ (3,459) $(12,614)
======== ======== ========
Included in the Predecessor's consolidated balance sheet as assets held
for sale at December 31, 2001 were $9.0 million of inventories presented as
current assets held for sale and $2.4 million of property, plant and equipment
presented as non-current assets held for sale. As part of the acquisition of
substantially all of the assets of Republic Technologies, the Company purchased
$1.9 million of inventory which was related to the Predecessor's specialty
steels division facilities.
NOTE 16. RELATED PARTY TRANSACTIONS
THE COMPANY
A Management Services Agreement dated as of August 16, 2002 between Blue
Bar, L.P. and Republic provides that Blue Bar, L.P. will provide certain ongoing
advisory and management services to Republic as requested by Republic from time
to time. Republic pays Blue Bar, L.P. a quarterly fee of $250,000 for such
services and reimburses Blue Bar, L.P. and its affiliates for all reasonable
costs and expenses incurred by them in providing such advisory and management
services. Republic's obligation to make such payments will terminate upon the
first to occur of (i) August 16, 2012, or (ii) the end of the fiscal year in
which Blue Bar, L.P., or any of its affiliates, directly or indirectly, ceases
to own any membership interests in Republic. As part of the restructuring
described in Note 19, Blue Bar, L.P. assigned to Blue Bar Holdings its interests
and obligations under the Management Services Agreement.
On August 16, 2002, Republic paid one-time transaction fees of $3.2
million to an affiliate of KPS Special Situations Fund, L.P. and $0.8 million to
an affiliate of Hunt Investment Group, which together owned all of the equity of
Blue Bar, L.P., the predecessor of Republic Holdings. These transaction fees
were paid out of the proceeds of the capital contribution made by Blue Bar, L.P.
to Republic contemporaneously with the Company's acquisition of assets from
Republic Technologies.
THE PREDECESSOR
The Predecessor had a monitoring agreement with Blackstone, Veritas, USX
and Kobe, where the parties were to receive an aggregate annual fee of $4.0
million. This agreement was stayed due to the Chapter 11 proceedings, therefore,
the Predecessor accrued only $1.0 million under this agreement in 2001.
During the period from January 1, 2002 to August 15, 2002, and the years
ended December 31, 2001 and 2000, the Predecessor had approximately $50.4
million, $77.9 million and $112.9 million, respectively, of net sales to
American Axle & Manufacturing, a company controlled by Blackstone.
81
The Predecessor and Haynes Specialty Steels Predecessor, a subsidiary of
Haynes, a company controlled by Blackstone, were parties to a facilities
management agreement dated as of April 15, 1999, by which Haynes agreed to
manage the Predecessor's Baltimore, Maryland and Canton, Ohio (Harrison Avenue)
specialty steel finishing facilities. The Predecessor continued to own these
facilities and approved all material expenditures and financial decisions of
Haynes with respect to these facilities. As compensation for the services
provided, Haynes received management fees equal to the total compensation costs,
including benefits, of the Haynes personnel providing management services to the
Predecessor that was allocable to the time these personnel devoted to these
facilities. In addition, Haynes was reimbursed by the Predecessor for all of its
reasonable out-of-pocket expenses incurred in connection with the provision of
management services. This agreement was terminated during 2000.
The Predecessor also had entered into the following agreements with USX,
Kobe and FirstEnergy Service Corp. ("FirstEnergy") (another equity investor in
the Predecessor's indirect parent) or their affiliates:
ROUND SUPPLY AGREEMENT
The Predecessor entered into a five-year supply agreement with USX and the
new tubular company owned by USX, which provides for the tubular joint venture
purchasing all of its requirements for steel rounds at its Lorain, Ohio pipemill
from the Predecessor up to a maximum of 400,000 tons per year for a price equal
to the Predecessor's production costs plus an agreed upon margin per ton. The
tubular company also had the right to purchase up to an additional 200,000 tons
per year for a price equal to the Predecessor's fixed production costs plus an
agreed upon margin per ton. If the tubular company was unable to purchase at
least 400,000 tons of steel rounds per year for its Lorain, Ohio pipemill, USX
was required to purchase any shortfall, under specified circumstances, to
satisfy the steel round requirements of its Fairfield, Alabama pipemill facility
that could not be satisfied from USX's internal production of steel rounds. The
Predecessor sold $73.7 and $106.1 million of seamless rounds to USX in the
period from January 1, 2002 to August 15, 2002, and the year ended December 31,
2001, respectively.
COKE SUPPLY AGREEMENT
The Predecessor entered into a five-year supply agreement with USX, which
provided that Republic Technologies purchase substantially all of its
requirements for coke for use in its Lorain, Ohio blast furnace from USX. The
purchase price for coke was based on market prices and adjusted annually,
subject to most favored nations provisions for price and other conditions, which
allowed the Predecessor to receive the most favorable terms that USX granted to
any of its coke customers. The Predecessor purchased $39.0 million of coke from
USX in the period from January 1, 2002 to August 15, 2002 and $51.2 million in
the year ended December 31, 2001.
PELLET SUPPLY AGREEMENT
Under this agreement, the Predecessor agreed to purchase all of its iron
ore pellet requirements for its Lorain, Ohio blast furnace from USX for a period
of five years. The purchase price for pellets were generally based on market
prices and were adjusted annually, subject to most favored nations provisions
for price and other conditions, which allowed the Predecessor to receive the
most favorable terms that USX granted to any of its pellet customers. The
Predecessor purchased $47.1 million of iron ore pellets from USX in the period
from January 1, 2002 to August 15, 2002 and $59.9 million in the year ended
December 31, 2001.
82
SAFE HARBOR LEASE MATTERS AGREEMENT
Pursuant to the master restructuring agreement, the Predecessor received
certain property formerly owned by USS/Kobe that qualified as "Safe Harbor Lease
Property," thus affording USX and Kobe with tax benefits. The Safe Harbor Lease
Matters Agreement contained covenants and warranties to ensure that the property
remain qualified as Safe Harbor Lease Property and to ensure the continuation of
the tax benefits.
ENERGY MANAGEMENT AGREEMENT
The Predecessor entered into an agreement with FirstEnergy under which it
appointed FirstEnergy as its exclusive representative for the procurement of
energy supply and services. FirstEnergy purchased $30.0 million of the Series C
convertible preferred stock of Republic Technologies International, Inc. (the
Predecessor's ultimate parent).
The Predecessor also entered into an agreement with the new tubular steel
company owned by USX regarding the provision of various utilities and an
agreement with USX regarding the provision of various transitional services. In
addition, the Predecessor entered into an agreement with USX regarding payment
of certain payables owed by USS/KOBE to USX.
NOTE 17. COMMITMENTS AND CONTINGENCIES
The Company, in the ordinary course of business, is the subject of or
party to various pending or threatened legal and environmental actions. The
Company provides for the costs related to these matters when a loss is probable
and the amount is reasonably estimable. Based on information presently known to
the Company, management believes that any ultimate liability resulting from
these actions will not have a material adverse affect on its consolidated
financial position, results of operations or cash flows.
In connection with the closing of the asset purchase transaction with
Republic Technologies, the USWA took the position that the Company's new labor
agreement did not apply to the unionized employees of Canadian Drawn Steel
Company, Inc., a Canadian subsidiary of Republic Technologies. In light of the
USWA's position and rather than delay consummation of the entire transaction,
the parties negotiated the first amendment to the Asset Purchase Agreement,
which among various other matters included the inventory and receivables of
Canadian Drawn Steel in the assets the Company acquired and gave the Company a
one-year option to purchase the other assets of Canadian Drawn Steel for nominal
additional consideration, without adjustment to the overall purchase price.
Under the option, if the business of Canadian Drawn Steel is sold to a third
party, Republic Technologies will pay the net proceeds of that sale to the
Company.
On August 30, 2002, the USWA filed a motion with the Bankruptcy Court
seeking to compel the sale to the Company of substantially all of the assets of
Canadian Drawn Steel. On September 17, 2002, the Company and Republic
Technologies filed separate objections to the USWA's motion, asserting among
other things that the USWA had breached the agreement with Republic Technologies
with respect to the unionized employees of Canadian Drawn Steel and was
attempting to force the Company to assume additional liabilities for legacy
costs which the Company did not agree to assume under the Asset Purchase
Agreement. In addition, Republic Technologies asserted various procedural
defenses against the USWA and the Company objected to several of the factual
assumptions underlying the USWA's proposed orders.
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The USWA withdrew its motion described above and on October 21, 2002 filed
a complaint with the Bankruptcy Court seeking similar relief as in the motion.
The complaint alleged, among other things, that because the Company did not
purchase substantially all of the assets of Canadian Drawn Steel, (i) Republic
Technologies breached a shutdown agreement with the USWA, (ii) the Company
breached a letter agreement with the USWA, (iii) the Company breached the Asset
Purchase Agreement and (iv) the Company and Republic Technologies violated an
order of the Bankruptcy Court which approved the sale of assets by Republic
Technologies to the Company. In the complaint, the USWA requested the Bankruptcy
Court to compel the sale to the Company of substantially all of the assets of
Canadian Drawn Steel. On December 4, 2002, the Company and Republic Technologies
filed separate answers to the USWA's complaint in which the Company and Republic
Technologies denied the principal allegations of the USWA and asserted various
defenses and counterclaims. The Company expects to vigorously pursue this
litigation.
The Company also uses certain lease arrangements to supplement its
financing activities. Rental expense under operating leases was approximately
$4.2 million for the period from August 16, 2002 to December 31, 2002. At
December 31, 2002, total minimum lease payments under non-cancelable operating
leases are $9.3 million in 2003, $6.5 million in 2004, $3.2 million in 2005,
$2.5 million in 2006, $1.3 million in 2007 and $1.7 million thereafter.
NOTE 18. ENVIRONMENTAL MATTERS
As is the case with most steel producers, the Company could incur
significant costs related to environmental issues in the future. The Company's
operations are subject to federal, state and local environmental laws and
regulations that in the event of environmental contamination could result in the
Company incurring significant liabilities.
The Company continuously monitors its compliance with applicable
environmental laws and regulations and believes that it currently is in
substantial compliance with them. The Company anticipates that its expenditures
for environmental control measures during the next 12-month period will be
approximately $0.3 million. The Company currently believes that estimated
aggregate cost to resolve environmental contingencies are likely to be in the
range of $3.9 million to $8.4 million over the lives of its facilities. The
Company's reserve to cover probable environmental liabilities was approximately
$5.6 million as of December 31, 2002. To the extent the Company incurs any such
remediation costs, these costs will most likely be incurred over a number of
years; however, future regulatory action regarding historical disposal practices
at the Company's facilities, as well as continued compliance with environmental
requirements, may require it to incur significant costs that may have a material
adverse effect on its future financial performance.
NOTE 19. RESTRUCTURING
Republic effected a restructuring so that the presentation of the
consolidated financial statements of Republic Holdings will satisfy the
financial reporting obligations of each of the issuers and guarantors of the
notes. As part of the restructuring, Blue Bar, L.P., a Delaware limited
partnership and the present parent company of Republic, merged with and into
Republic Holdings. In addition, the indenture governing the Company's notes was
amended so that the guarantee of Republic Holdings, as successor by merger of
Blue Bar, L.P., is full and unconditional. The indenture was also amended to
permit Republic Holdings to satisfy Republic's reporting obligations under the
indenture so long as Republic Holdings holds 100% of Republic's membership
interests and has no material business operations, assets or liabilities of
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its own. Republic Holdings was formed on January 28, 2003. The consolidated
financial statements presented give effect to the common control merger of Blue
Bar, L.P. with and into Republic Holdings (successor to Blue Bar L.P.) that was
completed on February 10, 2003 as part of the restructuring.
NOTE 20 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS AND SIGNIFICANT
GROUP CONCENTRATION OF CREDIT RISK
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity
of those investments.
Revolving Credit Facilities - Since these borrowings are based on
short-term interest rates available to the Company and the Predecessor, the
estimated fair values of these financial instruments approximate their recorded
carrying amounts.
LONG-TERM DEBT
The fair value of the Company's and the Predecessor's long-term debt
obligations are estimated based upon quoted market prices for the same or
similar issues or on the current rates offered for debt of the same
remaining maturities. The fair value of the Predecessor's senior secured
notes was determined using quoted market prices. The fair value of the
Predecessor's Industrial Revenue Bond approximated book value. Fair values
for the Predecessor's remaining economic development financing could not
be determined and have been reflected in the table as zero.
REDEEMABLE MEMBERS' INTEREST - CLASS A
It was not practicable to estimate the fair value of the Predecessor's
members' interest, which was not publicly traded.
The estimated fair values of the Company's and the Predecessor's financial
instruments are as follows: (in thousands)
The Company The Predecessor
--------------------- -----------------------
December 31, 2002 December 31, 2001
--------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Cash and cash equivalents $ 2,107 $ 2,107 $ 5,745 $ 5,745
Revolving credit facility 268,378 268,378 326,016 326,016
Long-term debt 80,000 80,000 512,377 31,200
Redeemable members' interest N/A N/A 3,700 N/A
NOTE 21. CONDENSED CONSOLIDATING SUPPLEMENTAL INFORMATION
Republic and Blue Steel Capital Corp. have issued $80.0 million aggregate
principal amount of 10% senior secured notes due 2009. Each of Republic Holdings
and N&T Railway Company LLC has jointly and severally guaranteed the notes on a
senior secured basis, and each guarantee is full and unconditional. 2011448
Ontario Limited does not currently guarantee the notes, but it must become a
guarantor of the notes in order to exercise its option to acquire the assets and
properties associated with the Hamilton, Ontario cold-finishing plant owned by
Canadian Drawn Steel Company, Inc., a subsidiary of Republic Technologies. Any
domestic subsidiary that Republic may form or acquire in the future will
guarantee the notes on a joint and several and full and unconditional basis.
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The following presents supplemental financial information with respect to
Republic Holdings, Republic and Blue Steel Capital Corp. on a consolidating
basis, the guarantor subsidiaries on a combined consolidating basis and the
non-guarantor subsidiaries on a combined consolidating basis at December 31,
2002 and for the period from August 16, 2002 to December 31, 2002.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM AUGUST 16, 2002 TO DECEMBER 31, 2002
BLUE STEEL
REPUBLIC CAPITAL GUARANTOR NON-GUARANTOR
HOLDINGS REPUBLIC CORP. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- -------- ------------ ------------- ------------ ------------
Net sales..................... $300,131 $300,131
Cost of goods sold............ 293,824 293,824
-------- -------- -------- -------- --------- --------- -------
Gross profit ................. 6,307 6,307
-------- -------- -------- -------- --------- --------- --------
Selling, general and
administrative expense...... 15,558 15,558
Depreciation expense.......... 2,586 2,586
Other operating expense, net.. 423 423
-------- -------- -------- -------- --------- --------- --------
Operating loss................ (12,260) (12,260)
Interest expense.............. 8,551 8,551
-------- -------- -------- -------- --------- --------- --------
Net loss...................... (20,811) (20,811)
Results of affiliates'
operations.................. $(20,811) -- $ 20,811 --
-------- -------- -------- -------- --------- -------- --------
Net loss...................... $(20,811) $(20,811) $ 20,811 $(20,811)
======== ======== ======== ======== ========= ========= ========
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BALANCE SHEET
DECEMBER 31, 2002
BLUE STEEL
REPUBLIC CAPITAL GUARANTOR NON-GUARANTOR
HOLDINGS REPUBLIC CORP. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- -------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash
equivalents .......... $ 2,107 $ 2,107
Accounts receivable, net 82,984 82,984
Inventories ............ 170,282 170,282
Prepaid expenses and
other current assets . 14,134 14,134
-------- -------- -------- -------- --------- --------- --------
Total current assets ..... 269,507 269,507
Property, plant and
equipment .............. 146,595 146,595
Accumulated depreciation . (2,586) (2,586)
-------- -------- -------- -------- --------- --------- --------
Net property, plant and
equipment .............. 144,009 144,009
Intangibles, net ......... 1,144 1,144
Goodwill ................. 58,680 58,680
Investment in subsidiaries $ 31,189 $ (31,189)
Other assets ............. 1,058 1,058
-------- -------- -------- -------- --------- --------- --------
Total assets ............. $ 31,189 $474,398 $ (31,189) $474,398
======== ======== ======== ======== ========= ========= ========
LIABILITIES AND MEMBER'S
INTEREST
Current liabilities:
Revolving credit
facility ............ $268,378 $268,378
Accounts payable ..... 43,276 43,276
Accrued compensation
and benefits ........ 25,101 25,101
Accrued interest ..... 1,434 1,434
Other accrued
liabilities ......... 19,688 19,688
-------- -------- -------- -------- --------- --------- --------
Total current
liabilities ............ 357,877 357,877
Long-term debt.........: 80,000 80,000
Accrued environmental
liabilities .......... 5,332 5,332
-------- -------- -------- -------- --------- --------- --------
Total liabilities ........ 443,209 443,209
-------- -------- -------- -------- --------- --------- --------
Member's interest ...... $ 31,189 $ 31,189 $ (31,189) $ 31,189
Accumulated other
comprehensive loss ... -- -- -- --
-------- -------- -------- -------- --------- --------- --------
Total member's interest 31,189 31,189 (31,189) 31,189
-------- -------- -------- -------- --------- --------- --------
Total liabilities and
member's interest .... $ 31,189 $474,398 $ (31,189) $474,398
======== ======== ======== ======== ========= ========= ========
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STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM AUGUST 16, 2002 TO DECEMBER 31, 2002
BLUE STEEL
REPUBLIC CAPITAL GUARANTOR NON-GUARANTOR
HOLDINGS REPUBLIC CORP. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- --------- -------- ------------ ------------- ------------ -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES ....................... $ -- $ 23,817 $ 23,817
-------- --------- -------- -------- --------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures ............ (17,297) (17,297)
Acquisition, net of cash
acquired ...................... (323,599) (323,599)
-------- --------- -------- -------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ............. -- (340,896) (340,896)
-------- --------- -------- -------- --------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings under
revolving credit facility ..... 268,378 268,378
Deferred financing costs ........ (1,192) (1,192)
Proceeds from capital
contributions ................. 52,000 52,000
-------- --------- -------- -------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ............. -- 319,186 319,186
-------- --------- -------- -------- --------- --------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS ...................... 2,107 2,107
Cash and cash equivalents -
beginning of period .............. -- -- --
-------- --------- -------- -------- --------- --------- ---------
Cash and cash equivalents - end
of period ........................ $ -- $ 2,107 $ 2,107
======== ========= ======== ======== ========= ========= =========
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SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
REPUBLIC ENGINEERED PRODUCTS LLC
FOR THE PERIOD FROM AUGUST 16, 2002 TO DECEMBER 31, 2002 AND
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC
FOR THE PERIOD FROM JANUARY 1, 2002 TO AUGUST 15, 2002 AND FOR THE
YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN THOUSANDS)
Additions
--------------------------------------------
Balance at Charged to Charged to
Beginning Costs and Other Accounts Deductions Balance at
Description of Year Expenses Recoveries - Describe from Reserves End of Year
----------- ------- -------- ---------- ---------- ------------- -----------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS:
8/16/2002 to 12/31/2002 $12,262 $ 308 $ 5,556 $ 7,014
1/1/2002 to 8/15/2002 9,422 6,016 3,176 12,262
2001 19,332 7,770 17,680 9,422
2000 8,798 10,534 19,332
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