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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the three month period ended Commission File Number:
March 31, 2003 333-100581-04
REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC
(Exact name of registrant as specified in its charter)
DELAWARE 35-2194249
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
3770 EMBASSY PARKWAY
AKRON, OHIO 44333-8367 (330) 670-3000
(Address of principal executive offices) (Registrant's telephone number)
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.
|X| Yes | | No
Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).
| | Yes |X| No
REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Republic Engineered Products Holdings LLC and Subsidiaries
Consolidated Statement of Operations for the Three
Months Ended March 31, 2003 and Republic Technologies
International Holdings, LLC and Subsidiaries
(Debtor-in-Possession) Consolidated Statement of
Operations for the Three Months Ended March 31, 2002 3
Republic Engineered Products Holdings LLC and Subsidiaries
Consolidated Balance Sheets March 31, 2003
and December 31, 2002 4-5
Republic Engineered Products Holdings LLC and Subsidiaries
Consolidated Statement of Cash Flows for the Three
Months Ended March 31, 2003 and Republic Technologies
International Holdings, LLC and Subsidiaries
(Debtor-in-Possession) Consolidated Statement of Cash
Flows for the Three Months Ended March 31, 2002 6
Republic Engineered Products Holdings LLC and Subsidiaries
and Republic Technologies International
Holdings, LLC and Subsidiaries (Debtor-in-Possession)
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
Certifications 33-34
2
PART I - FINANCIAL INFORMATION
Item 1 - Unaudited Financial Statements
REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
for the Three Months Ended March 31, 2003
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED STATEMENT OF OPERATIONS
for the Three Months Ended March 31, 2002
(In thousands of dollars)
(Unaudited)
THE COMPANY THE PREDECESSOR
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
------------------ ------------------
Net sales $ 201,503 $ 256,236
Cost of goods sold 199,069 244,330
--------- ---------
Gross profit 2,434 11,906
Selling, general and administrative expense 9,955 9,999
Depreciation and amortization expense 2,305 14,170
Special charges (Note 6) -- 4,762
Other operating expense (income), net 1,171 (1,024)
--------- ---------
Operating loss (10,997) (16,001)
Interest expense, net 5,377 7,839
Reorganization items - expense, net -- 654
--------- ---------
Loss before income taxes (16,374) (24,494)
Provision for income taxes -- 31
--------- ---------
Net loss $ (16,374) $ (24,525)
========= =========
The accompanying notes are an integral part of these statements.
3
REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2003 and December 31, 2002
(In thousands of dollars)
(Unaudited)
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,258 $ 2,107
Accounts receivable, less allowances of $8,339
and $10,875, respectively 98,881 82,984
Inventories (Note 4) 151,677 170,282
Prepaid expenses and other current assets 8,670 14,134
--------- ---------
Total current assets 262,486 269,507
Property, plant and equipment:
Land and improvements 4,326 4,326
Buildings and improvements 22,247 22,247
Machinery and equipment 115,126 95,704
Construction-in-progress 5,878 24,318
--------- ---------
Total property, plant and equipment 147,577 146,595
Accumulated depreciation (4,891) (2,586)
--------- ---------
Net property, plant and equipment 142,686 144,009
Intangible assets, net of accumulated amortization
of $77 and $48, respectively 1,274 1,144
Goodwill 58,997 58,680
Other assets 1,058 1,058
--------- ---------
Total assets $ 466,501 $ 474,398
========= =========
The accompanying notes are an integral part of these statements.
4
REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
LIABILITIES AND MEMBERS' INTEREST
Current liabilities:
Revolving credit facility $ 279,912 $ 268,378
Accounts payable 40,096 43,276
Accrued compensation and benefits 25,160 25,101
Accrued interest 1,393 1,434
Other accrued liabilities 19,934 19,688
--------- ---------
Total current liabilities 366,495 357,877
Long-term debt 80,000 80,000
Accrued environmental liabilities (Note 11) 5,191 5,332
--------- ---------
Total liabilities 451,686 443,209
--------- ---------
Members' interest: 14,815 31,189
--------- ---------
Total liabilities and members' interest $ 466,501 $ 474,398
========= =========
The accompanying notes are an integral part of these statements.
5
REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the Three Months Ended March 31, 2003
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
(Debtor-in-Possession)
CONSOLIDATED STATEMENT OF CASH FLOWS
for the Three Months Ended March 31, 2002
(In thousands of dollars)
(Unaudited)
THE COMPANY THE PREDECESSOR
----------- ---------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(16,374) $(24,525)
Adjustments to reconcile net cash provided by (used in)
operating activities:
Depreciation and amortization 2,305 14,170
Amortization of deferred financing cost 29 1,552
Restructuring charges -- 853
Reorganization items -- 654
Changes in operating assets and liabilities:
Increase in accounts receivable (15,897) (30,140)
Decrease in inventory 18,605 26,798
Decrease in prepaid and other assets 5,464 4,168
Decrease in accounts payable (3,180) (7,683)
Increase in accrued compensation and benefits 59 5,108
Increase in defined benefit pension obligations -- 8,863
Increase in other postretirement benefits -- 2,972
Decrease in accrued environmental liabilities (141) (46)
Increase (decrease) in other current liabilities 246 (5,494)
Other (358) 2,729
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (9,242) (21)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (982) (567)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (982) (567)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings/(payments) under revolving credit facilities 11,534 (1,787)
Financing costs (159) --
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 11,375 (1,787)
-------- --------
Effect of exchange rate changes on cash -- (10)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,151 (2,385)
Cash and cash equivalents - beginning of period 2,107 5,745
-------- --------
Cash and cash equivalents - end of period $ 3,258 $ 3,360
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 5,123 $ 4,648
======== ========
Cash paid for income taxes $ -- $ 16
======== ========
The accompanying notes are an integral part of these statements.
6
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)
(UNAUDITED)
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 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 International, LLC's 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.
7
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 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 a credit facility.
The Company hired approximately 2,500 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
modernizes 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. 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 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 May 13, 2003
was $12.4 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
8
interruption and property insurance for damage incurred to the #3 blast furnace
at the Lorain facility, and obtaining an extension of the contractual reductions
in borrowing capacity under its senior revolving credit facility (see Note 5).
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 the 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 and Republic Technologies for the three months ended March 31,
2003 and 2002, respectively. These consolidated statements are unaudited and
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. Certain information
and footnote disclosures normally prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Although management
believes that all adjustments, including normal recurring adjustments necessary
for a fair presentation, have been made, interim periods are not necessarily
indicative of the results of operations for a full year. As such, these
financial statements should be read in conjunction with the audited financial
statements and notes thereto for the year ended December 31, 2002 included in
the Company's Form 10-K, filed with the Securities and Exchange Commission.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances have
been eliminated in consolidation. Certain reclassifications have been made to
prior period financial statements to conform to current period presentation.
NOTE 3. 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 $410.9 million, which consists of $10.0 million paid to
Republic Technologies, $14.0 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 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
9
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 March 31, 2003. 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 58,997
Other assets 376
--------
Total assets 488,569
Current liabilities 72,059
Long-term liabilities 5,622
--------
Total liabilities 77,681
--------
Net assets acquired $410,888
========
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 4. INVENTORIES
The components of inventories are as follows:
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
Raw materials ...................... $ 11,107 $ 14,368
Semi-finished and finished goods.... 140,570 155,914
-------- --------
Total .............................. $151,677 $170,282
======== ========
Inventories are reported net of obsolescence reserves of $5.9 million and
$5.6 million at March 31, 2003 and December 31, 2002, respectively.
NOTE 5. REVOLVING CREDIT FACILITIES AND LONG-TERM DEBT
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 base equals the sum of 85% of eligible
10
accounts receivable plus 70% of the net book 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 60% of eligible inventory, plus the eligible fixed asset
component which will be $92.0 million. 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
May 13, 2003 was $12.4 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
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 March 31, 2003 was $279.9 million and the average
interest rate for the Company's credit facility for the three months ended March
31, 2003 was approximately 5.50% per year for base rate loans and 4.39% per year
for Eurodollar loans
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.
In May 2003, the Company's credit facility was amended. Under the terms
of the amendment, the maturity date was accelerated to June 30, 2006 and the
total commitment was reduced to $315.0 million with the total commitment being
reduced by $5.0 million on the first day of each fiscal quarter, commencing with
the fiscal quarter beginning January 1, 2004 until the total commitment is
reduced to $275.0 million. Consistent with the original credit facility,
availability under the amended credit facility is limited to a borrowing base,
however, the components of the borrowing base have been amended to delay the
June 30, 2003 reduction of the advance rate for eligible inventory from 70% of
the net book value to 60% until January 1, 2004. In addition, the reduction in
the eligible fixed asset component of the borrowing base originally scheduled to
occur on July 1, 2003 has been restructured so that the reduction occurs ratably
over a twelve-month period ending June 29, 2004. Finally, the amendment requires
the Company to maintain minimum cumulative EBITDA (as defined in the amendment)
levels and limits the amount of annual capital expenditures the Company may
incur to $9 million in 2003 and $20 million thereafter.
The credit facility amendment required the Company to pay a $1.6
million restructuring fee to the lenders with $1.1 million of the fee being paid
upon execution of the amendment and the remaining $0.5 million being due on
January 31, 2004. In addition, the amendment increases the applicable margin on
base rate and Eurodollar loans by 1%. Finally, the amendment provides for the
issuance of warrants representing five percent of the fully diluted equity of
the Company to the lenders upon the occurrence of certain events as defined in
the amendment.
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 constituted a covenant violation and a default under the
original credit facility. The amended credit facility contains a waiver
to permit non-compliance of this requirement with respect to the period ended
December 31, 2002.
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 12, 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
11
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.
NOTE 6. PREDECESSOR'S SPECIAL CHARGES
The Predecessor maintained a Master Collective Bargaining Agreement and
settlement agreement (collectively, the "Master CBA") with employees represented
by the United Steel Workers of America 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 Predecessor.
During the three months ended March 31, 2002, there was 19 ERB's accepted
amounting to $3.9 million.
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 $0.9 million during the three
months ended March 31, 2002. These charges related to supplemental unemployment
benefits payments, salary terminations, and the related health insurance costs.
12
NOTE 7. 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 8, 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 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.
13
THE COMPANY FOR THE THREE MONTHS ENDED MARCH 31, 2003
---------------------------------------------------------------------------------
INTER-SEGMENT
HOT-ROLLED COLD-FINISHED TOTAL SEGMENTS ELIMINATION/OTHER CONSOLIDATED
---------- ------------- -------------- ----------------- ------------
Net sales ................................ $ 186,600 $ 32,869 $ 219,469 $ (17,966) $ 201,503
Depreciation and amortization ............ 2,113 192 2,305 -- 2,305
Segment (loss) (EBITDA) .................. (6,733) (1,959) (8,692) -- (8,692)
Capital expenditures ..................... 963 19 982 -- 982
Segment Assets ........................... 419,129 47,372 466,501 -- 466,501
THE PREDECESSOR FOR THE THREE MONTHS ENDED MARCH 31, 2002
---------------------------------------------------------------------------------
INTER-SEGMENT
HOT-ROLLED COLD-FINISHED TOTAL SEGMENTS ELIMINATION/OTHER CONSOLIDATED
---------- ------------- -------------- ----------------- ------------
Net sales ................................ $ 233,368 $ 50,689 $ 284,057 $ (27,821) $ 256,236
Depreciation and amortization ............ 12,919 1,251 14,170 -- 14,170
Segment profit (loss) (EBITDA, as
defined) ............................ 11,666 (3,147) 8,519 -- 8,519
Capital expenditures ..................... 567 -- 567 -- 567
Segment Assets ........................... 907,891 107,375 1,015,266 12,992 1,028,258
A reconciliation of EBITDA of the Company and EBITDA, as defined for the
Predecessor to loss before income taxes is as follows:
THE COMPANY THE PREDECESSOR
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
------------------ ------------------
Segment profit (loss) (EBITDA for the Company
and EBITDA, as defined, for the Predecessor) ......... $ (8,692) $ 8,519
Depreciation and amortization expense ................ 2,305 14,170
Interest expense ..................................... 5,377 7,839
Special charges ...................................... -- 4,762
OPEB expense ......................................... -- 5,588
Reorganization items ................................. -- 654
-------- --------
Loss before income taxes ............................. $(16,374) $(24,494)
-------- --------
NOTE 8. PREDECESSOR'S 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
14
operations. In the three months ended March 31, 2002, no provision was recorded
for any gain or loss from the disposition of the discontinued operations.
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):
THREE MONTHS ENDED
MARCH 31, 2002
------------------
Net sales ........................ $ 4,936
Gross loss ....................... (623)
Loss before income taxes ......... (910)
Provision for income taxes ....... --
-------
Net loss ......................... $ (910)
=======
NOTE 9. RELATED PARTY TRANSACTIONS
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 12, Blue Bar, L.P. assigned to Blue Bar Holdings its interests
and obligations under the Management Services Agreement. On May 15, 2003 the
credit facility amendment discussed in Note 5 restricts the payment of
management fees if certain liquidity-related benchmarks are not satisfied.
NOTE 10. 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
15
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 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.
NOTE 11. 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
$5.5 million as of March 31, 2003. 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 12. 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
16
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 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 Republic Holdings (successor to Blue Bar L.P.)
that was completed on February 10, 2003 as part of the restructuring.
NOTE 13. 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.
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 March 31, 2003
and for the three months ended March 31, 2003.
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003
BLUE STEEL
REPUBLIC CAPITAL GUARANTOR NON-GUARANTOR
HOLDINGS REPUBLIC CORP. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ---------- ------------ ------------- ------------ ------------
Net sales ...................... $ 199,911 $ 1,592 $ 201,503
Cost of goods sold ............. 197,654 1,415 199,069
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit ................... 2,257 177 2,434
---------- ---------- ---------- ---------- ---------- ---------- ----------
Selling, general and
administrative expense ....... 9,911 44 9,955
Depreciation expense ........... 2,302 3 2,305
Other operating expense, net ... 1,171 -- 1,171
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating loss ................. (11,127) 130 (10,997)
Interest expense ............... 5,377 -- 5,377
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss ....................... (16,504) 130 (16,374)
Results of affiliates'
operations ................... $ (16,374) -- -- $ 16,374 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss ....................... $ (16,374) $ (16,504) 130 $ 16,374 $ (16,374)
========== ========== ========== ========== ========== ========== ==========
17
BALANCE SHEET
MARCH 31, 2003
BLUE STEEL
REPUBLIC CAPITAL GUARANTOR NON-GUARANTOR
HOLDINGS REPUBLIC CORP. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ---------- ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash
equivalents .............. $ 3,197 $ 61 $ 3,258
Accounts receivable, net 98,636 245 98,881
Accounts receivable
with affiliates .......... -- 354 (354) --
Inventories ................ 151,644 33 151,677
Prepaid expenses and
other current assets ..... 8,677 (7) 8,670
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total current assets ......... 262,154 686 (354) 262,486
Property, plant and
equipment .................. 147,477 100 147,577
Accumulated depreciation ..... (4,884) (7) (4,891)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net property, plant and
equipment .................. 142,593 93 142,686
Intangibles, net ............. 1,274 -- 1,274
Goodwill ..................... 58,540 457 58,997
Investment in subsidiaries.... $ 14,815 294 -- $ (15,109) --
Other assets ................. 1,058 -- 1,058
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total assets ................. $ 14,815 $ 465,913 1,236 $ (15,463) $ 466,501
========== ========== ========== ========== ========== ========== ==========
LIABILITIES AND MEMBER'S
INTEREST
Current liabilities:
Revolving credit
facility ................ $ 279,912 $ 279,912
Accounts payable ......... 39,742 $ 354 40,096
Accounts payable with
affiliates .............. 354 -- $ (354) --
Accrued compensation
and benefits ............ 24,855 305 25,160
Accrued interest ......... 1,393 -- 1,393
Other accrued
liabilities ............. 19,651 283 19,934
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total current
liabilities ................ 365,907 942 366,495
Long-term debt.............. 80,000 80,000
Accrued environmental
liabilities .............. 5,191 -- 5,191
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total liabilities ........ 451,098 942 451,686
---------- ---------- ---------- ---------- ---------- ---------- ----------
Member's interest ............ $ 14,815 14,815 294 (15,109) 14,815
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and
member's interest ........ $ 14,815 $ 465,913 1,236 $ (15,463) $ 466,501
========== ========== ========== ========== ========== ========== ==========
18
STATEMENT OF CASH FLOWS
THREE MONTH PERIOD ENDED MARCH 31, 2003
BLUE STEEL
REPUBLIC CAPITAL GUARANTOR NON-GUARANTOR
HOLDINGS REPUBLIC CORP. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ---------- ------------ ------------- ------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ............. $ -- $ (9,255) $ 13 $ (9,242)
--------- --------- --------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures .............. (982) (982)
--------- --------- --------- --------- --------- ---------
NET CASH USED IN INVESTING
ACTIVITIES ....................... -- (982) -- (982)
--------- --------- --------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings under revolving
credit facility .................. 11,534 11,534
Financing costs ................... (159) (159)
--------- --------- --------- --------- --------- --------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES ....................... -- 11,375 -- 11,375
--------- --------- --------- --------- --------- --------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS ...................... 1,138 13 1,151
Cash and cash equivalents -
beginning of period .............. -- 2,059 48 2,107
--------- --------- --------- --------- --------- --------- ---------
Cash and cash equivalents - end
of period ........................ $ -- $ 3,197 61 $ 3,258
========= ========= ========= ========= ========= --------- =========
NOTE 14. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"), 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. There was no financial statement implication related to the adoption
of this statement by the Company effective January 1, 2003.
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 were effective for exit or disposal
activities initiated after December 31, 2002.
19
There was no financial statement implication related to the adoption of this
statement by the Company effective January 1, 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
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 2,500 of the approximately 3,700 employees
of Republic Technologies. Of the approximately 2,500 employees we hired,
approximately 2,000 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
20
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 new labor agreement will simplify labor
administration, which we expect to contribute to the success of our business.
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.
RESULTS OF OPERATIONS OF OUR COMPANY AND OUR PREDECESSOR
The historical consolidated financial information of Republic Technologies
International Holdings, LLC and Republic Engineered Products Holdings LLC may
not be entirely comparable
21
and may be of limited value in evaluating our financial and operating results.
The consolidated results of operations for the three months ended March 31, 2003
are not necessarily indicative of the results to be expected for the full year
ended December 31, 2003.
Three Months ended March 31, 2003 compared with Three Months ended March 31,
2002
The following discussion provides a comparison of the results of
operations of our company and Republic Technologies for the three months ended
March 31, 2003 and 2002, respectively. The discussion is provided for
comparative purposes only, but the value of such a comparison may be limited.
Net sales for the three months ended March 31, 2003 totaled $201.5 million
on shipments of approximately 391,057 net tons compared with net sales of $256.2
million for the three months ended March 31, 2002 on shipments of approximately
525,169 tons. Net sales for the three months ended March 31, 2003 were comprised
of $168.6 million for hot-rolled and $32.9 million for cold-finished, compared
with hot-rolled net sales of $205.5 million and cold-finished net sales of $50.7
million for the three months ended March 31, 2002. The decrease in net sales and
tons shipped reflects the elimination of hot rolled bar and cold finished bar
capacity resulting from the idling or sale of two rolling mills and five cold
finished bar facilities. Weak service center market demand also contributed to
the decrease in shipments for the three months ended March 31, 2003.
Cost of sales totaled $199.1 million, or 98.8% of net sales, for the three
months ended March 31, 2003 compared with cost of sales of $244.3 million, or
95.4% of net sales, for the similar period ended March 31, 2002. Cost of sales
for the three months ended March 31, 2003 consisted of $166.6 million on
hot-rolled products and $32.5 million on cold-finished products compared with
$191.3 million on hot-rolled products and $53.0 million on cold-finished
products for the three months ended March 31, 2002. The overall increase in cost
of sales as a percentage of net sales from the three months ended March 31, 2002
to the three months ended March 31, 2003 was primarily due to increased natural
gas and scrap prices and an unplanned outage at a Lorain, Ohio blast furnace
resulting from property damage during the three months ended March 31, 2003.
Selling, general and administrative expenses were $10.0 million, or 4.9%
of net sales, for the three months ended March 31, 2003 compared with $10.0
million, or 3.9% of net sales, for the three months ended March 31, 2002. The
selling, general and administrative expenses increased as a percentage of sales
due to increased insurance premium costs in the three months ended March 31,
2003 as compared to the three months ended March 31, 2002.
Depreciation and amortization expenses were $2.3 million for the three
months ended March 31, 2003, compared with $14.1 million for the three months
ended March 31, 2002. The reduction in depreciation and amortization expense in
the current period is primarily a result of the change in basis of fixed assets
and intangible assets of Republic Technologies to the fair market value of fixed
assets acquired by Republic Holdings.
There were no special charges for the three months ended March 31, 2003,
compared with $4.8 million for the three months ended March 31, 2002. The
charges during the three months ended March 31, 2002 included $3.9 million in
voluntary early retirement buyouts. These charges also included $0.9 million in
supplemental unemployment benefits payments, salary terminations, and the
related health insurance costs related to the shutdown of the Johnstown,
Pennsylvania melt shop facility, the Canton 12" rolling mill facility, and the
Willimantic, Connecticut cold-finishing facility.
22
Net interest expense was $5.4 million for the three months ended March 31,
2003 compared with $7.8 million for the three months ended March 31, 2002. The
decrease in net interest expense was primarily a result of the Company
maintaining a lower average balance in its revolving credit facility, as well
as, lower interest rates in the three months ended March 31, 2003 as compared to
the Predecessor in the three months ended March 31, 2002.
As a result of the above, the Company reported a net loss of $16.4 million
for the three months ended March 31, 2003 compared with the Predecessor's net
loss of $24.5 million for the three months ended March 31, 2002.
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 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 May 13, 2003
was $12.4 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 obtaining an extension of the contractual reductions in borrowing capacity
under its senior revolving credit facility. 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 the 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 Engineered Products LLC invested $1.0 million in capital
expenditures during the three months ended March 31, 2003 and Republic
Technologies invested $0.6 million in capital expenditures during the three
months ended March 31, 2002. The Company's current
23
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 are limited
under our credit facility to $9.0 million for 2003 and $20.0 million thereafter.
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 the acquisition transaction and
immediately paid down the outstanding amount to $269.7 million. At March 31,
2003, we had $279.9 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 $12.4 million
on May 13, 2003. 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 amendment to our
credit facility discussed below increased these applicable margins by 1.0% each.
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 March 31, 2003, borrowings under the credit facility are accruing
interest at the rate of 5.50% per year for base rate loans and 4.39% 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
24
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.
In May 2003, our credit facility was amended. Under the terms of the
amendment, the maturity date was accelerated to June 30, 2006 and the total
commitment was reduced to $315.0 million with the total commitment being reduced
by $5.0 million on the first day of each fiscal quarter, commencing with the
fiscal quarter beginning January 1, 2004 until the total commitment is reduced
to $275.0 million. Consistent with the original credit facility, availability
under the amended credit facility is limited to a borrowing base, however, the
components of the borrowing base have been amended to delay the June 30, 2003
reduction of the advance rate for eligible inventory from 70% of the net book
value to 60% until January 1, 2004. In addition, the reduction in the eligible
fixed asset component of the borrowing base originally scheduled to occur on
July 1, 2003 has been restructured so that the reduction occurs ratably over a
twelve-month period ending June 29, 2004. Finally, the amendment requires us to
maintain minimum cumulative EBITDA (as defined in the amendment) levels and
limits the amount of capital expenditures the Company may incur to $9 million in
2003 and $20 million thereafter.
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.
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.
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 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
25
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
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
26
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.
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.
27
FORWARD LOOKING STATEMENTS
All statements other than statements of historical fact included in this
report, including statements under "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.
- 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.
28
ITEM 3. 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 March 31, 2003, we had $80.0 million
aggregate principal amount of the notes outstanding and $279.9 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 March 31, 2003, borrowings under the credit facility
are accruing interest at the rate of 5.50% per year for base rate loans and
4.39% per year for Eurodollar loans.
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.
ITEM 4. CONTROLS AND PROCEDURES
Based on their most recent evaluation, which was completed within 90 days
of the filing of this Form 10-Q, 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-Q 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 that required corrective actions.
PART II - OTHER INFORMATION
ITEM 1. 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.
29
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 employed by 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 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 was 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 by our company not purchasing
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 requests 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8 - K
None.
(b) Exhibits
99.3 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 Holdings LLC
99.4 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 Holdings
LLC
31
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: May 15, 2003 By: /s/ Joseph F. Lapinsky
---------------------------------------------
Joseph F. Lapinsky
President, Chief Executive Officer
and Managing Director
Date: May 15, 2003 By: /s/ Joseph A. Kaczka
--------------------------------------------
Joseph A. Kaczka
Chief Financial Officer, Vice President, Finance
and Controller, Treasurer and Secretary
32
CERTIFICATIONS
I, Joseph F. Lapinsky, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Republic Engineered
Products Holdings LLC (the "Company");
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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
quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: May 15, 2003 By: /s/Joseph F. Lapinsky
----------------------------------
Joseph F. Lapinsky
President, Chief Executive Officer and
Managing Director
33
CERTIFICATIONS
I, Joseph Kaczka, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Republic Engineered
Products Holdings LLC (the "Company");
2) Based on my knowledge, this quarterly 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 quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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
quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: May 15, 2003 By: /s/Joseph A. Kaczka
--------------------------------------------
Joseph A. Kaczka
Chief Financial Officer, Vice President, Finance
and Controller, Treasurer and Secretary
34