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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 nine month period ended Commission File Number: 333-100581-04
September 30, 2003
REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC
----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 35-2194249
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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. Financial Statements
Republic Engineered Products Holdings LLC and Subsidiaries Unaudited Consolidated
Statement of Operations (Going Concern Basis) for the Three Months Ended
September 30, 2003 and the Period from August 16, 2002 to September 30, 2002
and Republic Technologies International Holdings, LLC and Subsidiaries
(Debtor-in-Possession) Unaudited Consolidated Statement of Changes in Net
Liabilities in Liquidation (Liquidation Basis) for the Period from July
1, 2002 to August 15, 2002 3
Republic Engineered Products Holdings LLC and Subsidiaries Unaudited Consolidated
Statement of Operations (Going Concern Basis) for the Nine Months Ended
September 30, 2003 and the Period from August 16, 2002 to September
30, 2002 and Republic Technologies International Holdings, LLC and Subsidiaries
(Debtor-in-Possession) Unaudited Consolidated Statement of Changes in Net
Liabilities in Liquidation (Liquidation Basis) for the Period from January
1, 2002 to August 15, 2002 4
Republic Engineered Products Holdings LLC and Subsidiaries Consolidated Balance
Sheets (Going Concern Basis) September 30, 2003 (Unaudited) and December
31, 2002 5
Republic Engineered Products Holdings LLC and Subsidiaries Unaudited Consolidated
Statements of Cash Flows (Going Concern Basis) for the Nine Months Ended
September 30, 2003 and the Period from August 16, 2002 to September
30, 2002 and Republic Technologies International Holdings, LLC and
Subsidiaries (Debtor-in-Possession) Unaudited Consolidated Statement of Cash
Flows (Liquidation Basis) for the Period from January 1, 2002 to August 15, 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 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 39
Item 4. Controls and Procedures 39
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 39
Item 2. Changes in Securities and Use of Proceeds 41
Item 3. Defaults Upon Senior Securities 41
Item 4. Submission of Matters to a Vote of Security Holders 41
Item 5. Other Information 41
Item 6. Exhibits and Reports on Form 8-K 41
Signatures 43
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(GOING CONCERN BASIS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND THE
PERIOD FROM AUGUST 16, 2002 TO SEPTEMBER 30, 2002
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CHANGES IN NET LIABILITIES IN LIQUIDATION
(UNAUDITED)
(LIQUIDATION BASIS)
FOR THE PERIOD FROM JULY 1, 2002 TO AUGUST 15, 2002
(IN THOUSANDS OF DOLLARS)
THE COMPANY THE PREDECESSOR
-------------------------------------------- -------------------
Period From Period From
Three Months Ended August 16, 2002 to July 1, 2002 to
September 30, 2003 September 30, 2002 August 15, 2002
(Going Concern Basis) (Going Concern Basis) (Liquidation Basis)
--------------------- --------------------- -------------------
Net sales $ 164,718 $ 105,251 $ 103,157
Cost of goods sold 170,811 102,421 104,606
----------- ----------- -----------
Gross profit (loss) (6,093) 2,830 (1,449)
Selling, general and administrative expense 10,139 4,768 4,417
Depreciation and amortization expense 2,458 912 -
Special charges (Note 6) - - 1,006
Goodwill impairment charge (Note 13) 58,910 - -
Other operating expense, net 3,737 331 5,041
----------- ----------- -----------
Operating loss (81,337) (3,181) (11,913)
Interest expense 5,913 2,885 2,797
Reorganization items 209 - 528
----------- ----------- -----------
Loss before income taxes (87,459) (6,066) (15,238)
Provision for income taxes - - 12
Net loss $ (87,459) $ (6,066) (15,250)
=========== =========== -----------
Net Liabilities at July 1, 2002 (1,173,542)
Foreign currency translation adjustment (384)
-----------
Net liabilities in liquidation at August 15, 2002 $(1,189,176)
===========
The accompanying notes are an integral part of these statements.
3
REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(GOING CONCERN BASIS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND THE
PERIOD FROM AUGUST 16, 2002 TO SEPTEMBER 30, 2002
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CHANGES IN NET LIABILITIES IN LIQUIDATION
(UNAUDITED)
(LIQUIDATION BASIS)
FOR THE PERIOD FROM JANUARY 1, 2002 TO AUGUST 15, 2002
(IN THOUSANDS OF DOLLARS)
THE COMPANY THE PREDECESSOR
-------------------------------------------- ------------------
Period From Period From
Nine Months Ended August 16, 2002 to January 1, 2002 to
September 30, 2003 September 30, 2002 August 15, 2002
(Going Concern Basis) (Going Concern Basis) (Liquidation Basis)
--------------------- --------------------- -------------------
Net sales $ 560,734 $ 105,251 $ 611,983
Cost of goods sold 547,394 102,421 588,841
--------- --------- -------------
Gross profit 13,340 2,830 23,142
Selling, general and administrative expense 30,045 4,768 23,401
Depreciation and amortization expense 7,168 912 28,345
Special charges (Note 6) - - 10,541
Goodwill impairment charge (Note 13) 58,910 - -
Other expense, net 5,198 331 615
--------- --------- ------------
Operating loss (87,981) (3,181) (39,760)
Interest expense 17,286 2,885 17,721
Reorganization items 209 - 2,377
--------- --------- ------------
Loss before income taxes (105,476) (6,066) (59,858)
Provision for income taxes - - 45
Net loss $(105,476) $ (6,066) (59,903)
========= ========= ------------
Net Liabilities at January 1, 2002 (going concern basis) (671,132)
Adjustment to liquidation basis (Note 2) (458,371)
Foreign currency translation adjustment 230
------------
Net liabilities in liquidation at August 15, 2002 $ (1,189,176)
============
The accompanying notes are an integral part of these statements.
4
REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(GOING CONCERN BASIS)
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(IN THOUSANDS OF DOLLARS)
September 30, 2003 December 31, 2002
------------------ -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,581 $ 2,107
Accounts receivable, less allowances of $11,155 and $10,875, respectively 84,797 82,984
Inventories (Note 4) 105,956 170,282
Prepaid expenses and other current assets 12,079 14,134
--------- ---------
Total current assets 207,413 269,507
Property, plant and equipment:
Land and improvements 5,571 4,326
Buildings and improvements 22,247 22,247
Machinery and equipment 123,877 95,704
Construction-in-progress 1,708 24,318
--------- ---------
Total property, plant and equipment 153,403 146,595
Accumulated depreciation (9,754) (2,586)
--------- ---------
Net property, plant and equipment 143,649 144,009
Intangible assets, net of accumulated amortization of $556 and $48, respectively 3,430 1,144
Goodwill - 58,680
Other assets 3,348 1,058
--------- ---------
Total assets $ 357,840 $ 474,398
========= =========
LIABILITIES AND MEMBERS' INTEREST
Current liabilities:
Revolving credit facility (Note 5) $ 247,987 $ 268,378
Long-term secured debt in default 85,000 -
Accounts payable 43,917 43,276
Accrued compensation and benefits 21,238 25,101
Accrued interest 3,736 1,434
Other accrued liabilities 25,139 19,688
--------- ---------
Total current liabilities 427,017 357,877
Long-term debt (Note 5) - 80,000
Accrued environmental liabilities (Note 11) 5,111 5,332
--------- ---------
Total liabilities 432,128 443,209
--------- ---------
Members' Interest: (74,288) 31,189
--------- ---------
Total liabilities and members' interest $ 357,840 $ 474,398
========= =========
The accompanying notes are an integral part of these statements.
5
REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(GOING CONCERN BASIS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND THE
PERIOD FROM AUGUST 16, 2002 TO SEPTEMBER 30, 2002
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(LIQUIDATION BASIS)
FOR THE PERIOD FROM JANUARY 1, 2002 TO AUGUST 15, 2002
(IN THOUSANDS OF DOLLARS)
The Company The Predecessor
-------------------------------------------- ------------------
Period From Period From
Nine Months Ended August 16, 2002 to January 1, 2002 to
September 30, 2003 September 30, 2002 August 15, 2002
(Going Concern Basis) (Going Concern Basis) (Liquidation Basis)
--------------------- --------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(105,476) $ (6,066) $ (59,903)
Adjustments to reconcile net cash provided by
operating activities:
Restructuring charges - - 687
Gain on sale of fixed assets - - (4,191)
Depreciation and amortization 7,168 912 28,346
Goodwill impairment charge 58,910
Amortization of deferred financing cost 508 - 2,607
Reorganization items - - 2,377
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (2,092) 2,868 (5,294)
Decrease in inventory 64,326 7,330 37,872
Decrease (increase) in prepaid assets 2,362 (10,899) 5,815
Decrease in accounts payable (1,744) (812) (6,901)
Decrease in accrued compensation and benefits (3,863) (1,612) (328)
Increase in defined benefit pension obligations - - 19,422
Increase in other postretirement benefits - - 6,550
Decrease in accrued environmental liabilities (511) (4) (103)
Increase (decrease) in other current liabilities 7,570 10,732 (15,733)
Other (162) (430) 6,664
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 26,996 2,019 17,887
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,809) (4,821) (8,180)
Dispostition of property, plant, & equipment - - 7,005
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (6,809) (4,821) (1,175)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 5,000 - -
Net (payments) proceeds under revolving credit facilities (20,391) 9,051 (17,118)
Repayments of long-term debt - - (3,600)
Deferred financing costs (2,322) - -
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (17,713) 9,051 (20,718)
--------- --------- ---------
Effect of exchange rate changes on cash - (58) 231
--------- --------- ---------
NET INCREASE (decrease) IN CASH AND CASH EQUIVALENTS 2,474 6,191 (3,775)
Cash and cash equivalents - beginning of period 2,107 1,972 5,745
--------- --------- ---------
Cash and cash equivalents - end of period $ 4,581 $ 8,163 $ 1,971
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 13,871 $ 1,471 $ 11,150
========= ========= =========
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 ("N&T") 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 has created a more efficient, higher quality network of production
facilities operated by a smaller and more flexible workforce. The transaction
eliminated significant liabilities that had been associated with the business
7
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. This option was subsequently extended to November 30, 2003. 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 2,350 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 expires on August 16, 2007. 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.
On October 6, 2003 ("Petition Date"), Republic Engineered Products
Holdings LLC and some of its subsidiaries, Republic Engineered Products LLC, and
Blue Steel Capital Corp. (collectively, "Debtors"), filed petitions for
reorganization under Chapter 11 ("Chapter 11") of the Federal Bankruptcy Code
("Bankruptcy Code") in the United States Bankruptcy Court in the Northern
District of Ohio, Eastern Division ("Court"). The Company is managing its
business subsequent to the Petition Date as debtor-in-possession subject to
Court approval.
The Debtors attributed the need to reorganize to a series of events
that has negatively impacted liquidity. Republic's liquidity position has been
negatively impacted by three unplanned and unanticipated outages at Republic's
Lorain, Ohio facility: (a) an outage of Republic's #3 blast furnace in the first
fiscal quarter of 2003 caused by debris from the Black River which broke through
an intake screen and clogged the water system; (b) a second outage of Republic's
#3 blast furnace in June 2003 associated with the same problem; and (c)
catastrophic damage to Republic's #3 blast furnace during the August 14, 2003
electrical blackout (the "Blackout") in Ohio, Michigan, New York, and Ontario,
Canada region.
In addition, Republic's business, like others in the steel industry,
has been significantly impacted by the economic downturn and, in particular, the
declining price of steel in the United States. Furthermore, recent bankruptcy
filings by other steel makers have raised concerns among Republic's suppliers
and customers. Demands by suppliers for expedited payment terms have further
worsened Republic's liquidity position. As a result of these events, the Debtors
determined that the most effective way to continue to operate their businesses
and survive as going concerns while they consider restructuring alternatives is
through the protections afforded them under Chapter 11.
Under Chapter 11, the rights of and ultimate payments by the Company to
prepetition creditors and to equity investors may be substantially altered. This
could result in claims being liquidated in the Chapter 11 proceedings at less
(and possibly substantially less) than 100% of their face value and the equity
of the Company's equity investors being diluted or cancelled. Due to material
uncertainties, it is not possible to determine the additional amount of claims
that may arise or ultimately be filed. On November 5, 2003 the United States
Bankruptcy Court approved PAV Republic, Inc, a newly formed affiliate of Perry
Strategic Capital Inc. (Perry), as the lead bidder to purchase substantially all
the assets of Republic and has set a timetable for the sale of substantially all
of Republic's assets. Perry's offer is valued at approximately $245 million.
8
Other interested bidders can still submit higher and better offers by the
December 1, 2003 deadline set by the United States Bankruptcy Court.
On September 30, 2003 the Company informed Fleet Capital Corporation
("Fleet Capital") as Administrative Agent under the Company's credit facility,
that it was in default under the overadvance provision of that revolving credit
facility and it was unable to timely make a required interest payment on its 10%
senior secured notes. An overadvance can occur when the Company's estimated
borrowing base, consisting of 85% of eligible accounts receivable and 70% of the
eligible inventory is reconciled to actual at month end. The credit facility
default also constitutes default under the Company's $5.0 million loan from the
Ohio Department of Development. Events of Default, as defined in the related
debt agreements, have occurred with respect to all of the Company's secured
debt. As a result, the secured debt is classified as a current liability. As a
result of the Chapter 11 filing the unsecured debt will be classified as
liabilities subject to compromise.
On October 9, 2003, the Company entered into a Debtor-in-Possession
Revolving Credit Agreement ("DIP Credit Agreement") with Fleet Capital and other
lenders who are parties thereto to provide secured debtor-in-possession
financing to the Company. The DIP Credit Agreement allows for new borrowings of
up to $45.0 million and includes a sub-facility of $20 million for the issuance
of letters of credit. Advances under the DIP Credit Agreement bear interest at a
base rate used by Fleet Capital, plus the applicable margin; or a Eurodollar
rate on deposits for a given period, plus the applicable margin. The applicable
margin on base rate loans is 1.5% and on Eurodollar loans is 3.5%. The Company's
borrowing base, plus any permitted overadvance provision limits the amount
available at any time. The Company's net availability on its DIP Credit
Agreement at November 11, 2003 was $12.0 million. The DIP Credit Agreement
grants a security interest in accounts receivable, inventory, intellectual
property and related assets of the Company, and the real estate and fixed assets
comprising the Canton, Ohio Caster and Continuous Rolling Facility, including
the related melt shop. The DIP Credit Agreement provides for the Company to be
in an overadvance position. As a result of the overadvance position, which
occurred in August and September 2003, and as a result of the Company's
financial condition, the Company will continue to be in an overadvance position
while it operates under the DIP Credit Agreement. The amount of the overadvance
provision changes from month to month based on the Company's forecasted
borrowing needs. The overadvance provision ranges from $22.0 million to $31.0
million. The DIP Credit Agreement also contains certain restrictive covenants
which, among other things, restrict the Company's ability to incur additional
indebtedness or guarantee the obligations of others, change its line of
business, merge, consolidate and acquire or sell assets or stock, pay dividends,
or prepay or amend its 10% senior secured notes or any of its subordinated
indebtedness. The Company is also required to maintain minimum sales, liquid
steel production, and rolling production levels as defined in the DIP Credit
Agreement and limit its net capital expenditures.
NOTE 2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The U.S. Bankruptcy Court approved the sale of substantially all the
assets of Republic Technologies to the Company on July 11, 2002 in a transaction
that closed on August 16, 2002 (Note 1). Republic Technologies' intent was to
sell and liquidate its remaining assets, therefore, the accompanying 2002
consolidated financial statements were prepared on the liquidation basis of
accounting. The accompanying consolidated financial statements contain results
for Republic Holdings for the three and nine months ended September 30, 2003 and
the period from August
9
16, 2002 to September 30, 2002 and for Republic Technologies for the periods
from July 1, 2002 to August 15, 2002 and January 1, 2002 to August 16, 2002,
respectively.
Republic Holdings' consolidated statements have been prepared on a
going concern basis of accounting. Republic Technologies' statements were
prepared on a liquidation basis of accounting. These consolidated statements are
unaudited 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. A plan of reorganization could materially change the amounts
currently recorded in the consolidated financial statements. The accompanying
consolidated financial statements of Republic Holdings do not give effect to any
adjustment to the carrying value of assets or amounts and classifications of
liabilities that might be necessary as a result of resolving the bankruptcy. For
financial statement periods after the Petition Date, the Company's consolidated
financial statements will be presented in accordance with the AICPA Statement of
Position 90-7, Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code. On confirmation of a plan of reorganization, the Company
expects to utilize "Fresh Start Accounting" in accordance with the guidelines
for accounting for emergence from bankruptcy. Under Fresh Start Accounting, a
revaluation of Company assets to reflect current values can be expected. 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 period 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.
Due to the acquisition of substantially all the assets of Republic
Technologies by Republic Holdings, the accompanying 2002 consolidated financial
statements for Republic Technologies were prepared on the liquidation basis of
accounting. Under the liquidation basis of accounting, Republic Technologies'
assets and liabilities are stated at their net realizable value, and estimated
costs through the liquidation date are provided to the extent reasonably
determinable. The liquidation basis of accounting requires significant estimates
and judgments. Republic Technologies' adjustments required to convert from the
going concern (historical cost) basis to the liquidation basis of accounting
includes:
Decrease to reflect net realizable value of property, plant and equipment................. $ 433,748
Write-off of deferred financing costs..................................................... 22,192
Decrease to reflect the net realizable value of goodwill.................................. 2,431
---------
Net decrease in carrying value............................................................ $ 458,371
=========
10
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 consisted 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 Republic Technologies. The total purchase price was allocated to
the assets acquired and liabilities assumed, based on a preliminary estimate of
their respective fair values.
As a result of the acquisition of a substantial portion of the
operating assets from Republic Technologies, the Company has become the largest
domestic producer of special bar quality steel products. In connection with the
acquisition, the Company was able to select the assets and properties of
Republic Technologies and negotiate a modified successor labor contract that has
enabled 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 any subsequent adjustments to the
estimated fair values.
Current assets $ 300,205
Property, plant and equipment 129,298
Goodwill 61,235
Other assets 376
----------
Total assets 491,114
Current liabilities 74,901
Long-term liabilities 5,622
----------
Total liabilities 80,523
----------
Net assets acquired $ 410,591
==========
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. The August 16, 2003 deadline for this
option has been extended to November 30, 2003.
NOTE 4. INVENTORIES
The Company values its inventory at the lower of cost or market applied
on a first-in, first-out (FIFO) method for finished and semi-finished goods, and
a weighted-average method for raw materials. Inventory standards have been set
based on this methodology and periodically reviewed to verify that the standards
approximate actual costs.
11
The components of inventories are as follows:
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
Raw materials......................................... $ 13,275 $ 14,368
Semi-finished and finished goods...................... 92,681 155,914
------------ ------------
Total................................................. $ 105,956 $ 170,282
============ ============
Inventories are reduced by $5.6 million at September 30, 2003 and
December 31, 2002, respectively, due to obsolescence.
NOTE 5. REVOLVING CREDIT FACILITIES AND LONG-TERM DEBT
On August 16, 2002, Republic entered into a credit facility, which was
to mature on June 30, 2007, with Fleet Capital, as administrative
agent, and other lenders. The credit facility was amended on May 15, 2003. On
October 9, 2003, the Company entered into a DIP Credit Agreement with Fleet
Capital and other lenders who are parties thereto to provide secured
debtor-in-possession financing to the Company.
REVOLVING CREDIT FACILITY
Prior to the amendment discussed below, the credit facility consisted
of a senior revolving credit facility with a total commitment of up to $336.0
million. This total commitment was to automatically reduce by $5.0 million on
the first day of each quarter commencing the fiscal quarter that began on July
1, 2003 until such time as the total commitment was reduced to $275.0 million.
Availability under the credit facility was limited to a borrowing base as
defined in the credit facility as the sum of 85% of eligible accounts receivable
plus 70% of the net book value of eligible inventory plus the eligible fixed
asset component. Under the terms of the senior revolving credit facility prior
to the amendment discussed below, the borrowing base, effective June 30, 2003,
was to be reduced to 85% of eligible accounts receivable, plus 60% of eligible
inventory, plus the eligible fixed asset component, which would have been $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 was entitled to draw amounts under this new credit facility to finance
working capital and capital expenditures, and for other general corporate
purposes.
The borrowings under the credit facility were 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 secured the senior secured
notes on an equal and ratable basis, 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 Continuous Rolling Facility, or Canton CR(TM). The
obligations under the credit facility were secured and were unconditionally and
irrevocably guaranteed jointly and severally by Republic Holdings and each of
Republic's subsidiaries other than 2011448 Ontario Limited. Republic Holdings'
guarantee was limited in recourse to all of Republic's membership interests
owned by Republic Holdings, which were pledged to secure the guarantee.
Prior to an Event of Default, borrowings under the credit facility bore
interest, at the Company's option, at either a base rate equal to the higher of
the "prime rate" announced by Fleet National Bank, the weighted average of rates
on overnight federal funds transactions with members of the Federal Reserve
System
12
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 was 1.25% and on
Eurodollar loans was 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 could have been reduced to as low as 0.25% and 2.00%,
respectively, if the Company achieved specified reduced leverage ratios. The
Company's credit facility balance as of September 30, 2003 was $248.0 million
and the average interest rate for the Company's credit facility for the nine
months ended September 30, 2003 was approximately 5.91% per year for base rate
loans and 4.71% per year for Eurodollar loans. As of September 30, 2003,
borrowings under the credit facility are accruing interest at the rate of 6.25%
per year for base rate loans and 5.19% per year for Eurodollar loans.
The credit facility contained 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 required the Company
to meet financial covenants and ratios, particularly a minimum fixed charge
coverage ratio based on operating cash flow to total debt service which was to
be tested quarterly commencing on March 31, 2004.
AMENDMENT TO REVOLVING CREDIT FACILITY
On May 15, 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 has been reduced to $275.0 million. Consistent with the original
credit facility, availability under the amended credit facility was limited to a
borrowing base, however, the components of the borrowing base were 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 was restructured so that the reduction was to
occur ratably over a twelve-month period ending June 29, 2004. Finally, the
amendment required the Company to maintain minimum cumulative EBITDA (as defined
in the amendment) levels and limited the amount of annual capital expenditures
the Company could incur to $9.0 million in 2003 and $20.0 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 paid upon
execution of the amendment and the remaining $0.5 million due on January 31,
2004. In addition, the amendment increased the applicable margin on base rate
and Eurodollar loans by 1.0%. Finally, the amendment provided 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.
On September 30, 2003, the Company informed Fleet Capital under the
Company's credit facility, that it was in default under the overadvance
provision of that revolving credit facility. The Company was in an overadvance
position of $11.3 million on September 30, 2003.
13
DEBTOR-IN-POSSESSION REVOLVING CREDIT FACILITY
On October 9, 2003, the Company entered into the DIP Credit Agreement
with Fleet Capital and other lenders who are parties thereto to provide secured
debtor-in-possession financing to the Company. The maturity date is February 29,
2004. The DIP Credit Agreement allows for new borrowings of up to $45.0 million
and includes a sub-facility of $20 million for the issuance of letters of
credit. Advances under the DIP Credit Agreement bear interest at a base rate
used by Fleet Capital, plus the applicable margin; or a Eurodollar rate on
deposits for a given period, plus the applicable margin. The applicable margin
on base rate loans is 1.5% and on Eurodollar loans is 3.5%. A borrowing base
plus the overadvance provision limits the amount available at any time. The
Company's net availability on its DIP Credit Agreement at November 11, 2003 was
$12.0 million. The DIP Credit Agreement grants a security interest in accounts
receivable, inventory, intellectual property and related assets of the Company,
and the real estate and fixed assets comprising the Canton, Ohio Caster and
Continuous Rolling Facility, including the related melt shop. The DIP Credit
Agreement provides for the Company to be in an overadvance position. An
overadvance can occur when the Company's borrowing base, consisting of 85% of
eligible accounts receivable and 70% of the eligible inventory is less than the
amount outstanding on the credit facility. The amount of the overadvance
provision changes from month to month based on the Company's forecasted
borrowing needs. The overadvance ranges from $22.0 million to $31.0 million. The
DIP Credit Agreement also contains certain restrictive covenants which, among
other things, restrict the Company's ability to incur additional indebtedness or
guarantee the obligations of others, change its line of business, merge,
consolidate and acquire or sell assets or stock, pay dividends, or prepay or
amend its 10% senior secured notes or any of its subordinated indebtedness. The
Company is also required to maintain minimum sales, liquid steel production, and
rolling production levels as defined in the DIP Credit Agreement, and to limit
its net capital expenditures.
LONG-TERM DEBT
The outstanding 10% senior secured notes are senior secured obligations
of the issuers, aggregating $80.0 million of principal amount, and matures on
August 16, 2009. In the absence of an Event of Default, 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.
On September 30, 2003 the Company was unable to timely make the required
interest payment on its 10% senior secured notes. Events of Default, as defined
in the related indenture, have occurred with respect to the Company's bond debt.
The Company continues to accrue interest on the notes at the rate of 12%. As a
result of the Chapter 11 proceedings, no interest payments have been made since
June 30, 2003.
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
14
assets, payment of dividends and change of control provisions, in each case,
subject to certain exceptions. The notes are secured, subject to exceptions and
limitations, by (1) a first priority lien on, and security interest in,
substantially all of the existing assets of the Company and its subsidiaries,
other than the Canton CR(TM), inventory, accounts receivable and intellectual
property and related assets, and (2) a first priority interest in the capital
stock and other equity interests of each direct and indirect subsidiary of
Republic Holdings, other than 2011448 Ontario Limited. Each of Republic Holdings
and N&T Railway Company LLC has jointly and severally guaranteed the notes on a
senior secured basis, and each guarantee is full and unconditional. 2011448
Ontario Limited does not currently guarantee the notes, but it must become a
guarantor of the notes in order to exercise its option to acquire the assets and
properties associated with the Hamilton, Ontario cold-finishing plant owned by
Canadian Drawn Steel Company, Inc., a subsidiary of Republic Technologies. Any
domestic subsidiary that Republic may form or acquire in the future will
guarantee the notes on a joint and several and full and unconditional basis.
On June 6, 2003, the Company obtained a $5.0 million loan from the Ohio
Department of Development. This loan is secured by the 20" mill at the Lorain
facility and accrues interest at the rate of 3% per annum payable on the first
day of each calendar month until the loan matures in July 2008. Events of
Default, as defined in the related debt agreement, have occurred with respect to
this debt. The Company continues to accrue interest on this debt. As a result of
the Chapter 11 proceedings, no interest payments have been made since September
14, 2003.
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 period from January 1, 2002 to August 15, 2002 there were 43 ERB's
accepted amounting to $8.8 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. During the period from January 1, 2002 to
August 15, 2002 the Predecessor recorded $1.9 million of severance-related costs
for administrative staff reductions and $0.6 million of miscellaneous facility
closure costs. A gain of $0.8 million as a result of the Predecessor's
Willimantic plant sale and the reversal of the Predecessor's related shutdown
reserve offset these charges.
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
15
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,
depreciation, goodwill impairment charges and reorganization expenses
("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.
THE COMPANY FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
-------------------------------------------------------------------------------------
COLD- TOTAL INTER-SEGMENT
HOT-ROLLED FINISHED SEGMENTS ELIMINATION/OTHER CONSOLIDATED
---------- -------- -------- ----------------- ------------
Net sales.......................... $ 153,600 $ 29,507 $ 183,107 $ (18,389) $ 164,718
Depreciation and amortization...... 2,261 197 2,458 - 2,458
Segment (loss) (EBITDA)............ (16,269) (3,700) (19,969) - (19,969)
Capital expenditures............... 4,881 84 4,965 - 4,965
Segment assets..................... 318,510 39,330 357,840 - 357,840
16
THE COMPANY FOR THE PERIOD FROM AUGUST 16, 2002 TO SEPTEMBER 30, 2002
-----------------------------------------------------------------------
COLD- TOTAL INTER SEGMENT
HOT-ROLLED FINISHED SEGMENTS ELIMINATION/OTHER CONSOLIDATED
---------- -------- -------- ----------------- ------------
Net sales $ 100,566 $ 15,697 $ 116,263 $ (11,012) $ 105,251
Depreciation and amortization 847 65 912 -- 912
Segment (loss) (EBITDA,
as defined) (306) (1,963) (2,269) -- (2,269)
Capital expenditures 4,821 -- 4,821 -- 4,821
Segment assets 440,062 54,184 494,246 -- 494,246
THE PREDECESSOR FOR THE PERIOD FROM JULY 1, 2002 TO AUGUST 15, 2002
--------------------------------------------------------------------------
COLD- TOTAL INTER SEGMENT
HOT-ROLLED FINISHED SEGMENTS ELIMINATION/OTHER CONSOLIDATED
Net sales $ 95,298 $ 18,745 $ 114,043 $ (10,886) $ 103,157
Depreciation and amortization -- -- -- -- --
Segment (loss) (EBITDA,
as defined) (6,229) (2,793) (9,022) -- (9,022)
Capital expenditures 3,119 -- 3,119 -- 3,119
THE COMPANY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
-------------------------------------------------------------------------------------
COLD- TOTAL INTER-SEGMENT
HOT-ROLLED FINISHED SEGMENTS ELIMINATION/OTHER CONSOLIDATED
---------- ---------- ---------- ----------------- ------------
Net sales.......................... $ 522,105 $ 95,940 $ 618,045 $ (57,311) $ 560,734
Depreciation and amortization...... 6,588 580 7,168 - 7,168
Segment (loss) (EBITDA)............ (18,772) (3,131) (21,903) - (21,903)
Capital expenditures............... 6,543 266 6,809 - 6,809
Segment assets..................... 318,510 39,330 357,840 - 357,840
THE PREDECESSOR FOR THE PERIOD FROM JANUARY 1, 2002 TO AUGUST 15, 2002
-------------------------------------------------------------------------------------
COLD- TOTAL INTER-SEGMENT
HOT-ROLLED FINISHED SEGMENTS ELIMINATION/OTHER CONSOLIDATED
---------- ---------- ---------- ----------------- ------------
Net sales........................... $ 558,290 $ 117,863 $ 676,153 $ (64,170) $ 611,983
Depreciation and amortization....... 25,840 2,505 28,345 - 28,345
Segment profit (loss) (EBITDA, as
defined)....................... 17,274 (9,276) 7,998 - 7,998
Capital expenditures................ 8,180 - 8,180 - 8,180
A reconciliation of EBITDA of the Company and EBITDA, as defined, for
the Predecessor, to loss before income taxes is as follows:
17
THE THE
THE COMPANY THE COMPANY PREDECESSOR THE COMPANY PREDECESSOR
------------- --------------- --------------- ------------- -----------
PERIOD FROM
THREE MONTHS PERIOD FROM PERIOD FROM NINE MONTHS JANUARY 1,
ENDED AUGUST 16, 2002 JULY 1, 2002 TO ENDED 2002 TO
SEPTEMBER 30, TO SEPTEMBER AUGUST 15, SEPTEMBER 30, AUGUST 15,
2003 30, 2002 2002 2003 2002
------------- --------------- --------------- ------------- -----------
Segment profit (loss)
(EBITDA for the Company
and EBITDA, as defined, for
the Predecessor)................... $ (19,969) $ (2,269) $ (9,022) $ (21,903) $ 7,998
Depreciation and
amortization expense............... 2,458 912 -- 7,168 28,345
Goodwill impairment charge......... 58,910 -- -- 58,910
Interest expense................... 5,913 2,885 2,797 17,286 17,721
Special charges.................... -- -- 1,006 -- 10,541
Gain on sale of fixed assets....... -- -- -- -- (4,190)
OPEB expense....................... -- -- 1,885 -- 13,062
Reorganization items............... 209 -- 528 209 2,377
----------- ---------- ---------- ----------- ----------
Loss before income taxes........... $ (87,459) $ (6,066) $ (15,238) $ (105,476) $ (59,858)
=========== ========== ========== =========== ==========
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 operations. In the period from
January 1, 2002 to August 15, 2002, no provision was recorded for any gain or
loss from the disposition of the discontinued operations.
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):
PERIOD FROM JANUARY
1, 2002 TO AUGUST 15,
2002
---------------------
Net sales.......................... $ 10,111
Gross loss......................... (6,243)
Loss before income taxes........... (6,672)
Provision for income taxes......... -
----------
Net loss........................... $ (6,672)
==========
18
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 is required to pay 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. The
credit facility amendment discussed in Note 5 restricts the payment of
management fees if certain liquidity-related benchmarks are not satisfied. To
date, no payments have been made to Blue Bar, L.P.
NOTE 10. CONTINGENCIES
On October 6, 2003 ("Petition Date"), Republic Engineered Products
Holdings LLC and some of its subsidiaries, Republic Engineered Products LLC, and
Blue Steel Capital Corp. (collectively, "Debtors"), filed petitions for
reorganization under Chapter 11 ("Chapter 11") of the Federal Bankruptcy Code
("Bankruptcy Code") in the United States Bankruptcy Court in the Northern
District of Ohio, Eastern Division ("Court"). The Company is managing its
business subsequent to the Petition Date as debtor-in-possession subject to
Court approval.
The Company, in the ordinary course of business, is the subject of or
party to various pending or threatened legal and environmental actions. The
Company provides for the costs related to these matters when a loss is probable
and the amount is reasonably estimable. Based on information presently known to
the Company, management believes that any ultimate liability resulting from
these actions will not have a material adverse affect on its consolidated
financial position, results of operations or cash flows.
In connection with the closing of the asset purchase transaction with
Republic Technologies, the USWA took the position that the Company's new labor
agreement did not apply to the unionized employees of Canadian Drawn Steel
Company, Inc., a Canadian subsidiary of Republic Technologies. In light of the
USWA's position and rather than delay consummation of the entire transaction,
the parties negotiated the first amendment to the Asset Purchase Agreement,
which among various other matters included the inventory and receivables of
Canadian Drawn Steel in the assets the Company acquired and gave the Company a
one-year option to purchase the other assets of Canadian Drawn Steel for nominal
additional consideration, without adjustment to the overall purchase price.
Under the option, if the business of Canadian Drawn Steel is sold to a third
party, Republic Technologies will pay the net proceeds of that sale to the
Company.
On August 30, 2002, the USWA filed a motion with the Bankruptcy Court
seeking to compel the sale to the Company of substantially all of the assets of
Canadian Drawn Steel. On September 17, 2002, the Company and Republic
Technologies filed separate objections to the USWA's motion, asserting among
other things that the USWA had breached the agreement with Republic Technologies
with respect to the unionized employees of Canadian Drawn Steel and
19
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 costs 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
$5.1 million as of September 30, 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 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
20
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 - GOODWILL IMPAIRMENT CHARGE
During the third quarter of 2003, the Company recognized a non-cash
impairment charge of $58.9 million related to the write-off of its goodwill
balance. The Company's liquidity position has been negatively impacted by three
unplanned and unanticipated outages at Republic's Lorain, Ohio facility: (a) an
outage of Republic's #3 blast furnace in the first fiscal quarter of 2003 caused
by debris from the Black River which broke through an intake screen and clogged
the water system; (b) a second outage of Republic's #3 blast furnace in June
2003 associated with the same problem; and (c) catastrophic damage to Republic's
#3 blast furnace during the August 14, 2003 electrical blackout (the "Blackout")
in Ohio, Michigan, New York, and Ontario, Canada region. On October 6, 2003, the
Company filed petitions for reorganizations under Chapter 11. On November 5,
2003, the United States Bankruptcy Court approved PAV Republic, Inc, a newly
formed affiliate of Perry Strategic Capital Inc., as the lead bidder to purchase
substantially all the assets of Republic. Based on the value of Perry's offer,
the sale of substantially all of the Company's assets will be insufficient to
recover the goodwill balance. Accordingly, the carrying value of the Company's
goodwill balance was reduced to zero.
NOTE 14. 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 September 30,
2003 and for the three and nine months ended September 30, 2003.
21
STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF DOLLARS)
BLUE STEEL NON-
REPUBLIC CAPITAL GUARANTOR GUARANTOR
HOLDINGS REPUBLIC CORP. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ---------- ------------ ------------ ------------ ------------
Net sales..................... $ -- $163,852 -- $ 866 -- $ -- $164,718
Cost of goods sold............ -- 169,670 -- 1,141 -- -- 170,811
-------- ------- -------- ------- --------- ----------- --------
Gross loss ................... -- (5,818) -- (275) -- -- (6,093)
-------- -------- -------- ------- --------- ----------- --------
Selling, general and
administrative expense...... -- 10,101 -- 38 -- -- 10,139
Depreciation expense.......... -- 2,455 -- 3 -- -- 2,458
Goodwill impairment charge.... -- 58,453 -- 457 -- -- 58,910
Other operating expense, net.. -- 3,737 -- -- -- -- 3,737
-------- -------- -------- ------- --------- ----------- --------
Operating loss................ -- (80,564) -- (773) -- -- (81,337)
Interest expense.............. -- 5,913 -- -- -- -- 5,913
Reorganization items.......... -- 209 -- -- -- -- 209
-------- -------- -------- ------- --------- ----------- --------
Net loss...................... -- (86,686) -- (773) -- -- (87,459)
Results of affiliates'
operations.................. (87,459) -- -- -- -- 87,459 --
-------- -------- -------- ------- --------- ----------- --------
Net loss...................... $(87,459) $(86,686) -- $ (773) -- $ 87,459 $(87,459)
======== ======== ======== ======= ========= =========== ========
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF DOLLARS)
BLUE STEEL NON-
REPUBLIC CAPITAL GUARANTOR GUARANTOR
HOLDINGS REPUBLIC CORP. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- ---------- ------------ ------------ ------------ ------------
Net sales..................... $ -- $ 556,711 -- $ 4,023 -- $ -- $ 560,734
Cost of goods sold............ -- 543,496 -- 3,898 -- -- 547,394
--------- --------- -------- ----------- -------- ---------- ---------
Gross profit (loss)........... -- 13,215 -- 125 -- -- 13,340
--------- --------- -------- ----------- -------- ---------- ---------
Selling, general and
administrative expense...... -- 29,935 -- 110 -- -- 30,045
Depreciation expense.......... -- 7,159 -- 9 -- -- 7,168
Goodwill impairment charge.... -- 58,453 -- 457 -- -- 58,910
Other operating expense, net.. -- 5,198 -- -- -- -- 5,198
--------- --------- -------- ----------- -------- ---------- ---------
Operating loss................ -- (87,530) -- (451) -- -- (87,981)
Interest expense.............. -- 17,286 -- -- -- -- 17,286
Reorganization items.......... -- 209 -- -- -- -- 209
--------- --------- -------- ----------- -------- ---------- ---------
Net loss...................... -- (105,025) -- (451) -- -- (105,476)
Results of affiliates'
operations.................. (105,476) -- -- -- -- 105,476 --
--------- --------- -------- ----------- -------- ---------- ---------
Net gain (loss)............... $(105,476) $(105,025) -- $ (451) -- $ 105,476 $(105,476)
========= ========= ======== =========== ======== ========== =========
22
BALANCE SHEET
SEPTEMBER 30, 2003
(IN THOUSANDS OF DOLLARS)
BLUE STEEL
REPUBLIC CAPITAL GUARANTOR NON-GUARANTOR
HOLDINGS REPUBLIC CORP. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ---------- ------------ -------------- ------------ ------------
ASSETS
Current assets:
Cash and cash
equivalents............. $ -- $ 4,546 -- $ 35 -- $ -- $ 4,581
Accounts receivable, net.. -- 84,384 -- 413 -- -- 84,797
Accounts receivable
with affiliates......... -- -- -- 321 -- (321) --
Inventories............... -- 105,925 -- 31 -- -- 105,956
Prepaid expenses and
other current assets.... -- 12,082 -- (3) -- -- 12,079
-------- -------- -------- ------- --------- -------- --------
Total current assets........ -- 206,937 -- 797 -- (321) 207,413
Property, plant and
equipment................. -- 153,303 -- 100 -- -- 153,403
Accumulated depreciation.... -- (9,741) -- (13) -- -- (9,754)
-------- -------- -------- ------- --------- -------- --------
Net property, plant and
equipment................. -- 143,562 -- 87 -- -- 143,649
Intangibles, net............ -- 3,430 -- -- -- -- 3,430
Goodwill.................... -- -- -- -- -- -- --
Investment in subsidiaries.. (74,288) (287) -- -- -- 74,575 --
Other assets................ -- 3,348 -- -- -- -- 3,348
-------- -------- -------- ------- --------- -------- --------
Total assets................ $(74,288) $356,990 -- $ 884 -- $ 74,254 $357,840
======== ======== ======== ======= ========= ======== ========
LIABILITIES AND
MEMBERS' INTEREST
Current liabilities:
Revolving credit
facility............... $ -- $247,987 -- $ -- -- $ -- $247,987
Accounts payable........ -- 43,516 -- 401 -- -- 43,917
Accounts payable with
affiliates............. -- 321 -- -- -- (321) --
Accrued compensation
and benefits........... -- 20,808 -- 430 -- -- 21,238
Accrued interest........ -- 3,736 -- -- -- -- 3,736
Other accrued
liabilities............ -- 24,799 -- 340 -- -- 25,139
-------- -------- -------- ------- --------- -------- --------
Total current
liabilities............... -- 341,167 -- 1,171 -- (321) 342,017
Long-term debt............ -- 85,000 -- -- -- -- 85,000
Accrued environmental
liabilities............. -- 5,111 -- -- -- -- 5,111
-------- -------- -------- ------- --------- -------- --------
Total liabilities........... -- 431,278 -- 1,171 -- (321) 432,128
-------- -------- -------- ------- --------- -------- --------
Members' interest........... (74,288) (74,288) -- (287) -- 74,575 (74,288)
-------- -------- -------- ------- --------- -------- --------
Total liabilities and
members' interest....... $(74,288) $356,990 -- $ 884 -- $ 74,254 $357,840
======== ======== ======== ======= ========= ======== ========
23
STATEMENT OF CASH FLOWS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF DOLLARS)
BLUE STEEL
REPUBLIC CAPITAL GUARANTOR NON-GUARANTOR
HOLDINGS REPUBLIC CORP. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ---------- ------------ -------------- ------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES............. $ -- $ 27,009 $ -- $ (13) $ -- $ -- $ 26,996
-------- -------- -------- -------- --------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures.............. -- (6,809) -- -- -- -- (6,809)
-------- -------- -------- -------- --------- -------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES............. -- (6,809) -- -- -- -- (6,809)
-------- -------- -------- -------- --------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings under revolving
credit facility.................. -- (20,391) -- -- -- -- (20,391)
Proceeds from long-term debt...... -- 5,000 -- -- -- -- 5,000
Financing costs................... -- (2,322) -- -- -- -- (2,322)
-------- -------- -------- -------- --------- -------- --------
NET CASH USED IN FINANCING
ACTIVITIES....................... -- (17,713) -- -- -- -- (17,713)
-------- -------- -------- -------- --------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS............. -- 2,487 -- (13) -- -- 2,474
Cash and cash equivalents-
beginning of period.............. -- 2,059 -- 48 -- -- 2,107
-------- -------- -------- -------- --------- -------- --------
Cash and cash equivalents - end
of period........................ $ -- $ 4,546 $ -- 35 $ -- $ -- $ 4,581
======== ======== ======== ======== ========= ======== ========
NOTE 15. NEW ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses 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. There was no financial statement
implication related to the adoption of this statement by the Company effective
January 1, 2003.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others, which addresses disclosures to be made by
a guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of this Interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year end. The
24
disclosure requirements are effective for financial statements for periods
ending after December 15, 2002. Refer to Note 14 for discussion of the Company's
guarantees.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. For public companies with a variable interest
in a variable interest entity created before February 1, 2003, the
Interpretation applies to that company no later than the beginning of the first
interim or annual reporting period beginning after September 15, 2003. The
Interpretation requires certain disclosures in financial statements issued after
January 31, 2003 if it is reasonably possible that the company will consolidate
or disclose information about variable interest entities when the Interpretation
becomes effective. The application of this Interpretation does not and will not
have an effect on the company's consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities, which amends and clarifies
accounting for derivative instruments and hedging activities under SFAS No. 133
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149
provides guidance relating to decisions made (a) as part of the Derivatives
Implementation Group process, (b) in connection with other FASB projects dealing
with financial instruments and (c) regarding implementation issues raised in the
application of the definition of a derivative and the characteristics of a
derivative that contains financing components. SFAS No. 149 is effective for
contracts entered into or modified and for hedging relationships designated
after June 30, 2003. There was no financial statement implication related to the
adoption of this statement by the Company effective July 1, 2003.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity, which
requires freestanding financial instruments such as mandatory redeemable shares,
forward purchase contracts and written put options to be reported as liabilities
by their issuers, as well as imposing related new disclosure requirements. The
provisions of SFAS No. 150 are effective for instruments entered into or
modified after May 31, 2003 and pre-existing instruments as of the beginning of
the first interim period that commences after June 15, 2003. There was no
financial statement implication related to the adoption of this statement by the
Company effective July 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.
25
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. This option was subsequently extended to
November 30, 2003.
Our company hired approximately 2,350 of the approximately 3,700
employees of Republic Technologies. Of the approximately 2,350 employees we
hired, approximately 1,900 are hourly employees and approximately 450 are
salaried employees. We hired substantially all of the employees that had
previously been employed by Republic Technologies at the facilities that we
acquired. At these acquired facilities, we did not hire approximately 100
employees as a result of revised staffing levels, work eliminations and other
factors. We purchased a substantial part, but not all, of Republic Technologies'
facilities in Canton and Lorain, Ohio. Employees previously engaged by Republic
Technologies at the parts of the Canton and Lorain facilities that we did not
purchase were not hired.
We entered into a new labor agreement with the USWA, which covers most
of our hourly employees and has a five-year term. Compared to the labor
agreement between Republic Technologies and the USWA, our new labor agreement
reduces the number of employees and employment costs and provides us with
increased staffing flexibility to match our changing operating requirements. It
removes several significant items of fixed cost, which will permit improved
scheduling flexibility and eliminate legacy costs. Legacy costs that have been
eliminated consist of costs associated with non-employees, including retirees
and future retirees, under defined benefit retirement plans and retiree medical
and life insurance plans to which Republic Technologies contributed. These
plans, which had burdened the cash flow and balance sheet of Republic
Technologies, are not a part of the new labor agreement. We also expect the new
labor agreement to provide a better connection between the business plan
performance and variable compensation through the profit sharing plan and the
performance based incentive plan
26
for unionized employees contemplated under the new labor agreement. In
addition, the new labor agreement simplifies labor administration.
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; and certain environmental clean-up obligations of
Republic Technologies under a U.S. Environmental Protection Agency corrective
action order that may arise 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 were 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.
On October 6, 2003 ("Petition Date"), Republic Engineered Products
Holdings LLC and some of its subsidiaries, Republic Engineered Products LLC,
and Blue Steel Capital Corp. (collectively, "Debtors"), filed petitions for
reorganization under Chapter 11 ("Chapter 11") of the Federal Bankruptcy Code
("Bankruptcy Code") in the United States Bankruptcy Court in the Northern
District of Ohio, Eastern Division ("Court"). The Company is managing its
business subsequent to the Petition Date as debtor-in-possession subject to
Court approval.
RESULTS OF OPERATIONS OF OUR COMPANY AND OUR PREDECESSOR
The historical consolidated financial information of Republic Holdings
and Republic Technologies may not be entirely comparable and may be of limited
value in evaluating our financial and operating results. The consolidated
results of operations for the three and nine months ended September 30, 2003 are
not necessarily indicative of the results to be expected for the full year ended
December 31, 2003.
The following discussion provides a comparison of the results of
operations of Republic Holdings for the three and nine months ended September
30, 2003 and the period from August 16, 2002 to September 30, 2002 and for
Republic Technologies for the periods from July 1, 2002 to August 15, 2002 and
January 1, 2002 to August 16, 2002, respectively. The discussion is provided for
comparative purposes only, but the value of such a comparison may be limited.
27
Three Months ended September 30, 2003 compared with Three Months ended September
30, 2002
Net sales for the three months ended September 30, 2003 totaled $164.7
million on shipments of approximately 316,017 net tons compared with net sales
of $208.4 million for the three months ended September 30, 2002 on shipments of
approximately 414,000 tons. Net sales for the three months ended September 30,
2003 were comprised of $135.2 million for hot-rolled and $29.5 million for
cold-finished, compared with hot-rolled net sales of $174.0 million and
cold-finished net sales of $34.4 million for the three months ended September
30, 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 four cold-finished bar facilities. Additionally, net
sales and shipments were adversely impacted by the lost production related to
the unplanned outages of Republic's #3 blast furnace.
Cost of sales totaled $170.8 million, or 103.7% of net sales, for the
three months ended September 30, 2003 compared with cost of sales of $207.0
million, or 99.3% of net sales, for the similar period ended September 30, 2002.
Cost of sales for the three months ended September 30, 2003 consisted of $141.2
million on hot-rolled products and $29.6 million on cold-finished products
compared with $170.4 million on hot-rolled products and $36.6 million on
cold-finished products for the three months ended September 30, 2002. The
overall increase in cost of sales as a percentage of net sales for the three
months ended September 30, 2003 compared to the three months ended September 30,
2002 was primarily due to the expense and inefficiencies resulting from the
unexpected shutdown of Republic's #3 blast furnace on August 14, 2003. During
the three months ended September 30, 2003, the Company recorded a $12.0 million
reduction to cost of goods sold as a result of the partial reimbursement from a
business interruption and property insurance claims. These claims were filed due
to (a) an outage of Republic's #3 blast furnace in the first fiscal quarter of
2003 caused by debris from the Black River which broke through an intake screen
and clogged the water system; (b) a second outage of Republic's #3 blast furnace
in June 2003 associated with the same problem; and (c) catastrophic damage to
Republic's #3 blast furnace during the August 14, 2003 electrical blackout (the
"Blackout") in Ohio, Michigan, New York, and Ontario, Canada region.
Selling, general and administrative expenses were $10.1 million, or
6.1% of net sales, for the three months ended September 30, 2003 compared with
$9.2 million, or 4.4% of net sales, for the three months ended September 30,
2002. The selling, general and administrative expenses increased as a percentage
of sales primarily due to an increase in insurance premium costs in the three
months ended September 30, 2003 as compared to the three months ended September
30, 2002.
Depreciation and amortization expenses were $2.5 million for the three
months ended September 30, 2003, compared with $0.9 million for the three months
ended September 30, 2002. The increase in depreciation expense in the current
period is primarily a result of the Predecessor's change to liquidation based
accounting as of June 30, 2002. Under this method of accounting, no depreciation
expense was recorded for the period from July 1, 2002 to August 15, 2002.
Republic reported $0.9 million of depreciation for the period from August 16,
2002 to September 30, 2002 related to the assets acquired from Republic
Technologies.
There were no special charges for the three months ended September 30,
2003, compared with $1.0 million for the three months ended September 30, 2002.
The charges during the three
28
months ended September 30, 2002 included $0.4 million of severance related costs
for administrative staff reductions and $0.6 million of miscellaneous facility
closure costs.
During the third quarter of 2003, the Company recognized a non-cash
impairment charge of $58.9 million related to the write-off of its goodwill
balance. The Company's liquidity position has been negatively impacted by three
unplanned and unanticipated outages at Republic's Lorain, Ohio facility: (a) an
outage of Republic's #3 blast furnace in the first fiscal quarter of 2003 caused
by debris from the Black River which broke through an intake screen and clogged
the water system; (b) a second outage of Republic's #3 blast furnace in June
2003 associated with the same problem; and (c) catastrophic damage to Republic's
#3 blast furnace during the August 14, 2003 electrical blackout (the "Blackout")
in Ohio, Michigan, New York, and Ontario, Canada region. On October 6, 2003, the
Company filed petitions for reorganizations under Chapter 11. On November 5,
2003, the United States Bankruptcy Court approved PAV Republic, Inc, a newly
formed affiliate of Perry Strategic Capital Inc., as the lead bidder to purchase
substantially all the assets of Republic. Based on the value of Perry's offer,
the sale of substantially all of the Company's assets will be insufficient to
recover the goodwill balance. Accordingly, the carrying value of the Company's
goodwill balance was reduced to zero.
Other operating expense for the three months ended September 30, 2003
included $3.9 million of bad debt provisions.
Net interest expense was $5.9 million for the three months ended
September 30, 2003 compared with $5.7 million for the three months ended
September 30, 2002.
As a result of the above, the Company reported a net loss of $87.5
million for the three months ended September 30, 2003 compared with the Company
and the Predecessor's combined net loss of $21.3 million for the three months
ended September 30, 2002.
Nine Months ended September 30, 2003 compared with Nine Months ended September
30, 2002
Net sales for the nine months ended September 30, 2003 totaled $560.7
million on shipments of approximately 1,083,864 net tons compared with net sales
of $717.2 million for the nine months ended September 30, 2002 on shipments of
approximately 1,444,300 tons. Net sales for the nine months ended September 30,
2003 were comprised of $464.8 million for hot-rolled and $95.9 million for
cold-finished, compared with hot-rolled net sales of $583.7 million and
cold-finished net sales of $133.5 million for the nine months ended September
30, 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 four cold-finished bar facilities. Net sales and
shipments were also adversely impacted by the lost production related to the
series of unplanned outages of Republic's #3 blast furnace.
Cost of sales totaled $547.4 million, or 97.6% of net sales, for the
nine months ended September 30, 2003 compared with cost of sales of $691.3
million, or 96.4% of net sales, for the similar period ended September 30, 2002.
Cost of sales for the nine months ended September 30, 2003 consisted of $454.8
million on hot-rolled products and $92.6 million on cold-finished products
compared with $551.3 million on hot-rolled products and $140.0 million on
cold-finished products for the nine months ended September 30, 2002. Cost of
sales as a percentage of net sales from the nine months ended September 30, 2003
to the nine months ended September
29
30, 2002 remained essentially unchanged. Increased natural gas and scrap prices
and unplanned outages at a Lorain, Ohio blast furnace resulting from property
damage offset the benefits of increased utilization of production facilities and
reduced labor costs associated to our new labor contract implemented in August
2002. During the nine months ended September 30, 2003, the Company recorded a
$17.0 million reduction to cost of goods sold as a result of the partial
reimbursement from a business interruption and property insurance claims. These
claims were filed due to (a) an outage of Republic's #3 blast furnace in the
first fiscal quarter of 2003 caused by debris from the Black River which broke
through an intake screen and clogged the water system; (b) a second outage of
Republic's #3 blast furnace in June 2003 associated with the same problem; and
(c) catastrophic damage to Republic's #3 blast furnace during the August 14,
2003 electrical blackout (the "Blackout") in Ohio, Michigan, New York, and
Ontario, Canada region. The Company's inventory standards also were updated in
the second quarter to reflect the current cost structure resulting in a $6.0
million increase in inventory and a corresponding decrease in cost of goods
sold.
Selling, general and administrative expenses were $30.0 million, or
5.4% of net sales, for the nine months ended September 30, 2003 compared with
$28.2 million, or 3.9% of net sales, for the nine months ended September 30,
2002. The selling, general and administrative expenses increased as a percentage
of sales primarily due to a $2.8 million increase in insurance premium costs in
the nine months ended September 30, 2003 as compared to the nine months ended
September 30, 2002 offset by a reduction of salary wage costs.
Depreciation and amortization expenses were $7.2 million for the nine
months ended September 30, 2003, compared with $29.3 million for the nine months
ended September 30, 2002. Republic Technologies recorded depreciation expense
for the first six months of 2002. Republic Technologies changed to liquidation
basis accounting as of June 30, 2002, and under this method, no depreciation was
recorded from July 1, 2002 to August 15, 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 nine months ended September 30,
2003, compared with $10.5 million for the nine months ended September 30, 2002.
The charges during the nine months ended September 30, 2002 included $8.8
million in voluntary early retirement buyouts. These charges also included $1.9
million in supplemental unemployment benefits payments, salary terminations, and
the health insurance costs related to the shutdown of Republic Technologies'
Johnstown, Pennsylvania melt shop facility, Canton 12" rolling mill facility,
and Willimantic, Connecticut cold-finishing facility and $0.6 million of
miscellaneous facility closure costs. A gain of $0.8 million as a result of
Republic Technologies' Willimantic plant sale and the reversal of a substantial
portion of Republic Technologies' related shutdown reserve offset these charges.
During the third quarter of 2003, the Company recognized a non-cash
impairment charge of $58.9 million related to the write-off of its goodwill
balance. The Company's liquidity position has been negatively impacted by three
unplanned and unanticipated outages at Republic's Lorain, Ohio facility: (a) an
outage of Republic's #3 blast furnace in the first fiscal quarter of 2003 caused
by debris from the Black River which broke through an intake screen and clogged
the water system; (b) a second outage of Republic's #3 blast furnace in June
2003 associated with the same problem; and (c) catastrophic damage to Republic's
#3 blast furnace during the August 14, 2003 electrical blackout (the "Blackout")
in Ohio, Michigan, New York, and Ontario, Canada region.
30
On October 6, 2003, the Company filed petitions for reorganizations under
Chapter 11. On November 5, 2003, the United States Bankruptcy Court approved PAV
Republic, Inc, a newly formed affiliate of Perry Strategic Capital Inc., as the
lead bidder to purchase substantially all the assets of Republic. Based on the
value of Perry's offer, the sale of substantially all of the Company's assets
will be insufficient to recover the goodwill balance. Accordingly, the carrying
value of the Company's goodwill balance was reduced to zero.
Other operating expense for the nine months ended September 30, 2003
included $5.0 million of bad debt provisions.
Net interest expense was $17.3 million for the nine months ended
September 30, 2003 compared with $20.6 million for the nine months ended
September 30, 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 nine months ended September 30,
2003 as compared to the Predecessor in the nine months ended September 30, 2002.
As a result of the above, the Company reported a net loss of $105.5
million for the nine months ended September 30, 2003 compared with the Company
and Predecessor's combined net loss of $66.0 million for the nine months ended
September 30, 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 liquidity
position has been negatively impacted by greater than expected increases in the
cost of natural gas as well as by unplanned outages during January and June of
2003 at the Lorain #3 blast furnace resulting from property damage and
additional damage to the #3 blast furnace during the Northeast power blackout on
August 14, 2003. As a result of this additional damage, currently the #3 blast
furnace is non-operational and it has been necessary to start-up the Lorain #4
blast furnace. On September 30, 2003 the Company informed Fleet Capital under
the Company's credit facility, that it was in default under the overadvance
provision of that revolving credit facility. On October 6, 2003 the Company
filed a petition for reorganization under Chapter 11. On October 9, 2003, the
Company entered into the DIP Credit Agreement with Fleet Capital to provide
secured debtor-in-possession financing to the Company. The Company's net
availability on its DIP Credit Agreement at November 11, 2003 was $12.0 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. The Company has reduced its planned capital
expenditures from $20 million to $10.1 million for 2003. Additional financing of
$5.0 million was obtained from the State of Ohio. The Company sought
reimbursement from business interruption and property insurance due to damage
incurred to the #3 blast furnace at the Lorain facility. The insurance companies
issued a partial payment of $5.0 million in July 2003 and an additional $12.0 in
September 2003 against these claims. Also, on May 15, 2003, the Company obtained
an extension of the contractual
31
reductions in borrowing capacity under its senior revolving credit facility. In
light of the Company's liquidity, its ability to raise additional capital is
negatively impacted. Restrictive covenants included in the DIP Credit Agreement
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 prior to the Petition Date included cash
and cash equivalents, cash from operations and amounts available under our
credit facility. Subsequent to the Petition Date, our sources of liquidity also
included the DIP Credit Agreement. Our primary liquidity needs relate to working
capital and capital expenditures.
Capital Expenditures
Republic invested $6.8 million in capital expenditures during the nine
months ended September 30, 2003 and $4.8 million during the period from August
16, 2002 to September 30, 2002. Republic Technologies invested $8.2 million in
capital expenditures during period from January 1, 2002 to August 15, 2002. The
$6.8 million invested in capital expenditures during the nine months ended
September 30, 2003 was funded using cash from operations, borrowings under the
credit facility, and borrowing under loans from the State of Ohio. The Company's
current planned capital expenditures for the fourth quarter of 2003 are $1.0
million, and are expected to be funded using cash from operations and the DIP
Credit Agreement. Capital expenditures are limited under our DIP Credit
Agreement to $1.1 million from October 9, 2003 to February 29, 2004.
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 and other lenders
on August 16, 2002. Prior to the amendment discussed below, our credit facility
consisted 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 September 30, 2003, we had $248.0 million outstanding under
the credit facility. Under the original facility, the total commitment of $336.0
million was to automatically reduce by $5.0 million on the first day of each
quarter commencing the fiscal quarter that began on July 1, 2003 until such time
as the total commitment was reduced to $275.0 million. 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
32
property relating to, our Canton, Ohio Caster and Continuous 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 Republic's
membership interests owned by Republic Holdings, which have been pledged to
secure the guarantee.
Prior to the Event of Default, borrowings under the credit facility
bore 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 was 1.25% and on Eurodollar
loans was 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 could have been reduced to as low as 0.25% and 2.00%,
respectively, if we achieved specified reduced leverage ratios. As of September
30, 2003, borrowings under the credit facility are accruing interest at the rate
of 6.25% per year for base rate loans and 5.21% per year for Eurodollar loans.
Our credit facility contains negative covenants and provisions that
restrict, among other things, our ability to incur additional indebtedness or
guarantee the obligations of others, grant liens, make investments, pay
dividends, repurchase stock or make other forms of restricted payments, merge,
consolidate and acquire assets or stock, engage in sale and leaseback
transactions or dispose of assets, make capital expenditures in excess of
specified annual amounts, engage in transactions with our affiliates, and prepay
or amend our senior secured notes. The credit facility also requires us and our
subsidiaries to meet financial covenants and ratios, particularly a minimum
fixed charge coverage ratio based on operating cash flow to total debt service
to be tested quarterly commencing on March 31, 2004.
On May 15, 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 has been
reduced to $275.0 million. Consistent with the original credit facility,
availability under the amended credit facility was limited to a borrowing base,
however, the components of the borrowing base were 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 was to occur
ratably over a twelve-month period ending June 29, 2004. Finally, the amendment
required us to maintain minimum cumulative EBITDA (as defined in the amendment)
levels and limited the amount of capital expenditures the Company could incur to
$9 million in 2003 and $20 million thereafter.
On September 30, 2003, the Company informed Fleet Capital as
Administrative Agent under the Company's credit facility, that it was in default
under the overadvance provision of that revolving credit facility and it was
unable to timely make a required interest payment on its 10% senior secured
notes. An overadvance can occur when the Company's estimated borrowing base,
consisting of 85% of eligible accounts receivable and 70% of the eligible
inventory, is reconciled to actual at month end. The credit facility default
also
33
constitutes default under the Company's $5.0 million loan from the Ohio
Department of Development. Events of Default, as defined in the related debt
agreements, have occurred with respect to all of the Company's secured debt.
As a result, the secured debt is classified as a current liability. As a result
of the Chapter 11 filing the unsecured debt will be classified as liabilities
subject to compromise.
On October 9, 2003, we entered into the DIP Credit Agreement with Fleet
Capital and other lenders who are parties thereto to provide secured
debtor-in-possession financing to the Company. The DIP Credit Agreement allows
for new borrowings of up to $45.0 million and includes a sub-facility of $20
million for the issuance of letters of credit. Advances under the DIP Credit
Agreement bear interest at a base rate used by Fleet Capital, plus the
applicable margin; or a Eurodollar rate on deposits for a given period, plus the
applicable margin. The applicable margin on base rate loans is 1.5% and on
Eurodollar loans is 3.5%. The Company's borrowing base plus any permitted
overadvance provision limits the amount available at any time. Our net
availability on the DIP Credit Agreement at November 11, 2003 was $12.0 million.
The DIP Credit Agreement grants a security interest in accounts receivable,
inventory, intellectual property and related assets of the Company, and the real
estate and fixed assets comprising the Canton Ohio Caster and Continuous Rolling
Facility, including the related melt shop. The DIP Credit Agreement provides for
the Company to be in an overadvance position. An overadvance can occur when the
Company's borrowing base, consisting of 85% of eligible accounts receivable and
70% of the eligible inventory is less than the amount outstanding on the credit
facility. The amount of the overadvance changes from month to month based on the
Company's forecasted borrowing needs. The overadvance provision ranges from
$22.0 million to $31.0 million. The DIP Credit Agreement also contains certain
restrictive covenants which, among other things, restrict our ability to incur
additional indebtedness or guarantee the obligations of others, change its line
of business, merge, consolidate and acquire or sell assets or stock, pay
dividends, or prepay or amend the 10% senior secured notes or any of its
subordinated indebtedness. We are also required to maintain minimum sales,
liquid steel production, and rolling production levels as defined in the DIP
Credit Agreement, and to limit its net capital expenditures.
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. Prior to the
Event of Default, interest on the notes accrued 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 31, 2002. On September 30, 2003 the Company
was unable to timely make the required interest payment on its 10% senior
secured notes. Events of Default, as defined in the related indenture, have
occurred with respect to the Company's bond debt. The Company continues to
accrue interest on the notes at the rate of 12%. As a result of the Chapter 11
proceedings, no interest payments have been made since June 30, 2003.
Our notes were issued under an indenture dated as of August 16, 2002
between 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 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
34
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. 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.
On June 6, 2003, the Company obtained a $5.0 million loan from the Ohio
Department of Development. This loan is secured by the 20" mill at the Lorain
facility and accrues interest at the rate of 3% per annum payable on the first
day of each calendar month until the loan matures in July 2008. Events of
Default, as defined in the related debt agreement, have occurred with respect to
this debt. The Company continues to accrue interest on this debt. As a result of
the Chapter 11 proceedings, no interest payments have been made since September
14, 2003.
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.
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
35
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 management to make significant estimates and assumptions. Our
assessment of the purchased intangible assets, including the option to purchase
the assets and properties associated with 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.
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 is 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 debts to reduce the related receivable to the
amount we reasonably believe is collectible. We also record reserves for bad
debts 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. Our company values its inventory at
the lower of cost or market applied on a first-in, first-out (FIFO) method for
finished and semi-finished goods, and a weighted-average method for raw
materials. Inventory standards are set
36
based on this methodology and periodically reviewed to verify that the standards
approximate actual costs. 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. In the third quarter, the Company recognized a non-cash impairment charge
to write off the balance of the Company's goodwill.
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 the absence of any
deadlines for remediation under the applicable environmental laws and
regulations pursuant to which such remediation costs will be expended. No claims
for recovery are netted against the stated amount. It is reasonably possible
37
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.
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:
- Our ability to develop and obtain approval of a plan of
reorganization during our Chapter 11 proceedings.
- 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 lose 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 DIP_ Credit Agreement 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.
38
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 September 30, 2003, we had $80.0 million
aggregate principal amount of the notes outstanding, $5.0 million outstanding
principal to the Ohio Department of Development, and $248.0 million outstanding
under our credit facility. Prior to an Event of Default, our notes bore interest
at a fixed rate of 10% per year, our loan from the Ohio Department of
Development bore interest at a fixed rate of 3% per year, and the interest rate
on borrowings under our credit facility may vary. Subsequent to the Event of
Default, the notes bear interest at 12%. As a result, our primary exposure to
market risks 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 discussed in Note 5. As of September 30,
2003, borrowings under the credit facility are accruing interest at the rate of
6.25% per year for base rate loans and 5.19% 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
As of the end of the period covered by this quarterly report on Form
10-Q, the Company's President and Chief Executive Officer and Chief Financial
Officer conducted an evaluation of the Company's disclosure controls and
procedures (as defined in Rules 13a-15 and 15d-15) of the Securities Exchange
Act of 1934. Based upon this evaluation, the Company's President and Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting the
Company's management to material information relating to the Company that is
required to be disclosed by the Company in the reports it files or submits under
the Securities Exchange Act of 1934.
There have been no changes in the Company's internal controls over
financial reporting that occurred during the quarter ended September 30, 2003,
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Bankruptcy Filings.
On October 6, 2003 ("Petition Date"), Republic Engineered Products
Holdings LLC and some of its subsidiaries, Republic Engineered Products LLC, and
Blue Steel Capital Corp., filed petitions for reorganization under Chapter 11 of
the Federal Bankruptcy Code in the United States Bankruptcy Court in the
Northern District of Ohio, Eastern Division.
39
The Chapter 11 cases have been assigned to Judge Marilyn Shea-Stonum
and designated as case Numbers 03-55118 (Republic Engineered Products Holdings
LLC), 03-55120 (Republic Engineered Products LLC), and 03-55121 (Blue Steel
Capital Corp.). The chapter 11 cases will be jointly administered for procedural
purposes, only, under case Number 03-55118. Each of these entities will continue
to operate its business and manage its property as a debtor in possession
pursuant to sections 1107 and 1108 of the Bankruptcy Code. As a result of the
Chapter 11 filings, litigation relating to prepetition claims against the
Debtors is stayed; however, certain prepetition claims by the government or
governmental agencies seeking equitable or other non-monetary relief against the
Debtors are not subject to the automatic stay.
Other
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.
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 is sold to a third party,
Republic Technologies will pay the net proceeds of that sale to us. This option
was subsequently extended to November 30, 2003.
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
40
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
As a result of the Chapter 11 filings, Events of Default, as defined in the
related debt agreements, have occurred with respect to all of the Company's
$333.0 million of secured debt.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8 - K
A report on Form 8-K was filed on August 18, 2003 by the Company
announcing that on August 14, 2003 an explosion and fire caused
significant damage to Republic Engineered Products' #3 blast
furnace in Lorain, Ohio.
A report on Form 8-K was filed on August 28, 2003 by the Company
announcing plans to restart a backup blast furnace at its Lorain
plant to replace a furnace that, as previously disclosed, was
damaged and shut down during the Northeast power blackout on August
14.
A report on Form 8-K was filed on September 11, 2003 by the Company
announcing a cost-structuring program that will reduce costs,
conserve cash, and maximize the ability to meet customer
requirements while normal operations are restored.
A report on Form 8-K was filed on September 30, 2003 by the Company
announcing that 1) it has informed Fleet Capital Corporation as
Administrative Agent under the Company's credit facility, that it
is in default under the overadvance provisions of that revolving
credit facility, and 2) it is unable to timely make a required
interest payment on its 10% senior secured notes
41
(b) Exhibits
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 for Joseph F. Lapinsky, Chief Executive Officer and Managing
Director of Republic Engineered Products Holdings LLC
31.2 Certification Pursuant to Section 302 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
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for
Joseph F. Lapinsky, Chief Executive Officer and Managing Director
of Republic Engineered Products Holdings LLC
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for
Joseph A. Kaczka, Chief Financial Officer, Vice President, Finance
and Controller and Treasurer of Republic Engineered Products
Holdings LLC
10.17 Debtor-in-Possession Revolving Credit Agreement, dated as of
October 9, 2003, by and among Republic Engineered Products LLC, a
Delaware limited liability company, as Borrower; Republic
Engineered Products Holdings, a Delaware limited liability company,
Blue Steel Capital Corp., a Delaware corporation, and N&T Railway
Company LLC, a Delaware limited liability company, as Guarantors;
and Fleet Capital Corporation, as administrative agent; and Fleet
Capital Corporation, Bank of America, N.A., JP Morgan Chase Bank,
Wells Fargo Foothill, Inc., GE Capital CFE, Inc. as Co-Agents for
the Lenders.
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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: November 14, 2003 By: /s/Joseph F. Lapinsky
---------------------
Joseph F. Lapinsky
President, Chief Executive Officer and
Managing Director
Date: November 14, 2003 By: /s/Joseph A. Kaczka
-------------------
Joseph A. Kaczka
Chief Financial Officer, Vice President,
Finance and Controller, Treasurer and
Secretary
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