AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 12, 2000
REGISTRATION NO. 333-90709
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
REPUBLIC TECHNOLOGIES
INTERNATIONAL, LLC RTI CAPITAL CORP.
(EXACT NAME OF REGISTRANT CO-ISSUER (EXACT NAME OF REGISTRANT CO-ISSUER
AS SPECIFIED IN ITS CHARTER) AS SPECIFIED IN ITS CHARTER)
DELAWARE DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
3312 3312
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
NONE 34-1900904
(I.R.S. EMPLOYER IDENTIFICATION NUMBER) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
------------------------
3770 EMBASSY PARKWAY
AKRON, OHIO 44333-8367
(330) 670-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN GEORGE
REPUBLIC TECHNOLOGIES INTERNATIONAL, LLC
3770 EMBASSY PARKWAY
AKRON, OHIO 44333-8367
(330) 670-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANTS' AGENT FOR SERVICE)
------------------------
With a copy to:
JOHN D. LOBRANO, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 455-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act Registration number of the earlier effective
Registration Statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Registration Statement number of the earlier effective Registration
Statement for the same offering. / /
------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF REGISTRANT GUARANTORS
EXACT NAME OF REGISTRANT STATE OR OTHER JURISDICTION PRIMARY STANDARD
GUARANTOR AS SPECIFIED OF INCORPORATION OR INDUSTRIAL CLASSIFICATION I.R.S. EMPLOYER
IN ITS CHARTER ORGANIZATION CODE NUMBER IDENTIFICATION NUMBER
- ------------------------------ --------------------------- ------------------------- ---------------------
Republic Technologies Delaware 3312 34-1902647
International Holdings, LLC
Nimishillen & Tuscarawas, LLC Delaware 3312 None
Bliss & Laughlin, LLC Delaware 3312 None
Canadian Drawn Steel Canada 3312 None
Company, Inc.
ADDRESS, INCLUDING ZIP
CODE, AND TELEPHONE
NUMBER, INCLUDING AREA
EXACT NAME OF REGISTRANT CODE, OF REGISTRANT
GUARANTOR AS SPECIFIED GUARANTOR'S PRINCIPAL
IN ITS CHARTER EXECUTIVE OFFICES
- ------------------------------ ------------------------
Republic Technologies 3770 Embassy Parkway
International Holdings, LLC Akron, Ohio 44333-8367
(330) 670-3000
Nimishillen & Tuscarawas, LLC 3770 Embassy Parkway
Akron, Ohio 44333-8367
(330) 670-3000
Bliss & Laughlin, LLC 3770 Embassy Parkway
Akron, Ohio 44333-8367
(330) 670-3000
Canadian Drawn Steel 133 Chatham Street
Company, Inc. Hamilton, Ontario
(905) 546-5656
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities, and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JANUARY 12, 2000
Prospectus
$425,000,000
REPUBLIC TECHNOLOGIES INTERNATIONAL, LLC
RTI CAPITAL CORP.
OFFER TO EXCHANGE ALL OUTSTANDING 13 3/4% SENIOR
SECURED NOTES DUE 2009 FOR 13 3/4% SENIOR SECURED NOTES DUE 2009,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
UNCONDITIONALLY GUARANTEED ON A SENIOR BASIS BY REPUBLIC TECHNOLOGIES
INTERNATIONAL HOLDINGS, LLC AND SPECIFIED SUBSIDIARIES OF REPUBLIC TECHNOLOGIES
INTERNATIONAL, LLC
THE EXCHANGE OFFER
o Republic Technologies International, LLC and RTI Capital Corp. will exchange
all outstanding notes that are validly tendered and not validly withdrawn for
an equal principal amount of exchange notes that are generally freely
tradeable.
o You may withdraw tenders of outstanding notes at any time prior to the
expiration of the exchange offer.
o The exchange offer expires at 5:00 p.m., New York City time on
, 2000, unless extended. We do not currently intend to extend
the expiration date.
o The exchange of outstanding notes for exchange notes will not be a taxable
event for U.S. federal income tax purposes.
o We will not receive any proceeds from the exchange offer.
THE EXCHANGE NOTES
o The terms of the exchange notes to be issued in the exchange offer are
substantially identical to the outstanding notes, except that the exchange
notes will generally be freely tradeable.
MARKET FOR THE EXCHANGE NOTES
o The exchange notes may be sold in the over-the-counter market, in negotiated
transactions or through a combination of these methods. We do not plan to list
the exchange notes on any national market.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 10 OF THIS
PROSPECTUS BEFORE PARTICIPATING IN THE EXCHANGE OFFER.
------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------------------------------------------------------
The date of this prospectus is , 2000.
TABLE OF CONTENTS
PAGE
----
Summary......................................... 1
Risk Factors.................................... 10
Forward-Looking Statements...................... 23
Use of Proceeds................................. 24
Capitalization.................................. 24
Unaudited Pro Forma Combined Financial
Information................................... 25
Selected Historical Financial and Operating
Information................................... 33
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 42
Business........................................ 61
The Consolidation Plan.......................... 84
Management...................................... 89
Relationships and Related Party Transactions.... 95
PAGE
----
Security Ownership of Beneficial Owners and
Management.................................... 99
Description of the New Credit Facility.......... 102
Description of Other Indebtedness............... 105
The Exchange Offer.............................. 109
Description of the Notes........................ 119
Description of Collateral and Intercreditor
Agreements.................................... 169
Book-entry; Delivery and Form................... 180
United States Federal Income Tax Consequences... 183
Plan of Distribution............................ 187
Legal Matters................................... 188
Experts......................................... 188
Where You Can Find More Information............. 188
Index to Financial Statements................... F-1
---------------------------
SUMMARY
The following summary should be read in conjunction with the more detailed
information and consolidated financial statements and the related notes
appearing elsewhere in this prospectus. Unless we indicate otherwise or the
context otherwise requires, we use the following names and expressions in this
prospectus as indicated:
o "Republic" refers to Republic Engineered Steels, Inc. and its
subsidiaries prior to the combination of Republic, BarTech and USS/Kobe
to form Republic Technologies, which we refer to in this prospectus as
the "Combination";
o "BarTech" refers to Bar Technologies Inc. and its subsidiaries prior to
the Combination;
o "USS/Kobe" refers to the special bar quality production facilities and
related operations of USS/Kobe Steel Company, a 50/50 joint venture
between a subsidiary of USX Corporation and a U.S. subsidiary of Kobe
Steel, Ltd., prior to the Combination;
o "Republic Technologies," "we," "us" or "our" refer to Republic
Technologies International, LLC and its subsidiaries after the
Combination;
o "Holdings" refers to Republic Technologies International Holdings, LLC,
the direct parent of Republic Technologies International, LLC after the
Combination; and
o "RTI" refers to Republic Technologies International, Inc., as Bar
Technologies Inc. was renamed after the Combination. RTI now indirectly
owns 70% of our equity interests through Holdings.
Unless we indicate otherwise, all information in this prospectus presented on a
pro forma basis gives effect to the Transactions, which term we define later in
this summary. For the purpose of this prospectus, we have included high quality
engineered steel rod products in our definition of special bar quality, or
"SBQ," steel products.
SUMMARY OF TERMS OF THE EXCHANGE OFFER
On August 13, 1999, Republic Technologies and its wholly owned subsidiary
RTI Capital Corp., which we refer to as the "issuers" in this prospectus,
completed the private offering of the outstanding notes through the sale of
units also including warrants. References to "notes" in this prospectus are
references to both the outstanding notes and the exchange notes.
The issuers and the guarantors of the notes, which are identified below,
entered into a notes exchange and registration rights agreement with the initial
purchasers in the private offering. This agreement calls for us to deliver to
you this prospectus and to complete the exchange offer within 240 days after the
date of original issuance of the outstanding notes. In the exchange offer, you
are entitled to exchange your outstanding notes for exchange notes which are
identical in all material respects to the outstanding notes except that:
o the exchange notes have been registered under the Securities Act;
o the exchange notes are not entitled to registration rights under the
notes exchange and registration rights agreement; and
o liquidated damages provisions are no longer applicable.
The Exchange Offer........................ We are offering to exchange up to $425 million aggregate principal
amount of exchange notes for up to $425 million aggregate principal
amount of outstanding notes. Outstanding notes may be exchanged only
in integral multiples of $1,000.
Resales................................... We believe that the exchange notes issued in the exchange offer may
be offered for resale, resold and otherwise
1
transferred by you without compliance with the registration and
prospectus delivery provisions of the Securities Act if:
o you are not an affiliate of Republic Technologies;
o you are acquiring the exchange notes in the ordinary course of your
business; and
o you have not engaged in, do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a
distribution of the exchange notes.
If you do not meet these requirements, you must comply with the
registration and prospectus delivery requirements of the Securities
Act in connection with the resale of the exchange notes unless there
is an applicable exemption from these requirements.
Each participating broker-dealer that receives exchange notes for its
own account pursuant to the exchange offer in exchange for
outstanding notes that were acquired as a result of market-making or
other trading activity must acknowledge that it will deliver a
prospectus in connection with any resale of the exchange notes. See
"Plan of Distribution."
Expiration Date; Withdrawal of Tenders.... The exchange offer will expire at 5:00 p.m., New York City time, on
, 2000, or such later date and time to which
Republic Technologies extends the expiration date. A tender of
outstanding notes may be withdrawn at any time prior to the
expiration date. Any outstanding notes not accepted for exchange for
any reason will be returned without expense to the tendering holder
promptly after the expiration or termination of the exchange offer.
Conditions to the Exchange Offer.......... The exchange offer is subject to customary conditions, which we may
waive. Please read the section captioned "The Exchange
Offer--Conditions to the Exchange Offer" of this prospectus for more
information regarding the conditions to the exchange offer.
Procedures for Tendering Outstanding
Notes................................... If you wish to accept the exchange offer, you must complete, sign and
date the accompanying letter of transmittal, or a facsimile of the
letter of transmittal, according to the instructions contained in
this prospectus and the letter of transmittal. You must also mail or
otherwise deliver to the exchange agent the letter of transmittal, or
a facsimile of the letter of transmittal, together with the
outstanding notes and any other required documents. The address of
the exchange agent is set forth on the cover page of the letter of
transmittal. If you hold outstanding notes through DTC, you must
comply with the Automated Tender Offer Program procedures of DTC, by
which you will agree to be bound by the letter of transmittal. By
signing, or agreeing to be bound
2
by, the letter of transmittal, you will represent to us that, among
other things:
o any exchange notes that you receive will be acquired in the
ordinary course of your business;
o you have no arrangement or understanding with any person or entity
to participate in a distribution of the exchange notes;
o if you are not a broker-dealer, that you are not engaged in and do
not intend to engage in the distribution of the exchange notes;
o if you are a broker-dealer that will receive exchange notes for
your own account in exchange for outstanding notes that were
acquired as a result of market-making activities, that you will
deliver a prospectus, as required by law, in connection with any
resale of such exchange notes; and
o you are not an "affiliate," as defined in Rule 405 of the
Securities Act, of the issuers or, if you are an affiliate, you
will comply with any applicable registration and prospectus
delivery requirements of the Securities Act.
Special Procedures for Beneficial
Owners.................................. If you are a beneficial owner of outstanding notes which are not
registered in your name, you should contact the registered holder
promptly and instruct such registered holder to tender on your
behalf. If you wish to tender on your own behalf, you must first
either make appropriate arrangements to register ownership of the
outstanding notes in your name or obtain a properly completed bond
power from the registered holder.
Guaranteed Delivery Procedures............ If you cannot deliver your outstanding notes, the letter of
transmittal or any other documents required by the letter of
transmittal or comply with the applicable procedures under DTC's
Automated Tender Offer Program prior to the expiration date, you must
tender your outstanding notes according to the guaranteed delivery
procedures set forth in this prospectus under "The Exchange
Offer--Guaranteed Delivery Procedures."
Effect on Holders of Outstanding Notes.... As a result of the making and completing of the exchange offer, we
will have fulfilled covenants contained in the notes exchange and
registration rights agreement. Liquidated damages will not accrue on
the outstanding notes if we perform our obligations under the notes
exchange and registration rights agreement. If you are a holder of
outstanding notes and you do not tender your outstanding notes in the
exchange offer, you will continue to be entitled to all the rights
and limitations applicable to the outstanding notes in the indenture,
except as noted above.
To the extent that outstanding notes are tendered and accepted in the
exchange offer, the trading market for outstanding notes could be
adversely affected.
3
Consequences of Failure to Exchange....... All untendered outstanding notes will continue to be subject to the
restrictions on transfer provided for in the outstanding notes and in
the indenture. In general, the outstanding notes may not be offered
or sold, unless registered under the Securities Act, except pursuant
to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. Upon
consummation of the exchange offer, holders that were not prohibited
from participating in the exchange offer and did not tender their
outstanding notes will not have any registration rights under the
notes exchange and registration rights agreement with respect to such
nontendered outstanding notes.
U.S. Federal Income Tax Considerations.... The exchange of outstanding notes for exchange notes in the exchange
offer will not be a taxable event for U.S. federal income tax
purposes. See "United States Federal Income Tax Consequences."
Use of Proceeds........................... We will not receive any cash proceeds from the issuance of exchange
notes pursuant to the exchange offer.
Exchange Agent............................ United States Trust Company of New York is the exchange agent for the
exchange offer. The address and telephone number of the exchange
agent are set forth in the section captioned "Exchange Offer-Exchange
Agent" of this prospectus.
SUMMARY OF THE EXCHANGE NOTES
Maturity.................................. July 15, 2009.
Interest Payment Dates.................... January 15 and July 15 of each year, commencing January 15, 2000.
Optional Redemption....................... Except as described below, the issuers may not redeem the notes prior
to July 15, 2004. On and after that date, the issuers may redeem the
notes, in whole or in part, at the redemption prices listed in the
section titled "Description of the Notes--Optional Redemption." In
addition, prior to July 15, 2002, the issuers may redeem up to
approximately $148.8 million of the notes with the net cash proceeds
of one or more qualifying equity offerings at a price equal to
113.750% plus accrued and unpaid interest and liquidated damages, if
any, to the date of redemption.
Change of Control......................... Upon a change of control, the issuers must make an offer to purchase
the exchange notes at a price equal to 101% of the principal amount
of the exchange notes, together with accrued and unpaid interest and
liquidated damages, if any, to the date of purchase.
Ranking................................... The exchange notes are senior obligations of the issuers ranking
equally with any existing and future unsubordinated indebtedness of
the issuers, including indebtedness under the new credit facility.
4
Security.................................. The notes are initially 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 issuers and the
restricted subsidiaries, other than
(a) our CAST-ROLL(Trademark) and Cartersville, Georgia facilities,
(b) inventory,
(c) accounts receivable and
(d) intellectual property and related assets,
and (2) a first priority lien, shared on an equal and ratable basis
with the lenders under our new credit facility, on the equity
interests of Republic Technologies and its restricted subsidiaries.
Collateral is subject to release without substitution under a number
of circumstances. See "Description of Collateral and Intercreditor
Agreements."
Guarantees................................ Holdings and Nimishillen & Tuscarawas, LLC, Bliss & Laughlin, LLC and
Canadian Drawn Steel Company, Inc., which together we refer to as the
"guarantors" in this prospectus, jointly and severally guarantee the
notes on a senior basis. These guarantees are full and unconditional.
Covenants................................. The indenture contains covenants that, subject to exceptions, limit
us and our restricted subsidiaries from:
o paying dividends or making other restricted payments or
investments;
o incurring additional indebtedness and issuing preferred stock;
o creating liens on assets;
o merging, consolidating, or selling all or substantially all of our
assets;
o entering into specified transactions with affiliates; and
o creating restrictions on dividends or other payments by restricted
subsidiaries to the issuers.
Absence of a Public Market for the
Exchange Notes.......................... The exchange notes generally will be freely transferable but will
also be new securities for which there will not initially be a
market. Accordingly, a market for the exchange notes may not develop
or the market may lack significant liquidity. We understand that the
initial purchasers in the private offering of the outstanding notes
intend to make a market in the exchange notes. However, they are not
obligated to do so, and any market making with respect to the
exchange notes may be discontinued without notice.
REPUBLIC TECHNOLOGIES
We are the largest producer of special bar quality steel products in the
United States with a market share of approximately 23%, based on 1998 calendar
year pro forma shipments. SBQ steel products are high quality hot-rolled and
cold-finished carbon and alloy steel bar and rod used primarily in critical
applications in automotive and industrial equipment. SBQ steel products are sold
to customers who require precise metallurgical content and quality
characteristics. SBQ steel products generally contain more alloys, and sell for
substantially higher prices, than merchant and
5
commodity steel bar and rod products. We produce the widest range of SBQ steel
products in the United States and supply a diverse customer base that includes
leading automobile and industrial equipment manufacturers and their first tier
suppliers. We have aggregate annual steel melting capacity of approximately
3.0 million tons, hot-rolling production capacity of approximately 2.6 million
tons and cold-finishing production capacity of approximately 0.6 million tons.
Republic Technologies was created by the Combination of Republic, BarTech
and USS/Kobe on August 13, 1999. In connection with the Combination, we
developed a detailed Consolidation Plan to combine the operations of the three
constituent companies. We believe that the Consolidation Plan will create a more
efficient, higher quality network of production facilities operated by a smaller
and more flexible workforce. The principal components of the Consolidation Plan,
which are described in greater detail under "The Consolidation Plan" in this
prospectus, include
o rationalizing our production facilities and headcount,
o enhancing the productivity of our remaining facilities through facility
specialization and targeted capital investment,
o eliminating redundant overhead costs and
o producing internally more raw materials currently purchased from third
parties.
Our principal offices are located at 3770 Embassy Parkway, Akron, Ohio
44333-8367, and our main telephone number is (330) 670-3000.
THE TRANSACTIONS
The offering of the 13 3/4% Senior Secured Notes due 2009, which we refer
to as the "outstanding notes," by Republic Technologies and its subsidiary RTI
Capital Corp. was made concurrent with the Combination. The outstanding notes
were issued as part of units which also comprised warrants to purchase shares of
class D common stock of RTI, which we refer to as the "warrants".
As a result of the Combination, Republic Technologies International, LLC
directly owns and operates all of the assets of the following:
o Republic, except for two small subsidiaries not directly engaged in the
SBQ steel bar business, which are held by us as subsidiaries;
o BarTech, except for its Bliss & Laughlin Steel Company and its Canadian
Drawn Steel Company subsidiaries, which are held by us as subsidiaries;
and
o The SBQ steel products business of USS/Kobe Steel Company.
Under the terms of our equityholders agreement, the beneficial ownership of
entities affiliated with Blackstone Capital Partners II Merchant Banking Fund
L.P. in RTI is sufficient to entitle it to appoint a majority of the Board of
Directors of RTI, the controlling member of Holdings. See "Security Ownership of
Beneficial Owners and Management."
In conjunction with the Combination, we entered into a new credit facility
and applied a portion of the proceeds from borrowings under this new credit
facility, together with a portion of the proceeds of the offering of the
outstanding notes and warrants, including warrants sold separately from the
notes concurrent with the Combination, and new equity contributions, to
refinance a substantial portion of the indebtedness of Republic, RES Holding
Corporation, BarTech and USS/Kobe. These transactions are referred to
collectively in this prospectus as the "Refinancing." The Combination, the
Refinancing, the September 1998 acquisition of Republic by Blackstone and other
investors and the payment of related fees and expenses are collectively referred
to in this prospectus as the "Transactions."
6
The following chart reflects the material elements of our structure and
outstanding common equity ownership. The percentages included in the chart do
not take into account common stock which may be issued upon the exercise of the
warrants, including warrants sold separately from the notes concurrent with the
Combination, RTI's other warrants originally issued by BarTech or management
stock options that are expected to be granted in the future or the conversion of
the convertible preferred stock of RTI. In addition, under various
circumstances, the equity interests in Republic Technologies held by affiliates
of USX Corporation and Kobe Steel, Ltd. may be exchanged for a corresponding
equity interest, subject to adjustments, in RTI. Upon an exchange in full by the
affiliates of each of USX Corporation and Kobe Steel, Ltd., RTI would hold 100%
of the equity interests of Republic Technologies. See "Relationships and Related
Party Transactions--Equityholders Agreement."
- ---------- ----------------- ----------
Blackstone Veritas and Other
related investors investors
- ---------- ----------------- ----------
| | |
---- | ----
67.0% | | 24.3% | 8.7%
--------------------------------- --------------------- ---------------------
Republic Technologies USX Corporation Kobe Steel, Ltd.
International, Inc. (through subsidiaries) (through subsidiaries)
--------------------------------- --------------------- ---------------------
100.0% | | 31.3% 15.6% | 14.2% |
------------ ---------------- ------------ ------------------
RES Holding | | |
Corporation | | |
------------- | | |
| 39.0% | | |
----------------------- | | |
| | | |
---------------------------------------------
Republic Technologies
International
Holdings, LLC
(guarantor of the notes)
---------------------------------------------
100.0% |
---------------------------------------------
Republic Technologies
International, LLC
(co-issuer of the notes)
---------------------------------------------
| | 100.0%
| ------------------------
| RTI Capital Corp.
| (co-issuer of the notes)
| -------------------------
|
--------------------------------------------------------------------------------------------
100.0% | 100.0%| 100.0%| 100.0%|
- ------------------------ ------------------------ ------------------------ ----------------------
Nimishillen & Bills & Canadian Drawn Oberlin
Tuscarawas, LLC Laughlin, LLC Steel Company, Inc. Insurance
(guarantor of the notes) (guarantor of the notes) (guarantor of the notes) Company
- ------------------------ ------------------------ ------------------------ ----------------------
7
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following table sets forth our Summary Unaudited Pro Forma Financial
Information for the twelve months ended December 31, 1998 and for the nine
months ended September 30, 1999, which was derived from the Unaudited Pro Forma
Combined Financial Information included in this prospectus. The Summary
Unaudited Pro Forma Financial Information has been derived by the application of
pro forma adjustments to the historical financial statements of Republic
Technologies International Holdings, LLC and its predecessors, BarTech, Republic
and USS/Kobe.
The summary unaudited pro forma statement of operations data for the twelve
month period ended December 31, 1998 and for the nine month period ended
September 30, 1999 give pro forma effect to the Transactions as if they occurred
on January 4, 1998 for BarTech and on January 1, 1998 for Republic and USS/Kobe.
The information presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "The Consolidation Plan" and the consolidated financial statements
and notes included elsewhere in this prospectus. The unaudited pro forma
combined financial information set forth below is presented for informational
purposes only and is not necessarily indicative of the results that we would
have achieved had the Transactions been consummated as of the dates indicated,
or that we may achieve in the future. See "Unaudited Pro Forma Combined
Financial Information" for a more detailed presentation of, and information
relating to, the pro forma adjustments.
TWELVE
MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(IN MILLIONS, EXCEPT RATIOS)
PRO FORMA STATEMENT OF OPERATIONS DATA:
Net sales............................................................................ $1,567.5 $ 997.2
Cost of goods sold................................................................... 1,443.5 957.4
--------- ---------
Gross profit......................................................................... 124.0 39.8
Selling, general and administrative expense.......................................... 93.6 63.8
Depreciation and amortization expense................................................ 75.5 57.9
Other postretirement benefits........................................................ 19.9 14.7
Non-cash ESOP charges................................................................ 2.0 --
Workforce reduction charges.......................................................... 18.7 52.6
--------- ---------
Operating loss....................................................................... (85.7) (149.2)
Interest expense, net................................................................ 97.9 73.5
Other (income) loss, net............................................................. (3.3) 0.2
--------- ---------
Net loss from continuing operations.................................................. $ (180.3) $ (222.9)
--------- ---------
--------- ---------
OTHER PRO FORMA DATA:
Cash flows from (used in):
Operating activities............................................................... $ (13.3) $ (87.3)
Investing activities............................................................... (211.6) (52.1)
Financing activities............................................................... 209.7 155.0
EBITDA, as defined (1)............................................................... 80.6 (15.8)
(footnotes on next page)
8
(footnotes from previous page)
- ------------------
(1) "EBITDA, as defined" represents earnings before net interest expense, income
taxes, depreciation and amortization expense, other postretirement benefits
charges, non-cash employee stock ownership plan, or "ESOP" charges,
workforce reduction charges for early retirement benefits, stockholder
management fees and non-recurring transaction costs. "EBITDA, as defined"
should not be considered in isolation or as a substitute for net income,
cash flows from operating activities and other income or cash flow statement
data prepared in accordance with generally accepted accounting principles or
as a measure of profitability or liquidity. "EBITDA, as defined" is included
in this prospectus to provide additional information with respect to our
ability to satisfy our debt service, capital expenditure and working capital
requirements and because certain covenants in our debt instruments are based
on similar measures. While "EBITDA, as defined" is used as a measure of
operations and the ability to meet debt service requirements, it is not
necessarily comparable to other similarly titled captions of other companies
due to differences in methods of calculation. See note (h) in the notes to
Unaudited Pro Forma Combined Statements of Operations for detailed
information concerning the calculation of EBITDA", as defined".
The following table shows the calculation of pro forma EBITDA, as defined
for the twelve months ended December 31, 1998 and the nine months ended
September 30, 1999.
TWELVE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(IN MILLIONS)
Pro forma net loss from continuing operations........... $ (180.3) $ (222.9)
Interest expense, net................................... 97.9 73.5
Depreciation and amortization expense................... 75.5 57.9
Other postretirement benefits........................... 19.9 14.7
Non-cash ESOP charges................................... 2.0 --
Workforce reduction charges............................. 18.7 52.6
Stockholder management fees............................. 3.7 2.1
Non-recurring transaction costs (A)..................... 20.6 6.3
Inventory purchase accounting adjustment(B)............. 22.6 --
--------- --------
EBITDA, as defined...................................... $ 80.6 $ (15.8)
--------- --------
--------- --------
- ------------------
(A) Represents costs incurred related to investment banking and other
advisory fees, one-time labor-related expenses and various other
costs directly associated with the acquisition of Republic in
September 1998.
(B) Represents the fair value adjustment to inventory recorded in
purchase accounting associated with the acquisition of Republic in
September 1998. Upon conforming inventory costing policies with
BarTech following the Combination, the $22.6 million purchase
accounting adjustment resulted in a one-time non-cash charge included
in cost of goods sold for the period from September 8, 1998 to
December 31, 1998 in the combined financial statements of Holdings.
9
RISK FACTORS
Prospective participants in the exchange offer should consider carefully
all of the information contained in this prospectus in connection with the
exchange offer. The risk factors set forth below, with the exception of the
first risk factor, are generally applicable to the outstanding notes as well as
the exchange notes.
FACTORS RELATING TO THE EXCHANGE OFFER
IF YOU CHOOSE NOT TO EXCHANGE YOUR OUTSTANDING NOTES, THE PRESENT TRANSFER
RESTRICTIONS WILL REMAIN IN FORCE AND THE MARKET PRICE OF YOUR OUTSTANDING
NOTES COULD DECLINE.
If you do not exchange your outstanding notes for exchange notes under the
exchange offer, then you will continue to be subject to the transfer
restrictions on the outstanding notes as set forth in the offering memorandum
distributed in connection with the private offering of the outstanding notes. In
general, the outstanding notes may not be offered or sold unless they are
registered or exempt from registration under the Securities Act and applicable
state securities laws. Except as required by the notes exchange and registration
rights agreement, we do not intend to register resales of the outstanding notes
under the Securities Act. You should refer to "Summary--Summary of the Exchange
Offer" and "The Exchange Offer" for information about how to tender your
outstanding notes.
The tender of outstanding notes under the exchange offer will reduce the
principal amount of the outstanding notes outstanding, which may have an adverse
effect upon, and increase the volatility of, the market price of the outstanding
notes due to a reduction in liquidity.
FACTORS RELATING TO REPUBLIC TECHNOLOGIES
WE WILL BE UNABLE TO MEET OUR DEBT SERVICE OBLIGATIONS UNLESS WE
SUBSTANTIALLY IMPROVE OUR OPERATING RESULTS.
We will need to improve our operating results substantially in order to
meet our debt service obligations. After giving pro forma effect to the
Transactions, our interest expense, net, for the twelve months ended
December 31, 1998, would have been $97.9 million. For the twelve months ended
December 31, 1998, and after giving pro forma effect to the Transactions, our
earnings would have been insufficient to cover our fixed charges by
approximately $181.4 million. Furthermore, for the nine months ended
September 30, 1999, and after giving pro forma effect to the Transactions, our
earnings would have been insufficient to cover our fixed charges by
approximately $223.7 million.
As of September 30, 1999, we had approximately $783.3 million of
indebtedness, representing approximately 99% of our total capitalization. We
also may incur additional indebtedness in the future in accordance with the
limitations contained in our debt instruments, including borrowings of up to
$425 million under our new credit facility.
Our ability to pay interest and principal or to refinance our indebtedness,
including the notes, will depend upon our future performance. Our future
performance is subject to the success of our business plan, including our
ability to successfully integrate our operations, general economic conditions
and financial, competitive, regulatory, labor and other factors, many of which
may be unforeseen or beyond our control.
Our high level of long-term debt relative to our total capitalization could
have important consequences to you, including, among others, the following:
o we may be unable to obtain additional financing for working capital,
capital expenditures, debt service requirements and general corporate
purposes;
o a substantial portion of our cash flow from operations will need to be
used to pay principal and interest on our indebtedness, which will reduce
the funds available to us for other purposes, including operations and
future business opportunities;
o we may need to make payments in connection with environmental improvement
revenue bonds related to USS/Kobe facilities earlier than scheduled if
USX Corporation makes early payment on these bonds, and any such early
payment may adversely affect our liquidity;
10
o borrowings under our new credit facility as well as other future
borrowings, may be at variable interest rates of interest, which will
expose us to the risk of increased interest rates; and
o our leverage may make us more vulnerable to economic downturns and may
limit our ability to withstand competitive pressures.
Our performance since the completion of the Combination has been below
expectations due principally to problems arising from the integration of the
three constituent companies comprising Republic Technologies and adverse market
conditions. These problems have had a negative impact on our liquidity
particularly inasmuch as our operating cash flow has been below expectations. To
the extent that these problems continue or worsen, we will need to borrow
additional funds under our new credit facility, reduce production and liquidate
inventory, accelerate planned asset sales and/or defer capital expenditures.
Reductions in capital expenditures may delay the implementation of the
Consolidation Plan or require the plan to be revised. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Holdings."
You should consider that the new credit facility and other sources of
funds may not be available in amounts sufficient for us to pay interest and
principal under the notes and our other indebtedness, or to pay for capital
expenditures, including capital expenditures contemplated by the Consolidation
Plan, and other operating requirements, including expenses related to the
implementation of the Consolidation Plan. Our new credit facility availability
depends upon a borrowing base which can vary under a number of circumstances,
some of which may be in our lender's discretion. See "Description of the New
Credit Facility." If we are unable to generate sufficient cash flow from
operations or to refinance our debts, we may need to obtain additional financing
or sell assets. You should consider that we may be unable to obtain additional
financing or to sell assets, particularly as nearly all of our assets are
pledged. You should also consider that our ability to sell assets may also be
constrained by provisions in our new labor agreement with the United
Steelworkers union.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Business--Agreement
with the United Steelworkers Union."
THE NOTES AND OUR NEW CREDIT FACILITY IMPOSE SIGNIFICANT OPERATING AND
FINANCIAL RESTRICTIONS.
The indenture for the notes, our new credit facility and other agreements
governing our indebtedness contain provisions that limit our ability to:
o pay dividends or make other restricted payments or investments;
o incur additional indebtedness and issue preferred stock;
o create liens on assets;
o merge, consolidate, or sell all or substantially all of our assets;
o enter into specific transactions with affiliates; and
o create restrictions on dividends or other payments by restricted
subsidiaries to the issuers.
In addition, our new credit facility contains restrictive covenants that require
us to maintain financial ratios, including minimum levels of cash flow to total
debt service and maximum annual capital expenditure levels. Our ability to
comply with many of these restrictions may be affected by events beyond our
control. You should consider that we may not achieve operating results that will
permit us to meet these restrictive covenants or may need to take business
actions prohibited by these covenants. If we breach our covenants, (1) we could
be unable to borrow necessary funds under our new credit facility and (2) our
creditors could require immediate payment of amounts due under the agreements
and foreclose upon and sell any assets securing the indebtedness. Although we
are currently in compliance with these covenants, we cannot assure you that we
will continue to remain in compliance in the future. See "Description of the New
Credit Facility," "Description of Other Indebtedness" and "Description of the
Notes."
11
OUR COMPONENT COMPANIES HAVE HISTORIES OF NET LOSSES, AND WE MAY NOT BE
ABLE TO OPERATE PROFITABLY.
Since its formation, Republic has reported net losses for each fiscal year,
in part due to non-cash charges relating to postretirement benefits and its
employee stock ownership plan. Since the start-up of operations at BarTech, it
has incurred net losses for each fiscal year. USS/Kobe has incurred net losses
for the last three fiscal years. For the fiscal year ended June 30, 1999,
Republic reported net losses from continuing operations of $152.8 million, for
the fiscal year ended January 2, 1999, BarTech reported net losses of
$42.0 million, and for the fiscal year ended December 31, 1998, USS/Kobe
reported net losses of $52.9 million. After giving effect to the Transactions on
a pro forma basis, we would have had net losses from continuing operations of
approximately $180.3 million for the twelve months ended December 31, 1998 and
$222.9 for the nine months ended September 30, 1999. Holdings recorded a net
loss of $87.1 million for the period from August 13, 1999 to September 30, 1999
and, on a combined basis, Republic and BarTech recorded a net loss of
$11.7 million for the period from July 1, 1999 to August 12, 1999. On the basis
of preliminary information, we expect to record a significent net loss with
respect to the quarter ended December 31, 1999. See "Unaudited Pro Forma
Combined Financial Information," "Selected Historical Financial and Operating
Information," and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." You should consider that we may not operate
profitably in the future.
WE ARE A NEW ENTERPRISE AND THE FINANCIAL INFORMATION REGARDING OUR
BUSINESSES MAY BE LIMITED OR NOT FULLY COMPARABLE.
The combination of Republic, BarTech and USS/Kobe resulted in a new
vertically integrated enterprise that has not operated before as a single
integrated unit. The financial information concerning the individual operations
of Republic, BarTech and USS/Kobe and the pro forma financial information
concerning us may be of limited value in evaluating our financial and operating
prospects in the future.
BarTech began operations at its facilities in 1996. Due to the start-up of
manufacturing operations at BarTech in 1996, you have a limited history of
financial information with which to evaluate the prospects and future
performance of BarTech's businesses as a component of our company.
Because Republic's specialty steels business is reflected as a discontinued
operation in Republic's fiscal 1996, 1997, 1998 and 1999 historical financial
statements and not in prior period historical financial statements, your ability
to compare all of Republic's historical results is limited. In addition,
Republic's historical financial statements for the period September 8, 1998 to
June 30, 1999 reflect a new basis of accounting due to the acquisition of
Republic by Blackstone and other investors, while the prior periods are
presented using the historical cost basis of Republic.
The historical financial statements for USS/Kobe represent the carve-out
financial statements for the SBQ steel production facilities and related
operations, or Bar Products Line, of USS/Kobe Steel Company and do not
necessarily represent the financial condition or results of operations of
USS/Kobe had it actually been operated as a distinct stand-alone business. The
allocations and estimates of debt, various corporate administrative expenses and
account balances attributable to USS/Kobe made in these carve-out financial
statements do not conform in all cases to the treatment of these items in the
master restructuring agreement pursuant to which the Combination was effected.
IF WE DO NOT ACHIEVE THE OPERATING SYNERGIES AND COST SAVINGS THAT WE
EXPECT FROM THE COMBINATION, WE MAY NOT BE ABLE TO SERVICE OUR DEBT.
Although we expect to realize operating synergies and cost savings as a
result of the Combination, you should consider that we may be unable to achieve
the level of benefits that we expect to realize or that these benefits may not
be realized within the time frames we currently expect. Realization of these
benefits is important for our ability to generate cash flow and service our
debt. The realization of these benefits depends upon our implementation of our
Consolidation Plan which will not be fully implemented before the end of 2003
and which may be revised prior to its
12
completion. See "The Consolidation Plan" for a detailed description of the plan
and our schedule for taking the actions which it contemplates.
There are a large number of factors which may affect our ability to
complete the Consolidation Plan and achieve operating synergies and cost savings
and many of these factors are beyond our control. We could be adversely affected
by the following:
o general economic conditions;
o increased operating costs and unanticipated capital expenditures;
o problems in obtaining funding for capital expenditures;
o the responses of our competitors or customers;
o legal and regulatory developments;
o contracts and permits being terminated to the extent required consents
are not obtained prior to the completion of the Combination;
o integration of our constituent companies; and
o incomplete or delayed implementation of the Consolidation Plan,
particularly the rationalization of our facilities and the timing of our
planned headcount reductions.
We expect that the realization of some benefits of the Consolidation Plan
will depend on our taking specific actions, such as the offer of early
retirement buyout and voluntary severance plan packages, that will result in
one-time charges or expenses. We expect to incur non-recurring cash charges in
the twelve months subsequent to September 30, 1999 of an estimated
$15.9 million, consisting of $6.9 million for salaried separation costs,
$3.8 million for employee retention and hiring costs, $4.7 million for benefits
and systems integration costs and $0.5 million for equipment relocation costs.
We also expect to incur pension curtailment charges of an estimated
$70.9 million in the twelve months subsequent to September 30, 1999 related to
the anticipated level of early retirement buyout and other voluntary severance
packages accepted as part of our hourly workforce reduction plan. Actual future
charges and expenses could be greater than expected or occur during different
periods than expected and reduce cash flow and other economic benefits we expect
from the Combination.
Any delays or disruptions in our facilities rationalization could reduce
cash flow and harm customer relationships.
The steps to be taken to rationalize, reconfigure and/or replace our
facilities are a critical feature of the Consolidation Plan. We currently
anticipate that achieving the financial and operating benefits of the
Consolidation Plan will require approximately $322 million of capital
expenditures related to the completion of the facilities rationalization.
However, delays in construction and start-up, economic and financial conditions,
permit issues, certification delays and other factors not under our control
could result in this program not being completed or require additional time and
funds for completion. In addition, the significant changes in the configuration
of our facilities contemplated by the Consolidation Plan may result in
disruptions to our production, including mechanical and production process
failures. You should consider that disruptions in production could reduce our
cash flow and, particularly if severe, adversely affect our relationships with
customers. We have experienced problems in combining our operations and have
experienced production process failures which have reduced our cash flow and
disrupted certain customer relations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Results of
Operations--Holdings."
WE DID NOT OBTAIN ALL NECESSARY CONSENTS FOR THE TRANSACTIONS AND MAY BE
SUBJECT TO CONTRACT TERMINATIONS OR DAMAGE CLAIMS.
Various contracts of Republic, BarTech and USS/Kobe required consent to the
assignments, transfers and other actions taken in connection with the completion
of the Transactions. Not all of such consents were obtained prior to the
completion of the Transactions, and we cannot assure you that the failure to
obtain these consents prior to such completion will not lead to contract
terminations and/or claims for damages which could result in material costs or
business disruptions.
13
WE MAY BE UNABLE TO SIGNIFICANTLY REDUCE OUR NUMBER OF EMPLOYEES AS
CONTEMPLATED BY THE CONSOLIDATION PLAN, WHICH MAY ADVERSELY AFFECT OUR CASH
FLOW, RESULTS, FINANCIAL CONDITION AND COMPETITIVENESS.
In addition to a facilities rationalization program, the Consolidation Plan
contemplates that we will significantly reduce our workforce. Republic, BarTech
and USS/Kobe adopted a new labor agreement with the United Steelworkers union in
contemplation of the Combination.
The new labor agreement provides for voluntary early retirement buyouts and
a voluntary severance plan, which will be made available to hourly workers at
substantially all of our facilities. We intend to use these programs to reduce
our hourly workforce at these facilities from 5,012 at December 31, 1998 to
3,070 by the end of 2003. We may be unable to achieve the total headcount
reductions contemplated by these programs and through attrition. Job creation
and employment covenants in some of our debt instruments may also limit our
flexibility in terms of effecting headcount reductions. In addition, you should
consider that we may be unable to effect the headcount reductions at the costs
and in the time frames currently envisioned. A failure to accomplish the
workforce reduction, a delay in its implementation or any increases in the costs
of implementation could have a material adverse effect on our cash flow, results
of operations, financial condition and competitiveness.
OUR NEW LABOR AGREEMENT MAY LIMIT THE FLEXIBILITY OF OUR MANAGEMENT.
Our labor arrangements are less flexible than some of our competitors,
particularly our competitors without unionized workforces. Partnership
provisions in the new labor agreement call for the formation of committees
including union representatives to authorize and/or review changes in
technology. These committees could delay or impede the implementation of changes
sought by our management. The new labor agreement also contains an employment
security plan that guarantees employees represented by the United Steelworkers
union with two or more years of service an opportunity to earn 40 hours of pay
per week. This plan will restrict our ability to control the size and shape of
our workforce and to respond to adverse market developments. In addition, the
new labor agreement limits our ability to outsource work and production
functions and obligates us to make specified capital investments.
OUR NEW LABOR AGREEMENT WILL GENERALLY INCREASE THE WAGES WE PAY TO OUR
EMPLOYEES, WHICH MAY ADVERSELY AFFECT OUR RESULTS AND FINANCIAL CONDITION.
Our new labor agreement provides for the new wage scales which are
generally higher under the new labor agreement than the former wage scales. The
amounts of these wage increases are described under "Business--Agreement with
the United Steelworkers Union--Wages." You should consider that the new wage
scales could adversely affect our results and financial condition, particularly
if the workforce reduction is unsuccessful or if economic conditions
deteriorate.
OUR AGREEMENT WITH THE PENSION BENEFIT GUARANTY CORPORATION TO FUND PENSION
OBLIGATIONS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND PREVENT US FROM
FULFILLING OUR OBLIGATIONS UNDER THE NOTES.
We have agreed with the Pension Benefit Guaranty Corporation to fund
$178 million over the next four years into the Republic Engineered Steels, Inc.
USWA Defined Benefit Plan, a defined benefit pension plan for employees
represented by the United Steelworkers union in connection with the headcount
reduction and related early retirement benefits contemplated by the
Consolidation Plan. Of this $178 million, $56.5 million has been funded to date
with an additional $13 million to be funded in March, 2000. After such time we
will be required to make the additional quarterly contributions in accordance
with a specific schedule, which is described under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources." In addition, with respect to the USS/Kobe Union Eligible Pension
Plan, a defined benefit plan for union employees, we have agreed with the
Pension Benefit Guaranty Corporation to maintain a specified level of funding
based on statutory funding requirements. We estimate that approximately $53.6
million of fundings will be required in connection with our agreement with the
Pension Benefit Guaranty Corporation relating to the USS/Kobe Union Eligible
Pension Plan. The funding obligations agreed with the Pension Benefit Guaranty
Corporation with respect to the
14
pension plans may compound the risks arising from our high level of long-term
indebtedness relative to our total capitalization.
BECAUSE A SIGNIFICANT PORTION OF OUR SALES ARE TO THE AUTOMOTIVE INDUSTRY
AND TO TWO SPECIFIC CUSTOMERS, A DISRUPTION OF SALES TO THIS INDUSTRY OR TO
THESE CUSTOMERS COULD REDUCE OUR CASH FLOW AND ADVERSELY AFFECT OUR
RESULTS.
Demand for our products is affected by, among other things, the relative
strength or weakness of the U.S. automotive industry. The U.S. automotive
industry is highly cyclical and may be adversely affected by international
competition. In addition, the U.S. automotive industry is significantly
unionized and subject to work slowdowns and stoppages resulting from labor
disputes. On a pro forma basis, our direct sales of products to the automotive
market accounted for approximately 26% of our total net sales in the twelve
months ended December 31, 1998 and approximately 35% of our total net sales in
the nine months ended September 30, 1999. We also sell to independent forgers,
components suppliers and to steel service centers, all of which sell to the
automotive market as well as other markets. Considering both direct and indirect
sales, we believe that more than 42% of our pro forma total net sales for the
twelve months ended December 31, 1998 and 52% of our pro forma total net sales
for the nine months ended September 30, 1999 were to the U.S. automotive market.
Our two largest customers are American Axle & Manufacturing and Delphi
Automotive Systems. Both of these companies were formerly units of General
Motors and continue to depend on General Motors for a substantial portion of
their business. On a pro forma basis, direct sales of our products to these
customers accounted for approximately 9% of our total net sales in the twelve
months ended December 31, 1998 and approximately 12% of our total net sales in
the nine months ended September 30, 1999. In total, our ten largest customers
accounted for approximately 28% of pro forma total net sales in the twelve
months ended December 31, 1998 and 34% of our pro forma total net sales for the
nine months ended September 30, 1999. A disruption of sales to any of these
customers could adversely affect our cash flow and our results.
IF WE ARE UNABLE TO OBTAIN OR MAINTAIN QUALITY CERTIFICATIONS FOR OUR
FACILITIES, WE MAY LOSE EXISTING CUSTOMERS AND FAIL TO ATTRACT NEW
CUSTOMERS.
In order to continue to serve the higher quality part of the SBQ steel
products market, we will need to maintain existing and obtain additional quality
certifications such as QS-9000, the quality system standard established by The
Chrysler, Ford and General Motors Supplier Quality Requirements Task Force.
Consumers of high quality SBQ steel products often require that their suppliers
have these certifications before commencing new supplier trials.
All of our operating facilities have QS-9000 certifications or have been
approved for QS9000 certification. If our certifications are canceled or
approvals withdrawn, our ability to continue to serve our targeted market
segment or to retain our customers may be impaired. In addition, the
implementation of the Consolidation Plan will require us to obtain new
certifications or qualifications for specified facilities or products as we
reallocate production among our remaining facilities. If the necessary
credentials are not obtained in a timely fashion, our ability to service our
existing customers and to attract new customers will be impaired.
OUR PRODUCTION, SALES AND CASH FLOWS MAY BE ADVERSELY AFFECTED BY SYSTEMS
MALFUNCTIONS ARISING FROM THE YEAR 2000 PROBLEM
Many computer systems, possibly including some of ours, may experience
problems handling dates beyond the year 1999, which is commonly referred to as
the Year 2000 problem. We have replaced or upgraded many of our existing
computer systems in order to make them Year 2000 compliant. These upgrades and
replacements may prove to be inadequate, however, in addressing the Year 2000
problem and while we have not experienced any significant problems with our
computers which are the result of the Year 2000 problem, we cannot assure you
that we will not encounter the Year 2000 problems in the future which could
disrupt production, sales and cash flows. Even if our computer systems perform
properly, our production, sales and cash flows may be disrupted by computer
malfunctions associated with the Year 2000 problem experienced by our suppliers
and customers.
15
WE ARE CONTROLLED BY BLACKSTONE, WHOSE INTERESTS IN OUR BUSINESS MAY BE
DIFFERENT THAN YOURS.
Blackstone controls our affairs in all cases, except for actions specified
in an equityholders agreement among Blackstone, USX Corporation, Kobe Steel,
Ltd., Veritas and their various affiliates, FirstEnergy Services Corp. and other
investors, which also require the consent of both USX Corporation and Kobe
Steel, Ltd. for such actions. You should consider that the interests of
Blackstone, as well as our other owners, may differ from yours. See
"Relationships and Related Party Transactions" and "Security Ownership of
Beneficial Owners and Management."
PROVISIONS OF THE EQUITYHOLDERS AGREEMENT IMPOSE SIGNIFICANT OPERATING AND
FINANCIAL RESTRICTIONS ON OUR BUSINESS.
RTI is subject to the equityholders agreement. Under the equityholders
agreement, specified actions require the approval of the directors designated by
each of USX Corporation and Kobe Steel, Ltd., including:
o the incurrence of indebtedness in excess of a specified amount;
o material contracts between RTI and affiliates of Blackstone or Veritas;
o capital expenditures in excess of those set forth in the capital spending
plan and a specified additional aggregate amount;
o the issuance of equity, subject to exceptions;
o mergers or sales of RTI and its subsidiaries, subject to various
exceptions; and
o specified acquisitions.
You should consider that the parties to the equityholders agreement may not be
able to agree on the implementation of fundamental transactions and that our
ability to repay or refinance the notes may be adversely affected by any of
these disagreements. The USX Corporation and Kobe Steel, Ltd. directors could
block actions even if the other directors deem them advisable.
FACTORS RELATING TO OUR INDUSTRY
BOTH OUR INDUSTRY AND THE INDUSTRIES OF MANY OF OUR SIGNIFICANT CUSTOMERS
ARE SUBJECT TO CYCLICAL DOWNTURNS.
The steel industry is highly cyclical. Many U.S. steel producers suffered
substantial losses in the late 1980s. A number of factors contributed to these
losses, including the following:
o recessionary conditions in the U.S. economy;
o a high level of steel imports;
o the strength of the U.S. dollar against other currencies;
o worldwide production overcapacity;
o increased domestic and international competition;
o high labor costs; and
o inefficient physical plants.
Similar economic conditions in the future could materially reduce our sales
and increase our costs. Many domestic steel producers also suffered losses
during the early 1990s as a result of a downturn in industries upon which the
steel industry is highly dependent, such as the automotive and machinery
industries, which also are highly cyclical. Future downturns in industries that
use our products could have a material adverse effect on sales and margins.
While demand for steel products increased in the mid-1990s enabling
Republic and other domestic steel producers to obtain price increases for many
of their product lines, erosion of these price increases began in the second
quarter of 1998. In addition, the industry was adversely affected by the Asian
economic crisis and problems in other regions, which has resulted in an increase
in imports of SBQ and other steel products. The expected entry of new
competitors in the SBQ steel market may cause prices to erode even in the
absence of adverse general economic conditions. See
16
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
THE INPUTS USED TO PRODUCE STEEL, SUCH AS SCRAP METAL, IRON ORE AND ENERGY,
ARE SUBJECT TO PRICE FLUCTUATIONS THAT COULD INCREASE OUR COSTS OF
PRODUCTION.
In the twelve months ended December 31, 1998, we produced approximately 49%
of our steel from our electric arc furnaces. The principal raw material for
steel produced from our electric arc furnaces is ferrous scrap metal. Scrap
metal prices are affected by cyclical, seasonal and other market factors. Scrap
metal prices also fluctuate on the basis of factors affecting the supply of
scrap metal, such as periodic shortages, freight costs, speculation by scrap
brokers, and export markets, as well as the demand for steel. Most of these
factors are beyond our control. In addition, the supply of premium grades of
scrap metal that we use is more limited than the supply of lower grades of scrap
metal.
For the twelve months ended December 31, 1998, we produced approximately
51% of our steel from our blast furnaces. Iron ore pellets and coke are the
principal raw materials used in our blast furnaces. Prices for iron ore and coke
have fluctuated significantly in the past. Significant increases in the costs of
iron ore pellets or coke could adversely affect our margins.
During periods when prices for scrap metal, iron ore, coke and other
important raw materials have increased, our industry historically has sought to
maintain profit margins and pass along increased raw material costs to customers
by means of surcharges. If we are unable to pass along cost increases in the
future, our margins may be adversely affected. Even when we can successfully
apply surcharges, interim reductions in profit margins frequently occur due to a
time lag between the increase in raw material prices and the market acceptance
of higher selling prices for finished steel products.
Steel manufacturing is also an energy intensive industry. A substantial
increase in specific utility or service costs could have a material adverse
effect on our margins if we are unable to pass along such higher costs to our
customers. In addition, a disruption or curtailment in supply could have a
material adverse effect on our production and sales levels. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Raw
Materials" "Business--Raw Materials for Steel Production" and "--Energy
Requirements for Production."
WE FACE SIGNIFICANT COMPETITION FROM OTHER COMPANIES IN THE STEEL INDUSTRY,
MANY OF WHICH MAY HAVE LOWER COST STRUCTURES THAN US.
We compete in segments of the steel industry that are highly competitive
and that include a number of companies with greater financial and other
resources. In addition, many of our competitors have invested heavily in new
plant and equipment, which have improved their efficiency and increased their
productivity. These improvements together with the achievement of other
production efficiencies, such as man-power utilization and other work rule
changes, provide cost savings to these competitors.
We face increasing competitive pressures from mini-mills, which are
generally smaller volume steel producers serving regional markets. A number of
mini-mills have begun to improve their products in an attempt to penetrate the
SBQ steel market. Since mini-mills typically are not unionized, they frequently
have more flexible work rules which enable such mills to produce with labor
costs per ton shipped lower than ours.
New participants in, or producers expanding into, our product markets could
materially adversely affect the prices and sales volumes of our products. This
competition is exerting significant pressure to lower prices for our products.
Foreign competition also can be significant in segments of the SBQ steel
products market, particularly where certifications are not required and during
periods when the U.S. dollar is strong as compared with foreign currencies. We
may also face competition from other products, particularly in cases where
technological developments permit product substitution.
If our competitors are able to offer steel products at lower costs than us
or the general overall supply of steel products is significantly increased, our
sales and margins will be adversely affected.
17
OUR OPERATIONS ARE SUBJECT TO ENVIRONMENTAL LAWS AND REGULATIONS THAT IN
THE EVENT OF ENVIRONMENTAL CONTAMINATION AT OUR FACILITIES MAY GENERATE
SIGNIFICANT LIABILITY.
Our operations are subject to a broad range of environmental laws and
regulations. The environmental laws and regulations applicable to our operations
generally regulate the following:
o discharges into the air and water;
o the handling and disposal of solid and hazardous wastes;
o the remediation of soil and groundwater contaminated by petroleum
products or hazardous substances or wastes; and
o the health and safety of employees.
As a result of prior transactions in which we acquired real property,
including the consummation of the Combination, we obtained limited indemnities
from the former owners. The indemnifying parties may not meet their obligations
under the indemnification arrangements or damages relating to past or future
contamination may exceed the indemnified amounts or not be covered by these
indemnities. These liabilities may require us to incur significant costs that
could have a material adverse effect on our business, results of operations and
financial condition. In addition, claims under the indemnities under the master
restructuring agreement will generally be settled by adjusting the relative
equity interests of the parties rather than by cash payments. You should
consider that these non-cash indemnities will not provide us with liquidity if
necessary to remediate the related environmental problems or to make other
payments, and will not otherwise make us whole for resulting damages.
You should also consider that future regulatory action regarding soil or
groundwater at our facilities, as well as continued compliance with
environmental requirements, could require us to incur significant costs and
liabilities. In addition, we need to maintain existing and obtain future
environmental permits in order to operate our facilities. Completion of the
Combination required the transfer of some permits and some approvals were not
obtained before the Combination was consummated. The failure to obtain necessary
permits or consents to transfer or the loss of any permits could result in
significant penalties or prevent us from operating our facilities. See
"Business--Environmental Matters."
FACTORS RELATING TO THE NOTES
THE COLLATERAL SECURING THE NOTES MAY NOT BE SUFFICIENT TO COVER THE
INDEBTEDNESS OWED TO YOU UNDER THE NOTES.
The notes and the guarantees are initially secured, subject to exception
and limitations, by liens on substantially all of the existing assets of the
issuers and our restricted subsidiaries, other than our CAST-ROLL(Trademark) and
Cartersville, Georgia facilities, inventory, accounts receivable, intellectual
property and related assets. The notes and the guarantees are also secured by a
pledge, on an equal and ratable basis with our new credit facility obligations,
of all of the equity interests of Republic Technologies and our restricted
subsidiaries. The collateral does not include separable and identifiable
facilities constructed or acquired by us after the private offering of the
outstanding notes and machinery and equipment located at these facilities, other
than the planned new large bar mill scheduled to be completed in 2002, subject
to limitations and exceptions. In addition, the provisions of the indenture
permit the release of collateral without substitution under various
circumstances, including the release of our specialty steel assets held for
disposition and those facilities to be shut down as part of the Consolidation
Plan.
We obtained appraisals of much of our personal property and specified real
property from several nationally recognized appraisal firms. The appraisals were
not prepared for purposes of the private offering of the outstanding notes or
the exchange offer, do not separately appraise the value of the collateral for
the notes and do not take account of the impact of the Consolidation Plan. While
these appraisals are referred to under "Description of Collateral and
Intercreditor Agreements," you are cautioned not to place undue reliance upon
that information. A sale of all or a part of the collateral may not generate
sufficient cash, after payment of all prior claims on such collateral, to repay
all amounts due to you under the indenture and the notes. As of September 30,
1999, the book value of the collateral (other than the stock pledges) was $509.6
million, compared to a total of
18
$442.9 million of debt secured by the collateral, including $17.9 million of
indebtedness with liens junior to those of the notes. The equity interests of
Republic Technologies and its Restricted Subsidiaries are pledged to secure, on
a pari passu basis, the notes and borrowings under the new credit facility,
which notes and borrowings totaled $669.6 million as of September 30, 1999. As
of September 30, 1999, the total member's interest of Republic Technologies
equalled $4.7 million. Furthermore, we cannot assess the impact of the
Consolidation Plan and the collateral release provisions of the indenture on the
appraisal information. See "Description of Collateral and Intercreditor
Agreements."
YOUR CLAIM TO THE COLLATERAL MAY NOT ALWAYS BE FIRST PRIORITY.
In general, the priority of the liens on a particular item of collateral
securing your claims as a holder of notes is determined by, among other things,
the time of perfection of a security interest in such item of collateral. In
addition, creditors such as purchase money lenders may be entitled to a prior
claim to someone, such as the trustee under the indenture and the holders of
notes, who has previously perfected a security interest in an item of
collateral. Furthermore, liens such as landlords', warehousemens' and
materialmens' liens and tax liens may, as a matter of law, have priority over
the liens granted for your benefit in the collateral. The indenture also permits
additional indebtedness to be secured by liens on the collateral and does not
specify a maximum principal amount of indebtedness which may be so secured. The
indenture also excludes from the collateral specific property, acquired after
the issue date for the outstanding notes, to be used at the facilities included
in the collateral. While we may be obliged to grant you a security interest in
our new large bar mill upon its construction or acquisition, the lien may be
subject to a prior permitted lien of up to 65% of the cost of the mill. The
trustee has entered into intercreditor agreements with various of our existing
secured creditors for the purpose, among other things, of establishing the
relative priorities of their claims in various items of the collateral and
establishing their relative rights and remedies in respect of the collateral.
We do not believe there are any material existing prior liens on the
existing collateral securing claims of persons not party to the intercreditor
agreements. You should consider, however, that future additional prior claims
may arise by reason of applicable law and that a bankruptcy or other court may
refuse, on equitable or other grounds, to enforce the terms of the intercreditor
agreements against the other creditors party to such agreements, in which case
the claims of the other creditors against the collateral may be prior to yours.
BECAUSE WE HAVE NUMEROUS SECURED CREDITORS WITH DIFFERENT PRIORITY CLAIMS
TO OUR ASSETS, THE METHOD AND TIMING OF REALIZING COLLATERAL MAY NOT ALWAYS
BE IN YOUR BEST INTEREST.
Many of our other creditors will be secured by some of the assets that
secure the notes. In all instances of our existing property, we granted you a
lien expected to be a first priority lien but, in the case of pledged equity
interests, the lien is shared with the lenders under the new credit facility.
The complexity of the intercreditor arrangements and the shared priority lien on
the equity interests of Republic Technologies and our restricted subsidiaries
may hinder or delay your ability to realize the value of your collateral. In
general, pursuant to the intercreditor agreement relating to assets other than
the pledged equity interests, those secured creditors not entitled to a first
priority claim on an item of collateral will not be able to foreclose upon the
item of collateral without the consent of the noteholders. Under the
intercreditor agreement relating to collateral other than the pledged equity
interests, decisions regarding collateral after foreclosure will, subject to
applicable law, be determined by the noteholders. The intercreditor agreement
relating to the pledged equity interests permits both the new credit facility
lenders and noteholders to initiate a determination to foreclose upon the
pledged equity interests, subject to the following sentence. In the case of the
intercreditor agreement relating to pledged equity interests, decisions will be
made by the class of creditors holding a majority of the aggregate principal
amount of indebtedness and available commitments, unless the majority class of
creditors fails to commence such foreclosure after any secured creditor provides
written notice of its intention to commence such foreclosure within a specified
time frame, in which case the secured creditor delivering the notice will make
all such decisions.
Your interests in our existing assets may diverge from those of holders
entitled to other priority claims. For example, it may be in your best interest
to seek an expeditious sale of the collateral, while it may be in the best
interest of another lienholder to delay the sale. In addition, the lenders
19
under the new credit facility are secured by assets in addition to the shared
pledged equity interests and may make decisions contrary to your interests with
respect to the pledged shares. For noteholders, the most advantageous method of
realizing upon the collateral may be to sell pledged equity interests to avoid
issues attendant to the fixed assets. Depending upon the surrounding
circumstances, however, you may not control a foreclosure upon the pledged
equity interests. Because of the complexities of the intercreditor agreements,
and the shared lien, the only practical means of realizing upon the collateral
on a timely basis may be on a consensual basis with other secured creditors. See
"Description of Collateral and Intercreditor Agreements."
IF WE WERE SUBJECT TO BANKRUPTCY PROCEEDINGS, YOUR RIGHTS TO RECEIVE
PAYMENT ON THE NOTES OR THE GUARANTEES OR RECEIVE PROCEEDS FROM THE
REALIZATION ON THE COLLATERAL MAY BE SIGNIFICANTLY IMPAIRED.
The right of the collateral agent or the trustee under the indenture to
repossess and dispose of any of the collateral may be significantly limited by
applicable bankruptcy laws. Under U.S. federal bankruptcy laws, secured
creditors, such as the collateral agent, the trustee and the holder of notes,
are prohibited from foreclosing upon collateral held by a debtor in a bankruptcy
case, or from disposing of collateral repossessed from such a debtor, without
bankruptcy court approval. Moreover, applicable U.S. federal bankruptcy laws
generally permit a debtor to continue to retain and to use pledged assets,
including cash collateral, even if the debtor is in default under the applicable
debt instruments, provided that the secured creditor is given "adequate
protection." The interpretation of the term "adequate protection" may vary
according to circumstances, but it is generally intended to protect the value of
the secured creditor's interest in collateral.
Because the term "adequate protection" is subject to varying interpretation
and because of the broad discretionary powers of a bankruptcy court, it is
impossible to predict any of the following:
o if payments under the notes or the guarantees would be made following
commencement of and during a bankruptcy case;
o whether or when the collateral agent or the trustee could foreclose upon
or sell any of the collateral; and
o whether or to what extent holders of notes would be compensated for any
delay in payment or loss of value of collateral securing the notes and
the guarantees under the doctrine of "adequate protection."
In addition, if a bankruptcy court determined that the value of the
collateral securing the notes and the guarantees was less than all amounts due
on the notes, the noteholders would become holders of "undersecured claims."
Applicable federal bankruptcy laws do not permit the payment and/or accrual of
interest, cost and attorney's fees for "undersecured claims" during a debtor's
bankruptcy case. See "Description of Collateral and Intercreditor
Agreements--Certain Bankruptcy Limitations."
BANKRUPTCY AND FRAUDULENT TRANSFER LAWS COULD ALLOW A COURT TO LIMIT
PAYMENTS TO HOLDERS OF THE NOTES OR SUBORDINATE THE OBLIGATIONS OF THE
ISSUERS AND GUARANTORS WITH RESPECT TO THE NOTES.
Under U.S. federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, the indebtedness represented by the notes, the
guarantees and/or the liens on collateral may be avoided or the claims on this
indebtedness or liens could be subordinated to our other debt, if
(1) the notes and/or the guarantees were incurred with an intent to
hinder, delay or defraud creditors or
(2) less than a reasonably equivalent value or fair consideration was
received for the incurrence of the indebtedness or pledges and the issuers
and/or the guarantors
(A) were insolvent,
(B) were rendered insolvent as a result of such incurrence,
(C) were engaged in a business or transaction for which its
remaining assets constituted unreasonably small capital to
carry on its business or
20
(D) intended to incur, or believed that it would incur, debts
beyond its ability to pay the debts as they matured.
A legal challenge of the indebtedness represented by the notes, a guarantee or a
lien on fraudulent conveyance grounds could, among other things, focus on the
benefits, if any, realized by the issuers or a guarantor as a result of the
issuance of the notes.
The definition of insolvency in a proceeding where a fraudulent conveyance
is asserted will vary depending on the law applied in the proceeding. Generally,
however, a company is insolvent if
(1) its total debts, including contingent liabilities, are greater
than the fair saleable value of its assets at a fair value or
(2) the present fair saleable value of its assets is less than the
amount that would be required to pay its probable liabilities on
its existing debts, including contingent liabilities, as they
become absolute and mature.
We are not certain, however, what standard a court would apply in making such
determination. Our counsel will not express any opinion as to federal or state
laws relating to fraudulent transfers.
BECAUSE THE COLLATERAL INCLUDES REAL PROPERTY, YOU MAY BE LIABLE UNDER
LIMITED CIRCUMSTANCES FOR ENVIRONMENTAL CLAIMS RELATED TO THE REAL
PROPERTY.
A portion of the collateral securing the notes and the guarantees is
comprised of real property. Real property pledged as security to a lender may be
subject to known and unforeseen environmental risks. Under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, even a lender
who does not foreclose on property may be held liable, in limited circumstances,
for the costs of remediating or preventing releases, or threatened releases, of
hazardous substances at mortgaged property. There may be similar risks under
various state laws and common law theories. Lender liability generally has been
based on the lender having become sufficiently involved in the operations of the
borrower so that its activities are deemed to constitute "participation in the
management." A lender also may under various circumstances be considered to be a
current owner of a property who can be held liable under CERCLA if the lender
takes title to the property by foreclosure. See "Business--Environmental
Matters" and "Description of Collateral and Intercreditor
Agreements--Environmental Law Considerations."
WE MAY NOT HAVE THE ABILITY TO RAISE THE NECESSARY FUNDS TO FINANCE A
CHANGE OF CONTROL OFFER REQUIRED BY THE INDENTURE, AND THE NEW CREDIT
FACILITY MAY PROHIBIT MAKING THE OFFER.
Upon the occurrence of a change of control, you may require the issuers to
offer to purchase your notes at a price equal to 101% of the principal amount of
the notes, together with accrued and unpaid interest and liquidated damages, if
any, to the date of repurchase.
However, our new credit facility prohibits the issuers from purchasing any
notes, except in specified circumstances. Our new credit facility also provides
that specified change of control events with respect to the issuers and the
guarantors constitute a default under the new credit facility. Any future credit
agreements or other agreements relating to indebtedness to which the issuers or
the guarantors become parties may contain similar restrictions and provisions.
In the event a change of control occurs at a time when the issuers are
prohibited under the new credit facility or our other agreements related to
indebtedness from purchasing the notes, the issuers could seek the consent of
the lenders to purchase the notes or could attempt to refinance the borrowings
that contain such prohibition. If the issuers do not obtain a consent or
refinance the borrowings, the issuers would remain prohibited from purchasing
the notes. In this case, the issuers' failure to make the required repurchase
offer or purchase tendered notes would constitute a default under the indenture
and the new credit facility and portions of our other indebtedness, which, in
turn, could result in amounts outstanding under the new credit facility and
other indebtedness being declared due and payable. This declaration could have
adverse consequences to the issuers and to you as a noteholder.
In addition, in the event of a change of control, the issuers may not have
sufficient assets to satisfy all of their obligations under the notes and the
new credit facility and any other indebtedness which may become payable. The
provisions relating to a change of control included in the indenture also may
increase the difficulty of a potential acquiror obtaining control of the
issuers. See
21
"Description of the Notes--Offer to Purchase upon Change of Control" and
"Description of the New Credit Facility."
ORIGINAL ISSUE DISCOUNT RELATING TO THE NOTES MAY PRESENT UNFAVORABLE TAX
AND OTHER LEGAL CONSEQUENCES TO YOU.
The notes will be deemed to have been issued to you with original issue
discount equal to $121.02 per $1,000 principal amount of notes, which is the
difference between the issue price and the principal amount of the notes plus
the estimated value of the warrants originally issued with the notes.
Consequently, for U.S. federal income tax purposes, this original issue discount
will accrue from the issue date of the notes and will be includable in a
holder's gross income as it accrues. Accordingly, holders will recognize
additional income for income tax purposes as the original issue discount
amortizes without receiving a corresponding cash payment with which to pay the
tax associated with the additional income. See "United States Federal Income Tax
Consequences."
If a bankruptcy case under the U.S. Bankruptcy Code were commenced by or
against us after the issuance of the notes, the claim of a holder of notes could
be limited to exclude the amount of unaccrued original issue discount, as of the
relevant date, if the bankruptcy court determined that it was "unmatured
interest."
YOU CANNOT BE SURE THAT AN ACTIVE TRADING MARKET WILL DEVELOP FOR THE
NOTES.
We do not intend to apply for a listing of the notes on a securities
exchange. There is currently no established market for the notes and we cannot
assure you of any of the following:
o the liquidity of any market that may develop for the notes
o the ability of holders of notes to sell their notes
o the price at which holders of notes will be able to sell their notes
Although the initial purchasers of the outstanding notes have advised us
that they intend to make a market for the notes, the initial purchasers are not
obligated to do so, and may discontinue its market making at any time without
notice to the holders of the notes. If a market for the notes does develop,
prevailing interest rates, the markets for similar securities and other factors
could cause the notes to trade at prices lower than their initial market values
or reduce the liquidity of the notes.
22
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in this
prospectus, including statements under "Summary," "Risk Factors," "Unaudited Pro
Forma Combined Financial Information," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and "The
Consolidation Plan" 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:
o our ability to increase sales to existing and new customers, particularly
sales to automotive and industrial equipment manufacturers;
o our ability to implement our Consolidation Plan and to realize the
expected benefits of the Combination in the time frame and at the costs
currently contemplated;
o market conditions and general risks associated with the steel industry;
and
o the other risks discussed in this prospectus under the heading "Risk
Factors."
You should not place undue reliance on the forward-looking statements
contained in this prospectus.
Market data used in this prospectus were obtained from third parties and
internal sources. Although we believe these sources are reliable, we have not
independently verified such market data.
23
USE OF PROCEEDS
The issuers will not receive any cash proceeds from the issuance of the
exchange notes. In consideration for issuing the exchange notes as contemplated
in this prospectus, the issuers will receive in exchange a like principal amount
of outstanding notes. The outstanding notes tendered and accepted in exchange
for the exchange notes will be retired and canceled. Accordingly, issuance of
the exchange notes will not result in any change in the capitalization of the
issuers. See "Summary--The Transactions" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources--Holdings" for a discussion of the use of proceeds from the sale of
the outstanding notes.
CAPITALIZATION
Set forth below is Holdings consolidated cash and cash equivalents and
capitalization as of September 30, 1999. The information set forth below should
be read in conjunction with "Unaudited Pro Forma Combined Financial
Information," "Selected Historical Financial and Operating Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements of Holdings, Republic, BarTech and
USS/Kobe and the related notes and other financial information included
elsewhere in this prospectus.
AS OF
SEPTEMBER 30,
1999
---------------
(IN MILLIONS)
Cash and cash equivalents..................................... $ 3.8
-----------
-----------
Total debt:
Notes(1).................................................... $ 374.0
New credit facility(2)...................................... 300.2
Solid waste revenue bonds of Republic....................... 73.9
USS/Kobe environmental bonds(3)............................. 13.7
Various economic development loans of BarTech............... 21.0
Other note payable.......................................... 0.5
-----------
Total debt.................................................. 783.3
Members' interests............................................ 4.7
-----------
Total capitalization..................................... $ 788.0
-----------
-----------
- ------------------
(1) The notes are shown at less than the face amount of $425.0 million due to
the $5.4 million unamortized discount associated with the initial issue
price of the outstanding notes and $45.6 million of the unamortized
estimated fair value of the warrants issued with the outstanding notes in
the private offering.
(2) The amount that may be borrowed under the $425 million new credit facility
varies based on a borrowing base test that reflects levels of accounts
receivable and inventory and an initial value of $125 million assigned to
the CAST-ROLL(Trademark) facility. See "Description of the New Credit
Facility."
(3) Includes $2.2 million of additional debt assumed.
24
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The accompanying Unaudited Pro Forma Combined Financial Information of
Holdings has been prepared based on the historical financial statements of
Holdings and its predecessors, BarTech, Republic and USS/Kobe included elsewhere
in this prospectus, adjusted to give pro forma effect to the Transactions.
The Unaudited Pro Forma Combined Statements of Operations for the twelve
month period ended December 31, 1998 and for the nine month period ended
September 30, 1999 give pro forma effect to Transactions as if they occurred on
January 4, 1998 for BarTech and on January 1, 1998 for Republic and USS/Kobe.
The Pro Forma Combined Statements of Operations do not include any adjustment
for future cost savings or other operating improvements.
The Unaudited Pro Forma Combined Financial Information is presented for
informational purposes only and does not purport to represent what Holdings'
results of operations would actually have been had the Transactions in fact
occurred on the assumed dates or to project Holdings' results of operations for
any future period.
The pro forma adjustments are based upon available information and various
assumptions that we believe are reasonable. The pro forma adjustments and
various assumptions are described in the accompanying notes. Other information
included in the Unaudited Pro Forma Combined Financial Information has been
presented to provide additional analysis. The acquisitions of Republic and
USS/Kobe have been accounted for using the purchase method of accounting.
Allocation of the purchase price for USS/Kobe has been determined based upon
preliminary information, appraisals that are still in progress and estimates of
fair value, and are subject to change. The amounts included in these pro forma
financial statements and the final allocation may differ significantly.
The combination of Republic and BarTech, the predecessors of Holdings, as
part of the Transactions has been accounted for as a common control merger from
the acquisition date of September 8, 1998 due to their common ownership. The
common control merger of the predecessors has been accounted for using the
pooling of interests method of accounting for the period under common ownership
and presented as Holdings in the Unaudited Pro Forma Combined Statements of
Operations. The results of operations of Holdings prior to September 8, 1998
include the results of operations of BarTech only.
USS/Kobe financial statements have been derived from the carve-out
financial statements of the Bar Products Line of USS/Kobe Steel Company. All
balances reflected in the Unaudited Pro Forma Combined Financial Information
relate to the Bar Products Line only. The financial statements include
allocations and estimates of direct and indirect USS/Kobe Steel Company
corporate administrative expenses as well as account balances attributable to
the Bar Products Line operations. The allocations and estimates of debt, various
corporate administrative expenses and account balances attributable to USS/Kobe
made in the carve-out financial statements does not conform in all cases to the
treatment of these items in the master restructuring agreement pursuant to which
the Combination was effected. The carve-out financial statements of the Tubular
Products Line of USS/Kobe Steel Company have not been included herein because
the net assets and operations of the Tubular Products Line have been retained by
the former owners of USS/Kobe.
The Unaudited Pro Forma Combined Financial Information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the historical financial statements of Holdings,
BarTech, Republic and USS/Kobe, including the related notes, and other financial
information included elsewhere in this prospectus.
25
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 (a)
(IN MILLIONS, EXCEPT RATIOS)
ACQUISITION
AND
COMBINATION REFINANCING
HOLDINGS REPUBLIC USS/KOBE ADJUSTMENTS ADJUSTMENTS PRO FORMA
-------- -------- -------- ----------- ----------- ---------
Net sales............................... $ 472.6 $470.0 $614.4 $ 10.5 (b) $ -- $ 1,567.5
Cost of goods sold...................... 469.7 420.2 576.4 (22.8)(c) -- 1,443.5
-------- ------ ------ ------- ------- ---------
Gross profit.......................... 2.9 49.8 38.0 33.3 -- 124.0
Selling, general and administrative
expense............................... 37.6 38.8 17.2 -- -- 93.6
Depreciation and amortization expense... 16.2 -- 45.9 13.4 (c) -- 75.5
Other postretirement benefits........... 3.1 0.2 16.6 -- -- 19.9
Non-cash ESOP charges................... -- 2.0 -- -- -- 2.0
Workforce reduction charges............. 18.7 -- -- -- -- 18.7
-------- ------ ------ ------- ------- ---------
Operating loss........................ (72.7) 8.8 (41.7) 19.9 -- (85.7)
Interest expense, net................... 43.8 17.9 11.2 -- 25.0 (d) 97.9
Other (income) loss, net................ (2.9) (0.4) -- -- -- (3.3)
Income tax expense (benefit)............ -- 1.3 -- (1.3)(e) -- --
-------- ------ ------ ------- ------- ---------
Net loss from continuing
operations(f)....................... $(113.6) $(10.0) $(52.9) $ 21.2 $ (25.0) $ (180.3)
-------- ------ ------ ------- ------- ---------
-------- ------ ------ ------- ------- ---------
OTHER DATA:
Cash flows from (used in):
Operating activities.................. $ (25.6) $ 8.1 $ 8.0 $ 21.2 $ (25.0) $ (13.3)
Investing activities.................. (175.8) (17.0) (18.8) (211.6)
Financing activities.................. 204.1 (6.5) 12.1 209.7
EBITDA, as defined(g)................... (6.1) 41.5 45.2 80.6
Fixed charges(h) 99.0
Ratio of pro forma earnings to fixed
charges(h)............................ --
See Notes to Unaudited Pro Forma Combined Statements of Operations
26
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (a)
(IN MILLIONS)
ACQUISITION
AND
COMBINATION REFINANCING
HOLDINGS USS/KOBE ADJUSTMENTS ADJUSTMENTS PRO FORMA
-------- -------- ----------- ----------- ---------
Net sales......................................... $ 684.3 $311.3 $ 1.6 (b) $ -- $ 997.2
Cost of goods sold................................ 655.7 306.8 (5.1)(c) -- 957.4
-------- ------ ------- ------- -------
Gross profit.................................... 28.6 4.5 6.7 39.8
Selling, general and
administrative expense.......................... 52.3 11.5 -- -- 63.8
Depreciation and amortization expense............. 34.2 27.4 (3.7)(c) -- 57.9
Other postretirement benefits..................... 6.8 7.9 -- -- 14.7
Workforce reduction charges....................... 52.6 -- -- -- 52.6
-------- ------ ------- ------- -------
Operating loss.................................... (117.3) (42.3) 10.4 -- (149.2)
Interest expense, net............................. 61.0 8.1 -- 4.4 (d) 73.5
Other loss (income), net.......................... (0.2) 0.4 -- -- 0.2
Income tax expense (benefit)...................... 0.6 -- (0.6)(e) -- --
-------- ------ ------- ------- -------
Net loss from continuing operations(f).......... $(178.7) $(50.8) $ 11.0 $ (4.4) $(222.9)
-------- ------ ------- ------- -------
-------- ------ ------- ------- -------
OTHER DATA:
Cash flow from (used in):
Operating activities............................ $(108.9) $ 15.0 $ 11.0 $ (4.4) $ (87.3)
Investing activities............................ (51.7) (0.4) (52.1)
Financing activities............................ 158.2 (3.2) 155.0
EBITDA, as defined(g)............................. (15.8) -- (15.8)
See Notes to Unaudited Pro Forma Combined Statements of Operations
27
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS.
(a) Holdings has adopted a fiscal year ending on December 31. For purposes of
the pro forma presentation, the historical consolidated financial
information of Holdings for the period from August 13, 1999 to
September 30, 1999 has been combined with the combined financial
information of its predecessors, BarTech and Republic, for the periods
under common control to conform to the periods presented. Prior to
September 8, 1998, the financial information of Holdings includes financial
information related to its predecessor, BarTech, only.
Prior to the Combination, the predecessor companies had different fiscal
year ends. In 1998, BarTech utilized a 52-53 week period ending on the
Saturday closest to December 31 as its fiscal year end; its 1998 fiscal
year ended January 2, 1999. In 1999, BarTech adopted a fiscal year ending
December 31. Republic utilized a fiscal year ending June 30; its fiscal
year ended June 30, 1999. For purposes of the pro forma presentation, the
Republic historical financial statement information has been adjusted to
conform to the periods presented. USS/Kobe utilized a fiscal year ending
December 31.
(b) In connection with the Combination, Republic Technologies entered into a
supply agreement with USX Corporation and the new tubular steel joint
venture between USX Corporation and Kobe Steel, Ltd. These agreements
provide for these affiliates to purchase specified quantities from Republic
Technologies at prices that contain an agreed upon margin per ton over
production costs. The adjustment relates to the pro forma effect of the
price increases of certain items, as specified in the agreements on net
sales recognized during the periods presented. See "Relationships and
Related Party Transactions" for a discussion of these arrangements.
(c) Represents the net effect of conforming Republic's accounting
classification of depreciation expense, conforming the fixed asset
capitalization policy of USS/Kobe and applying purchase accounting to
Republic and USS/Kobe, as follows:
TWELVE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(IN MILLIONS)
Conforming accounting policies/classifications:
Classification of depreciation expense (1)
Cost of goods sold......................................... $ (16.5)
Depreciation and amortization expense...................... 16.5
-------
$ --
-------
-------
Fixed asset capitalization (2)
Cost of goods sold......................................... $ (11.8) $ (5.1)
Depreciation and amortization expense...................... 0.4 0.2
------- ------
$ (11.4) $ (4.9)
------- ------
------- ------
Inventory costing (3)
Cost of goods sold......................................... $ 5.5
-------
-------
Depreciation and amortization expense (4)....................... $ (3.5) $ (3.9)
------- ------
------- ------
Total cost of goods sold adjustment............................. $ (22.8) $ (5.1)
------- ------
------- ------
Total depreciation and amortization expense adjustment.......... $ 13.4 $ (3.7)
------- ------
------- ------
(footnotes on next page)
28
(footnotes from previous page)
- ------------------
(1) Represents adjustments required to conform Republic's
classification of depreciation expense to that of BarTech and
USS/Kobe. Republic has historically recorded depreciation expense
as a component of cost of goods sold, with amortization expense
included in general and administrative expenses. Conversely,
BarTech and USS/Kobe have historically recorded all depreciation
and amortization expense as a separate line item on their
statements of operations.
(2) Represents adjustments required to conform USS/Kobe's policy for
capitalizing fixed asset additions to that of BarTech and
Republic. The increase in depreciation and amortization expense
reflects the effect of increasing the fixed assets balance,
depreciated over an estimated average life of fifteen years.
(3) Represents adjustment required to conform Republic's inventory
costing policy to that of BarTech for the period prior to the
acquisition of Republic. Republic had historically recorded its
inventory and cost of goods sold using the last-in, first-out
(LIFO) method, whereas BarTech had historically recorded its
inventory and cost of goods sold using the first-in, first-out
(FIFO) method.
(4) The combination of USS/Kobe into Republic Technologies and the
Republic acquisition were accounted for as purchases. Under
purchase accounting, the total purchase cost is allocated to the
assets acquired and liabilities assumed based on their respective
fair values as of September 8, 1998 for Republic and as of
August 13, 1999 for USS/Kobe, which is based on valuations and
other studies that are not yet finalized. For the combination of
USS/Kobe into Republic Technologies, a preliminary allocation of
the purchase cost has been made to reduce property, plant and
equipment for the entire amount that the historical net equity of
USS/Kobe exceeds the estimated purchase price. The actual
allocation of purchase cost and the resulting effect on income
from operations for USS/Kobe may differ significantly from the
estimated pro forma amounts included in this prospectus. The
application of purchase accounting is expected to result in a net
decrease in depreciation and amortization expense, as follows:
TWELVE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(IN MILLIONS)
Republic: (A)
Property, plant & equipment depreciation.............. $ 0.7
Goodwill/intangible assets amortization............... 2.5
-----
Net adjustment...................................... 3.2
USS/Kobe: (B)
Property, plant & equipment depreciation.............. (6.7) $ (3.9)
----- ------
Net adjustment...................................... $(3.5) $ (3.9)
----- ------
----- ------
- ------------------
(A) Represents adjustment for the period from January 1,
1998 to September 7, 1998 as if the Republic
acquisition occurred at the beginning of the period.
(B) Represents adjustments for both periods presented as if
the Combination occurred at the beginning of the
period.
The adjustments for estimated pro forma depreciation and amortization
expense are based on the estimated fair value of the acquired assets. For
pro forma purposes, a forty year life has
29
been used for goodwill, a twenty year weighted-average life has been used
for intangible assets and a fifteen year weighted-average life has been used
for property, plant and equipment.
(d) Represents the net adjustment to interest expense as a result of the
borrowings under the new credit facility and the notes, calculated as
follows:
TWELVE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(IN MILLIONS)
New credit facility (1)........................................... $23.9 $ 17.9
Commitment fee (2)................................................ 0.9 0.7
Notes (3)......................................................... 58.4 43.8
Retained indebtedness (4)......................................... 8.2 6.2
----- ------
Cash interest expense........................................... 91.4 68.6
Amortization of deferred financing costs (5)...................... 4.0 3.0
Accretion of issue price discount (6)............................. 0.3 0.2
Accretion of discount relating to warrants issued with the
outstanding notes (7)........................................... 2.2 1.7
----- ------
Pro forma interest expense...................................... 97.9 73.5
Less: historical interest expense, net............................ 72.9 69.1
----- ------
Net interest expense adjustment................................. $25.0 $ 4.4
----- ------
----- ------
- ------------------
(1) Represents interest on $244.6 million which was drawn at closing of
the Combination using an assumed interest rate of 9.75%.
(2) Represents a commitment fee of 0.5% applied to the $180.4 million pro
forma unused balance of the new credit facility.
(3) Represents interest on the $425.0 million of notes at the stated
interest rate of 13.75%.
(4) Represents interest on the outstanding debt which was not be repaid at
the closing of the Combination, plus interest on additional USS/Kobe
debt assumed.
(5) Deferred financing costs are amortized over the term of the related
debt, five years for the new credit facility and ten years for the
notes.
(6) The issue price discount is accreted using the effective interest
method over the term of the related debt, ten years for the notes.
(7) The discount representing the estimated fair value of the warrants is
accreted using the effective interest method over the term of the
related debt, ten years for the notes.
A change of 0.125% in the interest rate would have the following effect on
pro forma interest expense:
TWELVE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(IN MILLIONS)
New credit facility............................................... $ 0.3 $0.2
----- ----
----- ----
(e) As a limited liability company, Holdings is not subject to corporate income
taxes. To the extent required, Holdings and Republic Technologies expect to
distribute cash to their respective members, who will pay income taxes.
(f) The call and tender offer premiums and prepayment penalties associated with
the retirement of the BarTech senior secured notes and Republic first
mortgage notes, respectively, will result in a charge to be reflected as an
extraordinary loss of $23.3 million. Costs associated with the
extinguishment of debt are not included in the Pro Forma Combined
Statements of Operations.
(g) "EBITDA, as defined" represents earnings before net interest expense,
income taxes, depreciation and amortization expense, other postretirement
benefit charges, non-cash employee stock ownership plan or "ESOP" charges,
workforce reduction charges for early retirement benefits, stockholder
management fees and non-recurring transaction costs. "EBITDA, as defined"
should not be considered in isolation or as a substitute for net income,
cash flows from operating activities and other income or cash flow
statement data prepared in
30
accordance with generally accepted accounting principles or as a measure of
profitability or liquidity. "EBITDA, as defined" is included in this
prospectus to provide additional information with respect to our ability to
satisfy our debt service, capital expenditure and working capital
requirements and because certain covenants in our debt instruments are
based on similar measures. While "EBITDA, as defined" is used as a measure
of operations and the ability to meet debt service requirements, it is not
necessarily comparable to other similarly titled captions of other
companies due to differences in methods of calculation. The calculation of
"EBITDA, as defined," is shown below:
TWELVE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(IN MILLIONS)
Pro forma net loss from continuing operations................. $(180.3) $ (222.9)
Interest expense, net..................................... 97.9 73.5
Depreciation and amortization expense..................... 75.5 57.9
Other postretirement benefit charges...................... 19.9 14.7
Non-cash ESOP charges..................................... 2.0 --
Workforce reduction charges............................... 18.7 52.6
Stockholder management fees............................... 3.7 2.1
Non-recurring transaction costs(1)........................ 20.6 6.3
Inventory purchase accounting adjustment(2)............... 22.6 --
------- --------
EBITDA, as defined............................................ $ 80.6 $ (15.8)
------- --------
------- --------
- ------------------
(1) Represents costs incurred related to investment banking and other
advisory fees, one-time labor-related expenses and various other
costs directly associated with the acquisition of Republic in
September 1998.
(2) Represents the fair value adjustment to inventory recorded in
purchase accounting associated with the acquisition of Republic
in September 1998. Upon conforming inventory costing policies
with BarTech following the Combination, the $22.6 million purchase
accounting adjustment resulted in a one-time non-cash charge
included in cost of goods sold for the period from September
8, 1998 to December 31, 1998 in the combined financial statements
of Holdings.
The calculation of "EBITDA, as defined" for each of Holdings, Republic
and USS/Kobe excluding pro forma refinancing adjustments for the twelve
months ended December 31, 1998 and for the nine months ended September 30,
1999 is as follows:
FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1998
--------------------------------
HOLDINGS REPUBLIC USS/KOBE
-------- -------- --------
(IN MILLIONS)
Net loss from continuing operations................................... $(113.6) $ (10.0) $(52.9)
Pro forma adjustments(1).............................................. -- (7.4) 28.6
-------- -------- ------
Pro forma net loss from continuing operations......................... (113.6) (17.4) (24.3)
Interest expense, net............................................... 43.8 17.9 11.2
Depreciation and amortization expense(2)............................ 16.2 19.7 39.6
Other postretirement benefits charges............................... 3.1 0.2 16.6
Non-cash ESOP charges............................................... -- 2.0 --
Workforce reduction charges......................................... 18.7 -- --
Stockholder management fees......................................... 0.9 0.7 2.1
Non-recurring transaction costs..................................... 2.2 18.4 --
Inventory purchase accounting adjustment(3)......................... 22.6 -- --
-------- -------- ------
EBITDA, as defined.................................................... $ (6.1) $ 41.5 $ 45.2
-------- -------- ------
-------- -------- ------
31
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, 1999
-----------------------------------------------
HOLDINGS USS/KOBE
--------------------- ----------------------
(IN MILLIONS)
Net loss from continuing operations............................................ $(178.7) $(50.8)
Pro forma adjustments(1)....................................................... 0.6 10.4
------- ------
Pro forma net loss from continuing operations.................................. (178.1) (40.4)
Interest expense, net........................................................ 61.0 8.1
Depreciation and amortization expenses....................................... 34.2 23.7
Other postretirement benefits charges........................................ 6.8 7.9
Workforce reduction charges.................................................. 52.6 --
Stockholder management fees.................................................. 1.4 0.7
Non-recurring transition costs............................................... 6.3 --
------- ------
EBITDA, as defined............................................................. $ (15.8) $ 0.0
------- ------
------- ------
- ------------------
(1) Represents Republic acquisition and Combination pro forma
adjustments.
(2) Amount includes the allocation of Republic acquisition and
Combination pro forma adjustments to BarTech, Republic and
USS/Kobe.
(3) Represents the fair value adjustment to inventory recorded
in purchase accounting associated with the acquisition of Republic
in September 1998. Upon confirming inventory costing policies with
BarTech following the Combination, the $22.6 million purchase
accounting adjustment resulted in a one-time non-cash charge
included in cost of goods sold for the period from September 8,
1998 to December 31, 1998 in the combined financial statements of
Holdings.
(h) For purposes of determining the pro forma ratio of earnings to fixed
charges, "earnings" are defined as net loss from continuing operations plus
fixed charges. "Fixed charges" include interest expense on all
indebtedness, amortization of deferred financing costs, accretion of the
issue price discount and one-third of rental expense, representing that
portion of rental expense which we deem attributable to interest. The pro
forma deficiency of earnings to cover fixed charges is $181.4 million for
the twelve months ended December 31, 1998 and $223.7 million for the nine
months ended September 30, 1999.
32
SELECTED HISTORICAL FINANCIAL AND OPERATING INFORMATION
HOLDINGS
The following table presents selected historical financial and operating
information of Holdings for the period from August 13, 1999 to September 30,
1999. The selected historical financial and operating information for the period
from August 13, 1999 to September 30, 1999 was derived from the unaudited
financial statements, which, in the opinion of management, include all normal
and recurring adjustments necessary for a fair presentation of such information.
The results for the period are not necessarily indicative of results to be
expected for the remainder of the year. Holdings' fiscal year ends December 31.
The selected financial and operational information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", the "Unaudited Pro Forma Combined Financial
Information" and Holdings' consolidated financial statements and the related
notes included elsewhere in this prospectus.
PERIOD FROM
AUGUST 13, 1999
TO
SEPTEMBER 30,
1999
----------------
STATEMENT OF OPERATIONS DATA:
Net sales...................................................................................... $ 209.8
Cost of product sold........................................................................... 209.0
--------
Gross profit................................................................................... 0.8
Selling, general and administrative expenses................................................... 20.9
Depreciation and amortization.................................................................. 13.4
Net interest expense........................................................................... 17.2
Other charges (credits), net................................................................... 12.9
Income tax expense............................................................................. 0.2
Extraordinary loss on extinguishment of debt................................................... 23.3
--------
Net loss....................................................................................... $ (87.1)
--------
--------
BALANCE SHEET DATA:
Working capital(1)............................................................................. $ (196.6)
Property, plant and equipment, net............................................................. 687.4
Total assets................................................................................... 1,380.2
Total debt..................................................................................... 783.3
Members' interest.............................................................................. 4.7
OPERATING STATISTICS:
Net tons shipped (in thousands)................................................................ $ 426.7
Average selling price per net ton shipped...................................................... 492
OTHER DATA:
Cash flows from (used in):
Operating activities......................................................................... $ (84.8)
Investing activities......................................................................... (16.6)
Financing activities......................................................................... 97.9
EBITDA, as defined(2).......................................................................... (19.7)
Capital expenditures........................................................................... (16.6)
Maintenance and repairs expense................................................................ 13.2
Ratio of earnings to fixed charges(3).......................................................... --
(Footnotes on next page)
33
(Footnotes from previous page)
- ------------------
(1) "Working capital" represents net current assets less net current
liabilities.
(2) "EBITDA, as defined" represents earnings before net interest expense, income
taxes, depreciation and amortization expense, other postretirement benefits
charges, stockholder management fees and non-recurring transaction costs.
"EBITDA, as defined" should not be considered in isolation or as a
substitute for net income, cash flows from operating activities and other
income or cash flow statement data prepared in accordance with generally
accepted accounting principles or as a measure of profitability or
liquidity. "EBITDA, as defined" is included in this prospectus to provide
additional information with respect to our ability to satisfy our debt
service, capital expenditure and working capital requirements and because
certain covenants in our debt instruments are based on similar measures.
While "EBITDA, as defined" is used as a measure of operations and the
ability to meet debt service requirements, it is not necessarily comparable
to other similarily titled captions of other companies due to differences in
methods of calculation.
(3) For the purposes of determining the ratio of earnings to fixed charges,
"earnings" are defined as loss before income taxes and extraordinary loss
plus fixed charges. "Fixed charges" consist of interest expense on all
indebtedness, amortization of deferred financing costs and one-third of
rental expense, representing that portion of rental expense which we deem
attributable to interest. Earnings were insufficient to cover fixed charges
for the period from August 13, 1999 to September 30, 1999 by $63.8 million.
34
REPUBLIC
The following table presents selected historical financial and operating
information of Republic for each of the four fiscal years ended June 30, 1995,
1996, 1997 and 1998 and the periods July 1, 1998 to September 7, 1998 and
September 8, 1998 to June 30, 1999. The selected historical financial
information as of and for the years ended June 30, 1996, 1997 and 1998 were
derived from the financial statements audited by KPMG LLP, independent auditors.
The selected historical financial information as of June 30, 1999 and for the
periods July 1, 1998 to September 7, 1998 and September 8, 1998 to June 30, 1999
were derived from the financial statements audited by Deloitte & Touche LLP,
independent auditors.
The accompanying selected historical financial and operational information
from September 8, 1998 to June 30, 1999 and as of June 30, 1999, reflect the new
basis of accounting of the acquisition of Republic. Periods prior to
September 8, 1998 (Predecessor Company) have been presented under the historical
cost basis of Republic.
The accompanying selected historical financial information for the years
ended June 30, 1996, 1997 and 1998 and for the periods July 1, 1998 to
September 7, 1998 and September 8, 1998 to June 30, 1999 reflect Republic's
specialty steel business as a discontinued operation. Due to the unavailability
of the applicable information, the historical financial information for the year
ended June 30, 1995 has not been restated to reflect specialty steels as a
discontinued operation and, accordingly, is not comparable to the information
presented for subsequent periods.
The selected financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the "Unaudited Pro Forma Combined Financial Information" and
Republic's consolidated financial statements and the related notes included
elsewhere in this prospectus.
35
PREDECESSOR COMPANY
--------------------------------------------------------
PERIOD FROM PERIOD FROM
FISCAL YEAR ENDED JUNE 30, JULY 1, 1998 TO SEPTEMBER 8,
------------------------------------- SEPTEMBER 7, 1998 TO JUNE 30,
1995(1) 1996 1997 1998 1998 1999
------- ------ ------ ------ --------------- -----------------
(IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Net sales........................................ $ 798.8 $604.1 $627.9 $689.9 $ 103.0 $ 518.9
Cost of product sold............................. 698.9 558.5 576.7 612.5 97.9 497.2
------- ------ ------ ------ ------- -------
Gross profit..................................... 99.9 45.6 51.2 77.4 5.1 21.7
Selling, general and administrative expenses..... 43.6 41.2 38.7 40.5 18.2 45.7
Special charges (credits)........................ -- 3.9 1.6 (1.1) -- --
Other postretirement benefits charges............ 14.6 12.7 15.6 5.0 2.1 5.8
Non-cash ESOP charges............................ 33.4 29.9 28.2 15.6 -- --
Workforce reduction charges...................... -- -- -- -- -- 60.7
Net interest expense............................. 14.2 18.9 28.3 26.9 4.4 43.2
Other (credits) charges, net..................... 1.3 (0.6) (0.7) (0.4) (0.2) (0.6)
Income tax benefit............................... (2.4) (24.0) (24.0) (2.6) -- --
------- ------ ------ ------ ------- -------
Net loss from continuing
operations before extraordinary
item.......................................... (4.8) (36.4) (36.5) (6.5) (19.4) (133.1)
Income (loss) from discontinued operations(1).... -- 3.0 2.2 5.6 (0.3) --
------- ------ ------ ------ ------- -------
Net loss......................................... $ (4.8) $(33.4) $(34.3) $ (0.9) $ (19.7) $(133.1)
------- ------ ------ ------ ------- -------
------- ------ ------ ------ ------- -------
PREDECESSOR COMPANY
-----------------------------------------
FISCAL YEAR ENDED JUNE 30,
----------------------------------------- JUNE 30,
1995 1996 1997 1998 1999
-------- ------ -------- ------- ---------------
(IN MILLIONS, EXCEPT NET TONS SHIPPED,
AVERAGE SELLING PRICE PER NET TON SHIPPED AND RATIO)
BALANCE SHEET DATA:
Working capital(2)........................... $ 142.3 $137.7 $ 136.7 $ 155.1 $ 103.0
Property, plant and equipment, net........... 309.6 314.1 299.9 290.7 296.2
Total assets................................. 610.8 639.4 632.9 637.0 794.3
Total debt................................... 243.3 281.0 273.9 274.1 440.2
Stockholders' equity (deficit)............... 88.1 89.0 85.3 101.5 (37.6)
PREDECESSOR
COMPANY
---------------
PERIOD FROM PERIOD FROM
JULY 1, 1998 TO SEPTEMBER 8,
SEPTEMBER 7, 1998 TO JUNE 30,
1998 1999
--------------- -----------------
OPERATING STATISTICS:
Net tons shipped (in thousands).............. 1,041.6 836.4 957.6 1,045.9 154.8 846.8
Average selling price per net ton shipped.... $ 773 $ 722 $ 655 $ 659 $ 665 $ 613
OTHER DATA:
Cash flows from (used in):
Operating activities....................... $ 57.8 $ 6.3 $ 20.4 $ 32.0 $ (12.2) $ (76.8)
Investing activities....................... (154.6) (45.1) (9.7) (16.3) (6.1) (173.7)
Financing activities....................... 39.1 36.3 (6.4) 0.6 (0.3) 252.9
EBITDA, as defined(3)........................ 71.8 22.1 39.9 67.0 (8.3) 7.3
Capital expenditures......................... 154.5 44.6 7.8 15.8 6.1 18.0
Maintenance and repairs expense.............. 75.2 65.1 63.8 65.9 12.0 64.0
Depreciation and amortization................ 17.1 21.0 28.0 27.4 4.6 29.6
Ratio of earnings to fixed charges(4)........ -- -- -- -- -- --
(footnotes on next page)
36
(footnotes from previous page)
(1) The income (loss) from discontinued operations represents the results of the
specialty steels division, which has been considered a discontinued
operation since the acquisition of Republic. All revenues and expenses
related to the specialty steels division since the acquisition of Republic
have been reported as adjustments to the purchase price. The financial
statements of Republic have been restated for the years ended June 30, 1996,
1997 and 1998 and for the period July 1, 1998 to September 7, 1998. The
financial statements of Republic for the year ended June 30, 1995 has not
been restated and accordingly, is not comparable to the information
presented for subsequent periods.
(2) Working capital is defined as current assets less current liabilities.
(3) "EBITDA, as defined" represents earnings before net interest expense, income
taxes, depreciation and amortization expense, other postretirement benefits
charges, non-cash employee stock ownership plan expense, workforce reduction
charges, stockholder management fees and non-recurring transaction costs.
"EBITDA, as defined" should not be considered in isolation or as a
substitute for net income, cash flows from operating activities and other
income or cash flow statement data prepared in accordance with generally
accepted accounting principles or as a measure of profitability or
liquidity. "EBITDA, as defined" is included in this prospectus to provide
additional information with respect to our ability to satisfy our debt
service, capital expenditure and working capital requirements and because
certain covenants in our debt instruments are based on similar measures.
While "EBITDA, as defined" is used as a measure of operations and the
ability to meet debt service requirements, it is not necessarily comparable
to other similarly titled captions of other companies due to differences in
methods of calculation.
(4) For purposes of determining the ratio of earnings to fixed charges,
"earnings" are defined as loss from continuing operations before income
taxes plus fixed charges. "Fixed charges" consist of interest expense on all
indebtedness, amortization of deferred financing costs and one-third of
rental expense, representing that portion of rental expense which we deem
attributable to interest. Earnings were insufficient to cover fixed charges
in the twelve months ended June 30, 1995, 1996, 1997 and 1998 and the period
from July 1, 1998 to September 7, 1998 and the period from September 8, 1998
to June 30, 1999 by $15.8 million, $68.9 million, $60.5 million,
$9.1 million, $19.7 million and $133.1 million.
37
BARTECH
The following table presents selected historical financial and operating
information of BarTech for each of the fiscal years ended September 30, 1995 and
1996, the three months ended December 28, 1996, the fiscal years ended January
3, 1998 and January 2, 1999 and the six month periods ended July 4, 1998 and
June 30, 1999. The selected historical financial information as of and for the
fiscal years ended September 30, 1995 and 1996, the three months ended
December 28, 1996 and the fiscal year ended January 3, 1998 were derived from
the financial statements audited by Arthur Andersen LLP, independent auditors.
The selected historical financial information as of and for the fiscal year
ended January 2, 1999 were derived from the financial statements audited by
Deloitte & Touche LLP, independent auditors. The selected historical financial
and operational information for the six month periods ended July 4, 1998 and
June 30, 1999 were derived from the unaudited financial statements, which, in
the opinion of management, include all normal and recurring adjustments
necessary for a fair presentation of such information. The results for the six
months ended June 30, 1999 are not necessarily indicative of results to be
expected for the full year.
Effective February 1997, BarTech changed its fiscal year from a calendar
quarter basis ended September 30 to a 4/4/5 week fiscal quarter basis ending on
the Saturday closest to December 31. Accordingly, the three month transition
period ended December 28, 1996 is presented to bridge the gap between BarTech's
old and new fiscal year ends. In 1999, BarTech adopted a fiscal year ending
December 31, 1999; its 1999 second fiscal quarter ended June 30, 1999.
The selected financial and operational information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", the "Unaudited Pro Forma Combined Financial
Information" and BarTech's consolidated financial statements and the related
notes included elsewhere in this prospectus.
FISCAL YEAR
ENDED THREE MONTHS FISCAL YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, ENDED ----------------------- ------------------
--------------- DECEMBER 28, JANUARY 3, JANUARY 2, JULY 4, JUNE 30,
1995 1996 1996 1998 1999 1998 1999
------ ------ ------------- ---------- ---------- ------- --------
(IN MILLIONS, EXCEPT NET TONS SHIPPED AND AVERAGE SELLING PRICE
PER NET TON SHIPPED AND RATIO)
STATEMENT OF OPERATIONS DATA:
Net sales...................................... $ -- $ 77.1 $ 40.2 $242.9 $271.9 $ 161.6 $136.4
Cost of product sold........................... -- 92.0 43.4 239.4 262.5 151.0 131.8
------ ------ ------- ------ ------ ------- ------
Gross profit................................... -- (14.9) (3.2) 3.5 9.4 10.6 4.6
Selling, general and administrative
expenses..................................... 10.3 14.6 4.3 21.7 21.1 9.9 6.4
Depreciation and amortization.................. 0.4 2.0 1.2 4.5 6.0 2.9 2.9
Net interest expense........................... 2.6 10.8 5.1 23.3 27.0 13.2 12.6
Other charges (credits), net................... (0.5) (1.1) (0.3) (1.4) (2.7) (0.3) 0.5
Income tax expense............................. -- 0.2 -- 0.2 -- 0.1 0.4
Extraordinary loss on extinguishment of
debt......................................... -- 2.2 -- -- -- -- --
------ ------ ------- ------ ------ ------- ------
Net loss....................................... $(12.8) $(43.6) $ (13.5) $(44.8) $(42.0) $ (15.2) $(18.2)
------ ------ ------- ------ ------ ------- ------
------ ------ ------- ------ ------ ------- ------
BALANCE SHEET DATA:
Working capital(1)............................. $ (1.1) $ 13.7 $ 7.8 $ (9.9) $(61.5) $ (29.9) $(78.4)
Property, plant and equipment, net............. 37.9 78.9 77.9 79.6 90.1 85.4 92.2
Total assets................................... 46.0 201.0 206.3 205.7 222.5 222.9 237.4
Total debt..................................... 46.7 161.8 174.6 187.4 211.8 212.4 201.1
Stockholders' deficit.......................... (9.6) (18.5) (32.2) (48.4) (91.4) (64.0) (109.4)
OPERATING STATISTICS:
Net tons shipped (in thousands)................ -- 114.6 66.6 450.1 527.0 319.0 279.3
Average selling price per net ton shipped...... -- $ 673 $ 604 $ 540 $ 516 $ 507 $ 488
OTHER DATA:
Cash flows from (used in):
Operating activities......................... $(11.5) $(32.3) $ (17.0) $(50.9) $ (7.2) $ (13.9) $ 17.0
Investing activities......................... (6.5) (62.3) (0.2) (5.8) (16.3) (8.6) (4.7)
Financing activities......................... 10.5 98.5 18.6 53.4 22.6 24.1 (11.5)
EBITDA, as defined(2).......................... (9.8) (30.6) (7.2) (16.8) (5.2) 1.5 (1.7)
Capital expenditures........................... 9.2 21.3 0.2 5.8 16.3 8.6 4.7
Maintenance and repairs expense ............... 0.4 4.6 2.1 8.8 12.0 6.4 5.2
Ratio of earnings to fixed
charges(3)................................... -- -- -- -- -- -- --
(Footnotes on next page)
38
(Footnotes from previous page)
- ------------------
(1) "Working capital" represents net current assets less net current
liabilities.
(2) "EBITDA, as defined" represents earnings before net interest expense, income
taxes, depreciation and amortization expense, other postretirement benefits
charges, stockholder management fees and non-recurring transaction costs.
"EBITDA, as defined" should not be considered in isolation or as a
substitute for net income, cash flows from operating activities and other
income or cash flow statement data prepared in accordance with generally
accepted accounting principles or as a measure of profitability or
liquidity. "EBITDA, as defined" is included in this prospectus to provide
additional information with respect to our ability to satisfy our debt
service, capital expenditure and working capital requirements and because
certain covenants in our debt instruments are based on similar measures.
While "EBITDA, as defined" is used as a measure of operations and the
ability to meet debt service requirements, it is not necessarily comparable
to other similarly titled captions of other companies due to differences in
methods of calculation.
(3) For purposes of determining the ratio of earnings to fixed charges,
"earnings" are defined as loss before income taxes and extraordinary loss
plus fixed charges. "Fixed charges" consist of interest expense on all
indebtedness, amortization of deferred financing costs and one-third of
rental expense, representing that portion of rental expense which we deem
attributable to interest. Earnings were insufficient to cover fixed charges
in the twelve months ended September 30, 1995 and 1996 by $12.8 million and
$41.2 million; in the three months ended December 28, 1996 by
$13.5 million; in the twelve months ended January 3, 1998 and January 2,
1999 by $44.6 million and $42.0 million; and in the six months ended
July 4, 1998 and June 30, 1999 by $15.1 million and $17.8 million.
39
USS/KOBE
The following table presents selected historical financial and operating
information of USS/Kobe for each of the five fiscal years ended December 31,
1994, 1995, 1996, 1997 and 1998 and for the six months ended June 30, 1998 and
1999. The selected historical financial and operating information as of
December 31, 1997 and 1998 and for the years ended December 31, 1996, 1997 and
1998 were derived from the financial statements audited by Ernst & Young LLP,
independent auditors. The selected historical financial information as of
December 31, 1994, 1995 and 1996 and for the years ended December 31, 1994 and
1995 and the six months ended June 30, 1998 and 1999 were derived from the
unaudited financial statements, which, in the opinion of management, include all
normal and recurring adjustments necessary for a fair presentation of such
information. Results for the six months ended June 30, 1999 are not necessarily
indicative of results to be expected for the full year.
The financial statements for USS/Kobe represent carve-out financial
statements of the Bar Products Line which is being contributed to us and are not
intended to be a complete presentation of the financial position or the results
of operations and cash flows of USS/Kobe Steel Company on a stand-alone basis.
The financial statements include allocations and estimates of direct and
indirect corporate administrative expenses as well as account balances
attributable to the contributed operations. Pursuant to the terms of the master
restructuring agreement, long-term debt of USS/Kobe Steel Company totaling
$203.7 million, rather than the amount of long-term debt allocated in the
USS/Kobe financials, was assumed by Republic Technologies.
The selected financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", the "Unaudited Pro Forma Combined Financial Information" and
USS/Kobe's financial statements and the related notes included elsewhere in this
prospectus.
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT NET TONS SHIPPED, AVERAGE SELLING PRICE PER
NET TON SHIPPED AND RATIO)
STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 686.1 $ 785.4 $ 712.0 $ 721.6 $ 614.4 $ 375.9 $ 267.7
Cost of product sold(1)................... 591.6 689.2 658.6 681.1 576.4 339.7 263.1
------- ------- ------- ------- ------- ------- -------
Gross profit.............................. 94.5 96.2 53.4 40.5 38.0 36.2 4.6
Selling, general and administrative
expenses................................ 19.5 18.5 20.1 19.5 17.2 9.4 9.0
Depreciation and amortization............. 27.9 33.0 40.2 41.5 45.9 22.8 23.5
Other postretirement benefit charges(1)... 17.6 15.2 15.9 16.1 16.6 8.3 6.8
Net interest expense...................... (1.0) 2.2 8.9 11.0 11.2 5.6 7.2
Other charges (credits), net.............. (0.1) (0.2) (0.3) (0.1) -- (0.1) 0.4
Extraordinary charge...................... -- 1.8 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)......................... $ 30.6 $ 25.7 $ (31.4) $ (47.5) $ (52.9) $ (9.8) $ (42.3)
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
40
SIX MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT NET TONS SHIPPED, AVERAGE SELLING PRICE PER
NET TON SHIPPED AND RATIO)
BALANCE SHEET DATA:
Working capital........................... $ 69.7 $ 19.0 $ 58.4 $ 33.2 $ 63.4 $ 40.0 $ 38.0
Property, plant and equipment, net........ 400.1 452.7 446.1 446.9 419.7 434.4 398.2
Total assets.............................. 600.8 638.5 624.0 614.4 618.1 576.3 562.5
Total non-current debt.................... 53.6 111.2 166.0 180.2 180.2 158.3 180.2
Partners' interests....................... 387.5 338.1 321.6 271.4 266.4 286.1 218.1
OPERATING STATISTICS:
Net tons shipped (in thousands)........... 1,677.9 1,908.0 1,700.8 1,692.0 1,410.9 881.7 596.5
Average selling price per net ton
shipped................................. $ 406 $ 409 $ 413 $ 415 $ 423 $ 415 $ 444
OTHER DATA:
Cash flows from (used in)(2):
Operating activities.................... N/A N/A $ (11.2) $ 30.4 $ 8.0 $ 31.8 $ 10.2
Investing activities.................... N/A N/A (33.5) (42.3) (18.8) (10.3) (2.0)
Financing acitivities................... N/A N/A 26.2 12.5 12.1 (22.0) (3.2)
EBITDA, as defined(3)..................... $ 76.7 $ 79.9 35.6 23.1 22.8 26.9 1.5
Capital expenditures...................... 73.4 85.6 33.6 42.3 18.8 10.3 3.2
Maintenance and repairs expense........... 86.7 97.0 89.1 101.8 86.1 46.3 35.1
Ratio of earnings to fixed
charges(4).............................. 12.6 3.8 -- -- -- -- --
- ------------------
(1) For presentation purposes, other postretirement benefit charges has been
shown separately from cost of products sold. This presentation differs from
the presentation in the audited financials where other postretirement
benefit charges are included cost of sales.
(2) Cash flow information for USS/Kobe for 1994 and 1995 is unavailable as full
carve-out financial statements have not been prepared for these years.
(3) "EBITDA, as defined" represents earnings before extraordinary charge, net
interest expense, income taxes, depreciation and amortization expense,
non-cash post-retirement benefits expense and technology transfer fees paid
to Kobe Steel, Ltd. "EBITDA, as defined" should not be considered in
isolation or as a substitute for net income, cash flows from operating
activities and other income or cash flow statement data prepared in
accordance with generally accepted accounting principles or as a measure of
profitability or liquidity. "EBITDA, as defined" is included in this
prospectus to provide additional information with respect to our ability to
satisfy our debt service, capital expenditure and working capital
requirements and because certain covenants in our debt instruments are based
on similar measures. While "EBITDA, as defined" is used as a measure of
operations and the ability to meet debt service requirements, it is not
necessarily comparable to other similarly titled captions of other companies
due to differences in methods of calculation.
(4) For purposes of determining the ratio of earnings to fixed charges,
"earnings" are defined as net income (loss) before extraordinary charge plus
fixed charges. "Fixed charges" consist of interest expense on all
indebtedness, amortization of deferred financing costs and one-third of
rental expense, representing that portion of rental expense which we deem
attributable to interest. Earnings were insufficient to cover fixed charges
in the fiscal years ended 1996, 1997 and 1998 by $32.0 million,
$48.4 million and $53.6 million, respectively, and in the six months ended
June 30, 1998 and 1999 by $10.1 million and $42.4 million, respectively.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
We are the largest producer of special bar quality steel products in the
United States with a market share of approximately 23%, based on 1998 calendar
year pro forma shipments. SBQ steel products are high quality hot-rolled and
cold-finished carbon and alloy steel bar and rod used primarily in critical
applications in automotive and industrial equipment. SBQ steel products are sold
to customers who require precise metallurgical content and quality
characteristics. SBQ steel products generally contain more alloys, and sell for
substantially higher prices, than merchant and commodity steel bar and rod
products. We produce the widest range of SBQ steel products in the United States
and supply a diverse customer base that includes leading automobile and
industrial equipment manufacturers and their first tier suppliers.
We intend to use a fiscal year ending on December 31.
RESULTS OF OPERATIONS--HOLDINGS
Factors Affecting Recent Performance
The financial results of Holdings and Republic Technologies for the third
quarter ended September 30, 1999 have differed substantially from the results
for the period assumed in previously published projections. Republic
Technologies included various projected financial and operating information in
the offering memorandum relating to the private offering of the outstanding
notes and these projections, together with, among other things, risk factors
relating to the projections and the business, were subsequently included in a
Current Report on Form 8-K filed with the Commission by RTI, as required by the
purchase agreement relating to the private offering.
In the three months ended September 30, 1999 there was a significant
shortfall in shipment volume relative to the assumptions for the third quarter
used in developing the projections and actual results for the second quarter:
PRO FORMA INFORMATION*
--------------------------------------------------------------
ACTUAL FOR THE ASSUMPTION FOR THE ACTUAL FOR THE
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1999 SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------ ------------------ ------------------
(TONS IN THOUSANDS)
Hot-rolled......................... 457.8 472.0 386.9
Semi-finished...................... 106.8 104.1 134.9
Cold-finished...................... 111.5 134.0 99.8
- ------------------
* Includes results for BarTech, Republic and USS/Kobe assuming the Combination
occurred at the beginning of the period.
Holdings believes that the significant drop-off in third quarter shipments
reflects difficult market conditions in the non-automotive sector which led to
lower volumes and lower prices including reduced volumes at key customers.
Management believes that shipments to service centers especially suffered due to
continued high inventory levels coupled with a resurgence in imports. In
addition, shipments were significantly impacted by problems encountered in
integrating the three companies, particularly in the area of computer systems
processing orders and shipments, affecting customer service. For example,
significant problems were experienced with existing SAP information systems used
at the Lorain facility. Holdings also had problems with systems at the
Lackawanna facility, a former Bar Tech facility, which were converted to systems
employed at Republic. Production was also adversely affected by a burn-through
fault in one of two basic oxygen process (BOP) vessels at the Lorain facility
which idled the vessel from September 22 through October 18 and disrupted
production cycles in the other vessel as well as casting and rolling operations
at the Lorain facility. While Holdings has adopted measures to address customer
service, systems and
42
facilities integration issues, for as long as volumes are depressed due to
unfavorable market conditions and integration problems persist, Holdings
believes that operating results will fall short of those contained in the
projections.
Nine Months Ended September 30, 1999
Compared with Nine Months Ended September 30, 1998
Net sales for the nine months ended September 30, 1999 totaled
$684.3 million on shipments of approximately 1,337,500 net tons compared with
net sales of $275.5 million for the nine months ended September 30, 1998 on
shipments of approximately 512,288 tons. Net sales for the nine months ended
September 30, 1999 were comprised of $436.36 million for hot-rolled and $248.0
million for cold-finished, compared with hot-rolled net sales of $171.0 million
and cold-finished net sales of $104.5 million for the nine months ended
September 30, 1998. The decrease in net selling value per ton in the current
year period is the result of a change in the product mix toward lower selling
value products combined with an overall decrease in selling prices for both
hot-rolled and cold-finished products as Holdings initiated efforts to reduce
excess inventory levels.
Cost of sales totaled $655.7 million, or 95.8% of net sales, for the nine
months ended September 30, 1999 compared with cost of sales of $265.2 million,
or 96.3% of net sales, for the similar period ended September 30, 1998. Cost of
sales for the nine months ended September 30, 1999 consisted of $192.6 million
on hot-rolled products and $463.1 million on cold-finished products compared
with $152.9 million on hot-rolled products and $112.3 million on cold-finished
products for the nine months ended September 30, 1998. The decrease in cost of
sales as a percentage of sales was primarily generated by a decrease in raw
material costs partially offset by a $4.9 million write-down in inventory
following a reassessment of inventories subsequent to the Combination.
Selling, general and administrative expenses were $52.3 million, or 7.7% of
net sales, for the nine months ended September 30, 1999 compared with
$18.7 million, or 6.8% of net sales, for the nine months ended September 30,
1998. The increase in selling, general and administrative expenses as a
percentage of net sales is primarily due to transaction related expenses
incurred in the current year period related to the Combination.
Net interest expense was $61.0 million for the nine months ended
September 30, 1999 compared with $22.7 million for the similar period ended
September 30, 1999. Approximately $32.6 million of the $38.3 million increase in
net interest expense was attributable to the higher average borrowings
outstanding following the completion of the Combination. The remainder of the
increase was attributable to higher average interest rates on the new
borrowings compared to the borrowings repaid in connection with the Combination.
The provision for income taxes for the nine month period ended
September 30, 1999 and 1998, consisted of currently payable income taxes,
primarily foreign income taxes owed by Canadian Drawn Steel Company.
As a result, Holdings recorded a net loss of $202.0 million for the nine
months ended September 30, 1999 compared with a net loss of $37.7 million for
the nine months ended September 30, 1998.
RESULTS OF OPERATIONS--REPUBLIC
Republic began operations in November 1989 with its purchase of
substantially all the assets of the Bar Division of LTV Steel. In recent years,
Republic has implemented a significant capital expenditure program which has
enabled it to achieve productivity improvements and cost reductions. As part of
this program, Republic's CAST-ROLL(Trademark) facility commenced operations in
January 1996. Average manufacturing cost per ton of steel shipped decreased from
$668 per ton in fiscal year ended June 30, 1996 to $602 per ton in fiscal year
ended June 30, 1997 to $585 per ton for the fiscal year ended June 30, 1998 to
$594.1 per ton for the fiscal year ended June 30, 1999. Republic has in place a
customer base which includes the top tier SBQ steel purchasers. We believe that
a
43
majority of Republic's total net sales in fiscal year ended June 30, 1999 were
derived from products sold directly and indirectly to the automotive industry,
which has been highly cyclical and directly affected by, among other things, the
level of consumer confidence and general economic conditions.
Since the specialty steels market is distinct from the SBQ market with
different customers, we intend to divest or pursue other strategic alternatives
with respect to Republic's specialty steels business. Accordingly, this business
has been reflected as discontinued operations in Republic's historical financial
statements for the fiscal years ended June 30, 1996, 1997 and 1998 and for the
periods July 1, 1998 to September 7, 1998 and September 8, 1998 to June 30,
1999. In addition, Republic's historical financial statements for the period
September 8, 1998 to June 30, 1999 reflect a new basis of accounting of the
acquisition of Republic by Blackstone and other investors, while the prior
periods are presented using the historical cost basis of Republic. See "Risk
Factors--We will be a new enterprise and the financial information regarding our
businesses may be limited or not fully comparable."
Since October 1998, Republic and BarTech shared common management and
performed various sales, marketing and administrative functions on a combined
basis. These functions included marketing both companies' steel products jointly
under the combined brand name "Republic Technologies International" using a
single sales force. The costs of joint functions were borne ratably by Republic
and BarTech based upon relative sales volumes achieved. Republic also
participated in an inventory purchasing arrangement with BarTech. Under the
terms of this arrangement, Republic purchased materials on behalf of both
companies and billed BarTech for its respective purchases, plus an
administrative fee. All of these special arrangements were discontinued
following the completion of the Combination, after which time they became
unnecessary as the operations of Republic and BarTech were unified in Republic
Technologies.
Fiscal Year Ended June 30, 1999
Compared to Fiscal Year Ended June 30, 1998
Net sales from continuing operations for the fiscal year ended June 30,
1999 totaled $621.9 million on 1,001,644 net tons of steel shipments compared to
net sales from continuing operations of $689.9 million and shipments of
1,045,900 net tons for the prior fiscal year, or a 9.9% decrease in net sales.
Shipping volume for the fiscal year ended June 30, 1999 decreased 4.2% from the
prior year level reflecting a general weakness in demand within the domestic
steel industry due principally to the strike at General Motors in July and
August 1998, an increase in imports and customer inventory adjustments. In
addition, the average selling price per ton decreased 5.9% to approximately $621
per ton for the fiscal year ended June 30, 1999 compared with approximately $660
per ton for the similar fiscal year in the prior year. The decrease in average
selling values per ton was primarily due to lower pricing agreements resulting
from lower material costs and a decrease in average selling prices per ton due
to the competitive environment.
Cost of products sold in continuing operations decreased $17.4 million for
the fiscal year ended June 30, 1999 to $595.1 million from $612.5 million for
the prior fiscal year principally due to the lower volumes as discussed above.
The cost per ton was $594 per ton shipped for the fiscal year ended June 30,
1999 compared with $586 per ton shipped for the in the prior fiscal year.
Manufacturing costs for the fiscal year ended June 30, 1999 included
approximately $2.9 million in signing bonuses, a base labor rate increase of
$0.30 per hour and $2.4 million in defined benefit costs all of which are
attributable to the new long-term labor agreement with the United Steelworkers.
In addition, manufacturing costs for the fiscal year ended June 30, 1999 were
adversely affected by an increase in vacation costs resulting from the new labor
agreement. As a result of the above, cost of products sold in continuing
operations was 95.7% of net sales for the fiscal year June 30, 1999 as compared
with 88.8% for the prior fiscal year.
Selling, general and administrative expenses totaled approximately
$63.9 million for the fiscal year ended June 30, 1999 compared with
$40.5 million during the prior fiscal year and represent approximately 10.3% and
5.9% of net sales, respectively. The increase is partially due to
44
amortization of goodwill and other intangible assets resulting from the
acquisition of Republic in 1998 totaling $5.0 million for the fiscal year ended
June 30, 1999. Also contributing to the increase in selling, general and
administrative expenses for the fiscal year ended June 30, 1999 were one-time
costs relating to the 1998 acquisition of Republic by RES Holding of
$12.9 million and advisory fees of $1.1 million related to Republic's management
and financial monitoring agreement with Blackstone and Veritas.
Also affecting selling, general and administrative expenses during the
fiscal year ended June 30, 1999 were cost sharing arrangements in effect between
Republic and BarTech since October 1998. Under the terms of an employee leasing
and overhead allocation agreement, Republic and BarTech shared the costs of
common expenses of the two companies including, but not limited to, sales and
marketing services, administrative services, plant overhead and costs for
various common facilities. These costs were allocated according to each
company's approximate share of combined trade volumes.
Net periodic postretirement benefit charges totaled approximately
$8.0 million for the fiscal year ended June 30, 1999, or an increase of
$3.0 million, as compared with the $5.0 million in fiscal 1998. The net change
was due primarily to a net actuarial gain recognized in 1998 partially offset
lower costs in 1999 from the establishment of a limit on Republic's liability
for future medical cost increases in connection with the new labor agreement.
There were no non-cash Employee Stock Ownership Plan, or "ESOP," charges in
the fiscal year ended June 30, 1999 as compared with a charge of $15.6 million
in the prior fiscal year. The decrease reflects the final ESOP loan payment made
during the third quarter of fiscal year 1998. The ESOP was eliminated in
connection with the 1998 acquisition of Republic.
Following the acquisition of Republic by Blackstone and other investors in
September 1998, Republic began to implement a multi-year plan to significantly
reduce its hourly workforce. The workforce reductions are expected to be
achieved through a combination of early retirement buyouts, a voluntary
severance plan and attrition. During the fiscal year ended June 30, 1999,
Republic incurred $60.7 million of workforce reduction charges for early
retirement benefits, including increased pension and other postretirement
benefit obligations and special termination payments.
Net interest expense totaled approximately $47.6 million for the fiscal
year ended June 30, 1999 as compared with $26.9 million in the prior fiscal
year. Approximately $8.7 million of this increase in interest expense resulted
of additional borrowings associated with the 1998 acquisition and other
operating requirements, approximately $6.5 million is related to accretion of
the premium paid in connection with the retirement of Republic's first mortgage
notes and approximately $2.9 million from the amortization of costs related to
these borrowings.
Fiscal Year Ended June 30, 1998
Compared to Fiscal Year Ended June 30, 1997
Net sales for fiscal year ended June 30, 1998 totaled $689.9 million on
shipments of approximately 1,045,900 net tons compared to $627.9 million on
shipments of approximately 957,600 tons during fiscal year ended June 30, 1997.
The increased revenues reflect the 9.2% increase in shipping volume, a slight
increase in realized selling prices per ton and an increased percentage of
hot-rolled products. The average selling price, increased by 0.6% for all
products to $659 per ton for fiscal year 1998 compared to $655 per ton during
fiscal year 1997.
Cost of products sold totaled $612.5 million or $586 per ton shipped for
fiscal year ended June 30, 1998 versus $576.7 million or $602 per ton shipped
for the previous fiscal year. The decrease was due to four major factors:
(1) the CAST-ROLL(Trademark) facility operated at approximately 98% of its
current rated capacity for the fiscal year 1998 compared to 74.0% for the
previous year; (2) operating cost efficiencies associated with the higher
production and shipment levels, offset somewhat by moderate increases in the
overall cost of raw materials; (3) a pretax gain of
45
approximately $3.0 million which reflects an independent reassessment of
probable environmental liabilities for various historical waste disposal sites
versus $2.0 million gain for the year earlier period; and (4) a one time
$4.4 million gain due to an adjustment in connection with the past supply of raw
materials. Republic recorded pretax LIFO credits of approximately $4.7 million
and $8.3 million for the 1998 and 1997 fiscal years, respectively, which credit
is associated with the displacement of ingot produced products with lower cost
cast products.
Selling, general and administrative expenses increased from $38.7 million
to $40.5 million for fiscal years ended June 30, 1997 and 1998, respectively.
The net increase is due primarily to professional fees related to a possible
joint venture and asset sale activities and the acquisition of Republic, which
was partially offset by an 18% reduction in salary expense related to an
organizational restructuring that was announced on January 29, 1997. The
restructuring involved the separation of Republic's operations into three
divisions: Hot-Rolling, Cold-Finishing and Specialty Steels. The restructuring
consisted primarily of a change in salaried job descriptions and work flow.
Sixty-eight individuals chose the special retirement window offered in
connection with the restructuring.
In fiscal year ended June 30, 1997, Republic recorded a $1.6 million charge
for the reduction of the salaried workforce and for the impairment of assets to
be idled during fiscal year ended June 30, 1998. The actual severance expense
was lower than estimated due to voluntary terminations and, therefore, Republic
recorded a credit of $1.1 million during fiscal year 1998.
The charge for other postretirement benefits totaled $5.0 million for
fiscal year ended June 30, 1998 compared to $15.6 million for fiscal year ended
June 30, 1997. The net change was due to: (1) the discount rate was decreased
from 8% to 7%; (2) the ultimate medical trend rate was lowered from 5.5% to
4.5%; (3) the per capita costs for the managed care and traditional plans did
not increase as anticipated; and (4) increased enrollment of retirees in risk
sharing managed care plans.
Non-cash Republic ESOP charges totaled $15.6 million and $28.1 million for
fiscal years ended June 30, 1998 and 1997, respectively. The decrease reflects
the final Republic ESOP loan payment during the third quarter of fiscal year
1998.
Net interest expense totaled $26.9 million for fiscal year ended June 30,
1998 compared to $28.3 million for fiscal year ended June 30, 1997. The decrease
was the result of lower outstanding borrowings under Republic's revolving credit
facility throughout the fiscal year ended June 30, 1998.
RESULTS OF OPERATIONS--BARTECH
BarTech acquired melt shop and hot bar rolling assets from the former
Bethlehem BRW Division in September 1994. The Bethlehem BRW Division had ceased
operations in December 1992. Pursuant to its modernization and expansion plan,
BarTech restarted operations at its Lackawanna hot-bar rolling mill in February
1996 and commissioned its continuous caster and restarted the melt shop in its
Johnstown, Pennsylvania facility in August 1996. Since April 1996, BarTech's
results have been impacted by the implementation of its modernization and
expansion plan, including related delays, and the gradual transition from
initial operational and organizational start-up activities to a focused
commercial effort. BarTech's results have also been affected by the acquisition
of Bliss and Laughlin Industries, Inc., one of the largest processors of
cold-finished steel bar products in North America, which was completed in April
1996. Since the first quarter 1997, all of BarTech's operating facilities have
QS-9000 certifications, except for its Johnstown, Pennsylvania and Cartersville,
Georgia facilities, both of which we expect to receive certification by December
1999.
As a result of a change of its fiscal year, BarTech's 1997 fiscal year
began on December 29, 1996 and ended January 3, 1998. BarTech's 1996 fiscal year
began on October 1, 1995 and ended September 30, 1996. Management does not
believe that BarTech's results of operations through December 28, 1996 are
indicative of future operations due to the absence of a BarTech operating
history, the absence of a Bliss & Laughlin operating history under BarTech
management and the
46
consequences of operating Bliss & Laughlin on a vertically integrated basis.
Comparison of 1997 results with either the twelve months ended September 30,
1996 or December 28, 1996 is limited based on the above factors. As a result,
BarTech has elected to present a comparison of the fiscal year ended January 3,
1998 with the previously reported fiscal year ended September 30, 1996.
Six Months Ended June 30, 1999
Compared to Six Months Ended July 4, 1998
Net sales for the six months ended June 30, 1999 totaled $136.4 million on
shipments of approximately 279,300 net tons compared with net sales of $161.6
million for the six months ended July 4, 1998 on shipments of approximately
319,000 tons. Net sales for the six months ended June 30, 1999 were comprised of
$69.2 million for hot-rolled and $67.2 million for cold-finished, compared with
hot-rolled net sales of $72.8 million and cold-finished net sales of $88.8
million for the six months ended July 4, 1998. The $25.2 million, or 15.6%,
decrease in net sales is primarily the result of a 12.5% decrease in shipping
volumes reflecting the general weakening in demand within the domestic steel
industry. In addition, there was a 3.7% decrease in average selling prices per
ton on cold-finished products as a reaction to competition and as a result of
product mix. Partially offsetting the decrease in shipping volumes was an
increase in hot-rolled shipping volumes to Republic's cold-finished operations
as management integrated the operations of the two companies in anticipation of
the Combination.
Cost of sales totaled $131.8 million, or 96.6% of net sales, for the six
months ended June 30, 1999 compared with cost of sales of $151.0 million, or
93.4% of net sales, for the similar period ended July 4, 1998. Cost of sales for
the six months ended June 30, 1999 consisted of $68.9 million on hot-rolled
products and $62.9 million on cold-finished products compared with
$72.9 million on hot-rolled products and $78.1 million on cold-finished products
for the six months ended July 4, 1998. The increase in cost of sales as a
percentage of sales was primarily generated by an increase in material and
manufacturing costs on a cost per ton basis for both BarTech's hot-rolled and
cold-finished operations.
Selling, general and administrative expenses were $6.4 million, or 4.7% of
net sales, for the six months ended June 30, 1999 compared with $9.9 million, or
6.1% of net sales, for the six months ended July 4, 1998. The decrease in
selling, general and administrative expenses was attributable to the cost
sharing arrangements begun in the fourth quarter of fiscal 1998 between BarTech
and Republic. Under the terms of an employee leasing and overhead allocation
agreement, BarTech and Republic shared the costs of common expenses of the
combined company including, but not limited to sales and marketing services,
administrative services, plant overhead and costs for certain common facilities.
These costs were allocated according to each company's approximate share of
combined trade volumes. Also a contributing factor to the decrease in selling,
general and administrative expense as a percentage of net sales are the results
of the Consolidation Plan between BarTech and Republic initiating certain cost
reductions in anticipation of the Combination.
Net interest expense was $12.6 million for the six months ended June 30,
1999 compared with $13.2 million for the similar period ended July 4, 1998. The
$0.6 million decrease in net interest expense was attributable to a decrease in
the average amount outstanding under BarTech's revolving credit agreement while
average debt levels on amounts borrowed under long-term arrangements remained
primarily fixed during the comparable periods.
The provision for income taxes for the six month period ended June 30, 1999
consisted of currently payable income taxes, primarily foreign income taxes owed
by its Canadian subsidiary, Canadian Drawn Steel Company, Inc. The provision for
income taxes in the similar period of the prior year included a benefit for
income taxes as BarTech's net operating losses, which generated a refund of
taxes previously paid by BarTech's wholly owned subsidiary, Bliss & Laughlin
Industries, Inc. As a result, BarTech reported a net loss of $18.2 million for
the six months ended June 30, 1999 compared with a net loss of $15.2 million for
the six months ended July 4, 1998.
47
Fiscal Year 1998 Ended January 2, 1999
Compared to Fiscal Year 1997 Ended January 3, 1998
Net sales for the fiscal year ended January 2, 1999 totaled $271.9 million
on shipments of approximately 527,000 net tons compared with net sales of
$242.9 million for the fiscal year ended January 3, 1998 on shipments of
approximately 450,000 tons. Fiscal 1998 net sales for hot-rolled products were
$114.1 million while net sales for cold-finished products were $157.8 million
for the same period compared with fiscal 1997 hot-rolled net sales of
$83.8 million and cold-finished net sales of $159.1 million. The $29.0 million
increase in net sales is largely the result of a 17.1% increase in shipping
volumes, primarily of hot-rolled products, coupled with a slight increase in
selling prices per ton on hot-rolled products. The increase in fiscal 1998 net
sales was adversely affected as selling prices per ton on cold-finished products
were lowered in response to price decreases by competitors.
Cost of sales totaled $262.5 million, or 96.5% of net sales, for the fiscal
year ended January 2, 1999 compared with cost of sales of $239.4 million, or
98.6% of net sales, for the similar period ended January 3, 1998. Cost of sales
in fiscal 1998 consisted of $120.2 million on hot-rolled products and
$142.3 million on cold-finished products compared with $97.3 million on
hot-rolled products and $142.1 million on cold-finished products in fiscal 1997.
The decrease in cost of sales as a percentage of net sales was due to operating
cost efficiencies associated with the higher production and shipping levels in
fiscal 1998 partially offset by production outages experienced at BarTech's
Lackawanna facility during its third quarter fiscal 1998 due to the installation
of a new rolling mill electrical control system. The improvement in operating
costs was primarily generated by a decrease in manufacturing costs on a cost per
ton basis for BarTech's hot-rolled products while costs on a per ton basis for
cold-finished products remained relatively unchanged.
Cost of sales for the fiscal year 1997 reflect operating cost
inefficiencies related to production outages during the fourth quarter of that
period, including an outage arising from a major mechanical breakdown at its
Lackawanna hot-rolling mill operation. A failure on the No. 1 rolling stand
resulted in a twelve-day production outage. Additionally in fiscal 1997, BarTech
experienced operating cost inefficiencies relating to the integration of
inexperienced personnel into its Lackawanna hot-rolling mill crews. BarTech
added a third and fourth production shift at the Lackawanna facility, which
began in April and August 1997, respectively. As a result, cost of sales as a
percentage of net sales for fiscal 1997 was 116.1% for hot-rolled products and
89.3% for cold-finished products.
Depreciation and amortization for the fiscal year ended January 2, 1999 was
$6.0 million compared with $4.5 million for the fiscal year ended January 3,
1998. The increase was primarily attributable to additional depreciation as a
result of the installation of a new rolling mill electrical control system at
BarTech's Lackawanna facility and upgrades to its computer system in an effort
to improve its processes related to financial and operational information.
Selling, general and administrative expense was $21.1 million during the
fiscal year ended January 2, 1999 compared with $21.7 million for the fiscal
year ended January 3, 1998. The decrease in selling, general and administrative
expense was primarily due to the combination of sales and marketing efforts of
BarTech and Republic in an effort to reduce overhead and improve customer
service. In the fall of 1998, the companies commenced marketing their respective
steel products jointly under the combined brand name "Republic Technologies
International" using a single sales force. However, throughout fiscal 1998 each
customer purchase order for steel products continued to be placed directly with
BarTech or Republic, as appropriate to make the sale. The costs of such joint
marketing efforts have been borne ratably by BarTech and Republic based upon
their approximate sales volumes achieved through such joint marketing.
The improvement in selling, general and administrative expense was offset
by $1.3 million of non-recurring expenses in fiscal 1998 as BarTech incurred
costs for employee severance compensation and the relocation of its corporate
offices previously located in Seven Hills, Ohio as
48
BarTech began initiatives to reduce overhead and increase efficiency in
anticipation of a combination with Republic.
Interest expense, net increased to $27.0 million for the year ended
January 2, 1999 compared with $23.3 million for the similar period for the year
ended January 3, 1998. The $3.7 million increase reflects higher average debt
levels borrowed under BarTech's revolving credit agreement.
Other income was $2.7 million for the year ended January 2, 1999 and
$1.4 million for the year ended January 3, 1998. Income for the year ended
January 2, 1999 primarily represented proceeds of $2.3 million for a settlement
of an antitrust lawsuit against various graphite electrode producers. Other
income for the year ended January 3, 1998 is primarily comprised of a gain on
the sale of real property at BarTech's facility in Johnstown, Pennsylvania.
The provision for income taxes for fiscal 1998 and fiscal 1997 consisted of
currently payable income taxes, primarily foreign income taxes owed by Canadian
Drawn Steel Company. As a result, BarTech reported a net loss of $42.0 million
in fiscal 1998 compared with a net loss of $44.8 million in fiscal 1997.
Fiscal Year 1997 Ended January 3, 1998
Compared to Fiscal Year 1996 Ended September 30, 1996
The following discussion of BarTech's results of operations covers the
fiscal years ended January 3, 1998 and September 30, 1996. The results of Bliss
& Laughlin have been included since the date of its acquisition, April 2, 1996.
The overall comparability of fiscal 1997 was influenced by the following
factors: (1) BarTech's movement from the start-up status of operations toward
levels of sales and production necessary to generate operating income, and
(2) the benefits expected to be attained from operating BarTech and Bliss &
Laughlin on a vertically integrated basis.
BarTech had net sales of $242.9 million for the fiscal year ended
January 3, 1998 compared with net sales of $77.2 million for the fiscal year
ended September 30, 1996. The increase in fiscal 1997 net sales reflected
initiatives started in the fourth calendar quarter of 1996, including among
others, the establishment of a full-time sales force, successful trials for
pre-qualification requirements and sales to numerous new customers. The increase
of $165.7 million over prior year's net sales was supported by increased
production from the Johnstown caster, which started up during third quarter 1996
and by the addition of a third and fourth production shift at the Lackawanna
facility, which began in April and August 1997, respectively. Net sales in
fiscal 1997 were adversely affected by inefficiencies experienced by the
Lackawanna facility as a result of increasing production levels and by Bliss &
Laughlin lowering prices in response to competitive pricing pressures in the
cold-finishing market.
In October 1997, BarTech experienced a major mechanical breakdown at its
Lackawanna hot-rolled bar mill operation. A failure on its No. 1 rolling stand
gearbox bearing resulted in catastrophic damage to the drive gear. BarTech
returned to partial operations after nine days, and full production resumed
after twelve days. BarTech lost an estimated 15,000 to 20,000 production tons
during the outage. Because of low finished hot-rolled bar inventory levels at
the time of the failure, shipment performance was adversely affected during and
after the outage.
As a result, BarTech's customer delivery performance deteriorated and some
customers did not place orders in November and December 1997. These customers
generally were in the higher margin segment of BarTech's product line.
Accordingly, BarTech's unit sales prices also declined during the fourth quarter
1997. Following the outage, BarTech's delivery performance improved such that
all of the customers which did not place orders in the latter part of the fourth
quarter placed orders and accepted shipments in first quarter 1998.
Cost of sales in fiscal 1997 was $239.4 million compared with
$92.0 million in fiscal 1996. Cost of sales was adversely affected by
inefficiencies relating to the implementation of its modernization and expansion
plan, including delays experienced in the plan, which resulted in lower than
49
anticipated production levels. Additionally, inefficiencies resulting from the
integration of inexperienced personnel into its Lackawanna hot-rolling mill
crews also adversely affected production and production costs.
As a result of the above factors, gross profit for fiscal 1997 was
$3.5 million, as compared with a gross loss of $14.8 million in fiscal 1996.
Depreciation and amortization for the fiscal year ended January 3, 1998 was
$4.5 million compared with $2.0 million for the fiscal year ended September 30,
1996. The increase was primarily attributable to BarTech's modernization and
expansion projects during its initial start-up period. Also contributing to the
increase was additional amortization of goodwill as a result of the Bliss &
Laughlin acquisition on April 2, 1996.
Selling, general and administrative expense was $21.7 million during the
fiscal year ended January 3, 1998 compared with $14.6 million for the fiscal
year ended September 30, 1996. The increase in selling, general and
administrative expense was primarily due to higher wage and salary costs as
BarTech continued to recruit qualified professionals. Contributing to the
increase, to a lesser extent, was a one-time charge of $1.0 million for
consulting fees incurred by BarTech in connection with re-negotiations of its
electric power contract for the primary mill at its Johnstown operations and
severance costs incurred in relation to BarTech's relocation of its corporate
offices from Johnstown, Pennsylvania to Seven Hills, Ohio.
Interest expense, net increased to $23.3 million in fiscal 1997 from
$10.8 million in fiscal 1996. This increase reflects higher average debt levels
borrowed under BarTech's revolving credit facility.
Other income was $1.4 million in fiscal 1997 compared with $1.1 million in
fiscal 1996. This increase is largely due to the gain on the sale of real
property at BarTech's facility in Johnstown, Pennsylvania in fourth quarter
fiscal 1997.
Income taxes in fiscal 1997 were $205,000 on a loss before income taxes of
$44.6 million, compared with income taxes of $205,000 on a loss before income
taxes of $41.2 million in fiscal 1996. The provision for income taxes consisted
primarily of a provision for foreign taxes in both fiscal 1997 and fiscal 1996.
As a result, BarTech reported a net loss of $44.8 million in fiscal 1997
compared with a net loss of $43.6 million in fiscal 1996, which includes an
extraordinary loss on early extinguishment of debt of $2.2 million.
Transition Period--Three months ended December 28, 1996
The following discussion for BarTech's results of operations covers the
three month transition period ended December 28, 1996, which bridges the gap
between BarTech's old and new fiscal year ends.
BarTech recorded net sales of $40.3 million for the three months ended
December 28, 1996, which included net sales of Bliss & Laughlin of
$35.4 million and net sales of $4.9 million from BarTech's Lackawanna facility.
Despite the inclusion of Bliss & Laughlin operations for the three months
ended December 28, 1996, BarTech continued to incur losses from operations as a
result of its continued start-up activities. BarTech reported a net loss from
operations of $8.7 million for the three months ended December 28, 1996, as
BarTech continued to experience lower gross profits reflecting its re-entry into
the market at the lower margin segment of the market. Inefficiencies resulting
from initial low volume production levels, the commercial start-up of the
Johnstown melt shop and the newly commissioned continuous caster contributed to
BarTech's operating loss for this three month period.
Interest expense, net was $5.1 million for the three month period ended
December 28, 1996, as a result of the higher average debt levels incurred on and
after April 2, 1996.
50
The provision for income taxes consisted primarily of a provision for
foreign taxes related to BarTech's Canadian Drawn Steel Company subsidiary.
RESULTS OF OPERATIONS--USS/KOBE
USS/Kobe Steel Company was formed on July 1, 1989 as a 50/50 joint venture
between a subsidiary of USX Corporation and a subsidiary of Kobe Steel, Ltd.
USS/Kobe Steel Company's facilities were the former Lorain Works of USX
Corporation. USS/Kobe Steel Company manufactured high quality steel bars, rod
and seamless tubular products, primarily for the automotive, automotive service
and energy markets. The tubular steel products business of USS/Kobe Steel
Company was excluded from the Combination and will continue to operate as a
joint venture partnership between USX Corporation and Kobe Steel, Ltd.
The accompanying financial statements represent carve-out financial
statements of the Bar Products Line of USS/Kobe Steel Company, and the following
discussions pertain to the operating results of the Bar Products Line. The
financial statements include allocations and estimates of direct and indirect
USS/Kobe Steel Company corporate administrative expenses as well as account
balances attributable to the Bar Products Line.
Six Months Ended June 30, 1999
Compared to Six Months Ended June 30, 1998
Revenues for the six months ended June 30, 1999 totaled $267.7 million on
shipments of 596,500 tons compared to $375.9 million on shipments of 881,700
tons for the six months ended June 30, 1998. The decrease in revenues was
primarily due to continued weakness in tubular goods for the oil and gas
exploration and drilling markets, along with a general weakness in demand within
the domestic steel industry.
Net sales to unrelated parties were $217.5 million and $242.1 million for
the six month periods ended June 30, 1999 and June 30, 1998, respectively. The
decrease in net sales to unrelated parties was primarily due to lower shipment
volumes of bar products and lower average selling prices for bar products in the
first half of 1999. Shipments of bar products decreased 21,600 tons, or
5.2 percent. The average selling price for bar products decreased $14 per ton,
or 2.7 percent.
Net sales to related parties were $50.2 million and $133.7 million for the
six month periods ended June 30, 1999 and June 30, 1998, respectively. Net sales
to related parties consist of semi-finished rounds sold to the U.S. Steel Group
of USX Corporation to be made into pipe at U.S. Steel's Fairfield Works and
billets sold to USS/Kobe Steel Company's tubular products line. The decrease in
net sales to related parties was primarily due to lower shipments of
semi-finished bar products, partially offset by higher average selling prices in
the first half of 1999. Shipments decreased 263,200 tons, or 64.5 percent. The
decrease in shipments was primarily due to lower shipments of billets to
USS/Kobe Steel Company's tubular products line and lower shipments of
semi-finished rounds to the U.S. Steel Group. The average selling price
increased $19 per ton. The increase was primarily due to an increase of $17 per
ton in the selling price per ton for shipments to USS/Kobe Steel Company's
tubular products line, partially offset by a $26 per ton decrease in the selling
price per ton for shipments to the U.S. Steel's Fairfield Works.
Cost of sales for the six months ended June 30, 1999 totaled
$269.9 million, compared to $348.0 million for the six months ended June 30,
1998, primarily due to lower production volumes. The cost per ton was $441 per
ton shipped for the first half of 1999, compared to $386 per ton shipped for the
first half of 1998. The increase in cost per ton reflected lower melt shop
capacity utilization and operating inefficiencies associated with the lower
production and lower shipment levels. Melt shop capacity utilization was 51% for
the first half of 1999, compared to 77% for the first half of 1998. The decrease
in capacity utilization was primarily the result of USS/Kobe Steel Company
temporarily idling one blast furnace in the second quarter of 1998 due to
general weakness in demand for tubular steel products and an increase in steel
imports.
51
Depreciation and amortization for the six month period ended June 30, 1999
was $23.5 million compared to $22.8 million for the six month period ended
June 30, 1998.
Selling, general and administrative expenses for the six month period ended
June 30, 1999 totaled $9.0 million compared to $9.4 million for the six month
period ended June 30, 1998.
Interest expense, net was approximately $7.2 million for the six months
ended June 30, 1999 compared to approximately $5.6 million for the six months
ended June 30, 1998. The $1.6 million increase was primarily due to increased
interest rates and higher average debt balances.
Net loss for the six month period ended June 30, 1999 was $42.3 million
compared to $9.8 million for the six month period ended June 30, 1998. The
increased loss was primarily the result of the factors discussed above.
Fiscal Year Ended December 31, 1998
Compared to Fiscal Year Ended December 31, 1997
Revenues for the year ended December 31, 1998 totaled $614.4 million on
shipments of 1,410,900 tons compared to $721.6 million on shipments of 1,692,000
tons for the year ended December 31, 1997. The decrease in revenues was
primarily due to lower shipment volumes of semi-finished rounds and of billets,
and lower average selling prices for bar and semi-finished trade products. Lower
shipments resulted from weakness in tubular goods for the oil and gas country
exploration and drilling markets and an increase in imports.
Net sales to unrelated parties were $426.5 million and $416.6 million for
the years ended December 31, 1998 and December 31, 1997, respectively. The
increase in net sales to unrelated parties was primarily due to higher shipment
volumes, partially offset by lower average selling prices. Higher shipment
volumes reflected increased shipments of bar products and semi-finished trade
products. Shipments of bar products and semi-finished trade products increased
34,700 tons and 38,400 tons, respectively. Lower average selling prices reflects
a decrease in selling price of $17 per ton for bar products and $65 per ton for
semi-finished trade products. The average selling price to unrelated parties was
$484 per ton for the year ended December 31, 1998 compared to $510 per ton for
the year ended December 31, 1997.
Net sales to related parties were $187.9 million and $305.0 million for the
years ended December 31, 1998 and December 31, 1997, respectively. The decrease
in net sales to related parties was primarily due to lower shipments and lower
average selling prices. The decrease in lower shipments was primarily due to
lower shipments of semi-finished rounds to U.S. Steel and lower shipments of
billets to USS/Kobe Steel Company's tubular products line. The average selling
price to related parties was $340 per ton for the year ended December 31, 1998
compared to $333 per ton for the year ended December 31, 1997.
Cost of sales for the year ended December 31, 1998 was $593.0 million
compared to $697.2 million for the year ended December 31, 1997. The decrease in
cost of sales was primarily due to lower production volumes. The cost per ton
was $409 per ton shipped in 1998, compared to $403 per ton shipped in 1997. The
increase in cost per ton reflected lower melt shop capacity utilization and
operating inefficiencies associated with the lower production and lower shipment
levels. Melt shop capacity utilization was 64% in 1998, compared to 69% in 1997.
In the second quarter of 1998, USS/Kobe Steel Company temporarily idled one
blast furnace as a result of general weakness in demand for tubular steel
products and an increase in steel imports.
Selling, general and administrative expenses totaled $17.2 million in 1998,
compared to $19.5 million in 1997. The decrease was primarily due to reductions
in the non-union workforce achieved through attrition. Selling, general and
administrative expenses in 1997 included a one-time accrual related to the
retirement of an executive.
52
Depreciation and amortization expenses totaled $45.9 million in 1998,
compared to $41.5 million in 1997. The increase was primarily due to an increase
in the depreciable base for information systems projects.
Interest expense, net for the year ended December 31, 1998 was
$11.2 million compared to $11.0 million for the year ended December 31, 1997.
Net loss for the year ended December 31, 1998 was $52.9 million compared to
$47.5 million for the year ended December 31, 1997. The increased loss was
primarily the result of the factors discussed above.
Fiscal Year Ended December 31, 1997
Compared to Fiscal Year Ended December 31, 1996
Revenues for the year ended December 31, 1997 totaled $721.6 million on
shipments of 1,692,000 tons compared to $712.0 million on shipments of 1,700,800
tons for the year ended December 31, 1996. The increase in revenues was
primarily due to higher shipment volumes of bar and semi-finished trade
products, partially offset by lower average selling prices for bar and semi-
finished trade products and lower shipment volumes of semi-finished rounds to
U.S. Steel.
Net sales to unrelated parties were $416.6 million and $394.5 million for
the years ended December 31, 1997 and December 31, 1996, respectively. The
increase in net sales to unrelated parties was primarily due to an increase in
shipments of bar and semi-finished trade products, partially offset by a
decrease in the selling price of bar semi-finished trade products. Shipments of
bar products and semi-finished trade products increased 52,700 tons and 18,200
tons, respectively. The average selling price of bar and semi-finished trade
products decreased $26 per ton and $69 per ton, respectively.
Net sales to related parties were $305.0 million and $317.5 million for the
years ended December 31, 1997 and December 31, 1996, respectively. Net sales to
related parties consist of semi-finished rounds sold to USX Corporation's U.S.
Steel Fairfield Works and billets sold to USS/Kobe Steel Company's tubular
products line. The decrease in net sales to related parties was primarily due to
a decrease in shipments of semi-finished rounds to U.S. Steel, partially offset
by an increase in shipments of billets to USS/Kobe Steel Company's tubular
products line and an increase in the selling price of billets to USS/Kobe Steel
Company's tubular products line. The average selling price to related parties
was $333 per ton for the year ended December 31, 1997 compared to $321 per ton
for the year ended December 31, 1996.
Cost of sales for the year ended December 31, 1997 was $697.2 million
compared to $674.6 million for the year ended December 31, 1996. The increase in
cost of sales was primarily due to lower production volumes and higher operating
expenses associated with scheduled blast furnace outages. The cost per ton was
$403 per ton shipped in 1997, compared to $387 per ton shipped in 1996. The
increase in cost per ton reflected lower melt shop capacity utilization and
operating inefficiencies associated with the scheduled blast furnace outages.
Melt shop capacity utilization was 69% in 1997, compared to 75% in 1996.
Selling, general and administrative expenses totaled $19.5 million in 1997,
compared to $20.1 million in 1996. Selling, general and administrative expenses
for 1997 included a one-time accrual related to the retirement of an executive.
Selling, general and administrative expenses for 1996 included a one-time
accrual related to a customer bankruptcy.
Depreciation and amortization expenses totaled $41.5 million in 1997,
compared to $40.2 million in 1996. The increase was primarily due to an increase
in the depreciable base for information systems projects.
53
Interest expense, net was $11.0 million for the year ended December 31,
1997 compared to $8.9 million for the year ended December 31, 1996. The $2.1
million increase was primarily due to higher interest rates and higher average
debts levels for the year ended December 31, 1997.
Net loss for the year ended December 31, 1997 was $47.5 million compared to
$31.4 million for the year ended December 31, 1996. The increased loss was
primarily the result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Republic--Historical. Republic's principal sources of liquidity consisted
of cash on hand, cash flow from operations and available borrowings under its
revolving credit facility. Net cash provided from operating activities of
continuing operations was $0 million in fiscal year 1997, $13.4 million in
fiscal year 1998. Net cash used in operating activities of continuing operations
amounted to $92.2 million in fiscal year 1999.
Republic's revolving credit facility, which had permitted borrowings up to
$90 million and was due to expire in December 1997, was amended on April 25,
1997 to expire on April 25, 2000 and was amended on May 6, 1999 to permit
borrowings up to $135 million. As of June 30, 1999, approximately $24.0 million
was available under this revolving credit facility.
Maintenance expenses for facilities and equipment were $63.8 million for
fiscal year 1997, $65.9 million for fiscal year 1998 and $76.0 million in fiscal
year 1999. Capital expenditures were $7.8 million for fiscal year 1997,
$15.8 million for fiscal year 1998 and $18.2 million in fiscal year 1999.
On October 28, 1994, the Ohio Water Development Authority issued
$20.2 million of 8 1/4% Solid Waste Revenue Bonds due 2014, on behalf of the
State of Ohio, at 98% of face amount in connection with the solid waste disposal
facilities installed at the CAST-ROLL(Trademark) facility. Additionally, on
June 1, 1996, the Ohio Water Development Authority issued $53.7 million of 9.0%
Solid Waste Revenue Bonds due June 1, 2021 in connection with the solid waste
recycling facilities installed at the CAST-ROLL(Trademark) facility. The
proceeds of the 1996 bonds were used to reduce outstanding borrowings under
Republic's revolving credit facility. As of June 30, 1999 Republic had available
$0.3 million from the 1996 bonds, which is classified as restricted cash in the
accompanying consolidated balance sheet, and $0 from the 1994 bonds. Both series
of Solid Waste Revenue Bonds remain outstanding.
At its inception, Republic established a reserve of $27.1 million for
estimated environmental liabilities assumed as part of the acquisition of the
Bar Division from LTV Steel, which has been reduced to approximately
$16.2 million as of June 30, 1999 due to lower than anticipated spending and
revised estimates of items covered by the reserve. Holdings believes it has
sufficient resources to meet environmental liabilities relating to the former
Republic facilities; however, no assurance can be given that future regulatory
action regarding historical disposal practices at Republic's facilities, as well
as continued compliance with environmental requirements, will not result in
significant additional costs that could have a material adverse effect on the
future financial performance. See "Business--Environmental Matters."
BarTech--Historical. BarTech's primary sources of liquidity consisted of
available cash and cash equivalents, borrowings under BarTech's revolving credit
facility and cash flows from operations. At June 30, 1999, BarTech had liquidity
available of approximately $2.9 million from cash and cash equivalents. At June
30, 1999, BarTech's revolving credit facility was fully drawn.
Cash used by operating activities decreased to $7.2 million in fiscal 1998,
a decrease of $43.6 million, from $50.9 million in fiscal 1997. The decrease was
partially attributable to the reduction in accounts receivable resulting from
lower sales volume during the year and increases in accounts payable and amounts
due to affiliates.
Maintenance expenses for facilities and equipment were $12.0 million for
fiscal 1998 and $8.8 for fiscal 1997. Capital expenditures during fiscal 1998
were $16.3 million, an increase of $10.5 million from $5.8 million in fiscal
1997. Capital expenditures for fiscal 1998 included the
54
modernization and expansion of its Johnstown operations. BarTech had not
committed to any material capital expenditures in the second half of fiscal
1999.
Dividends paid to holders of BarTech's preferred stock were approximately
$0.4 million in both fiscal 1998 and 1997.
USS/Kobe--Historical. USS/Kobe Steel Company's primary sources of
liquidity consist of cash and cash equivalents, cash provided from operating
activities and borrowings against its revolving credit facility. At June 30,
1999, $75 million was drawn against its revolving credit facility, with
$66 million attributed to its Bar Products Line. USS/Kobe Steel Company executed
and delivered documents granting a security interest to its lenders in some of
its assets on June 30, 1999. For additional information, see Notes A and D to
the Financial Statements for Bar Products Line of USS/Kobe Steel Company.
Net cash provided by operating activities was $10.2 million for the six
months ended June 30, 1999 and $31.8 million for the six months ended June 30,
1998. The decrease in the first half of 1999 compared to the first half of 1998
was primarily due to decrease in sales volume.
Capital expenditures were $18.8 million, $42.3 million and $33.6 million
for the years ended December 31, 1998, 1997 and 1996, respectively. Capital
expenditures for 1997 included a blast furnace re-line and various production
facility improvements, and for 1996 included various production facility
improvements and systems upgrades. USS/Kobe has committed capital expenditures
in fiscal 1999 of $5.5 million, with approximately $3.2 million spent as of
June 30, 1999.
Holdings--The primary liquidity needs of Holdings relate to working capital
needs, funding requirements relating to Republic Technologies' agreement with
the Pension Benefit Guaranty Corporation, capital expenditures and other costs
relating to the Consolidation Plan, debt service requirements and tax
distributions to its members.
Republic Technologies has agreed with the Pension Benefit Guaranty
Corporation to fund $178 million over the next four years into the Republic
Engineered Steels, Inc. USWA Defined Benefit Plan, a defined benefit pension
plan for employees represented by the United Steelworkers union in connection
with the headcount reduction and related early retirement benefits contemplated
by the Consolidation Plan. Of the $178 million, $56.5 million has been funded to
date with an additional $5.5 million to be funded by March 15, 2000. We will be
required to make the additional quarterly contributions in accordance with the
following schedule: $7.5 million per quarter in each of the first and second
quarters of 2000, $7.6 million per quarter for the next four payments,
$9.1 million per quarter for the next four payments and $8.5 million per quarter
for the final four payments. In addition, pursuant to the Consolidation Plan,
Republic Technologies will offer a combination of early retirement buyout
packages and voluntary severance plans to our employees, which Republic
Technologies currently expects will include expenditures outside its defined
benefit plan of up to approximately $36 million over the next 5 years. The
actual cost of the early retirement buyout packages and voluntary retirement
plans will depend on the mix of such arrangements offered to and accepted by our
hourly employees represented by the United Steelworkers union.
In addition, with respect to the USS/Kobe Union Eligible Pension Plan, a
defined benefit plan for union employees, Republic Technologies has agreed with
the Pension Benefit Guaranty Corporation to maintain a specified level of
funding based on statutory funding requirements. The contributions shall be made
as follows: for the year 2000, an amount necessary to avoid an accumulated
funding deficiency plus $4 million; for 2001, an amount so that the December 31,
2001 credit balance equals that of December 31, 2000 with interest plus $2
million; for 2002, an amount so that the December 31, 2002 credit balance equals
that of December 2001 with interest plus $2 million; for 2003, an amount so that
the December 31, 2003 credit balance equals that of December 31, 2002 with
interest plus $2 million. Beginning with 2004, Republic Technologies shall make
contributions to maintain the December 31, 2003 credit balance with interest. As
security for such obligation, Republic Technologies has provided that Pension
Benefit Guaranty Corporation with a $5 million letter of credit. Republic
Technologies currently estimates that approximately $53.6 million of fundings
will be required in connection with these obligations.
55
The four year Consolidation Plan contemplates capital expenditures of
$48 million in 2000, $56 million in 2001, $113 million in 2002 and $88 million
in 2003. In connection with its Consolidation Plan, Republic Technologies
intends to construct a new large bar mill, with groundbreaking occurring in 2001
and completion expected in 2002. Management expects the cost of constructing
this facility will be approximately $90.0 million. Republic Technologies
anticipates receiving an estimated $30.0 million in government-assisted
borrowings to fund a portion of this construction.The remaining funds required
to construct the new bar mill may be obtained from a combination of operating
cash flow, additional borrowings under the new credit facility, to the extent
then available, and proceeds from sales of assets and/or sales of debt or equity
securities.
In conjunction with the Combination, Republic Technologies completed a
private offering of $425 million of senior secured notes and warrants and
entered into the $425 million new credit facility. RTI applied the proceeds of
the private offering, together with approximately $239 million of borrowings
under the new credit facility and the proceeds from new equity contributions, to
refinance an aggregate of $749 million of indebtedness of Republic, RES Holding,
BarTech and USS/Kobe.
As a result of the Combination and the other transactions, Holdings and
Republic Technologies have significant amounts of debt, with the interest
payments on the senior secured notes and interest and principal repayments under
the new credit facility representing significant obligations. The notes will
require semi-annual interest payments and mature on July 15, 2009. The notes
require that tender offers be made for such securities with certain proceeds
from asset sales in the event that such proceeds are not applied to specified
purposes within certain time periods. The loans under the new credit facility
will require periodic payments of interest and mature on August 13, 2004. The
new credit facility requires prepayment of loans and reductions of commitments
with net proceeds of specified asset dispositions, casualty and condemnation
recovery events, issues of equity and incurrences of permitted indebtedness. The
1984 environmental improvement revenue bonds, of which $9.0 million was
outstanding as of September 30, 1999, mature on December 1, 2001. In addition,
the $5.5 million Series A Preferred Stock of Republic Technologies
International, Inc. is mandatorily redeemable on September 26, 2000.
The notes and the new credit facility each contain significant affirmative
and negative covenants including separate provisions imposing restrictions on
additional borrowings, certain investments, certain payments, sale or disposal
of assets, payment of dividends and change of control provisions, in each case,
subject to certain exceptions.
The notes are secured, subject to exceptions and limitations, by (1) a
first priority lien on, and security interest in, substantially all of the
existing assets of the issuers and the restricted subsidiaries, other than (a)
the CAST-ROLL(Trademark) and Cartersville, Georgia facilities, (b) inventory,
(c) accounts receivable and (d) intellectual property and related assets, and
(2) a first priority lien, shared on an equal and ratable basis with the lenders
under the new credit facility, on the equity interests of Republic Technologies
and its restricted subsidiaries. This collateral is subject to release without
substitution under a number of circumstances. Borrowings under the new credit
facility are secured by a first priority perfected security interest in (1) the
equity interests of Republic Technologies and its restricted subsidiaries,
shared on an equal and ratable basis with the senior secured notes and (2) all
presently owned and subsequently acquired accounts, inventory, intellectual
property and related assets of Republic Technologies and guarantors and the real
estate and fixed assets comprising, and the intellectual property relating to,
the CAST-ROLL(Trademark) facility, including the related melt shop.
The obligations under the notes are unconditionally and irrevocably
guaranteed jointly and severally by Holdings and each of its subsidiaries other
than Republic Technologies, RTI Capital Corp. (the co-issuer of the notes) and
Oberlin Insurance Company. The obligations under the new credit facility are
unconditionally and irrevocably guaranteed jointly and severally by Holdings and
each of its subsidiaries other than Republic Technologies and Oberlin Insurance
Company.
Holdings and Republic Technologies are limited liability companies that
will be treated as a partnership for income tax purposes and accordingly are not
an income taxpaying entity. However, pursuant to the limited liability company
agreement of Holdings, Holdings will be required to make
56
cash distributions to its members to the extent necessary to satisfy tax
obligations regarding members' investment in Republic Technologies
International, Inc. To the extent Holdings is required to make these tax
distributions, Republic Technologies will be required to make equivalent cash
distributions to Holdings. However, Holdings believes that certain of its
members have net operating loss carryforwards which may be available to offset a
significant portion of their taxable income attributable to their investment in
us and reduce, but not eliminate, the need for tax distributions. Use of these
net operating losses is subject to various limitations and uncertainties and,
accordingly, no assurances can be given that these net operating loss
carryforwards will reduce the need for tax distributions or that they will not
be otherwise utilized.
Republic and USS/Kobe participated in Enterprise Zone Agreements
granting abatements from certain Ohio real and personal property taxes.
USS/Kobe was party to three 10 year agreements with municipal
subdivisions (City of Lorain) granting USS/Kobe a 50% abatement of taxes
on specified investment in real property, equipment and inventory,
conditioned upon the company's best efforts to maintain certain
employment levels, subject to certain exceptions. The reduction in taxes
under these agreements amounted to approximately $2.6 million in 1998.
Republic was party to a 10 year agreement with the municipal subdivision
(Canton Township) granting Republic a 75% abatement of Ohio personal
property taxes on certain investments in new equipment. The reduction in
taxes under the terms of this agreement amounted to approximately $1.1
million in 1998. Republic Technologies is currently seeking ratification
of the past agreements for the future benefit of Republic Technologies.
Republic and USS/Kobe participated in Enterprise Zone Agreements granting
abatements from certain Ohio real and personal property taxes. USS/Kobe was
party to three 10 year agreements with municipal subdivisions (City of Lorain)
granting USS/Kobe a 50% abatement of taxes on specified investment in real
property, equipment and inventory, conditioned upon the company's best efforts
to maintain certain employment levels, subject to certain exceptions. The
reduction in taxes under these agreements amounted to approximately $2.6 million
in 1998. Republic was party to a 10 year agreement with the municipal
subdivision (Canton Township) granting Republic a 75% abatement of Ohio personal
property taxes on certain investments in new equipment. The reduction in taxes
under the terms of this agreement amounted to approximately $1.1 million in
1998. Republic Technologies is currently seeking ratification of the past
agreements for the future benefit of Republic Technologies.
Holdings intends to fund its working capital, cash pension contribution
requirements, capital expenditure, debt service requirements and tax
distributions to its members through cash flows generated from operations and
borrowings under the $425.0 million new credit facility. Availability under the
new credit facility is limited to a borrowing base equal to (1) 60% of eligible
inventory, plus (2) 85% of eligible accounts receivable, plus (3) the lesser of
67% of the appraised value of the CAST-ROLL(Trademark) facility and
$125 million, which will decrease by $4.5 million per quarter beginning the
quarter ended December 31, 2000, minus (4) a reserve between $35.0 million and
$50.0 million. The CAST-ROLL(Trademark) facility is subject to reappraisal after
March 31, 2001 or upon a default under the new credit facility. As of September
30, 1999, approximately $300.2 million was outstanding under the new credit
facility, leaving undrawn commitments of approximately $107.8 million.
In connection with the Combination, RTI issued 30,000 shares of its Series
C convertible preferred stock. The Series C convertible preferred stock accrues
dividends at a rate of 5% per year, which can be paid in cash or by the issuance
of additional shares of Series C convertible preferred stock at the election of
Republic Technologies International, Inc.
As is the case with most steel producers, we could incur significant costs
related to environmental issues in the future, in particular those arising from
remediation costs for historical waste disposal practices at our facilities. Our
operations are subject to environmental laws and regulations that in the event
of environmental contamination at our facilities may generate significant
liability.
Because the specialty steels market is distinct from the SBQ market, we
expect to divest or otherwise dispose of Republic's specialty steels business.
We are currently in discussions with Haynes International regarding the sale of
this business.
As discussed above under the caption "Results of Operations--Holdings", our
performance in the third quarter of 1999 was below expectations and our results
of operations and cash flow for the fourth quarter of 1999 will not be
substantially improved. Our liquidity position has also been negatively affected
by the implementation of the Consolidation Plan as a result of the time lag
between the incurrence of certain costs and the receipt of expected cash flow
benefits, such as in the case of headcount reductions requiring lump sum
payouts.
In the light of the integration and other problems which we have
experienced in recent months, we have sought to improve our liquidity position
by scaling back operations at our Johnstown facility and reducing inventory.
Notwithstanding these efforts, however, we may need to borrow additional funds
under the new credit facility or, to the extent that sufficient funds are not
available thereunder, seek to obtain additional financing to meet cash flow
requirements, including financing through the sale of additional debt or equity
securities. To the extent that these problems continue or worsen, we may also
need to accelerate planned asset sales and/or defer capital expenditures.
Reductions in capital expenditures may delay the implementation of the
Consolidation Plan or require the plan to be revised.
Management believes that cash generated from operations, together with
amounts under the new credit facility and government-assisted borrowings
expected to be obtained, will be sufficient to meet our working capital, cash
pension contribution, capital expenditure, debt service requirements and other
cash needs, for the foreseeable future. However, there can be no assurance that
this will be the case.
57
RAW MATERIALS
Our major raw materials are ferrous scrap metal, which is generated
principally from industrial, automotive, demolition and railroad sources and is
melted in our electric arc furnaces, iron ore and coke, which are the component
materials for the production of raw steel at our blast furnace. Although the
prices of many of our raw materials vary, the fluctuations in the price of steel
scrap, iron ore and coke are most significant to us.
The long-term demand for scrap metal and its importance to the domestic
steel industry is expected to increase as steelmakers continue to expand scrap
metal-based electric furnace capability, with additions to or replacements of
existing integrated steel manufacturing facilities that use iron ore, coke and
limestone as their principal raw materials. The high quality of our products
requires the use of premium grades of scrap metal, the supply of which is more
limited. Prices for scrap vary based on numerous factors including quality,
periodic shortages, freight costs, speculation by scrap brokers and other
conditions beyond our control, but we generally have not had difficulty
purchasing adequate scrap metal of the required quality. We believe that
adequate supplies of scrap metal will continue to be available in sufficient
quantities for the foreseeable future.
We currently purchase our scrap in the open market through a number of
broker dealers or by direct purchase. We also seek to protect against
fluctuations in the price of scrap metal by charging some customers scrap metal
surcharges based on the increase in the price of scrap metal above specified
levels. For other customers, adjustments are made in selling prices if the price
of scrap exceeds or drops below specified levels. We determine these surcharges
and price adjustments on a monthly or quarterly basis.
Iron ore pellets and coke are the principal raw materials used in blast
furnace operations in the production of SBQ steel products at our Lorain, Ohio
facility. In connection with the Combination, we entered into supply agreements
for iron ore pellets and coke with USX Corporation for the supply of our
requirements of such raw materials. These supply agreements will provide us with
"most favored nations" pricing terms with respect to the same raw materials
supplied by USX facilities which should ensure that the costs of such supplies
do not exceed market prices. If these supplies from USX Corporation are
disrupted, we believe that we would be able to obtain adequate supplies from the
market without a material disruption to our operations. See "Risk Factors--The
inputs used to produce steel, such as scrap metal, iron ore and energy, are
subject to price fluctuations that could increase our costs of production" and
"Relationships and Related Party Transactions."
INFLATION
We do not believe that inflation has had a significant impact on our
results of operations during the periods discussed.
SEASONALITY
Our business is subject to some degree of seasonality. The primary end
markets for our products are the automotive and industrial equipment industries.
Consequently, we experience seasonal fluctuations to the extent that the
operations of the automotive and industrial equipment industry slow down in the
summer months when plants close for vacation, model year changeovers and
maintenance and at the end of December when plants close for a portion of the
holiday season. In the twelve months ended December 31, 1998, we realized 21%
and 20% of our pro forma sales in the three months ended September 1998 and
December 1998, respectively.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
was recently enacted by the FASB. SFAS No. 133, as amended by SFAS No. 137,
establishes accounting and reporting standards for derivative instruments and
hedging activities and is effective for fiscal years beginning after June 15,
2000. We have not yet determined the impact that the adoption of this standard
will have on our financial statements.
58
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Computer
equipment, software and other devices with embedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to do the following:
o receive orders;
o manufacture product;
o ship inventory;
o process transactions;
o send invoices;
o deposit cash; and
o engage in other normal business activities.
The inability of business processes to function properly in year 2000 could have
adverse effects on companies and entities throughout the world.
We presently believe that we have effective plans in place to address Year
2000 issues at all of our former Republic, BarTech and USS/Kobe facilities. In
the event, however, that we have not properly and fully anticipated and resolved
all Year 2000 issues, Year 2000 issues may materially impact and adversely
affect our results of operations and our relationships with third parties.
Since the consummation of the Transactions, we have been consolidating and
integrating the information systems of Republic, BarTech and USS/Kobe. Since
Republic and BarTech have begun operating under common management, these two
companies developed a joint plan for Year 2000 compliance, which is summarized
below. Prior to the Combination, USS/Kobe Steel Company had also developed a
compliance plan, which is discussed separately below.
Republic and BarTech. We have developed integrated plans to address issues
related to the impact of Year 2000 in four major areas at Republic and BarTech:
o infrastructure;
o business applications;
o plant applications; and
o suppliers.
The infrastructure portion of the program addresses wide and local area
networks, servers, personal computing, telecommunications systems and software,
fax and facility security systems. Each location's equipment has been
inventoried and assessed for Year 2000 problems. Some Republic and BarTech
facilities have completed the remediation process through replacement or
upgrade. As of December 31, 1999, this portion of the program was complete and
no significant problems have been encountered in 2000.
The business application portion of the program addresses applications and
system software that run on the larger mainframe and mid-range computers. These
systems have been upgraded and/or replaced with new applications to address Year
2000 issues. As of December 31, 1999, this program area was complete and no
significant problems have been encountered in 2000.
Our plant systems include hardware, software and associated embedded
computer technologies that are used to operate our manufacturing facilities.
These systems have been inventoried and adequately assessed. All Republic and
BarTech plant sites completed remediation and testing prior to December 31, 1999
and no significant problems have been encountered in 2000.
We are currently assessing the impact of the Year 2000 issue as it relates
to the suppliers and customers of Republic and BarTech to identify the extent to
which we may be vulnerable in the event those parties fail to properly resolve
their own Year 2000 issues. Readiness questionnaires were sent to our Republic
and BarTech supplier base. Through December 31, 1999, less than 20%
59
of the suppliers surveyed had responded. None of the responding suppliers
reported any significant problems.
USS/Kobe. USS/Kobe Steel Company formed a multi-functional Year 2000 task
force to execute a preparedness plan addressing the readiness of USS/Kobe Steel
Company's business systems, technical infrastructure, end-user computing,
manufacturing, environmental operations, systems products produced and sole and
dedicated research and development facilities. To assist in assessing Year 2000
compliance and readiness, the management of USS/Kobe Steel Company engaged
specialized information technology consultants.
Prior to the Combination, USS/Kobe finished its Year 2000 assessment and
modified or replaced and tested portions of its critical software and hardware
enabling its financial and operating systems and processes to achieve Year 2000
readiness. The former USS/Kobe facilities have experienced no significant
problems attributable to the Year 2000 issues in 2000.
Prior to the Combination, USS/Kobe Steel Company began a program of
querying significant third parties, including suppliers, utility and other
resource providers and customers to assess their Year 2000 readiness. Management
has not been made aware of any third parties significant to the former USS/Kobe
operations that were not, or did not plan to be, Year 2000 ready.
Contingency Plans. As part of the Year 2000 plans, we assessed the risks
associated with the potential system failures of our suppliers, banks, utilities
and internal systems. We developed contingency plans for these failures, which
include, but are not limited to the use of alternative suppliers and developing
alternative manual systems.
We currently believe that the most reasonably likely worst case scenario
for our operations with respect to the Year 2000 issue would include the
following:
o the inability to sustain our current level of shipments;
o inability to bill or invoice; and
o a decrease in operational efficiency as a result of the increase in
manual processing efforts.
These problems could result in potential lost sales and profits. We are
continuing to assess our contingency plans to address these potential
disruptions to our business.
60
BUSINESS
GENERAL
We are the largest producer of special bar quality steel products in the
United States, with a market share of approximately 23% based on 1998 calendar
year pro forma shipments. SBQ steel products are high quality hot-rolled and
cold-finished carbon and alloy steel bar and rod used primarily in critical
applications in automotive and industrial equipment. SBQ steel products are sold
to customers who require precise metallurgical content and quality
characteristics. SBQ steel products generally contain more alloys, and sell for
substantially higher prices, than merchant and commodity steel bar and rod
products. We produce the widest range of SBQ steel products in the United States
and supply a diverse customer base that includes leading automobile and
industrial equipment manufacturers and their first tier suppliers. We have
aggregate annual steel melting capacity of approximately 3.0 million tons,
hot-rolling production capacity of approximately 2.6 million tons and
cold-finishing production capacity of approximately 0.6 million tons.
The Combination combined three businesses with both complementary and
overlapping operations. As a result, the Combination offers opportunities to
significantly enhance our financial and operating performance by
(1) rationalizing our production facilities and headcount,
(2) enhancing the productivity of the remaining facilities through
facility specialization and targeted capital investment,
(3) eliminating redundant corporate overhead and
(4) in-sourcing more feedstock currently purchased from third parties.
In addition, the Combination will result in our having a broader product range
than any of the combining companies, thereby positioning us to expand our role
as a critical supplier to automobile and industrial equipment manufacturers and
their first tier suppliers. In order to take advantage of these opportunities,
we intend to implement our Consolidation Plan, which is described below in
detail under the caption "The Consolidation Plan."
HISTORY OF BARTECH, REPUBLIC AND USS/KOBE
Our company represents the combination of BarTech, Republic and USS/Kobe.
BarTech was formed in September 1994 with the assistance of affiliates of The
Veritas Capital Fund L.P. to acquire and restart specific melt shop and
hot-rolling assets of the former Bar, Rod & Wire Division of Bethlehem Steel
Corporation. In February 1996, BarTech resumed commercial steel making
activities at the former operations of the Bethlehem BRW Division. In April
1996, Blackstone acquired control of BarTech concurrently with BarTech's
acquisition of Bliss & Laughlin, one of the largest processors of cold-finished
SBQ steel products in North America. Republic was a leading U.S. manufacturer of
SBQ steel products which was formed in November 1989 to own and operate the
former assets of the Bar Division of LTV Steel Company Inc. In September 1998,
Blackstone and other investors acquired control of Republic through RES Holding
with the intention of combining it with BarTech. USS/Kobe is the SBQ steel
production facilities and related operations division of USS/Kobe Steel Company,
a 50/50 joint venture formed in July 1989 between a subsidiary of each of USX
Corporation, the former owner of the Lorain, Ohio facility, and Kobe Steel, Ltd.
As part of a strategy to pursue consolidation opportunities in the steel
industry Blackstone, Veritas, USX Corporation and Kobe Steel, Ltd. identified
the combination of Republic, BarTech and USS/Kobe as a significant opportunity
to establish a leading position in the North American SBQ steel market and to
realize sizable cost savings and synergistic benefits.
THE SBQ STEEL PRODUCTS INDUSTRY
According to statistics obtained from external and internal sources, in
1998, domestic suppliers shipped approximately 23.5 million tons of steel bar
and rod in the United States, of which approximately 10.1 million tons were SBQ
steel products. Industry sources estimate that consumption of U.S. SBQ steel
products has grown at a compound annual rate of 3.4% since 1986
61
and at a compound annual rate of 5.6% since 1992. This growth is the result of
several favorable trends, including the following:
o increased share of the U.S. auto market represented by light trucks,
including minivans and sports utility vehicles, which contain on average
nearly twice as much SBQ steel per unit as passenger cars;
o increased use of SBQ steel products in the manufacture of automotive and
industrial equipment components due to the greater ability of SBQ steel
products to satisfy increased quality and safety requirements;
o continued displacement of imported SBQ steel-based automotive and
industrial equipment components by domestically produced components as a
result of the improved quality of domestic components and manufacturers'
desires to reduce inventory levels;
o increased domestic investment in the capital goods sector, a large
consumer of SBQ steel products; and
o increased sales to foreign transplant automobile and industrial equipment
manufacturers and their components suppliers that have established
manufacturing operations in North America. According to industry
consultants, these companies are expected to increase their use of
domestic SBQ steel products from approximately 30% to over 75% in the
next several years.
OUR COMPETITIVE STRENGTHS
The Combination merged three businesses with both complementary and
overlapping operations. As a result, the Combination offers opportunities to
significantly enhance our financial and operating performance.
o Leading Market Position. We are the largest U.S. producer of SBQ steel
products based on our 2.3 million net tons shipped on a pro forma basis
during the twelve months ended December 31, 1998. We also manufacture the
broadest product line in the SBQ steel products industry.
o High Quality Products for Established Customers. We enjoy broad customer
recognition for our high quality products, quality certified facilities
and customer service. These strengths contribute significantly to our
strong relationships with automobile and industrial equipment
manufacturers, like Ford and DaimlerChrysler, and their first tier
suppliers, like American Axle & Manufacturing and Delphi Automotive
Systems, both of which were formerly divisions of General Motors.
o Complementary, Efficient Production Facilities. Our Consolidation Plan
is designed to increase production at our facilities that have benefitted
from previous investments and to close our least efficient facilities. We
intend to focus production at our remaining facilities on the specific
range of product sizes that these facilities are best suited to produce.
We expect this will enable us to lower fixed and variable costs while
increasing total production volume.
o Complementary Product and Customer Base. USS/Kobe has traditionally been
a supplier of high-quality, small-diameter bar and rod in coil form,
while Republic and BarTech have supplied primarily intermediate and large
size cut-length bar. As a result, we have low overlap among our principal
customers. We believe that this low overlap and our expanded product
offering will enable us to increase sales to our customers.
o Flexible Workforce. We believe our new labor agreement with the United
Steelworkers union and the implementation of the Consolidation Plan will
create a smaller and more flexible and efficient workforce, which will
lower our cost structure.
o Vertically Integrated Manufacturer. We are vertically integrated, with
the ability to complete all aspects of the SBQ steel manufacturing
process from raw steel production and scrap steel melting to
cold-finishing of steel bar and rod.
o Experienced Management Team. Our five most senior managers, led by
Thomas N. Tyrrell, our Chief Executive Officer, have an average of over
28 years of experience in the steel industry.
62
o Strong Equity Sponsors. We believe that Blackstone Capital Partners II
Merchant Banking Fund L.P. and our other principal investors, USX
Corporation, Kobe Steel, Ltd. and The Veritas Capital Fund, L.P., provide
us with significant financial and industry expertise and resources.
OUR BUSINESS STRATEGY
Our objective is to significantly improve our results and strengthen our
position as the industry leader in SBQ steel products through the following
strategic initiatives:
Implement Our Consolidation Plan. Our Consolidation Plan builds on
initiatives already under way at Republic and BarTech and the significant
capital expenditures made in recent years by all three companies. It is intended
to improve our operating efficiency and results by rationalizing our production
facilities, which will enable us to
(1) significantly reduce our production headcount,
(2) eliminate substantial non-labor plant-related fixed costs and
(3) decrease our variable costs of production through the reallocation
of our production to our more efficient facilities.
In addition, the Consolidation Plan will allow us to eliminate redundant
corporate overhead, administrative and selling costs. We believe that
significant benefits from the Consolidation Plan can be realized by the end of
1999 with minimal capital investment. See "Summary--Overview of the
Consolidation Plan," "Risk Factors--We may not be able to achieve the operating
synergies and cost savings that we expect from the Combination" and "The
Consolidation Plan."
Capitalize on Competitive Cold-Finished Product Cost Position. We believe
that we have a lower cost structure than most of our cold-finished SBQ steel
competitors because we are able to source internally a significant portion of
the SBQ steel used in our cold-finishing operations and thus avoid paying a
mark-up on such supplies. Prior to the Combination, our cold-finishing
facilities obtained approximately 60% of their hot-rolled product requirements
from internal sources. As a result of the Combination, we have an expanded range
of hot-rolled products, particularly in smaller sized coils, which we expect
will enable us to obtain 88% of our hot-rolled product requirements internally
which will significantly reduce our production costs.
Increase Our Penetration of the SBQ Steel Market. We are well positioned
to increase our share of both the hot-rolled and cold-finished SBQ steel market
segments by expanding sales to our existing customers and developing new
customer relationships. We have significant opportunities to cross-sell to
existing customers as only five customer accounts out of our top 20, which
accounts represented approximately 21% of our pro forma sales for the nine
months ended September 30, 1999, overlapped among the top 20 customers of each
of Republic, BarTech and USS/Kobe. We believe this opportunity is magnified by
the trend among customers in our industry to reduce their total number of SBQ
steel product suppliers. In addition, our high-quality products, broad product
range and lower cost operations should enhance our ability to attract and
service new customers.
Improve Our Product Mix. We are a major supplier to leading automobile and
industrial equipment manufacturers and their first tier suppliers. Approximately
48% of our annual shipments are pre-certified products to these customers. We
intend to use our strong relationships in this highly attractive market segment
to improve our product mix. As we further penetrate the high end of the SBQ
steel market, we believe our product pricing and margins will improve.
Continue to Provide Strong Customer Service. We believe that a high degree
of technical service and customer support is critical to developing and
maintaining long-term relationships with our customers. In addition to requiring
consistent high-quality products, many of the major automobile and industrial
equipment manufacturers and first tier suppliers that we serve require timely
delivery of materials to support their "just-in-time" inventory management. We
offer our customers a knowledgeable field technical salesforce that we believe
is the largest in the industry. Our field technical sales representatives work
closely with customers to coordinate our development
63
and delivery of products with the metallurgical, physical and performance
attributes that best serve their needs.
OUR SBQ STEEL PRODUCTS
The following table sets forth our net tons shipped and margins over
materials per ton shipped for our principal product lines for the periods
indicated:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------------- -------------------
1997 1998 1998
-------------------- ------------------- -------------------
(TONS IN THOUSANDS)
Net tons shipped:
SBQ hot-rolled products.................................... 1,669 53% 1,776 60% 1,395 59%
SBQ cold-finished products................................. 489 16 486 17 382 16
Seamless rounds............................................ 906 29 552 19 481 21
Semi-finished steel products............................... 90 3 128 4 105 4
----- --- ------ ---- ------ ----
Total net tons shipped................................... 3,154 100% 2,942 100% 2,363 100%
----- --- ------ ---- ------ ----
----- --- ------ ---- ------ ----
Average margin over raw materials per net ton shipped:
SBQ hot-rolled products.................................... $ 382 $ 387 $ 381
SBQ cold-finished products................................. 588 601 585
Seamless rounds(1)......................................... 216 217 216
Semi-finished steel products(1)............................ 317 256 249
All products............................................. 364 385 374
1999
-------------------
Net tons shipped:
SBQ hot-rolled products.................................... 1,248 65%
SBQ cold-finished products................................. 339 17
Seamless rounds............................................ 253 13
Semi-finished steel products............................... 89 5
------ ----
Total net tons shipped................................... 1,929 100%
------ ----
------ ----
Average margin over raw materials per net ton shipped:
SBQ hot-rolled products.................................... $ 371
SBQ cold-finished products................................. 577
Seamless rounds(1)......................................... N/A
Semi-finished steel products(1)............................ 205
All products............................................. 376
- ------------------
(1) For the nine months ended September 30, 1999, seamless rounds are included
in semi-finished steel products; margins on seamless rounds cannot be
separately determined for this period. Accordingly, margins for
semi-finished steel products for the nine months ended September 30, 1999 is
not comparable with the information for the twelve months ended December 31,
1997 and 1998.
Hot-Rolled Products. Our hot-rolled products are manufactured from steel
or iron melted in our steel production facilities, which is cast into blooms or
direct cast into billets and then hot-rolled into bar or rod in a variety of
sizes and product shapes. As a direct cast billet or bloom cast billet is
reduced in size at our hot-rolling mills, the strength and integrity of the
resulting bar or rod product is increased. Because blooms have a larger
cross-sectional area than billets, a greater reduction to size occurs.
Accordingly, a hot-rolled product rolled from a bloom cast billet is generally
stronger than a direct cast billet hot-rolled product of the same size and
metallurgical content. Typically customers concerned about product quality and
strength as related to reduction of area require bloom-based hot-rolled bar
products.
Direct cast billet products are generally used for smaller SBQ product
sizes and for less demanding end-use applications. However, we are currently in
the process of receiving customer certification to supply billet-based products
for higher-end applications and expect to sell increasing amounts of direct cast
billet-based products to our higher-end automotive and industrial equipment
customers. Our Canton, Ohio CAST-ROLL(Trademark) and Lorain, Ohio melt shop
facilities cast bloom-based products in a 10" by 13" or 12.5" by 14" size and
have approximately 2.4 million tons of aggregate annual bloom capacity. Our
Johnstown, Pennsylvania facility produces direct cast billet-based products in a
6 3/4" by 6 3/4" size and has 0.77 million tons of annual billet capacity.
64
The table below displays the major end-market applications of our
hot-rolled products by size and shape, as well as the percentage of our total
hot-rolled product shipments for the twelve months ended December 31, 1998 by
each shape:
MAJOR END-MARKET APPLICATIONS BY PRODUCT SIZES AND SHAPES
ROUNDS SQUARES HEXAGONS
7/32"- 3/4" Auto fasteners Not Applicable Hose couplings
Tire cord Converters
Specialty springs
3/4"-3 1/4" Bearings Not Applicable Hose couplings
Spindles Converters
Steering columns
Gears
Constant velocity
joints
Hubs
Axles
3 1/4"+ Crankshafts Off-highway Not Applicable
Axles equipment
Hydraulic cylinders Agricultural equipment
Machine parts Converters
Converters
% OF TOTAL SHIPMENTS 95 4 1
For the twelve months ended December 31, 1998, we shipped approximately
1,776,000 tons of hot-rolled products, which comprised 60% of our total product
shipments. For the nine months ended September 30, 1999, we shipped
approximately 1,248,000 tons of hot-rolled products, which comprised 65% of our
total product shipments.
Cold-Finished Products. Our cold-finished products are manufactured from
hot-rolled bars or rods that are processed further to achieve superior
straightness, tolerance, finish and mechanical properties. In the twelve months
ended December 31, 1998, approximately 56% of our cold-finished bar and rod
production used internally produced hot-rolled products. In the nine months
ended September 30, 1999, approximately 80.6% of our cold-finished bar and rod
used internally produced hot-rolled products. Given our increased product size
and grade range for hot-rolled products, we expect to be able to increasingly
substitute internally produced hot-rolled products for external purchases.
Ultimately, we intend for 88% of the hot-rolled products needed in our
cold-finishing production to be produced internally.
65
The table below displays the major end market applications of our
cold-finished products by shape without references to product size, which is
less important for determining the end use of cold-finished steel products:
MAJOR END MARKET APPLICATIONS BY SHAPES
ROUNDS HEXAGONS SQUARES FLATS
Constant velocity joints Hose fittings Agricultural Machine tool fixtures
Hydraulic hose couplings Spark plug shells equipment Office furniture
Fractional horsepower motor shafts Nuts Exercise equipment
Steering rack gears Agricultural equipment
Engine valves and fuel injector parts
Hydraulic cylinders for off-highway
and agricultural equipment
Shafts and gears for appliance
industry
For the twelve months ended December 31, 1998 we shipped approximately
486,000 tons of cold-finished products, which comprised 17% of our total product
shipments. For the nine months ended September 30, 1999, we shipped
approximately 339,000 tons of cold-finished products, which comprised 17% of our
total product shipments.
Seamless Tube Rounds. In connection with a supply agreement with USX
Corporation and the Lorain, Ohio seamless tubular steel joint venture of USX and
Kobe Steel, Ltd., we produce semi-finished rounds at our Lorain, Ohio facility
for purchase by the tubular joint venture and by USX's Fairfield, Alabama
facility under specified circumstances. Depending upon the desired end-use
application for the Lorain tubular joint venture, these products are either cast
to sizes of 10.5", 12.25" or 13.5" or cast to size and then rolled at our
primary rolling mill to sizes of 6" or 10.5". For the Fairfield facility, we
produce semi-finished product in rounds at 11.6". Seamless tubes are used in oil
and gas drilling and exploration applications. Over the last five years, the
Lorain tube mills have consumed, on average approximately 450,000 tons per year.
Over the last five years, we have shipped to the Fairfield facility, on average,
approximately 326,000 tons per year. For the twelve months, ended December 31,
1998, we shipped approximately 552,000 tons of seamless rounds which comprised
approximately 19% of total shipments. For the nine months ended September 30,
1999 we shipped approximately 253,000 tons of seamless rounds, which comprised
approximately 13% of total shipments. For a description of the rounds supply
agreement, see "Relationships and Related Party Transactions--Agreements with
USX Corporation and Kobe Steel, Ltd. and Their Affiliates."
Semi-Finished Steel Products. In addition to our hot-rolled and
cold-finished products, we sell semi-finished products directly from our melt
shop casters, before they have been processed further at our rolling mill
facilities. These products are typically sold to rolling mills operated by
competitors without melt shop facilities or to steel service centers or
distributors, for further processing before they reach the ultimate end user.
These products are sold in sizes ranging from 5"-14". For the twelve month
period ended December 31, 1998, we shipped approximately 128,000 tons of semi-
finished steel products, which comprised approximately 4% of our total product
shipments. For the nine months ended September 30, 1999 we shipped approximately
89,000 tons of semi-finished steel products, which comprised approximately 5% of
our total product shipments.
THE STEEL MANUFACTURING PROCESS
The manufacturing process for our hot-rolled and cold-finished SBQ steel
products involves a number of steps that we outline below.
Melting. Our production of steel begins at our two electric furnace melt
shops in Canton, Ohio and Johnstown, Pennsylvania and our blast furnaces in
Lorain, Ohio. The Canton and Johnstown melt shops operate electric arc furnaces,
which consume ferrous scrap as the primary raw material.
66
At both facilities, premium grade steel scrap is transported from a scrap yard
to the facility's melt shop, where it is melted in two 220-ton electric arc
furnaces at the Canton, Ohio facility or one of two 180-ton electric arc
furnaces at the Johnstown, Pennsylvania facility. After the scrap reaches a
molten state, it is poured from the furnace into ladles and further processed in
a ladle refining furnace, where alloys, carbon and other materials are added to
create the desired chemical, metallurgical and physical properties. During the
scrap melting and refining process, impurities are removed from the molten
steel. In addition, as part of the refining process, the molten steel is further
processed in a vacuum degasser, which removes oxygen, hydrogen and nitrogen to
produce a clean, high-quality steel.
At our Canton, Ohio facility, the molten steel is introduced to our
CAST-ROLL(Trademark) process in which molten steel is poured into a four-strand
continuous bloom caster, solidified in molds and cut into blooms and billets in
a single continuous process. At the Johnstown, Pennsylvania facility, the molten
steel is poured into a five-strand continuous caster to be solidified and rolled
into billets. These semi-finished blooms and billets, having been produced to a
specified chemical composition, size and quality, are then cooled and sent to
our rolling mills for further processing into finished products.
Unlike our electric furnace melt shops that rely on steel scrap, our
Lorain, Ohio facility produces iron in a blast furnace, and later converts the
iron to steel in a basic oxygen furnace by adding scrap. The primary raw
materials used in our blast furnace are
(1) taconite pellets, which are a concentrated form of iron ore,
(2) coke, which is a product produced by baking specific types of coal
at high temperature, and
(3) limestone or other cleansing materials, which are necessary to
remove impurities in the material.
In addition, scrap material is often used in place of iron ore and pulverized
coal is often used in place of coke. The taconite pellets and coke are purchased
by us from USX Corporation pursuant to long-term supply agreements and the other
materials are either produced at the facility or purchased from third parties.
See "Relationships and Related Party Transactions--Agreements with USX
Corporation and Kobe Steel, Ltd. and Their Affiliates."
The Lorain facility has two blast furnaces but currently operates only one.
It is unnecessary for us to operate the idle furnace in order to produce at
current levels. Within the refractory brick-lined blast furnace chamber, the
iron material consisting of taconite or other ores, the carbon material
consisting of coke and pulverized coal and the cleansing or "flux" material are
heated to temperatures in excess of 2,500 degrees Fahrenheit. The high
temperature causes a chemical reaction between the iron and carbon creating pig
iron or hot metal. The flux material combines with impurities to create a
by-product called slag.
The pig iron is then transferred in liquid form by special rail vehicles to
the Lorain melt shop, which operates two 220-ton basic oxygen furnaces. Sulfur
is removed from the hot metal and the hot metal is mixed with high quality
scrap. This mixture is injected with oxygen that causes another chemical
reaction that converts the pig iron or hot metal into molten steel, which is
then poured into ladles. The ladles are transported to a ladle metallurgy
facility where alloying agents and other refining materials may be added and
blended into the steel. In addition, for some applications, the molten steel may
be processed in a vacuum degasser to reduce oxygen, hydrogen and nitrogen.
The molten steel is then poured into a five-strand continuous bloom caster
through which the steel flows and cools. The cooled material solidifies and then
is cut into blooms. The caster produces large diameter round blooms that are
feedstock for hot-rolled large diameter seamless tube products or rectangular
blooms that are transported to a mill that converts the blooms into billets to
be used as feedstock for hot-rolled bar and rod, or into smaller diameter
semi-finished rounds to be used as feedstock for hot-rolled smaller diameter
seamless tube products.
Hot-Rolling. At our hot-rolling mills, the blooms and billets are
processed into hot-rolled products by changing the internal physical properties,
size and shape of the steel. Blooms and billets
67
are first reheated, then rolled through up to 22 mill stands, which form the
blooms and billets into the desired dimensions and sizes for our hot-rolled SBQ
steel products. The heated, finished hot-rolled products are coiled or are
placed on a cooling bed and then cut into required lengths. The hot-rolled
products are then stacked into coils or bundles and placed in warehouses from
which they are shipped directly to the customer or to one of our cold-finishing
mills for further processing.
Cold-Finishing. To produce our cold-finished SBQ steel products, we
improve the physical properties of hot-rolled products through value-added
processes at our cold-finishing plants. Cold-finishing processes produce
products with more precise size and straightness tolerances as well as a surface
finish that provide customers with a more efficient means of producing a number
of end products by often eliminating the first processing step in the customer's
process. The four basic cold-finishing processes are the following:
PROCESS DESCRIPTION
- ------------------------------------------ -----------------------------------------------------------
Cold Drawing.............................. Hot-rolled products that have been descaled by blasting the
surface with hardened steel shot or pickling with acid are
(1) drawn or pulled through a tungsten carbide die, which
compresses the surface, elongates the product and makes it
smooth and shiny and (2) straightened.
Turning and Polishing..................... Removing the surface of hot-rolled products with a
revolving cutting tool, which is the turning process, then
rotating the turned product through rollers that polish the
surface and straighten the product.
Turning, Grinding and Polishing........... The same processes as turning and polishing products, with
the addition of a grinding process that yields very fine
tolerances.
Drawing, Turning, Grinding and
Polishing............................... The same processes as turning, grinding and polishing
products, with the addition of a drawing process to add
physical strength.
After the cold-finished products are cut to length, they are stacked in
bundles and transported to warehouses from which they are shipped to customers.
68
OUR PROPERTIES
The table below sets forth certain information regarding our melt shops,
hot-rolling mills, cold-finishing facilities and offices. All of these
properties are owned by us other than our corporate offices, which are leased.
APPROXIMATE PRODUCTION NUMBER OF EMPLOYEES
SIZE IN CAPACITY(A) (AS OF 9/30/99)(B)
THOUSANDS OF (TONS IN QS-9000 ------------------------------
LOCATION SQUARE FEET THOUSANDS) CERTIFICATION HOURLY SALARIED(C) TOTAL
- ---------------------------------------------- ------------ ---------- ------------- ------ ----------- -----
Melt Shops/Caster Facilities:
Canton, Ohio................................ 481 925 u 583 134 672
Lorain, Ohio................................ 688 1,300 u 1,087 87 1,174
Johnstown, Pennsylvania..................... 1,917 770 u 163 47 210
Hot-Rolling and Processing Mills:
Lorain, Ohio (two mills).................... 1,247 1,115 u 526 56 582
Lackawanna, New York........................ 1,099 600 u 285 59 344
Massillon, Ohio (Oberlin Road) ............. 667 480 u 305 29 334
Canton, Ohio................................ 743 380 u 417 86 503
Chicago, Illinois........................... 2,019 0(D) u 223 35 258
Cold-Finishing Facilities:
Harvey, Illinois............................ 331 120 u 107 26 133
Massillon, Ohio (Rose Avenue) .............. 553 120 u 201 34 235
Gary, Indiana (Dunes Highway) .............. 266 90 u 85 16 101
Batavia, Illinois........................... 61 Closed N/A 0 0 0
7/2/99
Cartersville, Georgia....................... 92 60 Approved 30 9 39
for
certification
Medina, Ohio................................ 126 Closed N/A 0 0 0
7/2/99
Gary, Indiana (Seventh Avenue).............. 200 60 u 52 6 58
Hamilton, Ontario, Canada................... 135 60 u 78 14 92
Beaver Falls, Pennsylvania.................. 176 55 u 85 16 101
Willimantic, Connecticut.................... 89 25 u 17 4 21
Corporate Offices............................. 0 275 275
------ ----- -----
Total Employees........................... 4,244 933 5,132
------ ----- -----
------ ----- -----
- ------------------
(A) Stated tons represent the production capacity of the individual facility
only and do not represent our production capacity as a whole added together.
(B) All of our current hourly employees are represented by the United
Steelworkers union except for hourly employees at our Cartersville, Georgia
facility, which is non-unionized, and guards and masons who belong to
separate unions.
(C) Salaried headcount reflects responsibilities of the respective personnel,
with corporate office salaried headcount reflecting employees included in
sales, general and administrative expense.
(D) The hot-rolling operations at the Chicago mill were shutdown in November
1999. Certain processing operations are continuing in part of this facility.
These processing operations employ approximately 65 personnel.
69
Melt Shops. We operate three primary melt shop facilities in Canton, Ohio,
Lorain, Ohio and Johnstown, Pennsylvania.
o Canton, Ohio. Our melt shop facility in Canton, Ohio comprises
CAST-ROLL(Trademark) facility, which has 750,000 tons of annual capacity,
and which uses a continuous casting process. Our CAST-ROLL(Trademark)
facility is one of the most modern and sophisticated melt shops in the
world. The CAST-ROLL(Trademark) facility links five proven technologies
with a high level of computer control into one continuous process. The
CAST-ROLL(Trademark) facility includes a ladle metallurgical facility, a
vacuum tank degasser and a four strand continuous bloom caster supplied
with molten steel from two 220-ton electric arc furnaces. A portion of
the cast steel from the bloom caster moves directly to an inline reheat
furnace and then to a rolling mill which produces SBQ steel billets for
our rolling mills. The CAST-ROLL(Trademark) facility is currently
operating at its present rated capacity of 750,000 tons per year with
approximately 98% of the product to be produced through the
CAST-ROLL(Trademark) facility having been qualified by our customers. As
part of the Consolidation Plan, we shut down the ingot cast route, which
had 500,000 tons of annual capacity, in August 1999. We expect to expand
the CAST-ROLL(Trademark) facility's capacity to 925,000 tons per year and
shift the production of the ingot cast route to the CAST-ROLL(Trademark)
facility and to the melt shops in Lorain, Ohio and Johnstown,
Pennsylvania.
o Lorain, Ohio. The Lorain melt shop facility contains two blast furnaces
with annual production capacities of 1.4 million and 1.1 million tons,
respectively, and two basic oxygen furnaces with aggregate annual
production capacity of 2.6 million tons. The 1.1 million ton blast
furnace is currently idle. Raw steel, which is made in the blast furnaces
and the basic oxygen furnaces, is cast into molds in our billet or bloom
caster, which have annual production capacities of 1.2 and 1.3 million
tons, respectively, and then either
(1) sent directly to one of our bar mills or
(2) rolled into billets at the Lorain facility's primary rolling mill
and then shipped directly to customers as semi-finished product or
to one of our rolling mills for further processing.
The blast furnace that we will continue to operate after the
Consolidation Plan was relined and modernized in 1992 at a capital cost
of $107 million and the bloom caster was installed in 1995 at a cost of
$70 million. As part of our Consolidation Plan, we expect to shut down
(1) the smaller blast furnace and
(2) the billet caster, relying on our Johnstown facility for cast
billet production.
On September 22, 1999, one of the two basic oxygen process (BOP) vessels
at Lorain suffered a burn-through fault. This problem idled the damaged
vessel through October 18, 1999 and disrupted production cycles in the
other vessel as well as casting and rolling operations at the Lorain
facility.
All Lorain melt shop products will be processed through the bloom caster, which
is currently operating at 50% of production capacity. We expect to invest
approximately $5 million in the remaining blast furnace, which will extend the
life of the furnace lining through 2005.
o Johnstown, Pennsylvania. BarTech modernized the melt shop facility in
Johnstown, Pennsylvania in 1996 to replace the existing ingot-based
process with the continuous casting process. By virtue of the
installation of a billet caster and related equipment, the Johnstown
facility is now able to cast multiple furnace "heats" in sequence without
interrupting the casting process. The caster was designed with equipment
features to ensure compliance with the quality standards of the SBQ steel
market. These features include
(1) a technically advanced "tundish", which is the liquid steel
reservoir above the molds with flow control devices to maximize
cleanliness,
(2) electromagnetic stirring coils in the caster molds and
(3) a specialized water spray cooling system designed to optimize
internal quality of the cast steel.
70
The Johnstown facility has annual production capacity of 770,000 tons and is
currently operating at approximately 50% of this capacity. As part of the
Consolidation Plan, we plan to upgrade capacity to 980,000 tons per year by
(1) more fully utilizing a recently restarted second 180-ton electric
arc furnace, which will operate in sequence with the existing
furnace,
(2) adding a fourth production shift at the melt shop and
(3) adding a sixth strand to the continuous billet caster.
See "The Consolidation Plan."
The Johnstown facility has received its formal QS-9000 certification
following an assessment audit in September 1999.
Hot-Rolling Mills. We currently operate the following five hot-rolling
mills with nameplate capacities shown:
o a 9"/10" mill in Lorain, Ohio with an annual capacity of 465,000 tons;
o a 12" mill in Canton, Ohio with an annual capacity of 380,000 tons;
o a 12" mill in Lorain, Ohio with an annual capacity of 650,000 tons;
o a 13" mill in Lackawanna, New York with an annual capacity of 600,000
tons; and
o an 18" mill in Massillon, Ohio with an annual capacity of 480,000 tons.
As part of the Consolidation Plan, we have shut down hot-rolling operations at
our 11" mill in Chicago and plan to shut down our 12" mill in Canton and our 18"
mill in Massillon. We plan to transfer the hot-rolling production of these
facilities to the 13" mill in Lackawanna, the 9"/10" and 12" mills in Lorain and
a new large bar mill to be constructed by the end of 2002. We expect that the
reallocation of our production to our remaining hot-rolling mills based on
specific size ranges and selected capital expenditures will significantly
increase the production from our remaining facilities. After we have completed
the implementation of the Consolidation Plan, we expect to operate the following
four hot-rolling mills at approximately the production level shown:
o the small product-size 9"/10" mill in Lorain, Ohio with an annual
production of 550,000 tons;
o the intermediate product-size 12" mill in Lorain, Ohio with an annual
production of 650,000 tons;
o the intermediate product-size 13" mill in Lackawanna, New York with an
annual production of 720,000 tons; and
o the planned large product-size mill with an annual production of 650,000
tons.
See "The Consolidation Plan."
Cold-Finishing Facilities. We currently operate eight distinct
cold-finishing mills, having recently closed two of our ten cold-finishing
facilities. In connection with the Consolidation Plan, we plan to downsize at
least two other facilities. Upon completion of this rationalization program, we
expect to be able to maintain our current capacity and capabilities with
significantly less equipment and manpower. We expect to reposition the best
equipment from the closed facilities and the downsized facilities at our other
operating locations while investing in new specialized finishing equipment. We
also plan to construct a new central processing center to perform high
value-added processing for the high end of the hot-rolled and cold-finished SBQ
steel market. See "The Consolidation Plan."
Corporate Offices. Republic, BarTech and USS/Kobe housed our corporate
personnel at ten different locations. During 1999, we consolidated these offices
into one corporate office in Akron, Ohio and a temporary information technology
center at a second location. At a later date, we plan to merge these two offices
at a single location.
71
RAW MATERIALS FOR STEEL PRODUCTION
Scrap Metal. The major raw material for our electric arc furnace melt
shops is ferrous scrap metal, which is generated principally from industrial,
automotive, demolition and railroad sources. On a pro forma basis, scrap metal
accounted for approximately 27% of our total cost of products sold, excluding
depreciation, of products originating from our electric arc furnaces for the
twelve months ended December 31, 1998. The long-term demand for scrap metal and
the importance of scrap metal to the domestic steel industry is expected to
increase as steelmakers continue to expand scrap metal-based electric furnace
capacity, with additions to, or replacements of, existing integrated steel
manufacturing facilities that use iron ore, coke and limestone as their
principal raw materials. The high quality of our products requires the use of
premium grades of scrap metal, the supply of which is more limited. Prices for
scrap metal vary based on numerous factors including quality, availability,
freight costs, speculation by scrap brokers and other conditions beyond our
control. However, we generally have not had difficulty purchasing adequate scrap
metal of the required quality. We believe that adequate supplies of scrap metal
will continue to be available in sufficient quantities for the foreseeable
future.
From November 1997 through April 1998, BarTech purchased scrap through a
single brokerage which obtained material for BarTech through a variety of scrap
brokers, dealers and the brokerage firm's own supplies. Before such time and
after such time until October 1998, BarTech purchased scrap in the open market
through a number of brokers and dealers. Beginning in October 1998, BarTech
began participating in an inventory purchasing arrangement with Republic, under
which arrangement Republic purchased materials, including scrap, on behalf of
both companies and billed BarTech for their respective share plus an
administrative fee. Over the past several years, Republic purchased scrap metal
in the open market through a number of scrap brokers and dealers or by direct
purchase. Republic purchased approximately 27.8% of its scrap metal from General
Motors during fiscal year ended June 30, 1999. USS/Kobe historically had not
purchased a significant amount of scrap in the open market due to the use of
scrap generated by its own steel manufacturing processes and its use of iron
produced in a blast furnace from its component raw materials of iron and carbon.
In the future, we expect to purchase scrap in the open market through a number
of brokers and dealers or by direct purchase.
We seek to reduce our exposure to fluctuations in the price of scrap metal
by charging where possible scrap metal surcharges based on the increase in the
price of scrap metal above specified levels. For other customers, adjustments
are made in selling prices if the price of scrap exceeds or drops below
specified levels. These surcharges and price adjustments are determined on a
monthly or quarterly basis.
The following tables set forth our average cost of scrap metal per net ton:
FISCAL YEAR NINE MONTHS
ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------ ------------
1997 1998 1998 1999
---- ---- ---- ----
Average cost of purchased scrap
metal per net ton................................................... $137 $117 $128 $ 98
Coke and Iron Ore Pellets. For the twelve months ended December 31, 1998,
we produced approximately 51% of our steel from our blast furnaces. Iron ore
pellets and coke are the principal raw materials used in our blast furnaces. On
a pro forma basis, iron ore pellets and coke accounted for approximately 31% of
our total cost of products sold, excluding depreciation, of products originating
from our blast furnaces for the twelve months ended December 31, 1998. We have
entered into long-term sourcing agreements with USX Corporation who will supply
the iron ore pellets and coke that are the raw material inputs for the blast
furnace/basic oxygen process route at our Lorain, Ohio facility. These
requirements agreements guarantee a consistent supply of quality materials to us
in the future at prices that will be favorable as compared to market prices due
to the "most favored nations" pricing terms in the agreement, which guarantees
us a price matching the
72
lowest price offered by USX. See "Relationships and Related Party
Transactions--Agreements with USX Corporation and Kobe Steel, Ltd. and Their
Affiliates."
Coal. The Lorain, Ohio blast furnace injects pulverized coal into the
blast furnace to offset its use of higher priced metallurgical coke and reduce
the material cost for hot metal production. This coal is pulverized and
delivered to the Lorain facility under a long-term tolling agreement with Ohio
Edison Power Company. The price over the life of the agreement is fixed.
Alloys and Fluxes. Additionally, we purchase various materials such as
nickel, chrome, molybdenum, vanadium, manganese, silicon, aluminum, titanium,
sulphur, lead, lime and fluorspar for use as alloying agents and fluxing, or
cleansing, materials. Since 1994, prices of many of these materials have
fluctuated dramatically. Republic and USS/Kobe have used price surcharges for
nickel, chrome, molybdenum and vanadium and other alloys in an attempt to
protect their profit margins from the effects of fluctuating prices on these
commodities. For Republic, alloys and fluxes as a percentage of cost of goods
sold constituted 12.7% in fiscal year ended June 30, 1996, 10.1% in fiscal year
ended June 30, 1997, 10.7% in fiscal year ended June 30, 1998 and 7% in the
fiscal year ended June 30, 1999. For BarTech, alloys and fluxes as a percentage
of cost of goods sold constituted 8.5% in the fiscal year ended January 2, 1999
and 6.4% in the six months ended June 30, 1999. For USS/Kobe, alloys and fluxes
as a percentage of costs of goods sold constituted 10.0% in the fiscal year
ended December 31, 1996, 7.9% in the fiscal year ended December 31, 1997, 8.1%
in the fiscal year ended December 31, 1998 and 5.6% in the six months ended
June 30, 1999.
Semi-Finished Billets and Hot-Rolled Bars. In the past, we have purchased
semi-finished billets from other steelmakers for use in production at our
hot-rolling mills. We purchase from several suppliers and expect that grades of
semi-finished billets that we choose not to produce will be available for
purchase. During the twelve months ended December 31, 1998, our hot-rolling
mills purchased approximately 34,000 tons of billet feedstock from outside
suppliers. As part of the Consolidation Plan, we intend to produce internally
substantially all of our billet requirements currently supplied by third
parties.
In addition, we have previously purchased a portion of our hot-rolled bar
requirements for our cold-finishing operations from third-party suppliers.
During the twelve months ended December 31, 1998, our cold-finishing operations
purchased approximately 208,000 tons of hot-rolled bar feedstock from outside
suppliers. As part of the Consolidation Plan, we intend to increase the amount
of internally supplied hot-rolled bar requirements consumed by our
cold-finishing operations from approximately 80.6% as of September 30, 1999 to
over 88% by 2003.
ENERGY REQUIREMENTS FOR PRODUCTION
Our manufacturing facilities consume large amounts of electricity and
natural gas. We have not had difficulty in obtaining adequate sources of
electricity and natural gas in the past and do not foresee any significant
difficulties in the future.
Our primary use of electricity is at our electric arc furnace melt shop
facilities in Canton, Ohio, and Johnstown, Pennsylvania and at our blast furnace
melt shop facility in Lorain, Ohio, which uses less electric power than the
electric arc furnaces. On a combined basis, these facilities would have
accounted for approximately 86.4% of our electricity consumption in the twelve
months ended December 31, 1998. We currently have long-term electricity
contracts in place at each of these facilities, with the Canton, Ohio agreement
expiring in 2000, the Johnstown, Pennsylvania agreement expiring in 2002 and the
Lorain, Ohio agreement running until 2004. The rest of our facilities purchase
their electricity from local utilities under various contracts and terms. We
believe that our electricity costs are competitive with other steel
manufacturers.
In connection with the consummation of the Transactions, we entered into an
agreement with FirstEnergy Services Corp. under which we appointed FirstEnergy
as our exclusive representative for the procurement of energy supply and
services. As a result of this arrangement, we expect that it
73
is likely that much of our energy purchasing requirements will eventually be
filled by FirstEnergy. See "Relationships and Related Party
Transactions--Agreements with USX Corporation, Kobe Steel, Ltd. and FirstEnergy
Services Corp. and Their Affiliates."
The principal use of natural gas in our operations is for the billet
reheating operations at our Lorain, Ohio; Canton, Ohio; Lackawanna, New York;
Chicago, Illinois and Massillon, Ohio hot-rolling mills and at the blast furnace
and primary mill at our Lorain, Ohio melt shop facility. We have negotiated a
contract expiring in April 2001 that provides natural gas to the Lackawanna
facility priced at the NYMEX contract price with fixed delivery charges. We
purchase natural gas for our hot-rolling mills in Canton, Chicago and Massillon
on a 6 to 12 month future contract basis, priced at the NYMEX contract price.
Although we have no long-term gas contract for our Lorain facility, we hedge
approximately 50% of the 12 to 18 month future natural gas consumption at this
facility with financial swaps based on NYMEX contract prices. In the future, we
intend to purchase our natural gas on a facility-by-facility basis consistent
with past practice. We believe that we purchase our natural gas at rates that
are competitive in the current marketplace.
CUSTOMERS
We primarily market our products to consumers of higher quality, critical
application SBQ steel products. Customers in these targeted market segments
require higher quality SBQ steel products for use in hot and cold metal-forming
operations such as cold forge/extrusion, warm forge, hot forge and hot/cold
heading processes, rather than traditional machining processes. Penetration of
these targeted market segments is dependent upon various factors, including the
ability to achieve precise chemistry and manufacturing tolerances. Additionally,
producers must meet pre-qualification requirements to become approved suppliers
for potential customers.
For customers in the automobile manufacturing industry and their suppliers,
the most important form of certification is the Quality System Requirement
standard, or "QS-9000" certification, which is a quality system standard
established by the Chrysler, Ford and General Motors Quality Requirement Task
Force, which sets forth a standard set of quality requirements for components
and materials suppliers to the automotive industry. Certification requirements
vary in scope and generally take between three and twelve months for a supplier
to achieve. Frequently, the qualification process requires a producer to supply
one or more trial heats of SBQ steel products for customer evaluation, although
some customers have longer pre-qualification requirements. Because of the high
costs incurred by suppliers and customers and significant time that may be
required to obtain qualifications, the qualification processes can create strong
bonds and commitments between suppliers and customers.
Most of our facilities have satisfied all major customer pre-qualification
requirements, including QS-9000. All of our facilities have received QS 9000
certifications or have been approved for QS 9000 certification.
The following table shows the percentage of our pro forma sales to major
market segments:
TWELVE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 1999
--------------------------------------- ----------------------------------------
HOT-ROLLED COLD-FINISHED HOT-ROLLED COLD-FINISHED
PRODUCTS PRODUCTS PRODUCTS PRODUCTS
----------------- ------------------ ------------------ ------------------
Automotive industry........ 37% 18% 40% 24%
Machinery, industrial and
tools industry............. 20 12 18 16
Independent forgers........ 12 -- 15 --
Service centers............ 14 49 10 50
Other...................... 17 21 17 10
--- ---- ---- ----
100% 100% 100% 100%
--- ---- ---- ----
--- ---- ---- ----
Our major customers include leading automobile and industrial equipment
manufacturers such as DaimlerChrysler, Ford, Honda and Caterpillar, first tier
suppliers to automobile and industrial
74
equipment manufacturers such as American Axle & Manufacturing, Delphi Automotive
Systems MascoTech, TRW, forgers such as Jernberg Industries, and service centers
such as AM Castle, EM Jorgensen and Ryerson Tull. On a pro forma basis, direct
sales of our products to our two largest customers, American Axle &
Manufacturing and Delphi Automotive Systems, both of which were formerly units
of General Motors, accounted for approximately 9% of our total net sales in the
twelve months ended December 31, 1998. In total, our ten largest customers
accounted for approximately 28% of our pro forma total net sales in the twelve
months ended December 31, 1998. We have enjoyed relationships with each of our
ten largest customers for at least ten years.
DISTRIBUTION
We market our SBQ steel products through a staff of approximately 30
professional sales representatives and sales technicians located in the major
manufacturing centers of the Midwest, Great Lakes, and Southeast regions of the
United States and Canada, as well as utilizing independent sales agents to cover
some areas in states in the South and the West Coast of the United States.
Our facilities are strategically located to serve the majority of consumers
of SBQ steel products in the United States and Canada. We ship products between
our mills and finished products to our customers by rail and truck. Customer
needs and location dictate the type of transportation utilized by us for
deliveries. The proximity of our rolling mills and cold-finishing plants to our
customers allows us to provide competitive rail and truck freight rates and
flexible deliveries in order to satisfy just-in-time and other customer
manufacturing requirements. Our ability to meet the product delivery
requirements of our customers in a timely and flexible fashion is expected to
continue to be a key competitive advantage for us as more and more SBQ steel
product consumers reduce their in-plant raw material inventory. We plan to
optimize our freight costs by using our significantly greater scale of
operations to negotiate more favorable transportation arrangements, continuing
to combine orders in shipments whenever possible and utilizing "backhauling" of
scrap and other raw materials.
STEEL INDUSTRY COMPETITION
The domestic steel industry is highly competitive. We compete with other
SBQ steel producers including the following:
o integrated mills, which make steel by processing iron ore and other raw
materials in a blast furnace;
o mini-mills, which make steel by melting scrap metals in an electric arc
furnace; and
o merchant bar quality producers.
Our major competitors in the hot-rolled product market include CSC Ltd.;
Ispat-Inland Steel Industries, Inc.; North Star Steel Company; MacSteel, which
is an operating division of Quanex Corporation; and The Timken Company. We
estimate that there are currently over 20 cold-finishers in the U.S. market,
including the following major competitors: Corey Steel, Inc.; Niagara LaSalle
Corporation; and Nucor Cold Finished.
Recent entrants into the SBQ steel market compete directly with us in a
major portion of our products. Qualitech Steel Corporation, which recently
became the subject of bankruptcy proceedings, completed the $500 million
construction of a SBQ steel making facility and an iron carbide production
facility in 1998. Birmingham Steel Corporation completed a new continuous melt
shop facility in 1997, which we believe will principally replace billets which
it had been importing. Birmingham Steel Corporation also commenced operation of
a new bar mill in 1996, which was in part a replacement of an older facility
that has discontinued production of SBQ steel products. In addition, foreign
competition can be significant in segments of the SBQ steel market, particularly
where certifications are not required, and during periods when the U.S. dollar
is strong as compared with foreign currencies. This competition is exerting
significant downward pressure on the price level
75
of some of our products. See "Risk Factors--We face significant competition from
other companies in the steel industry, many of which have lower cost structures
than us."
The principal areas of competition in our markets are product quality and
range, delivery reliability, service and price. SBQ steel products are
characterized by special chemistry and precise processing requirements.
Maintaining high standards of product quality while keeping production costs
competitive is essential to our ability to compete in our markets. We have the
widest selection of product grades and sizes in our industry. The ability of a
manufacturer to respond quickly to customer orders currently is, and is expected
to remain, important as customers continue to reduce their in-plant raw material
inventory.
BACKLOG OF STEEL ORDERS
We calculate backlog as those orders received but not yet shipped. Our
combined backlog as of September 30, 1999 was $301 million compared to
$427 million as of September 30, 1998. At year end December 31, 1998, our
combined backlog was $306 million. Our booked orders during the third quarter of
calendar 1999 totaled 522,000 tons as compared to 619,000 tons during the second
quarter of calendar 1999 and 387,000 tons during the third quarter of calendar
1998. Orders are generally filled within 3 to 14 weeks of the order depending on
the product, customer needs and other production requirements. Customer orders
are generally cancelable without penalty prior to finish size rolling and depend
on the customers' changing production schedules. Accordingly, we do not believe
that the amount of backlog orders is a reliable indication of future sales.
EMPLOYEES
The vast majority of our production workers are covered by our new
collective bargaining agreement. Production employees at our recently closed
Medina, Ohio facility were covered by a collective bargaining agreement with the
International Association of Machinists and Aerospace Workers. Production
employees at our Cartersville, Georgia facility are not represented by a union.
The following table shows the number of our employees as of September 30,
1999:
USWA hourly employees................................................................ 4,174
Other union hourly employees......................................................... 40
Non-union hourly employees........................................................... 30
-----
Total hourly employees.......................................................... 4,244
Salaried employees................................................................... 933
-----
Total employees................................................................. 5,132
-----
-----
AGREEMENT WITH THE UNITED STEELWORKERS UNION
In connection with the acquisition of Republic by RES Holding Corporation
in September 1998, we entered into a new Master Collective Bargaining Agreement
covering all of the former Republic and BarTech facilities with employees
represented by the United Steelworkers union and replaced the existing
collective bargaining agreements with the United Steelworkers union, other than
selected plant-specific agreements. In connection with the Combination, the
scope of the same Master Collective Bargaining Agreement was extended to cover
the former USS/Kobe Lorain, Ohio facility. This new labor agreement expires on
October 31, 2003.
Workforce Flexibility and Job Placement Efficiencies. The new labor
agreement provides for formalized workplace flexibility and consolidation of job
classifications at our facilities. Under the new labor agreement, the United
Steelworkers union has agreed to eliminate many practices, which in the past
restricted workplace flexibility and led to inefficiencies. We and the United
Steelworkers union have also agreed to reduce the number of job classifications
at all covered facilities to five from over 34. This reduction will enable us to
assign a greater number of responsibilities to individual employees.
76
Management and Union Partnership. We and the United Steelworkers union
have agreed under the new labor agreement that the United Steelworkers union
will be granted "partnership" rights in the management of our company. These
"partnership" rights afford access to our decisionmaking processes through the
formation of leadership and advisory committees containing members of our
management and United Steelworkers union representatives. Additionally, the
United Steelworkers union has the right to appoint one director to the Board of
Directors of RTI as agreed to by the United Steelworkers union and us.
Workforce Reductions and Related Payments. The new labor agreement
provides for voluntary early retirement buyouts and a voluntary severance plan
applicable to all former Republic facilities with employees represented by the
United Steelworkers union and the former USS/Kobe facilities, for the purpose of
permanently reducing the net number of hourly employees represented by the
United Steelworkers union at these facilities by over 1,700 from the date of the
Master Collective Bargaining Agreement. In the event that the required headcount
reductions are not achieved through the early retirement buyout program and a
voluntary severance plan, we may layoff up to 300 employees. For additional
information regarding the expected cash costs associated with the early
retirement buyout program and and the voluntary severance plan, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Republic Technologies--After the
Transactions."
Wages. The new labor agreement provides for across the board base wage
increases over the term of the agreement for former Republic hot-rolled and
former Republic cold-finished employees of $2.25 per hour and $1.25 per hour
respectively. The Republic wage classification schedule has been reduced to five
new labor grades resulting in a rolling up of rates and a one-time average
increase of approximately $0.46 per hour.
In addition, a $0.95 per hour wage increase contained in the plant-specific
agreements covering employees located at the former BarTech facilities in
Lackawanna, New York and Johnstown, Pennsylvania will be implemented on
March 1, 2001 and the BarTech base wage schedule will be harmonized with the
then effective Republic base rate schedule. A production based incentive plan
will also be implemented at the former BarTech facilities designed to yield
$2.16 per hour, if all of the targets which are to be established are met. The
employees will be guaranteed their base wage rate prior to the harmonization
plus $0.25 per hour. Effective November 1, 2002, the harmonization of BarTech's
wages to the then effective Republic base wage rates will be implemented,
resulting in a $1.25 per hour across the board base wage increase and the
production based incentive plan will be amended to yield $2.80 per hour, if all
of the targets which are to be established are met.
The new labor agreement provides for harmonization of base wage rates at
the former USS/Kobe facilities with the base rates applicable to the former
Republic hot-rolled facilities. We expect that this harmonization will result in
base wage increases at the former USS/Kobe facilities of approximately $1.15 per
hour over the life of the agreement. In addition, in connection with the
reduction in wage classifications at the former USS/Kobe facilities to five new
labor grades, there will be a one-time average increase in wage rates of
approximately $0.38 per hour as well as a one-time average increase in wage
rates of $0.25 to implement our operating mechanic strategy, which will enable
our maintenance personnel to both operate and repair our mills.
The new labor agreement provides for wage harmonization at the former Bliss
& Laughlin Harvey, Illinois facility by adopting the newly established five
labor grades for Republic's former cold-finished facilities. Concurrent with the
implementation of the new labor grades, a new incentive plan has been
implemented. The plan is designed to share cost savings arising from
improvements in the ratio of labor costs to tons produced. This plan would
yield, subject to meeting certain quality and other standards, $2.29 per hour
upon achieving 7,380 tons per month as compared to a base of 5,795 tons per
month.
Pension Plan. The new labor agreement provides for improvements in the
existing defined benefit pension plans covering employees at former Republic
facilities, former USS/Kobe facilities and the former Bliss & Laughlin Harvey,
Illinois facility, and the creation of a defined benefit plan
77
obligation covering employees at former BarTech's facilities. The existing
defined benefit pension plans may be consolidated into one defined benefit
pension plan in the future, which will contain terms found in traditional steel
industry defined benefit pension plans. For additional information regarding the
anticipated pension costs associated with the new labor agreement, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Republic Technologies--After the
Transactions."
In the light of the defined benefit plan improvements during the term of
the new labor agreement, our contributions to the defined contribution plans
covering employees at former Republic facilities and the former Bliss & Laughlin
Harvey, Illinois facility have been discontinued. Our contributions to the
defined contribution plan covering employees at former BarTech facilities will
likewise be discontinued in the future. The defined contribution plans may be
merged into the defined benefit plan.
Employee Stock Purchase Rights. Pursuant to the new labor agreement, the
employees covered by the agreement are expected to be offered the opportunity to
purchase up to $15.0 million worth of common stock of RTI at a price per share
equal to the effective price per share paid by the investors for new shares they
acquire in the Transactions. Pursuant to an agreement with the union, this
offering is to be accomplished on the earliest of (1) January 1, 2001,
(2) immediately preceding RTI proceeding with an initial public offering or
(3) a change of control. The new labor agreements contemplate that any shares
sold will be subject to customary restrictions on transfer and will have the
benefit of customary "piggyback" registration rights.
The pro forma financial information included in this prospectus does not
give effect to any sale of common stock pursuant to the terms of the new labor
agreement.
Other Provisions. The new labor agreement also provides for management
neutrality, employment security for covered employees and various capital
expenditures with respect to our new and existing facilities consistent with our
Consolidation Plan. The new labor agreement also contemplates one-time payments
to various USS/Kobe covered employees expected to total approximately $3 million
relating to signing bonuses and employee equity interest obligations.
ENVIRONMENTAL MATTERS
The domestic steel industry is subject to a broad range of environmental
laws and regulations, including those governing the following:
o discharges into the air and water;
o the handling and disposal of solid and hazardous wastes;
o the remediation of soil and groundwater contamination by petroleum
products or hazardous substances and wastes; and
o the health and safety of our employees.
We continuously monitor our compliance with these environmental laws and
regulations and believe that we currently are in substantial compliance with
them. We anticipate that our expenditures for environmental control measures
during the next twenty-four months will be approximately $5 million.
As is the case with most steel producers, we could incur significant costs
related to environmental issues in the future, in particular those arising from
remediation costs for historical waste disposal practices at our facilities. We
currently believe that these costs for Republic are likely to be in the range of
$11.6 million to $19.6 million over the lives of Republic's facilities although
some third-party estimates are substantially higher. Republic's reserve to cover
probable environmental liabilities, including the matters discussed below, was
approximately $16.4 million as of September 30, 1999. In addition to the accrual
amounts specifically discussed below, the $16.4 million total also includes
accruals of approximately $1 million relating to our voluntary program relating
to the replacement of PCB-containing transformers at our facilities,
approximately $1.7 million relating to additional environmental remediations
anticipated in connection with our
78
Consolidation Plan, and $1.2 million relating to certain remaining environmental
matters which are not believed to be material and which are not discussed below.
We currently believe that we have no significant environmental compliance and
remediation costs with respect to BarTech's operations and, accordingly, no
reserves have been established. As of June 30, 1999, USS/Kobe had established a
reserve of $486,000 relating to the U.S. EPA "multimedia" audit which is
discussed below. As a result of the Transactions, we were allocated $361,000 of
this reserve. We are not otherwise aware of any significant environmental
compliance and remediation costs with respect to USS/Kobe's operations for which
the establishment of a reserve would be appropriate. To the extent we incur any
such remediation costs, these costs will most likely be incurred over a number
of years; however, future regulatory action regarding historical disposal
practices at our facilities, as well as continued compliance with environmental
requirements, may require us to incur significant costs that may have a material
adverse effect on our future financial performance.
The U.S. Environmental Protection Agency has identified a number of solid
waste management units, or "SWMUs," at our Eighth Street facility in Canton,
Ohio. On June 16, 1999, we entered into an Administrative Consent Order with the
U.S. EPA to investigate these SWMUs and propose appropriate remedial measures.
The "Berger Triangle," a seven acre parcel of land we own in Canton that is
listed on the U.S. EPA's Comprehensive Environmental Response, Compensation and
Liability Information System list of contaminated or potentially contaminated
sites, is also included within the scope of the Administrative Consent Order. We
anticipate that through the year 2004, we will spend approximately $1.8 million
to investigate the SWMUs and the Berger Triangle. We have accrued approximately
$4.5 million regarding these matters. However, we are currently unable to
predict precisely the amount or timing of the costs we may be required to incur
to remediate these sites, but the cost could be material to our business,
results of operations or financial condition.
The electric arc furnace dust waste pile located at our Canton facility has
been exempted from the scope of the Administrative Consent Order discussed
above. However, on April 26, 1999, we entered into a Consent Decree with the
Ohio Environmental Protection Agency providing for the closure in-place of that
waste pile. We submitted a draft closure plan to the Ohio EPA on July 2, 1999
which was approved on October 22, 1999. We anticipate initiating closure
construction in the Spring of the year 2000. We anticipate that the
construction, which would involve the placement of a 54 inch thick cover on top
of the existing pile, would involve expenditures of approximately $1.1 million.
We estimate that the cost of 30 years of post-closure monitoring and maintenance
of the closed waste pile would be an additional $1 million. We have accrued
approximately $2.1 million regarding the closure and post-closure care of the
waste pile.
Notices of historical waste disposal activities at one of our two
Massillon, Ohio facilities and the two Canton facilities were filed by LTV Steel
and its predecessors with the U.S. EPA, under Section 103(c) of the federal
Comprehensive Environmental Response, Compensation and Liability Act. In 1985,
the Ohio EPA recommended the Massillon plant as a medium priority for further
state investigation. The Ohio EPA recommended the Harrison Avenue facility in
Canton as a medium priority for further state investigation and a low priority
for further federal investigation. No further investigation of historical waste
disposal activities has been performed at these facilities since 1986 by any
environmental authority. We could be required, in the future, to incur
significant costs to investigate such historical waste disposal activities and
remediate any contamination found to exist at these facilities. We have accrued
approximately $5.6 million regarding the Massillon facilities. However, we are
currently unable to predict precisely the amount or timing of such costs.
Through contractual agreements with Bethlehem Steel Corporation, we have
sought to reduce the impact of costs arising from or related to actual or
potential environmental conditions at BarTech's facilities caused or created by
Bethlehem or BarTech's predecessors in title and attributable to the period in
which the Bethlehem BRW Division or BarTech's predecessors operated such
facilities. Pursuant to such arrangements, Bethlehem has agreed to indemnify
BarTech for such costs by limiting BarTech's potential exposure to any such
damages incurred (1) through December 1996, to 50% of the first $2 million in
damages, or $1 million, and (2) thereafter, to 50% of the first
79
$10 million of damages in the aggregate, or $5 million in total exposure.
Although several investigations of past or present environmental conditions at
BarTech's facilities have been conducted by or on behalf of Bethlehem and
regulatory agencies, the reports and results of which have been made available
to BarTech, an in-depth, environmental review of BarTech's facilities to
determine the potential scope, if any, of required remediation at such
facilities has not been conducted by or on the behalf of BarTech. There can be
no assurance that Bethlehem will meet its obligations under the indemnification
arrangements or that there will not be future contamination for which we might
be fully liable and that may require us to incur significant costs that could
have a material adverse effect on our business, results of operations or
financial condition.
Bethlehem is conducting remedial activities on a small portion of our
Lackawanna, New York facility historically used for mill scale storage, which
was identified as requiring corrective action by the U.S. EPA pursuant to an
Administrative Order on Consent issued to Bethlehem in 1990. Bethlehem is
currently awaiting approval of the Remedial Work Plan for the former mill scale
storage area submitted to the U.S. EPA in September 1994. Bethlehem is
ultimately liable for compliance with the Administrative Order on Consent and,
while no assurances can be given, we believe that Bethlehem is likely to fulfill
these obligations.
Some of the steel processing operations presently conducted by Bliss &
Laughlin Steel Company commenced over 100 years ago by predecessors of Bliss &
Laughlin and included properties which over the years were sold by Bliss &
Laughlin's predecessors. Given the nature and geographic diversity of its
current and its predecessors' former operations, it is possible that claims
would be asserted against Bliss & Laughlin in the future based upon the current
property ownership of Bliss & Laughlin and by operations of BarTech's
predecessors. Bliss & Laughlin has received an indemnification from the former
owner and operator of such properties for various environmental claims or
liabilities relating to activities at Bliss & Laughlin's Harvey and Batavia,
Illinois and Medina, Ohio properties prior to October 23, 1984, when Bliss &
Laughlin succeeded to ownership of such properties, and for various
environmental claims or liabilities relating to properties that were sold by
Bliss & Laughlin's predecessors. There can be no assurance that such former
owner and operator will meet its obligation under the indemnification agreements
or that there will not be future contamination for which we might be fully
liable and that may require us to incur significant costs that could have a
material adverse effect on our business, results of operations or financial
condition.
Canadian Drawn Steel Company, Inc., is also subject to Canadian federal,
provincial, regional and municipal environmental laws and regulations. We
believe that we are currently in substantial compliance with applicable
environmental laws and regulations and do not anticipate any material capital
expenditures for environmental control facilities in the future. However, there
can be no assurance that we will not be required to incur significant costs that
could have a material adverse effect on our business, results of operations or
financial condition.
Republic Technologies, as successor to Republic, is a potentially
responsible party regarding one federal Superfund site at which it has disposed
of waste. Bliss & Laughlin Industries, BarTech's cold-finishing subsidiary, is
also a potentially responsible party regarding its disposal of waste at two
federal Superfund sites and at a third site that is being remediated under
authority of Ohio state law. USS/Kobe is a potentially responsible party
regarding one site being addressed by the U.S. EPA. We have accrued
approximately $0.3 million regarding these matters and, while no assurances can
be given, we do not believe that the liabilities relating to these sites will
have a material adverse effect on our business, results of operations or
financial condition.
Our Lorain, Ohio facility has been in continuous operation by USS/Kobe, USX
Corporation and its predecessors for over 100 years. Although we are not aware
of any material environmental issues at this facility other than those described
in this prospectus, we believe the long operational history of this facility
poses a significantly greater probability of some form of environmental
contamination than at our newer facilities. Contamination at this facility could
be material to our business, results of operations or financial condition.
80
In connection with the formation of USS/Kobe Steel Company in 1989 by USX
Corporation and Kobe Steel, Ltd., USS/Kobe Steel Company obtained a limited
indemnity from USX concerning identified matters arising out of the past
operation of the melt, bar and tubular facilities at Lorain, Ohio by USX and its
predecessors. We will be the beneficiary of a portion of this indemnity in the
future. The 1989 agreement relating to the formation of USS/Kobe Steel Company
divided environmental responsibility into several different categories. The
first category includes specific areas and projects for which USX retained
complete responsibility. USX retained all responsibility relating to a hazardous
waste landfill referred to as the D-2 Landfill, and for all disposal of waste
materials prior to June 30, 1989 at locations other than the Lorain property.
The second category includes matters that were split between USS/Kobe Steel
Company and USX.
Two cost sharing baskets and one cost sharing percentage were agreed to by
USX and USS/Kobe Steel Company as well. One of the cost sharing baskets provides
that USS/Kobe Steel Company will be responsible for the first $10 million of
costs and USX will be responsible for costs above that amount incurred relating
to the areas formerly occupied by a coke plant and related facilities, a
sintering plant, and a galvanizing plant. USX and USS/Kobe Steel Company
subsequently agreed that USS/Kobe Steel Company could treat $3 million of its
expenses in demolishing the coke batteries as expenditures against this
$10 million basket. The second cost sharing basket provides that USS/Kobe Steel
Company will be responsible for the first $9 million of costs related to 13
identified SWMUs that are generally classified as disposal sites. The percentage
cost sharing agreement provides that in the event of any groundwater
remediation, USS/Kobe Steel Company will pay 65% of the cost and USX will pay
35% of the cost. In each case, USX's obligation to indemnify is limited to
cleanup actions specifically required by government agencies.
Except for these specific indemnities and for specific projects that USX
agreed to complete, USS/Kobe Steel Company assumed responsibility for all
environmental conditions at the Lorain facility, including regarding additional
SWMUs at the facility that were not included within the scope of the
environmental cost sharing provisions of the 1989 agreement contributing the
Lorain facilities to USS/Kobe Steel Company. Although environmental regulators
have not required action regarding the SWMUs at the Lorain facility, we could
incur significant investigation and remediation costs in the future. However, we
are currently unable to predict precisely the amount or timing of the costs we
may be required to incur to investigate and remediate the SWMUs or other
potential areas of contamination.
Pursuant to the master restructuring agreement, which sets forth
indemnification and cost sharing arrangements regarding environmental liability
at the Lorain, Ohio facilities, the new 50/50 tubular steel joint venture
between USX and Kobe Steel, Ltd. will be responsible for environmental
liabilities relating to its operations and to the portions of the real property
at the Lorain site that it owns. As a general matter, we will be responsible for
environmental liabilities relating to our operations and to the portions of the
real property at the Lorain site that we own. There can be no assurance that the
tubular joint venture will meet its obligations under the indemnification and
cost sharing arrangements in the master restructuring agreement or that there
will not be future identification of contamination at the facilities in Lorain,
Ohio for which we might be fully liable and that may require us to incur
significant costs that could have a material adverse effect on our business,
results of operations and financial condition.
USS/Kobe Steel Company and the U.S. EPA are parties to an April, 1992
consent decree and an April 1999 amendment to this consent decree concerning the
blast furnaces at our Lorain facility. Pursuant to the original consent decree,
USS/Kobe Steel Company paid a $500,000 penalty. The amended consent decree
settled additional past violations by payment of a $440,000 penalty, required
the installation of new continuous emission monitors, included a revised
emission limit for carbon monoxide and established interim emissions limits that
will apply until a permit modification establishing final emission limits is
complete pursuant to the amended consent decree.
USS/Kobe Steel Company was the subject of a "multimedia" audit by the U.S.
EPA beginning in 1997, which included an air, water and hazardous waste
compliance review. The final report and
81
citations have not been issued, but a number of citations and notices of
violation have been issued as a result of the audit. USS/Kobe Steel Company has
already addressed many of the issues pointed out by U.S. EPA. USS/Kobe Steel
Company and the U.S. EPA have entered into a tolling agreement concerning
issuance of the final audit. On July 20, 1999, USS/Kobe Steel Company had an
initial meeting with the U.S. EPA regarding the multimedia audit. At that time,
the U.S. EPA proposed penalties related to alleged violations of environmental
laws addressing water, air and hazardous waste issues and indicated that it
would pursue the negotiation of a consent decree with USS/Kobe Steel Company
relating to the findings of the multimedia audit. We have subsequently met with
the U.S. EPA regarding these matters on three occasions. It is possible that
such a consent decree, if finalized, will require penalties, further testing and
mandatory and voluntary enviromental projects. At this time, we are unable to
predict the final outcome of the audit and the ongoing investigation, but it
could result in litigation or material penalities or other costs. Although the
multimedia audit is not generally the subject of an environmental indemnity, we
believe that that penalties resulting from the multimedia audit, to the extent
relating to the steel tube facilities at the Lorain facility, would be under the
master restructuring agreement the responsibility of the new tubular steel joint
venture between USX and Kobe. To the extent that any penalties relate to
discharges of waste water from the D-2 Landfill, we believe those penalties
would be indemnified against by USX.
In August 1998, the U.S. EPA issued a notice of violation concerning
emissions from the Lorain, Ohio blast furnace casthouse and gas flare stack that
allegedly exceeded opacity limits. The U. S. EPA has stated that it will pursue
these matters as part of the multimedia enforcement action discussed above.
In July and November of 1998, the U.S. EPA issued Findings of Violation and
Order for Compliance alleging that USS/Kobe Steel Company violated its National
Pollutant Discharge Elimination System permit by exceeding permit limits and
allowing unauthorized discharges. We believe that there have been a small number
of permit limit exceedences since January 1996 and that these events are
isolated incidents. The U.S. EPA has indicated an intention to pursue these
matters as part of the multimedia enforcement action discussed above.
In September 1998, the Ohio EPA issued a notice of violation regarding an
oil discharge from a storm sewer. USS/Kobe Steel Company remediated this
discharge and in April 1999 submitted to the agency a study that was required by
the notice of violation. No response has been received from the Ohio EPA
concerning this matter.
In December 1992, the Ohio EPA issued a notice of potential violation
alleging that the storage of blast furnace flue dust constitutes unlawful
disposal. USS/Kobe Steel Company contests this characterization and in 1995
submitted to Ohio EPA a revised waste management plan addressing this and other
issues. USS/Kobe Steel Company has not received a response from the agency.
The pipe mill lagoon, a component of the wastewater treatment system at our
Lorain, Ohio facility, is used by both our operations and the operations of the
new tubular steel joint venture between USX and Kobe. Although we will be
responsible for historical environmental liabilities at the pipe mill lagoon, on
an on-going basis the new tubular steel joint venture and we will share the cost
of the continued operation of the pipe mill lagoon on a basis proportionate to
the amount of our respective discharges to that lagoon. We are under no current
obligation to upgrade or replace the pipe mill lagoon, and we do not anticipate
that we will do so within the next three years. However, we do anticipate that a
project to upgrade or replace the pipe mill lagoon will occur after this period
and the expense could be material to our business, results of operation or
financial condition. The new tubular steel joint venture has agreed that if it
elects to continue to use the upgraded or replaced pipe mill lagoon, it will
bear a portion of the capital expense proportionate to the amount of its
discharge to the shared facility.
Various federal, state and local laws, regulations and ordinances govern
the removal, encapsulation or disturbance of asbestos containing materials, or
"ACMs." Such laws and regulations may impose liability for the release of ACMs
and may provide for third parties to seek
82
recovery from owners or operators of facilities at which ACMs were or are
located for personal injury associated with exposure to ACMs. We are aware of
the presence of ACMs at our facilities, but we believe that such materials are
in acceptable condition at this time. While no assurances can be given, we
believe that any future costs related to remediation of ACMs at these sites will
not be material, either on an individual basis or in the aggregate.
See "Risk Factors--Our operations are subject to environmental laws and
regulations that in the event of enviromental contamination at our facilities
may generate significant liability."
LEGAL PROCEEDINGS
We are involved in various legal proceedings, including environmental
proceedings with governmental authorities, personal injury and product liability
litigation and claims by present and former employees under federal and
counterpart state anti-discrimination and other laws relating to employment and
pursuant to collective bargaining agreements. Except those environmental
proceedings described above under "--Environmental Matters," we do not believe
that any proceedings, either individually or in the aggregate, will have a
material adverse effect on the our business, results of operations or financial
condition.
INTELLECTUAL PROPERTY
We have the patents, trademarks, trade names and licenses necessary for the
operation of our business as now conducted. We do not consider our patents,
trademarks, trade names and licenses to be material to our business.
83
THE CONSOLIDATION PLAN
All statements other than statements of historical facts included in this
section are forward-looking statements. Although we believe that the
expectations reflected in these forward-looking statements will prove to have
been correct, we can give no assurance that our expectations will prove to have
been correct. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this prospectus.
The Combination combines three businesses with a broad base of both
complementary and overlapping operations. The Consolidation Plan intends to
create a more efficient, higher quality network of production facilities
operated by a smaller and more flexible workforce. The Consolidation Plan
contemplates total capital investment of approximately $322 million to expand
capacity, maximize operating efficiency and increase value-added product
processing. The principal components of the Consolidation Plan include the
following:
o Plant Rationalization. We plan to have shut down 13 higher cost, less
efficient facilities by the end of 2003, including 12 facilities by the
end of 2000. The production of these facilities will be reallocated to
the remaining lower-cost facilities and a new production facility we plan
to finish constructing in 2002. We also intend to construct a new quality
verification line inspection and shipping center and a heat treatment
center. These actions are designed to significantly reduce our fixed
operating costs, principally through (1) the targeted reduction of 1,942
production employees represented by the United Steelworkers union from
5,012 at December 31, 1998 to 3,070 by the end of 2003 and (2) the
targeted reduction of 228 non-union salaried plant personnel from 676 at
December 31, 1998 to 448 by the end of 2003.
o Enhance Productivity at Remaining Facilities. Through the use of
targeted capital investment, improved product flows and facility
specialization, we believe that we can realize substantial variable cost
savings at our remaining facilities. Much of this variable cost
improvement arises from closing outmoded shops with poor tolerances and
high yield losses and shifting production to higher quality modernized
operations with minimal yield losses. Also, the elimination of obsolete
steelmaking equipment with higher production consumable rates will result
in lower expense. Finally, targeted capital expenditures for projects
like the new Lorain processing center will allow us to insource
production steps and recapture variable margin.
o Elimination of Redundant Overhead Costs. By combining the overhead
functions of the three companies, we plan to reduce our selling, general
and administrative and plant overhead headcount by over 231 positions
from 513 at December 31, 1998 to 282 through the elimination of redundant
positions.
o In-sourcing Feedstock for Cold-Finishing and Bar Billets for
Hot-Rolling. Republic and BarTech both have captive cold-finishing
divisions which have sourced approximately 60% of their hot-rolled bar
requirements from internal sources. Remaining requirements were directed
to outside vendors at considerable cost, approximately $105 million in
1998. Under the Consolidation Plan, we expect that RTI will be able to
self-supply approximately 90% of our cold-finishing rough stock
requirements. This Combination benefit arises from the breadth of our
product offerings across 3 melt sources and an extensive range of product
sizes and shapes. We believe this in-sourcing will create additional
margin as we will capture the margin between our external purchase price
and internal production costs.
We believe that these actions will lower our labor and non-labor fixed
production costs per ton, reduce our variable conversion costs per ton, improve
our productivity and asset utilization and streamline our marketing and
administrative functions.
PLANT RATIONALIZATION
We intend to shut down our least efficient production facilities, enabling
us to reduce significantly our production headcount and fixed costs and to
reallocate production to the remaining, more efficient plants. These actions are
designed to allow us to increase production levels with fewer
84
facilities at lower conversion and variable costs per ton. The plant
rationalization includes the following components:
Melt Shop Consolidation. Our melt shop facilities have benefitted from
over $410 million in aggregate capital investments since 1994. As a result of
these investments, the efficiency and production costs of these facilities have
improved significantly. We intend to achieve further reductions in our melt shop
operating costs, the highest cost component of SBQ steel production, and improve
product quality, by shifting production from old, high cost facilities to, and
expanding the production capacity of, our more productive, efficient plants.
o Canton Melt Shop Rationalization. As contemplated by the Consolidation
Plan, we phased-out the high-cost, low productivity ingot route at our
Canton, Ohio melt shop shortly after the completion of the Combination.
We plan to shift the steel production of this unit to our other
facilities. The ingot route process was costly and inefficient because it
involved an additional step to roll the ingots into blooms before being
rolled into billets for bar production. We plan to transfer production
formerly handled through the ingot route to our state-of-the-art CAST-
ROLL(Trademark) facility in Canton and to our melting and casting
facilities in Johnstown, Pennsylvania and Lorain, Ohio. In order to
accommodate the increased production at the CAST-ROLL(Trademark)
facility, we intend to increase its capacity from 750,000 tons of blooms
per year to 925,000 tons of blooms per year by the end of 2003. We expect
to achieve this capacity expansion by improving process efficiency and
throughput through the consolidation of three production furnaces into a
single, more efficient furnace and increasing bloom caster speeds through
the installation of tundish temperature maintenance equipment.
o Johnstown Facility Capacity Expansion. In order to shift a portion of
the production from the ingot route at Canton, we plan to increase
melting and casting facilities capacity at our Johnstown facility from
770,000 tons per year to 980,000 tons per year by the end of 2003. The
expansion will be achieved by (1) more fully utilizing a recently
restarted second 180-ton electric arc furnace and (2) adding a sixth
strand to the continuous billet caster and an additional ladle station.
We also expect to address logistical issues to reduce internal
transportation costs.
o Lorain Blast Furnace and Caster Shutdown. As part of the integration of
the Lorain, Ohio facility during the fourth quarter of 1999, we intend to
shut down the smaller of the two blast furnaces and the billet caster at
this facility. These shutdowns will enable us to utilize fully the
remaining furnace and bloom caster and continue to supply all of the
material requirements for both (1) our hot-rolling operations and
(2) pursuant to a long-term supply agreement, the seamless tube
operations of the 50/50 tubular steel products joint venture between USX
Corporation and Kobe Steel, Ltd. at Lorain and a portion of the
requirements of the USX facility in Fairfield, Alabama under specified
circumstances. See "Relationships and Related Party
Transactions--Agreements with USX Corporation and Kobe Steel, Ltd. and
Their Affiliates".
Hot-Rolling Mill Consolidation. A number of our hot-rolling mills have
benefitted from significant capital expenditures over the last several years
designed to increase capacity, lower conversion costs and improve product
quality and consistency. In total, we have invested over $90 million in our
Lackawanna, New York mill and the two Lorain rolling mills since 1994. In
connection with the Combination, we expect to shut down our least efficient
mills and replace this production with greater output from our remaining mills.
We intend to allocate production at our remaining mills based on specific size
and grade ranges, with each mill producing fewer sizes but with Republic
Technologies offering more products than any of Republic, BarTech and USS/Kobe
separately. These actions will enable us to reduce downtime due to product size
changeovers by approximately 70% and increase run lengths, with average tons per
product size increasing from approximately 200 in 1998 to approximately 1,160 by
the end of 2003. As a result, we believe that we will be able to increase
production by approximately 450,000 tons. In November 1999, we shut down
hot-rolling operations at the Chicago, Illinois 11" and by 2002 we intend to
have shut down the Canton 12" and the Massillon 18" hot-rolling mills. We expect
to finish construction of a new large bar mill in 2002 and to
85
close the Massillon 18" hot-rolling mill once the new large bar mill becomes
operational. Once the hot-rolling mill consolidation is completed, our
hot-rolling and finishing operations will be comprised of four highly-efficient
mills with a combined annual production capacity of approximately 2.6 million
tons per year, compared to the current network of six mills producing
approximately 2.1 million tons per year. The remaining mills will include:
o The existing 9"/10" small bar/rod mill at Lorain, which produces rod and
bar in sizes from 0.218" to 0.812";
o The existing 12" intermediate bar mill at Lorain, which produces bar in
sizes from 0.812" to 2.0";
o The existing 13" intermediate bar mill at Lackawanna producing bar in
sizes from 0.750" to 3.0"; and
o A new large bar mill in Ohio that will produce bar in sizes from 2.5" to
7.0".
The hot-rolling mill consolidation process will consist of the following
steps:
o Transfer of Production to Lackawanna and Lorain. In the second quarter
of 2000, we plan to close the 12" mill in Canton which was constructed in
the 1920s, and to redistribute the 333,000 tons of annual production from
this mill to the Lackawanna 13" mill and the Lorain 9"/10" and 12" mills.
We expect production volumes at Lackawanna and Lorain to increase from
approximately 466,000 tons and approximately 390,000 tons in 1998 to
720,000 and 650,000, respectively, in 2003. In connection with the
increase in production at the Lackawanna 13" mill, we will install new
quality verification line equipment and new furnace controls, as well as
complete continuing process controls improvements. We plan to upgrade the
Lorain 12" bar mill to world class automotive-quality standards to
improve productivity. These enhancements will include the installation of
a walking-beam reheat furnace, new descaling equipment and new electrics.
In the fourth quarter of 1999, we plan to close the Chicago 11" mill,
which was constructed in the 1950s, and to shift the approximately
200,000 tons of production of this facility to the state-of-the-art
Lorain small-size mill, which produced at only 66% of its projected
550,000 ton annual capacity during 1998, as well as the Lackawanna 13"
mill.
o Construction of the Large-Size Bar Mill. In 2002, we plan to complete
construction of a new large-size bar mill with annual rolling capacity of
650,000 tons per year. This new mill will replace the Massillon 18" mill,
which was constructed in the 1920s, and had a production volume of
approximately 365,000 in 1998. The new bar mill will also manufacture
large size products previously run at the Lackawanna mill and the primary
mill at Lorain. Our management team has significant experience in
constructing and starting new rolling operations, including (1) the
restart of the Lackawanna intermediate-size bar rolling mill for BarTech
in 1996, (2) the construction and start-up of a billet re-rolling mill
for Republic in Canton, Ohio in 1995, (3) the construction and start-up
of a new hot-rolling mill in 1996 and the major rebuild and restart of a
hot-rod rolling mill in 1989 for American Steel & Wire and (4) the
redesign and start up of an intermediate-size hot-rolling mill for CSC
Industries in 1991.
Cold-Finishing and Processing Facilities Consolidation. We currently
operate eight separate cold-finishing facilities, having completed the shutdown
of the Medina and Batavia facilities early in July 1999. We plan to downsize at
least two other facilities. As part of the Consolidation Plan we also intend to
implement a modernization program that will expand our finishing capabilities at
our remaining core facilities and further improve our operating efficiency. We
expect to reposition the best equipment from the closed facilities at other
operating locations while investing in new specialized finishing equipment. We
also plan to construct a new central processing center by the end of 2003 to
perform high value-added processing for the high end of the hot-rolled and cold-
finished SBQ steel market.
86
The chart below displays the combined facilities and process flow that we
expect will result from our Consolidation Plan; the shaded boxes are facilities
that we have closed or intend to close pursuant to the Consolidation Plan.
USS/KOBE BARTECH REPUBLIC
No. 4(A) No. 4(C)
No. 3 Blast Furnace No. 4 Blast Furnace[+] Electric Electric
|______________________| Arc Furnace Arc Furnace[+]
| | |
| Electric | |
|_____________ Pig Iron Arc Furnace | No. 4(B) |
| | | Electric |
BOP | | Arc Furnace[+] |
Shop | | | |
| | |_____________|_______________|
________|__________ | | |
| | Billet Caster CAST-ROLL(TM) Teeming Shop[+]
No. 1 Billet No. 2 Bloom | | |
Caster[+] Caster | | |
| | | | |
| | | | Blooming Mill[+]
Supply to Seamless | 6 Stand | | |
Tubular Facilities | Billet Mill | | |
| | | | | |
| | | | | |
| | | 4 Stand | | |
| | |____________ Billet | | |
| | | Mill[+] | | |
|___________|_________________|_________________| | | |
| | | |
Large Rounds | | |
___________________________________________________________|_____________|__________________|____________________|______
| | | | | | | |
External 9"/10" 12" 13" 12" 18" 11" New
Customers Bar Mill Bar Mill Bar Mill Bar Mill Bar Mill Bar Mill Large
(Lorain) (Lorain) (Lackawanna) (Canton)[+] (Massillon)[+] (Chicago)[+] Bar Mill
|________________|_________________|________________|_________________|________________|________________|
| | |
External Customers Internal Cold-Finished Further Processed
_________________________________________________|___________________________ |
| | | | | | |
| Harvey Medina[+] Batavia[+] Hamilton Cartersville External Customers
|
|
|_________ Massillon_______Gary__________Gary________Beaver Falls______Willimantic
[+]Facilities to be Closed
Facilities to Remain
- ------------------
* We intend to downsize at least two other cold-finishing facilities.
To date, the following facilities have been closed: the No. 4(B) and
No. 4(C) Electric Arc Furnaces at Canton, the Teeming Shop at Canton, the
Blooming Mill at Canton and the cold-finishing facilities at Medina and Batavia.
The Chicago Bar Mill is scheduled to be shutdown in November 1999.
87
The chart below displays the combined facilities and process flow following
completion of the Consolidation Plan:
REPUBLIC TECHNOLOGIES INTERNATIONAL, LLC
________________________________________|________________________________________
| | |
Lorain Johnstown Electric Canton No. 4(A) Electric
No. 3 Blast Furnace Arc Furnace Arc Furnace
| | |
BOP Billet Caster CAST-ROLL(TM)
Shop | |
| | |
No. 2 Bloom Caster | |
| | |
6 Stand Billet Mill | |
| | |
| | |
__________|________________________________________|______________________________________ |
| | | | |
9"/10" Bar Mill 12" Bar Mill 13" Bar Mill New Large
(Lorain) (Lorain) (Lackawanna) Bar Mill
| | | |
_______________________________________________________________________________
| |
External Internal Cold
Customers Finish
|
_____________________________________________________________________________________________________
| |
|________Harvey _____________________Hamilton_____________ Cartersville_________________________ Willimantic
| |
|____ Massillon___________________ Gary ___________________Gary ______________________________ Beaver Falls
- ------------------
* We intend to downsize at least two of the cold-finishing facilities included
in this chart as part of the Consolidation Plan.
88
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our executive officers and the directors of RTI, which is the sole managing
member of our parent, are as follows:
NAME AGE POSITION
- ------------------------------------------ --- -----------------------------------------------------
Thomas N. Tyrrell......................... 54 Chief Executive Officer and Director
Joseph F. Lapinsky........................ 50 President, Chief Operating Officer
George F. Babcoke......................... 42 Executive Vice President and General Manager, Steel
Manufacturing
Robert L. Meyer........................... 50 Executive Vice President and General Manager, Rolling
Operations
John G. Asimou............................ 54 Executive Vice President and General Manager,
Cold-Finished Bar Operations
James T. Thielens, Jr..................... 41 Vice President, Commercial, Hot-Rolled Bar
Charles T. Cochran........................ 45 Vice President, Commercial, Cold-Finished Bar
Timothy Demma............................. 54 Vice President, Marketing
Stanley M. Savukas........................ 34 Vice President, Human Resources
Katie B. Trinchard........................ 42 Vice President, Information Technology
Joseph Kaczka............................. 52 Vice President, Finance and Controller
John B. George............................ 53 Vice President, Finance, Treasurer and Secretary
Richard C. Lappin......................... 55 Chairman and Director
Robert Friedman........................... 56 Director
David A. Stockman......................... 53 Director
David Blitzer............................. 30 Director
Robert B. McKeon.......................... 45 Vice Chairman and Director
Thomas J. Campbell........................ 40 Director
Lynn R. Williams.......................... 75 Director
Paul J. Wilhelm........................... 57 Director
Albert E. Ferrara, Jr..................... 51 Director
Susumu Okushima........................... 58 Director
Tadashi Takeuchi.......................... 46 Director
Thomas N. Tyrrell, with over 32 years in the steel industry, served as
Chief Executive Officer of BarTech since September 1996, and served as a
director of BarTech since December 1996. Beginning in September 1998,
Mr. Tyrrell also served as the Chief Executive Officer, and as a director, of
Republic. Mr. Tyrrell also served as President of BarTech from September 1996 to
September 1998. From 1994 to 1996, Mr. Tyrrell served as Vice Chairman and
Executive Vice President-Commercial of Birmingham Steel Corporation, a producer
of steel bar, rod and wire. Mr. Tyrrell was the President and Chief Executive
Officer of American Steel & Wire Corporation from 1986 to 1994, a producer of
steel bar, rod and wire, when it was acquired by Birmingham Steel Corporation.
From 1978 to 1986, Mr. Tyrrell was Vice President Commercial of Raritan River
Steel Company, a producer of steel rod. From 1967 to 1978, Mr. Tyrrell was
employed by Bethlehem Steel Corporation, a fully integrated steel producer, in
various sales and product development capacities.
Joseph F. Lapinsky has over 26 years in the steel industry and became
President and Chief Operating Officer of BarTech and Republic in October 1998.
Mr. Lapinsky also became a director of Republic at that time. Mr. Lapinsky
served as a corporate Vice President and President of Republic's Hot-Rolled Bar
Division from January 1997 to September 1998. Prior to that time he served as
General Manager of Republic's hot-rolled bar operations from September 1995 to
January 1997. Prior to that time he was Executive Vice President of Autumn
Industries, Inc. from September 1991
89
to September 1995 and Executive Vice President of CSC Industries, Inc. from
December 1987 to September 1991.
George F. Babcoke has over 23 years in the steel industry and became
President of USS/Kobe Steel Company in July 1998. Mr. Babcoke served as Vice
President of Operations for USS/Kobe Steel Company from February 1997 until July
1998. Before coming to USS/Kobe Steel Company, Mr. Babcoke held several senior
management position at United States Steel's Gary Works, a fully integrated
steel producing facility in Gary, Indiana. Mr. Babcoke was the Plant Manager,
Primary Operations from 1996 to 1997 and the Plant Manager, Finishing Operations
from 1995 to 1996. Prior to that he held several positions including Division
Manager of Operation Services and Division Manager of Hot Rolling.
Robert L. Meyer has over 28 years in the steel industry and became
Executive Vice President and General Manager, Hot-Rolled Bar Division for
Republic and BarTech in October 1998. Mr. Meyer served as Executive Vice
President and Chief Operating Officer of BarTech from October 1996 until
September 1998. From 1994 to 1996, Mr. Meyer was President and Chief Operating
Officer of Chase Brass & Copper, Inc., a producer of copper alloy rod. From 1993
to 1995, Mr. Meyer was Vice President and General Manager of the Precious Metals
Products Division of Handy & Harman, Inc., a manufacturer of metal products
including automotive parts and wire and tubing products. From 1986 to 1998,
Mr. Meyer was employed by American Steel & Wire Corporation as general manager
of its rod mill and, from 1988 to 1993, as Vice President of Operations. Prior
to 1986, Mr. Meyer was employed by the United States Steel Corporation in
various supervisory capacities.
John G. Asimou has over 31 years in the steel industry and became Executive
Vice President and General Manager, Cold-Finished Bar Division for Republic and
BarTech in October 1998. Mr. Asimou served as Executive Vice President of
Technology & Development of BarTech from August 1996 until September 1998. From
1993 to 1996, Mr. Asimou was Vice President--Quality & Technology for Birmingham
Steel Corporation. From 1986 to 1993, Mr. Asimou served as General
Manager--Quality and Technology of American Steel & Wire Corporation. From 1984
to 1986, Mr. Asimou was Metallurgical Service Engineer for Bethlehem Steel
Corporation. From 1968 to 1984, Mr. Asimou served in various assignments for
United States Steel Corporation, a fully integrated steel producer.
James T. Thielens, Jr. has over 19 years in the steel industry and became
Vice President, Commercial, Hot-Rolled Bar Division for BarTech and Republic in
October 1998. Mr. Thielens served as Vice President, Sales and Marketing, of
Republic's Hot-Rolled Bar Division from March 1997 until September 1998. He
served as General Manager of Marketing for Republic from March 1995 to March
1997 and as a Regional Sales Manager of the Republic's Bar Products Division
from April 1994 to March 1995. Prior to that time he held various sales and
marketing positions at Republic since its formation in 1989.
Charles T. Cochran has over 23 years in the steel industry and became Vice
President, Commercial, Cold-Finished Bar Division for BarTech and Republic in
October 1998. Mr. Cochran served as Vice President, Sales and Marketing of
Republic's Cold-Finished Bar Division from January 1997 to September 1998. He
served as Vice President, Sales and Marketing of Republic's Bar Products
Division from January 1995 to January 1997. From May 1994 to January 1995 he was
Republic's General Manager, Cold-Finished Bar Division. Prior to that time he
held various regional sales positions at Republic since its formation in 1989.
Timothy Demma has over 29 years in the steel industry and became Vice
President, Marketing of BarTech and Republic in October 1998. Mr. Demma served
as Vice President, Commercial with Bliss & Laughlin, BarTech's cold finished bar
division, from March 1997 to September 1998. He served as Vice President,
Commercial with Pennsylvania Steel Technologies, Inc., a subsidiary of Bethlehem
Steel Corporation, from August 1989 to March 1997. From 1986 to 1989, Mr. Demma
was Manager of Sales and Marketing, Rod and Wire Sales with Bethlehem Steel
Corporation. From 1984 to 1986, Mr. Demma served as Vice President, Sales and
Marketing, for Presidents Island
90
Steel and Wire. From 1971 to 1984, Mr. Demma worked in several sales and
marketing positions for Bethlehem Steel Corporation.
Stanley M. Savukas has over 7 years of experience in the steel industry and
became Vice President, Human Resources for BarTech and Republic in October 1998.
Mr. Savukas joined BarTech in September 1995 as Manager, Human Resources and
served as General Manager, Human Resources from October 1996 until September
1998. From 1994 to September 1995, Mr. Savukas was employed by Andritz
Sprout-Bauer, a manufacturer of capital equipment for the pulp and paper, food
feed and grain industries, as Manager, Human Resources. From 1992 to 1993,
Mr. Savukas was employed by Chicago Pneumatic tool company as personnel and
Labor Relations Manager. From 1991 to 1992, Mr. Savukas was employed by UCAR
Carbon Company and from 1989 to 1991, he was employed by Sharon Steel
Corporation, serving each of these companies in various human resources
capacities.
Katie B. Trinchard became Vice President, Information Technology for
BarTech and Republic in October 1998. Ms. Trinchard served as General Manager,
Information Technology of BarTech from November 1997 until September 1998. From
1996 to 1997, Ms. Trinchard was an Independent Systems Integration Consultant
whose clients included among others, BarTech and Chase Brass & Copper, Inc., a
producer of copper alloy rod. From 1990 to 1996, Ms. Trinchard was Manager of
Consulting Services for Digital Equipment Corp.
Joseph Kaczka became Vice President of Finance and Controller for Republic
Technologies in September 1999. Mr. Kaczka joined Republic Technologies
following over 30 years of service with USS/Kobe Steel Company and its
predecessor companies. He most recently served as Treasurer and Controller for
USS/Kobe Steel Company which position he held since 1997. From 1995 through
1997, Mr. Kaczka held the position of Treasurer for USS/Kobe Steel Company and
from 1989 through 1995 he served as Controller for USS/Kobe Steel Company. Prior
to 1989, he held various positions at USX locations in Pennsylvania, Alabama and
Ohio.
John B. George has over 30 years of experience in the steel industry and
became Vice President of Finance and Treasurer for BarTech and Republic in
October 1998. He was also appointed Secretary in December 1998. Mr. George
previously served as Treasurer of Republic since April 1991. From November 1989
to April 1991, he was Assistant Treasurer for Republic.
Richard C. Lappin became a director of Republic in January 1999.
Mr. Lappin became Chairman of the board of directors of RTI in November 1999.
Mr. Lappin is a Senior Managing Director of The Blackstone Group, L.P., with
which he has been associated since 1999. Prior to this time, Mr. Lappin served
as President of Farley Industries, which included West-Point Pepperell, Inc.,
Acme Boot Company, Inc., Tool and Engineering, Inc., Magnus Metals, Inc., and
Fruit of the Loom, Inc. Mr. Lappin is also a director of American Axle &
Manufacturing Inc., Clark Refining Holdings Inc., Collins & Aikman Corporation
and Prime Succession, Inc.
Robert Friedman has been a Senior Managing Director of The Blackstone Group
L.P. since March 1999. From 1975 to March 1999, Mr. Friedman was a partner with
the law firm of Simpson Thacher & Bartlett. Mr. Friedman is also a director of
American Axle & Manufacturing Inc., Clark Refining Holdings Inc. and Corp.
Group.
David A. Stockman was elected as a director of BarTech in March 1996 and
became Chairman of the board of directors of BarTech in September 1998. In
September 1998, Mr. Stockman also became Chairman of the board of directors of
Republic. Mr. Stockman served as Chairman of the boards of directors of BarTech
and Republic through the completion of the Combination. Mr. Stockman served as
Chairman of the board of directors of RTI until November 1999. From 1998 until
September 1999, Mr. Stockman was a Senior Managing Director of The Blackstone
Group L.P. In September 1999, Mr. Stockman founded Heartland Industrial
Management L.L.C., a new private equity sponsor. Mr. Stockman is also a director
of American Axle & Manufacturing Inc.
David Blitzer was elected as a director of Republic in September 1998.
Mr. Blitzer is a Senior Managing Director of The Blackstone Group L.P., which he
joined in 1991. He also currently serves
91
on the Board of Directors of Haynes International, Inc., Imperial Home Decor
Group Inc., Volume Services America, Inc. and Volume Services, Inc.
Robert B. McKeon served as a director of BarTech since September 1993 and
as a director of Republic since September 1998, and became Vice Chairman of the
Board of Directors of RTI following the completion of the Transactions.
Mr. McKeon has served as President and general partner of The Veritas Fund,
L.P., a New York-based merchant banking and private equity investment firm, and
its predecessors since its formation in 1992. From 1990 to 1992, Mr. McKeon was
Chairman and from 1988 to 1990, was President of Wasserstein Perella Management
Partners, Inc., a New York merchant banking fund. Mr. McKeon was formerly
Chairman of Maybelline Inc. from 1990 to 1992 and Co-Chairman and Co-Chief
Executive Officer of Collins & Aikman Inc. from 1989 to 1992. Mr. McKeon also
serves as Chairman of H. Koch & Sons Inc.
Thomas J. Campbell served as a director of BarTech since September 1993.
Mr. Campbell has served as a general partner and is a director of The Veritas
Fund L.P., a New York merchant banking and private equity firm, and its
predecessors since its formation in 1992. From 1988 to 1992, Mr. Campbell was
Vice President of Wasserstein Perella Management Partners, Inc., a New York
merchant banking fund. Mr. Campbell also served as a director of Collins &
Aikman Inc. from 1988 to 1992 and as a director of Maybelline Inc. from 1990 to
1992. Mr. Campbell is also a director of Baltimore Marine Industries, Inc.
Lynn R. Williams has been retired since 1994. From 1983 until his
retirement, Mr. Williams served as President of the United Steelworkers union.
Paul J. Wilhelm has served as the President of U.S. Steel Group of USX
Corporation since 1994 and as a director of USX Corporation since 1995. From
1994 to 1995, Mr. Wilhelm served as Vice President--Operations of the U.S. Steel
Group, and from 1993 to 1994, he was the President of USS/Kobe Steel Company.
Mr. Wilhelm is also a director of Union Carbide Corporation and the Chairman of
the American Iron and Steel Institute.
Albert E. Ferrara, Jr. has served as Vice President--Strategic Planning of
USX Corporation since 1997. From 1994 to 1997, Mr. Ferrara served as the
President of USX Realty Development, an affiliate of USX Corporation.
Susumu Okushima has served as Managing Director of Kobe Steel, Ltd. since
June 1998 and President of Kobe Steel USA Inc. since April 1996. Mr. Okushima
has also served as Chairman of the Management Committee of USS/Kobe Steel
Company since November 1997. From July 1989 to March 1996, Mr. Okushima was the
Executive Vice President of USS/Kobe Steel Company responsible for technology
and quality assurance.
Tadashi Takeuchi has served as a General Manager of joint ventures of Kobe
Steel USA Inc. since April 1998. Prior to such time, Mr. Takeuchi held a
management position at the Iron and Steel Division of Kobe Steel, Ltd. where he
was responsible for overseas operations.
EXECUTIVE COMPENSATION
Based on salaries and bonuses paid by Republic, BarTech and USS/Kobe during
their respective fiscal years 1998, the following table sets forth the total
components of compensation from Republic, BarTech and/or USS/Kobe paid to our
Chief Executive Officer and our four other most highly compensated officers,
which are our "named executive officers." With respect to Messrs. Tyrrell, Meyer
and Asimou, the periods reflected are BarTech's fiscal years ended January 2,
1999, January 3, 1998 and September 30, 1996, as well as for the three month
period ended December 28, 1996, which reflects BarTech's change in fiscal year.
With respect to Mr. Lapinsky, the periods reflected are Republic's fiscal years
ended June 30, 1998, 1997 and 1996. With respect to Mr. Babcoke, the periods
reflected are USS/Kobe Steel Company's fiscal year ended December 31, 1998.
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SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------------------ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
- --------------------------------------------------------- ---- -------- -------- ---------------
Thomas N. Tyrrell ....................................... 1998 $367,000 $175,000 $ 4,620
Chief Executive Officer 1997 350,000 n/a 2,100
1996* 87,500 n/a 658
1996 35,950 300,000(2) 483
Joseph F. Lapinsky ...................................... 1998 229,160 363,075(2) n/a
President & Chief Operating Officer 1997 180,522 n/a 11,304
1996 n/a n/a n/a
Robert L. Meyer ......................................... 1998 205,000 112,500 2,706
Executive Vice President and General Manager, Rolling 1997 195,000 n/a 1,170
Operations 1996* 35,500 150,000(2) 232
1996 n/a n/a n/a
John G. Asimou .......................................... 1998 191,250 87,500 2,525
Executive Vice President and General Manager, 1997 180,000 n/a 1,080
Cold-Finished Bar Operations 1996* 44,792 n/a 338
1996 18,585 135,000(2) 124
George F. Babcoke ....................................... 1998 138,940 60,000 2,152
Executive Vice President and General Manager, Steel
Manufacturing
- ------------------
* The amounts set forth in this row represent compensation paid by BarTech
only for the three month period ended December 28, 1996. This presentation
is the result of BarTech's change in its fiscal year from its previous
calendar quarter basis ended September 30 to a 4/4/5 week fiscal quarter
basis ending the Saturday closest to December 31. As a result, BarTech's
fiscal year 1996 ended on September 30, and its fiscal 1997 began on
December 29, 1996 and ended on January 3, 1998.
(1) The amounts set forth in this column for Messrs. Tyrrell, Meyer and Asimou
reflect amounts of annual premiums paid by BarTech under group term life
insurance for these officers. The life insurance carries a maximum value of
two times base salary for each officer and has no cash surrender value. The
amount set forth in this column for Mr. Lapinsky in Republic's fiscal year
1997 includes $4,619 of supplemental salary available to purchase benefits
under a Republic cafeteria plan, $274 for contributions to a trust providing
for the difference between the amount needed to fund an agreed upon
retirement benefit and the maximum amount that may be contributed to
Republic's Defined Contribution Pension Plan under the Code and $38,049 for
other prerequisites, consisting primarily of relocation allowance. The
amount set forth for Mr. Babcoke consists of $2,152 of imputed income from a
life insurance policy.
(2) In October 1998, Mr. Lapinsky received a retention bonus of $83,075, and
signing bonuses totaling $280,000 upon assuming his new positions with
BarTech and Republic. Mr. Meyer received a signing bonus of $150,000 during
the BarTech three month period ended December 28, 1996. Mr. Tyrrell received
a signing bonus of $300,000 and Mr. Asimou received a signing bonus of
$135,000 in BarTech's fiscal 1996.
EMPLOYMENT AGREEMENTS
Messrs. Tyrrell, Lapinsky, Meyer and Asimou entered into employment
agreements with BarTech and Republic, effective October 1, 1998, each of which
agreement contains substantially similar terms. Each of these employment
agreements has a term ending on September 30, 2001,
93
and will renew automatically on each October 1 after 2001 for one-year renewal
terms unless terminated by the executive or us at least 90 days prior to any
expiration date. The employment agreements provide that Messrs. Tyrell,
Lapinsky, Meyer and Asimou are entitled to a base salary equal to $400,000,
$275,000, $235,000 and $225,000, respectively, and an annual bonus, which will
be no less than $150,000, $100,000, $75,000 and $75,000, respectively, for
fiscal years 1999 and 2000.
As a result of signing the employment agreements, Messrs. Tyrrell, Meyer,
and Asimou, and other members of management, forfeited their rights to prior
vested and unvested options to purchase common stock of BarTech.
Mr. Babcoke entered into an employment agreement with BarTech and Republic,
which became effective July 1, 1999. Mr. Babcoke's employment agreement contains
substantially similar terms to the employment agreements of Messrs. Tyrrell,
Lapinsky, Meyer and Asimou. Mr. Babcoke's agreement provides for a base salary
equal to $235,000 and an annual bonus, which will be no less than $75,000 for
fiscal years 1999 and 2000.
We expect that members of our management, including the five executive
officers discussed above, will be granted options to acquire common stock of RTI
equaling up to 5% of RTI's fully diluted equity at the time of granting of these
options.
DIRECTORS' COMPENSATION AND CONSULTING ARRANGEMENTS
Our directors receive no remuneration for serving as directors. All
directors are reimbursed for reasonable expenses incurred in attending director
meetings.
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RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In our management's opinion, the terms of each of the transactions with our
affiliates described below are generally no less favorable in the aggregate than
terms which could have been obtained with third parties which were previously
unaffiliated with us.
MASTER RESTRUCTURING AGREEMENT
The Combination was effected pursuant to a master restructuring agreement
entered into among RTI, Holdings, Republic Technologies, Blackstone, Veritas,
USX Corporation, Kobe Steel, Ltd., and various of their affiliates and related
investors. The master restructuring agreement contains customary
representations, warranties, covenants and indemnities. Indemnification claims
under the master restructuring agreement are generally satisfied through
adjustments to our owners' relative ownership interests.
EQUITYHOLDERS' AGREEMENT
In connection with the completion of the Transactions, RTI, Blackstone,
Veritas, USX Corporation, Kobe Steel, Ltd., FirstEnergy Services Corp., various
of their affiliates and other equityholders of RTI entered into an equityholders
agreement regarding their ownership of Holdings' equity and the common stock of
RTI.
Election of Directors. The equityholders agreement provides that the
parties will vote their shares of RTI common stock to elect a board of directors
that includes the following individuals:
o six directors designated by Blackstone;
o two directors designated by Veritas;
o two directors designated by USX;
o two directors designated by Kobe; and
o one director designated by the United Steelworkers union.
In each of the cases above other than the United Steelworkers, the right to
designate one or more directors is subject to decrease or termination if the
respective party's ownership level falls below thresholds specified in the
equityholders agreement. In addition, for so long as Blackstone is entitled to
designate six directors, it has the right upon its request to appoint additional
directors so as to obtain majority board control.
Fundamental Matters. Until the third anniversary of an initial public
offering of RTI common stock and provided that each of USX and Kobe maintains
specified equity ownership levels, the consent of each of USX and Kobe is
required for RTI to take specified actions, which, subject to various
exceptions, include the following:
o entering into or modifying specified types of material contracts between
RTI and affiliates of Blackstone or Veritas;
o issuing equity interests in RTI and its subsidiaries, other than
specified allowances for management incentives, strategic transactions
and an initial public offering;
o incurring indebtedness other than pursuant to the Transactions,
refinancings of indebtedness existing at the time of the Combination or
otherwise permitted to be incurred by the equityholders agreement,
indebtedness pursuant to undrawn commitments under existing credit
facilities, and other incremental indebtedness not to exceed
$500 million;
o other than pursuant to RTI's existing capital expenditures budget, making
capital expenditures in excess of $50 million during the period ending
August 13, 2004;
o merging RTI with or into any other entity, or the acquisition of the
capital stock or assets of any other person, subject to various
exceptions; and
95
o selling two-thirds or more of the consolidated assets of RTI, subject to
various exceptions.
In addition, USX and Kobe generally have the right in connection with an
initial public offering of RTI common stock to purchase additional shares in the
public offering to the extent necessary to maintain their ownership percentage.
Exchange Events. Each of the affiliates of USX and Kobe that initially
hold interests in Holdings have the right, subject to specified requirements, to
exchange the interests then owned by it for shares of Class D common stock of
RTI. In addition, these parties are also entitled to receive in the exchange
warrants designed to mitigate the dilutive effect of the Warrants issued with
the outstanding notes and other RTI warrants. If these exchanges are completed,
RTI will own 100% of Holdings. Blackstone also generally may require these
exchanges to occur upon an initial public offering of the common stock of RTI.
Transfers of Common Stock. Unless an initial public offering of RTI's
common stock has occurred, transfers of common stock prior to August 13, 2004
require the consent of Blackstone, except for transfers:
(1) to an affiliate,
(2) pursuant to the "tag-along" provision discussed below,
(3) pursuant to the "drag-along" provision discussed below,
(4) after three years following the closing of the Transactions,
transfers subject to a right of first offer on the part of
Blackstone and
(5) pursuant to the exercise of the registration rights discussed
below.
The equityholders agreement also provides that, without the prior consent of
Blackstone, USX and Kobe may only transfer equity interests in Holdings to each
other or to RTI.
Tag-Along Rights. The equityholders agreement grants to the parties the
right, subject to specified conditions, in connection with a proposed transfer
of common stock by either Blackstone or Veritas, to require the proposed
transferee to purchase a proportionate percentage of the shares owned by the
other parties, as applicable, at the same price and upon the same economic
terms.
Drag-Along Rights. So long as Blackstone owns 31% or more of the
outstanding common stock of RTI on a fully diluted basis, Blackstone has the
right, subject to specified conditions, in connection with an offer by a third
party to purchase all of the outstanding shares of common stock of RTI held by
the parties, to require the other parties to transfer all shares owned by them
to this third party at the same price and on the same economic terms as the
offer accepted by Blackstone.
Registration Rights. The equityholders agreement gives Blackstone the
right to "demand" that RTI register its shares under the federal securities laws
on three separate occasions. The equityholders agreement also grants three
"demand" registrations to USX, three "demand" registrations to Kobe, one
"demand" registration to FirstEnergy Services Corp. and, subject to conditions,
three "demand" registrations to Veritas. The demand registration rights granted
to USX, Kobe, FirstEnergy and Veritas may, with limited exceptions, generally
only be exercised after an initial public offering of RTI common stock has
occurred. In addition, the equityholders agreement grants "piggyback"
registration rights to each of the equityholders each time RTI files a
registration statement in connection with a sale of common stock, except for
registration statements relating to
(1) shares underlying management options,
(2) the offering contemplated by the new labor agreement with the
United Steelworkers union or
(3) an initial public offering consisting only of primary shares.
96
PAYMENT OF FEES AND EXPENSES
Since April 1996, Blackstone and Veritas have received an annual monitoring
fee from BarTech equal to $875,000 per year pursuant to a monitoring agreement.
Under the terms of the monitoring agreement, Blackstone and Veritas provide
management and financial monitoring services to BarTech. Blackstone and Veritas
have split these monitoring fees paid evenly between them. Blackstone and
Veritas have also been reimbursed by BarTech for their out-of-pocket expenses
incurred in providing such services.
In connection with the acquisition of Republic in 1998, RES Holding paid
transaction fees of $3.4 million to Blackstone and $0.8 million to Veritas and
reimbursed them for all related out-of pocket expenses. In addition, pursuant to
a monitoring agreement entered into with RES Holding, Blackstone and Veritas
have received an annual monitoring fee for providing management and financial
monitoring services equal to $1.125 million, with Blackstone receiving 75% and
Veritas receiving 25%, of this monitoring fee. Blackstone and Veritas have also
been reimbursed by RES Holding and Republic for their out-of-pocket expenses
incurred in providing these services. Approximately $2.4 million of accrued
BarTech and RES Holding monitoring fees that were then in arrears were paid
following the closing of the Transactions.
In connection with the Combination, we paid transaction fees in the
aggregate of $4.0 million to Blackstone, Veritas, USX Corporation and affiliates
of Kobe Steel, Ltd. In addition, we reimbursed or expect to reimburse
Blackstone, Veritas, USX Corporation and Kobe Steel, Ltd. for their out-of-
pocket expenses related to the Transactions. Upon consummation of the
Combination, we entered into a new monitoring agreement with Blackstone,
Veritas, USX Corporation and Kobe Steel, Ltd. that replaced the existing
monitoring agreements regarding BarTech and Republic, with the parties to
receive an aggregate annual fee of $4.0 million.
In addition, in the future, Blackstone, Veritas, USX Corporation and Kobe
Steel, Ltd. or their affiliates may receive customary fees for other advisory
and transactional services rendered to us. If such services are rendered in the
future, the fees will be negotiated from time to time on an arms-length basis
and will be based on the services performed and the fees charged to third
parties for comparable services.
SALES TO AND AGREEMENTS WITH BLACKSTONE AFFILIATES
American Axle & Manufacturing. In the twelve months ended December 31,
1998, we had approximately $100 million of net sales to American Axle &
Manufacturing, a company controlled by Blackstone. All such sales were in the
ordinary course of business and on arms-length terms.
Haynes. We and Haynes International, Inc. a company controlled by
Blackstone, are parties to a facilities management agreement dated as of
April 15, 1999, by which Haynes agreed to manage our Baltimore, Maryland and
Canton, Ohio (Harrison Avenue) specialty steel finishing facilities. Under the
facilities management agreement, Haynes provides senior management oversight of
the operation of these facilities (subject at all times to the control of our
chief executive officer, chief operating officer and board of directors),
including the day-to-day management of our personnel working at these facilities
and the making of recommendations to us with respect to the sales and marketing
of the products produced at these facilities, quality control and assurance and
personnel decisions. We continue to own these facilities and must approve all
material expenditures and other material financial decisions, production
allocation decisions, personnel decisions and product pricing decisions made in
connection with the operation of these facilities. As compensation for the
services provided, Haynes receives management fees equal to the total
compensation costs, including benefits, of the Haynes personnel providing
management services to us that is allocable to the time these personnel devote
to these facilities. In addition, Haynes is reimbursed by us for all of its
reasonable out-of-pocket expenses incurred in connection with the provision of
management services. Prior to entering into the facilities management agreement,
Haynes had no role in the management of these facilities.
97
We currently intend to sell our specialty steels business, and Haynes is a
possible buyer. We have discussed the possible sale with a number of other
potential purchasers as well. Factors weighed in connection with the sale of
this business include the amount and form of consideration, speed, simplicity
and certainty of completion and an assessment of residual costs and exposures.
AGREEMENTS WITH USX CORPORATION, KOBE STEEL, LTD. AND FIRSTENERGY SERVICES CORP.
AND THEIR AFFILIATES
In connection with the Combination, we entered into the following
agreements with USX Corporation, Kobe Steel, Ltd. and FirstEnergy Service Corp.
or their affiliates:
Round Supply Agreement. We entered into a five-year supply agreement with
USX Corporation and the new tubular steel joint venture between USX and Kobe
Steel, Ltd., which provides for the tubular joint venture purchasing all of its
requirements for steel rounds at its Lorain, Ohio pipemill from us up to a
maximum of 400,000 tons per year for a price equal to our production costs plus
an agreed upon margin per ton. The tubular joint venture also has the right to
purchase up to an additional 200,000 tons per year for a price equal to our
fixed production costs plus an agreed upon margin per ton. If the tubular joint
venture is unable to purchase at least 400,000 tons of steel rounds per year for
its Lorain, Ohio pipemill, USX is required to purchase any shortfall, under
specified circumstances, to satisfy the steel round requirements of its
Fairfield, Alabama pipemill facility that can not be satisfied from USX's
internal production of steel rounds.
Coke Supply Agreement. We entered into a five-year supply agreement with
USX, which provides that we purchase substantially all of our requirements for
coke for use in our Lorain, Ohio blast furnace from USX. The purchase price for
coke is based on market prices and adjusted annually, subject to most favored
nations provisions for price and other conditions, which allow us to receive the
most favorable terms that USX grants to any of its coke customers.
Pellet Supply Agreement. Under this agreement, we agreed to purchase all
of our iron ore pellet requirements for our Lorain, Ohio blast furnace from USX
for a period of five years. The purchase price for pellets is generally based on
market prices and will be adjusted annually, subject to most favored nation
provisions for price and other conditions, which allow us to receive the most
favorable terms that USX grants to any of its pellet customers.
Technology Transfer Agreements. We entered into technology transfer and
related agreements with Kobe Steel, Ltd. and one of its affiliates which
provides us with a license to use various Kobe technology and requires Kobe to
provide us with various technical assistance in return for annual payments to
Kobe of approximately $1 million.
Safe Harbor Lease Matters Agreement. Pursuant to the master restructuring
agreement, we received certain property formerly owned by USS/Kobe that
qualifies as "Safe Harbor Lease Property," thus affording USX and Kobe with tax
benefits. The Safe Harbor Lease Matters Agreement contains covenants and
warranties to ensure that the property remains qualified as Safe Harbor Lease
Property and to ensure the continuation of the tax benefits.
Energy Management Agreement. In connection with the consummation of the
Transactions, we entered into an agreement with FirstEnergy Services Corp. under
which we appointed FirstEnergy as our exclusive representative for the
procurement of energy supply and services. As a result of this arrangement, it
is likely that much of our energy purchasing requirements will eventually be
filled by FirstEnergy. Also in connection with the consummation of the
Transactions, FirstEnergy purchased $30 million of the Series C convertible
preferred stock of RTI. See "Security Ownership of Beneficial Owners and
Management."
In connection with the Combination, we also entered into an agreement with
the new tubular steel joint venture between USX and Kobe Steel, Ltd. regarding
the provision of various utilities and an agreement with USX regarding the
provision of various transitional services. In addition, at the closing of the
Combination, we entered into an agreement with USX regarding payment of certain
payables owed by USS/KOBE Steel Company to USX.
98
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
All of our equity is owned by Holdings, which is a limited liability
company whose managing member is RTI. A number of material arrangements relating
to the voting or disposition of equity securities of RTI and Holdings are
included in an equityholders agreement described under "Relationships and
Related Party Transactions." Except as indicated below, the following table sets
forth information as to the approximate beneficial ownership of the voting
equity securities of RTI after the consummation of the Transactions, assuming
exercise of outstanding warrants, conversion of outstanding convertible
preferred stock and exchange by USX and Kobe of their membership interests in
Holdings into RTI common stock, by the following:
o owners of more than 5% of the outstanding equity;
o each of our directors and named executive officers; and
o all of our executive officers and directors, as a group.
The following table does not take into account options that are expected to be
granted to management in the future. Blackstone has the right to appoint a
majority of the directors of RTI for so long as it beneficially owns at least
25% of the fully diluted common stock of RTI. Except as indicated in the
footnotes to this table, we believe that the persons named in the table have
sole voting and investment power with respect to all equity interests shown as
beneficially owned by them. Unless otherwise indicated below, the address for
each of our beneficial owners is c/o Republic Technologies International, LLC,
3770 Embassy Parkway, Akron, Ohio 44333-8367.
OWNERSHIP OF RTI
----------------------------
NUMBER OF PERCENTAGE
NAME SHARES (#) OWNED (%)
- --------------------------------------------------------------------------- -------------- ----------
Blackstone Management Associates II L.L.C.("BMA II")(1)(6) ................ 3,077,918 38.2
345 Park Avenue
New York, New York 10154
Veritas Capital Management LLC ("VCM")(2)(8) .............................. 1,072,452 13.3
660 Madison Avenue
New York, New York 10021
USX Corporation(3) ........................................................ 1,111,405 13.8
600 Grant Street
Pittsburgh, Pennsylvania 15219
Kobe Steel, Ltd.(4) ....................................................... 1,013,650 12.6
10-26 Wakinohama Cho
2 Chome Chuo-ku
Kobe City Hyogo
651-0072
Japan
FirstEnergy Services Corp.(5) ............................................. 429,478 5.3
76 South Main Street
Akron, Ohio 44308
Thomas N. Tyrrell ......................................................... -- --
Joseph F. Lapinsky ........................................................ -- --
George F. Babcoke ......................................................... -- --
Robert L. Meyer ........................................................... -- --
John G. Asimou ............................................................ -- --
Richard C. Lappin(1)(6).................................................... 3,077,918 38.2
Robert Friedman(1)(6) ..................................................... 3,077,918 38.2
David A. Stockman(7) ...................................................... -- --
David Blitzer(1)(6) ....................................................... 3,077,918 38.2
Robert B. McKeon(2)(8) .................................................... 1,072,452 13.3
Thomas J. Campbell(2)(8)................................................... 1,072,452 13.3
Lynn R. Williams .......................................................... -- --
99
OWNERSHIP OF RTI
----------------------------
NUMBER OF PERCENTAGE
NAME SHARES (#) OWNED (%)
- --------------------------------------------------------------------------- -------------- ----------
Paul J. Wilhelm ........................................................... -- --
Albert E. Ferrara, Jr. .................................................... -- --
Susumu Okushima ........................................................... -- --
Tadashi Takeuchi........................................................... -- --
All executive officers and directors as a group (23 persons)(6)(8) 4,150,370 51.5
- ------------------
(1) BMA II's beneficial ownership interest in Holdings is held indirectly
through RTI. Blackstone beneficially owns all of the 536,829 outstanding
shares of Class B common stock of RTI, 393,701, or approximately 73.3%, of
the total 536,865 outstanding shares of Class C common stock of RTI and
2,147,388, or approximately 67.3%, of the total 3,191,637 outstanding shares
of Class D common stock of RTI. Of BMA II's Class B common stock, 423,132
shares are held directly by BRW Steel Holdings, L.P., a Delaware limited
partnership initially organized by persons associated with Veritas in
connection with the initial formation of BarTech, and 113,697 shares are
held by BRW Steel Offshore Holdings, L.P., a Delaware limited partnership
initially organized by persons associated with Blackstone and Veritas in
connection with Blackstone's initial investment in BarTech. Blackstone
Capital Partners II Merchant Banking Fund L.P., a Delaware limited
partnership for which BMA II is the sole general partner, is the Class B
general partner of BRW Steel Holdings, and pursuant to the limited
partnership agreement of BRW Steel Holdings exercises all voting and
dispositive powers with respect to the Class B common stock held by BRW
Steel Holdings. BMA II controls the Class B general partners of BRW Steel
Offshore Holdings, and pursuant to the limited partnership agreement of BRW
Steel Offshore Holdings, exercises all voting and dispositive powers with
respect to the Class B common stock held by BRW Steel Offshore Holdings.
Accordingly, because BMA II has voting and dispositive control with respect
to all of the shares of Class B common stock held by these partnerships, it
may be deemed to beneficially own these shares. The shares of Class C and
Class D common stock beneficially owned by BMA II are held directly by
Blackstone Capital Partners II Merchant Banking Fund, Blackstone Family
Investment Partnership II L.P., a Delaware limited partnerships for which
BMA II is the sole general partner, and Blackstone Offshore Capital Partners
II L.P., a Cayman Islands exempted limited partnership for which BMA II is
the general partner with voting and dispositive power. Accordingly, BMA II
may be deemed to beneficially own all of the shares of Class C and Class D
common stock held by Blackstone Capital Partners II Merchant Banking Fund,
Blackstone Offshore Capital Partners II and Blackstone Family Investment
Partnership II. Messrs. Peter G. Peterson and Stephen A. Schwarzman are the
founding members of BMA II and control BMA II. Accordingly, they may be
deemed to share beneficial ownership of the shares of RTI held by BMA II,
although they disclaim this beneficial ownership.
(2) VCM's beneficial ownership interest in Holdings is held indirectly through
RTI. VCM beneficially owns 196,410, or approximately 66.5%, of the total
295,199 outstanding shares of Class A common stock of RTI (which includes
outstanding warrants for 91,609 shares of Class A common stock), 143,164, or
approximately 26.7%, of the total 536,865 outstanding shares of Class C
common stock of RTI and 732,878, or approximately 23.0%, of the total
3,191,637 outstanding shares of Class D common stock of RTI. Of VCM's
Class A common stock, 154,811 are held directly by BRW Steel Holdings, L.P.,
a Delaware limited partnership initially organized by persons associated
with VCM in connection with the initial formation of BarTech, and 41,599
shares are held by BRW Steel Offshore Holdings, L.P., a Delaware limited
partnership initially organized by persons associated with Blackstone and
Veritas in connection with Blackstone's initial investment in BarTech. BRW
Partners, Inc., a Delaware corporation controlled by the principals of VCM,
is the Class A general partner of both BRW Steel Holdings and BRW Steel
Offshore Holdings, and pursuant to the limited partnership agreements of
these partnerships, exercises all voting and dispositive powers with respect
to the Class A common stock held by these partnerships. Accordingly, because
VCM has voting and dispositive control with respect to
(footnotes continued on next page)
100
(footnotes continued from previous page)
all of the shares of Class A common stock held by these partnerships, it may
be deemed to beneficially own these shares. The shares of Class C common
stock beneficially owned by VCM are held directly by BRW Steel Holdings II,
L.P., a Delaware limited partnership, and Veritas Capital, L.L.C. and KDJ,
L.L.C., each Delaware limited liability companies. The general partner of
BRW Steel Holdings II is BRW Partners L.L.C., a limited liability company
controlled by VCM. Each of Veritas Capital and KDJ are also controlled by
VCM. Accordingly, VCM may be deemed to beneficially own all of these shares
of Class C common stock. The shares of Class D common stock beneficially
owned by VCM are held directly by The Veritas Capital Fund, L.P., a Delaware
limited partnership of which VCM controls the general partner with voting
and dispositive power. Accordingly, VCM may be deemed to beneficially own
all of the shares of Class D common stock held by The Veritas Capital Fund.
The beneficial ownership number for VCM does not include 0.6% of the fully
diluted common stock held by an investor that is related to, but not an
affiliate of, VCM.
(3) USX's beneficial ownership interest in Holdings is held directly by USX RTI
Holdings, Inc., a Delaware corporation and an indirect subsidiary of USX.
Under the equityholders agreement described under "Relationships and Related
Party Transactions," USX may exchange its ownership interests in Holdings
for Class D common stock and warrants of RTI at any time after consummation
of the Transactions, and under some circumstances may be required to do so
by Blackstone. We have assumed such exchange in the above table.
(4) Kobe's beneficial ownership interest in Holdings is held directly by Kobe
RTI Holdings, Inc., a Delaware corporation and an indirect subsidiary of
Kobe. Under the equityholders agreement described under "Relationships and
Related Party Transactions," Kobe may exchange its ownership interests in
Holdings for Class D common stock and warrants of RTI at any time after
consummation of the Transactions, and under some circumstances may be
required to do so by Blackstone. We have assumed such exchange in the above
table.
(5) In connection with the consummation of the Transactions, FirstEnergy or its
affiliate purchased 30,000 shares of the Class C Convertible Preferred Stock
of RTI, which shares are immediately convertible, at the option of
FirstEnergy, into the indicated number of shares of RTI common stock
beneficially owned by FirstEnergy. The conversion of First Energy's shares
has been assumed in the table above. See "Description of Capital
Stock--Preferred Stock."
(6) Messrs. Lappin, Friedman and Blitzer are affiliated with Blackstone in the
capacities described under "Management." Their address is c/o The Blackstone
Group L.P., 345 Park Avenue, New York, New York 10154. Messrs. Lappin,
Friedman and Blitzer disclaim beneficial ownership of any equity of Holdings
or RTI beneficially owned by BMA II.
(7) Mr. Stockman's address is c/o Heartland Industrial Management L.L.C., 320
Park Avenue, New York, New York 10022. Mr. Stockman was a Senior Managing
Director of the Blackstone Group L.P. from 1988 until September 1999.
(8) Messrs. McKeon and Campbell are the principals of Veritas and control VCM.
Accordingly, they may be deemed to share beneficial ownership of the shares
of RTI common stock owned by VCM, although they disclaim this beneficial
ownership.
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DESCRIPTION OF THE NEW CREDIT FACILITY
OVERVIEW
In connection with the Transactions, we entered into a new credit facility
with BankBoston, N.A., as administrative agent and co-book manager, Bank of
America, N.A., as co-book manager, syndication agent and co-arranger, BancBoston
Robertson Stephens Inc. as co-arranger, The Chase Manhattan Bank, as co-book
manager and documentation agent, and other lenders.
Our new credit facility consists of a senior revolving credit facility in a
total principal amount of up to $425 million. The amount available to be
borrowed at any time is limited by a borrowing base described below.
The new credit facility matures on August 13, 2004.
The obligations under the new credit facility are secured and are
unconditionally and irrevocably guaranteed jointly and severally by Holdings and
each of its subsidiaries other than Republic Technologies and Oberlin Insurance
Company.
SECURITY INTERESTS
Our borrowings under our new credit facility are secured by a first
priority perfected security interest in:
o the capital stock and other equity interests of each direct and indirect
subsidiary of Holdings, other than Oberlin Insurance Company but
including Republic Technologies, which collateral also secures the notes
on an equal and ratable basis; and
o all presently owned and subsequently acquired accounts, inventory,
intellectual property and related assets of Republic Technologies and
guarantors and the real estate and fixed assets comprising, and the
intellectual property relating to, the CAST-ROLL(Trademark) facility,
including the related melt shop.
AVAILABILITY
Availability under our new credit facility is limited to a borrowing base.
We are entitled to draw amounts under it to repay existing indebtedness, to
finance working capital and capital expenditures, and for other general
corporate purposes.
The borrowing base equals:
o 60% of "eligible inventory" subject to a maximum; plus
o 85% of "eligible accounts receivable"; plus
o the lesser of (a) 67% of the appraised "liquidation in-place value" of
the CAST-ROLL(Trademark) facility plus the appraised value of the related
real estate in Canton, Ohio, provided that no downward adjustment will be
made prior to March 31, 2001, and (b) $125 million, minus the product of
$4.5 million and the number of quarters elapsed beginning with the
quarter ended December 31, 2000; minus
o a reserve of between $35 million and $50 million, which will be adjusted
based on the amount of undrawn available amounts under the new credit
facility.
The administrative agent under the new credit facility has the right in its
discretion to modify advance rates, eligibility standards and reserves
applicable to the borrowing base based on the results of commercial finance
examinations, appraisals and other information.
INTEREST RATES AND FEES
Borrowings under the new credit facility bear interest, at our option, at
either:
o a base rate used by BankBoston, N.A., plus an applicable margin; or
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o a eurodollar rate on deposits for one, two, three or six month periods,
plus the applicable margin.
The applicable margin on base rate loans is 1.25% and on eurodollar loans
is 3.25%. The applicable margin on base rate and eurodollar loans may be
increased by 0.25% under specified circumstances.
As of November 3, 1999, borrowings under the new credit facility are
accruing interest at the rate of 9.1% per year.
We also pay the lenders a commitment fee on the unused commitments under
the new credit facility equal to 0.50% per annum, payable monthly in arrears. In
addition, we paid the arrangers and underwriters of the new credit facility an
underwriting fee on the closing date of the new credit facility.
MANDATORY AND OPTIONAL REPAYMENT
Subject to exceptions for reinvestment of proceeds and other exceptions and
materiality thresholds to be agreed upon, we are required to prepay outstanding
loans and reduce commitments under the new credit facility with the net proceeds
of specified
o asset dispositions
o casualty and condemnation recovery events,
o issuances of equity and
o incurrences of permitted debt.
We may voluntarily prepay loans under our new credit facility, in whole or
in part, without penalty, subject to minimum prepayments. If we prepay
eurodollar rate loans, we are required to reimburse lenders for their breakage
and redeployment costs.
COVENANTS
Our new credit facility contains negative covenants and provisions that
restrict, among other things, our ability to
o incur additional indebtedness or guarantee the obligations of
others,
o grant liens,
o change our line of business or create new subsidiaries,
o merge, consolidate and acquire or sell assets or stock,
o make capital expenditures in excess of specified annual amounts,
o engage in transactions with our affilliates,
o pay dividends, repurchase stock or make other forms of restricted
payments and
o prepay or amend the notes or any of our subordinated indebtedness.
The new 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, 2001.
The new credit facility also contains the following affirmative covenants,
among others:
o mandatory reporting of financial and other information,
o access to our properties and books by the new credit facility
lenders,
o notice to the administrative agent and the new credit facility
lenders upon the occurrence of specified events of default and other
events and
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o other customary obligations requiring us and our subsidiaries to
operate our business in an ordinary manner consistent with past
practices, including the maintenance of accurate books and records,
insurance coverage and interest rate protection and the payment of
taxes and other government charges.
EVENTS OF DEFAULT
The new credit facility specifies customary events of default, including:
o non-payment of principal, interest or fees,
o violation of covenants in the new credit facility,
o specified types of defaults by us under documents evidencing other
indebtedness,
o change of control and
o failure to maintain security interest in, or material damage to, the
collateral securing the new credit facility.
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DESCRIPTION OF OTHER INDEBTEDNESS
The following discussion includes a summary of the material provisions of
indebtedness originally incurred by Republic, BarTech and USS/Kobe that we
retained after consummation of the Transactions. For further information
regarding the terms and provisions of this indebtedness, please refer to the
debt instruments themselves which we have filed or incorporated by reference as
exhibits to the registration statement of which this prospectus is part. The
exhibit index included as part of the registration statement indicates where
copies of these debt instruments may be found. We urge you to read these
documents.
REPUBLIC PROJECT LOAN AGREEMENTS
On October 28, 1994, the Ohio Water Development Authority issued $20.2
million of 8 1/4% Solid Waste Revenue Bonds due October 1, 2014. Additionally,
on June 1, 1996, the Ohio Water Development Authority issued $53.7 million of 9%
Solid Waste Revenue Bonds due June 1, 2021, which together with the 1994 bonds
are referred to in this offering memorandum as the "Republic Revenue Bonds." The
proceeds of the Republic Revenue Bonds funded loans by the Ohio Water
Development Authority to Republic pursuant to loan agreements between Republic
and the Ohio Water Development Authority. These loans were used by Republic to
finance a portion of the costs of solid waste disposal and recycling facilities
installed at its CAST-ROLL(Trademark) facility. Republic has agreed under the
loan agreements to make payments sufficient to pay when due the principal of and
interest on the Republic Revenue Bonds and any other amounts relating to the
bonds. The Republic Revenue Bonds are special obligations of the State of Ohio
exempt from various forms of federal, state and local income taxation and are
therefore subject to mandatory redemption upon the occurrence of a determination
of taxability as provided in the Republic Revenue Bonds. The Republic Revenue
Bonds are also redeemable, in whole or in part, (1) at the option of Republic,
at any time on or after October 1, 2004 at specified premiums set forth in the
bonds that decline over three years and (2) by the Ohio Water Authority under
extraordinary conditions described in the bonds.
BARTECH ECONOMIC DEVELOPMENT FINANCING
In connection with its startup modernization and expansion plan, BarTech
entered into loan agreements with lenders in the Commonwealth of Pennsylvania.
Pennsylvania
General. BarTech entered into a Master Agreement with the Commonwealth of
Pennsylvania on July 18, 1994, which provided BarTech with a $33.0 million
commitment for financing to consummate the acquisition of assets from the
Bethlehem BRW Division and to modernize the BarTech facilities. The loans have
been made through the Economic Development Partnership, the Community
Development Block Grant Program and the Business Infrastructure Development
Program. The loans governed by the Master Agreement are collectively referred to
in this offering memorandum as the "Commonwealth Loans." As of June 30, 1999,
approximately $28.2 million in aggregate principal amount of Commonwealth Loans
were outstanding.
Covenants. The Master Agreement, as modified by the Principal
Intercreditor Agreement, contains affirmative and negative covenants, including
covenants requiring BarTech, subject to exceptions, to do the following:
o use loan proceeds in a specified manner;
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o comply with laws, pay taxes, maintain insurance, preserve its corporate
existence, provide financial statements and other material operational
information and maintain its operations, facility and equipment;
o proceed diligently to complete the modernization and expansion plan
relating to BarTech's Johnstown, Pennsylvania facility;
o commence operations by a specified date and establish various employee
benefit programs and to achieve certain employment levels at the
Johnstown facility;
o comply with environmental and other laws;
o not merge, consolidate with any other person or sell, assign, lease,
abandon or otherwise dispose of specified property;
o not create or incur additional liens, encumbrances or indebtedness; and
o not pay any dividends or other distributions to the holders of BarTech's
equity or subordinated debt.
EDP Loans. The City of Johnstown, Pennsylvania has loaned an aggregate of
approximately $10.0 million to BarTech pursuant to the Economic Development
Partnership program. The EDP loans are in the approximate amounts of
$5.7 million, $1.3 million and $3.0 million. The EDP loans bear interest at a
rate of 3.0% per year and mature on October 1, 2009, July 1, 2010 and
December 1, 2007, respectively. As of June 30, 1999, approximately $10.0 million
in aggregate principal amount of indebtedness was outstanding under the EDP
loans.
CDBG Loans. The County of Cambria, Pennsylvania has loaned funds to
BarTech under the Community Development Block Grant program. The CDBG loans bear
interest at a rate of 3.0% per year and mature on July 1, 2010. As of June 30,
1999, approximately $643,000 in aggregate principal amount of indebtedness was
outstanding under the CDBG loans.
BID Loans. The Johnstown Industrial Development Commission has loaned
BarTech $2.5 million under the Business Infrastructure Development program. The
BID loan bears interest at a rate of 3.0% per year and matures on July 1, 2010.
As of June 30, 1999, $2.5 million in aggregate principal amount of indebtedness
was outstanding under the BID loan.
EZCP Loan. In connection with the consummation of the Transactions, we
entered into a loan agreement with the City of Johnstown, Pennsylvania pursuant
to which Johnstown loaned approximately $431,600 to us from funds obtained from
the Pennsylvania Department of Community Affairs under the Enterprise Zone
Competitive Program. The loan bears interest at 3.0% per year, and payments of
interest and principal are due quarterly. The entire unpaid balance of the loan
is due on October 1, 2003. This loan is governed by the Master Agreement with
the Commonwealth of Pennsylvania.
Section 108 Loans
The City of Johnstown and the County of Cambria loaned to BarTech
$5.5 million and $3.0 million, respectively, from funds received from the U.S.
Secretary of Housing and Urban Development under the Section 108 program. The
Section 108 loans bear interest at 8.12% per year, will be amortized according
to a schedule of payments of various amounts included in the Section 108 loan
agreement, with quarterly installments (1) for the City of Johnstown loan, which
began on July 15, 1999, and (2) for the County of Cambria loan, which began on
July 15, 1997. These loans mature on September 26, 2003. As of June 30, 1999,
approximately $5.75 million in aggregate principal amount was outstanding under
the Section 108 loans.
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BLISS & LAUGHLIN STEEL COMPANY CARTERSVILLE IRBS
In December 1988, the Development Authority of Cartersville, Georgia issued
$3.6 million in aggregate principal amount of its tax exempt industrial revenue
bonds, or "IRBs," the proceeds of which were loaned to BarTech's Bliss &
Laughlin subsidiary and used to partially fund the construction and equipping of
Bliss & Laughlin's Cartersville, Georgia facility. The Cartersville IRBs bear
interest at a rate equal to the minimum rate of interest which, in the opinion
of the remarketing agent for the Cartersville IRBs, would be necessary to sell
Cartersville IRBs in the secondary market. The interest rates paid on the
Cartersville IRBs varied from 3.26% to 4.75% during fiscal 1998 and was 3.95% at
June 30, 1999. Principal payments of $300,000 are due on the Cartersville IRBs
on each December 1 beginning in 2009 and continuing through 2012. Thereafter,
payments of $400,000 are due on each December 1 until the final payment on
December 1, 2018. The Cartersville IRBs are secured by Bliss & Laughlin's
Cartersville, Georgia facility and the equipment located at the facility. As of
June 30, 1999, $3.6 million of indebtedness was outstanding under the
Cartersville IRBs.
USS/KOBE REVENUE BONDS
1984 EIRBs. In December 1984, the Ohio Water Development Authority issued
$9 million in aggregate principal amount of tax exempt variable rate demand
environmental improvement revenue bonds, or "1984 EIRBs," the proceeds of which
were loaned to USX Corporation and used to finance the cost of pollution control
equipment at the Lorain, Ohio facility, which was contributed by USX to USS/Kobe
Steel Company in 1989. The 1984 EIRBs are special obligations of the State of
Ohio exempt from various forms of federal, state and local income taxation and
are therefore subject to mandatory redemption upon the occurrence of a
determination of taxability, and are further subject to optional and mandatory
redemption and tender prior to maturity pursuant to the terms of the trust
indenture agreement concerning the 1984 EIRBs.
The interest rates paid on the 1984 EIRBs averaged 3.68% during calendar
year 1998 and was 3.3% at June 30, 1999. The 1984 EIRBs mature on December 1,
2001. As of June 30, 1999, $9.0 million of indebtedness was outstanding for
USS/Kobe Steel Company under the 1984 EIRBs.
In connection with the original issuance of the 1984 EIRBs, PNC Bank, N.A.
issued an irrevocable, direct-pay letter of credit to secure payment of the
principal of, interest on and the purchase price of the 1984 EIRBs, in an amount
equal to the principal of the 1984 EIRBs plus an amount equal to 75 days of
interest on the 1984 EIRBs at a rate of 15% per year. Draws on the letter of
credit are secured by a first priority lien on bonds purchased as a result of
the draw pursuant to the terms of the reimbursement agreement and a pledge and
security agreement entered into between PNC Bank and USX Corporation.
In connection with the consummation of the Transactions, we agreed to pay
the debt service on the 1984 EIRBs, including remarketing fees and amounts due
under the PNC letter of credit. We may need to make payments in respect of the
1984 EIRBs earlier than scheduled if USX Corporation terminates the PNC letter
of credit or otherwise makes early payment in respect of the 1984 EIRBs.
1995 EIRBs. In November 1995, the Ohio Air Quality Development Authority
issued $10.16 million of its tax exempt variable rate environmental improvement
revenue bonds, or "1995 EIRBs," the proceeds of which were loaned to USX
Corporation for the purpose, in part, of refinancing its outstanding $4.745
million Ohio Air Quality Development Authority Floating Rate Environmental
Improvement Revenue Bonds, Series B. These Series B bonds had been issued in
1980 to finance the cost of pollution control equipment at the Lorain facility.
The 1995 EIRBs are special obligations of the State of Ohio exempt from various
forms of federal, state and local income taxation and are therefore subject to
mandatory redemption upon the occurrence of a determination
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of taxability, and are further subject to optional and mandatory redemption and
tender prior to maturity pursuant to the terms of the trust indenture agreement
concerning the 1995 EIRBs.
The interest rates paid on the 1995 EIRBs averaged 3.54% during calendar
year 1998 and was 3.7% at June 30, 1999. The 1995 EIRBs mature on November 1,
2015. As of June 30, 1999, $4.7 million of indebtedness was outstanding for
USS/Kobe Steel Company under the 1995 EIRBs.
The Wachovia Bank of North Carolina, N.A. has issued an irrevocable,
direct-pay letter of credit to secure payment of the principal of, interest on
and the purchase price of the 1995 EIRBs, in a stated amount equal to the
principal amount of the 1995 EIRBs plus an amount equal to 210 days of interest
on the 1995 EIRBs at a rate of 12% per year. Draws on the letter of credit are
secured by a first priority lien on bonds purchased as a result of the draw
pursuant to the terms of the reimbursement agreement and a pledge and security
agreement entered into between Wachovia and USX Corporation.
In connection with the consummation of the Transactions, we agreed to pay
46.7% of the debt service on the 1995 EIRBs, including 46.7% of the remarketing
fees and amounts due under the Wachovia letter of credit. We may need to make
payments in respect of the 1995 EIRBs earlier than scheduled if USX Corporation
terminates the Wachovia letter of credit or otherwise makes early payment in
respect of the 1995 EIRBs.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
We entered into a notes exchange and registration rights agreement with the
initial purchasers of the outstanding notes in which we agreed, under specified
circumstances, to file a registration statement relating to an offer to exchange
the outstanding notes for exchange notes. We also agreed to use our reasonable
best efforts to cause the exchange offer to be consummated within 240 days
following the original issue of the outstanding notes. The exchange notes will
have terms substantially identical to the outstanding notes, except that the
exchange notes will not contain terms with respect to transfer restrictions,
registration rights and liquidated damages for failure to observe specific
obligations in the notes exchange and registration rights agreement. The
outstanding notes were issued on August 13, 1999.
Under the circumstances set forth below, we will use our reasonable best
efforts to cause the Securities and Exchange Commission to declare effective a
shelf registration statement with respect to the resale of the outstanding notes
and keep the statement effective for up to two years after the effective date of
the shelf registration statement. These circumstances include:
o because of any change in law or applicable interpretations of these laws
by the staff of the Commission, the issuers and the guarantors are not
permitted to effect the exchange offer as contemplated by this
prospectus;
o any initial purchaser requests a shelf registration statement with
respect to notes not eligible to be exchanged for exchange notes in the
exchange offer;
o any applicable law or interpretations do not permit any holder of notes
to participate in the exchange offer and any of these holders notifies
the issuers of this fact within 30 days of the completion of the exchange
offer; or
o any holder of notes that participates in the exchange offer does not
receive freely transferable exchange notes in exchange for tendered
Transfer Restricted Securities, as defined under "Notes Exchange and
Registration Rights Agreement", and any of these holders notifies the
issuers of this fact within 30 days of the completion of the exchange
offer.
If we fail to comply with specified obligations under the registration
rights agreement, we will be required to pay liquidated damages to holders of
the outstanding notes. Liquidated damages, if payable, would equal $0.192 per
week per $1,000 principal amount of notes constituting Transfer Restricted
Securities held by each holder until the non-compliance is remedied.
Each holder of outstanding notes that wishes to exchange outstanding notes
for transferable exchange notes in the exchange offer will be required to make
the following representations:
o any exchange notes to be received by it will be acquired in the ordinary
course of its business;
o it has no and will have no arrangement or understanding with any person
to participate in the distribution of the exchange notes; and
o it is not an "affiliate," as defined in Rule 405 under the Securities
Act, of the issuers and the guarantors, or if it is an affiliate, that it
will comply with the registration and prospectus delivery requirements of
the Securities Act, to the extent applicable.
RESALE OF EXCHANGE NOTES
Based on interpretations of the Commission staff set forth in no action
letters issued to unrelated third parties, we believe that exchange notes issued
under the exchange offer in exchange for outstanding notes may be offered for
resale, resold and otherwise transferred by any exchange
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note holder without compliance with the registration and prospectus delivery
provisions of the Securities Act, if:
o the holder is not an "affiliate" of Republic Technologies within the
meaning of Rule 405 under the Securities Act;
o the exchange notes are acquired in the ordinary course of the holder's
business; and
o the holder does not intend to participate in a distribution of the
exchange notes.
Any holder who tenders in the exchange offer with the intention of
participating in any manner in a distribution of the exchange notes:
o cannot rely on the position of the staff of the Commission enunciated in
"Exxon Capital Holdings Corporation" or similar interpretive letters; and
o must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
This prospectus may be used for an offer to resell, resale or other
retransfer of exchange notes only as specifically set forth in this prospectus.
With regard to broker-dealers, only broker-dealers that acquired the outstanding
notes as a result of market-making activities or other trading activities may
participate in the exchange offer. Each broker-dealer that receives exchange
notes for its own account in exchange for outstanding notes, where the
outstanding notes were acquired by the broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of the exchange notes.
Please read the section in this prospectus captioned "Plan of Distribution" for
more details regarding the transfer of exchange notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept for exchange any outstanding
notes validly tendered and not properly withdrawn prior to the expiration date.
We will issue $1,000 principal amount of exchange notes in exchange for each
$1,000 principal amount of outstanding notes surrendered under the exchange
offer. Outstanding notes may be tendered only in integral multiples of $1,000.
The form and terms of the exchange notes will be substantially identical to
the form and terms of the outstanding notes, except the exchange notes will be
registered under the Securities Act, will not bear legends restricting their
transfer and will not provide for any liquidated damages upon our failure to
fulfill our obligations under the notes exchange and registration rights
agreement to file, and cause to be effective, a registration statement. The
exchange notes will evidence the same debt as the outstanding notes. The
exchange notes will be issued under, and entitled to, the benefits of, the same
indenture that authorized the issuance of the outstanding notes. Consequently,
both series will be treated as a single class of debt securities under that
indenture. For a description of the indenture, see "Description of the Notes"
below.
The exchange offer is not conditioned upon any minimum aggregate principal
amount of outstanding notes being tendered for exchange.
As of the date of this prospectus, $425 million aggregate principal amount
of the outstanding notes are outstanding. This prospectus and the letter of
transmittal are being sent to all registered holders of outstanding notes. There
will be no fixed record date for determining registered holders of outstanding
notes entitled to participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the provisions
of the notes exchange and registration rights agreement, the applicable
requirements of the Securities Act and the Exchange Act and the rules and
regulations of the Commission. Outstanding notes that are not tendered for
exchange in the exchange offer will remain outstanding and continue to accrue
interest
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and will be entitled to the rights and benefits such holders have under the
indenture relating to the outstanding notes and the notes exchange and
registration rights agreement.
Republic Technologies will be deemed to have accepted for exchange validly
tendered outstanding notes when it has given oral or written notice of the
acceptance to the exchange agent. The exchange agent will act as agent for the
tendering holders for the purposes of receiving the exchange notes from us and
delivering the exchange notes to holders. Subject to the terms of the notes
exchange and registration rights agreement, Republic Technologies expressly
reserves the right to amend or terminate the exchange offer and not to accept
for exchange any outstanding notes not previously accepted for exchange, upon
the occurrence of any of the conditions specified below under the caption
"--Conditions to the Exchange Offer."
Holders who tender outstanding notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the letter of transmittal, transfer taxes with respect to the exchange of
outstanding notes. We will pay all charges and expenses, other than applicable
taxes described below, in connection with the exchange offer. It is important
that you read the section labeled "--Fees and Expenses" below for more details
regarding fees and expenses incurred in the exchange offer.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time, on
, 2000, unless in our sole discretion, we extend it.
In order to extend the exchange offer, we will notify the exchange agent
orally or in writing of any extension. We will notify the registered holders of
outstanding notes of the extension no later than 9:00 a.m., New York City time,
on the business day after the previously scheduled expiration date.
We reserve the right, in our sole discretion:
o to delay accepting for exchange any outstanding notes;
o to extend the exchange offer or to terminate the exchange offer and to
refuse to accept outstanding notes not previously accepted if any of the
conditions set forth below under "--Conditions to the Exchange Offer"
have not been satisfied, by giving oral or written notice of such delay,
extension or termination to the exchange agent; or
o subject to the terms of the notes exchange and registration rights
agreement, to amend the terms of the exchange offer in any manner.
Any delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice to the registered
holders of outstanding notes. If we amend the exchange offer in a manner that we
determine to constitute a material change, we will promptly disclose this
amendment in a manner reasonably calculated to inform the holders of outstanding
notes of the amendment.
Without limiting the manner in which we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the exchange offer, we will have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to a financial news service.
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CONDITIONS TO THE EXCHANGE OFFER
Despite any other term of the exchange offer, we will not be required to
accept for exchange, or exchange any exchange notes for, any outstanding notes,
and we may terminate the exchange offer as provided in this prospectus before
accepting any outstanding notes for exchange if in our reasonable judgment:
o the exchange notes to be received will not be tradeable by the holder,
without restriction under the Securities Act, the Exchange Act and
without material restrictions under the blue sky or securities laws of
substantially all of the states of the United States;
o the exchange offer, or the making of any exchange by a holder of
outstanding notes, would violate applicable law or any applicable
interpretation of the staff of the Commission; or
o any action or proceeding has been instituted or threatened in any court
or by or before any governmental agency with respect to the exchange
offer that, in our judgment, would reasonably be expected to impair our
ability to proceed with the exchange offer.
In addition, we will not be obligated to accept for exchange the
outstanding notes of any holder that has not made to us
o the representations described under "--Purpose and Effect of the Exchange
Offer," "--Procedures for Tendering" and "Plan of Distribution" and
o such other representations as may be reasonably necessary under
applicable Commission rules, regulations or interpretations to make
available to Republic Technologies an appropriate form for registration
of the exchange notes under the Securities Act.
We expressly reserve the right, at any time or at various times, to extend
the period of time during which the exchange offer is open. Consequently, we may
delay acceptance of any outstanding notes by giving oral or written notice of
such extension to the holders, including notice by press release. During any
extensions, all outstanding notes previously tendered will remain subject to the
exchange offer, and we may accept them for exchange. We will return any
outstanding notes that we do not accept for exchange for any reason without
expense to the tendering holder as promptly as practicable after the expiration
or termination of the exchange offer.
We expressly reserve the right to amend or terminate the exchange offer,
and to reject for exchange any outstanding notes not previously accepted for
exchange, upon the occurrence of any of the conditions of the exchange offer
specified above. We will give oral or written notice of any extension,
amendment, non-acceptance or termination to the holders of the outstanding notes
as promptly as practicable. In the case of any extension, such notice will be
issued no later than 9:00 a.m., New York City time, on the business day after
the previously scheduled expiration date.
These conditions are for our sole benefit, and we may assert them
regardless of the circumstances that may give rise to them or waive them in
whole or in part at any or at various times in our sole discretion. If we fail
at any time to exercise any of our rights, this failure will not constitute a
waiver of such right. Each such right will be deemed an ongoing right that we
may assert at any time or at various times.
In addition, we will not accept for exchange any outstanding notes
tendered, and will not issue exchange notes in exchange for any such outstanding
notes, if at such time any stop order will be threatened or in effect with
respect to the registration statement of which this prospectus constitutes a
part or the qualification of the indenture under the Trust Indenture Act of
1939.
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PROCEDURES FOR TENDERING
Only a holder of outstanding notes may tender such outstanding notes in the
exchange offer. To tender in the exchange offer, a holder must:
o complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal; have the signature on the letter of transmittal
guaranteed if the letter of transmittal so requires; and mail or deliver
such letter of transmittal or facsimile to the exchange agent prior to
the expiration date; or
o comply with DTC's Automated Tender Offer Program procedures described
below.
In addition, either:
o the exchange agent must receive outstanding notes along with the letter
of transmittal;
o the exchange agent must receive, prior to the expiration date, a timely
confirmation of book-entry transfer of such outstanding notes into the
exchange agent's account at DTC according to the procedure for book-entry
transfer described below or a properly transmitted agent's message; or
o the holder must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at the
address set forth below under "--Exchange Agent" prior to the expiration date.
The tender by a holder that is not withdrawn prior to the expiration date
will constitute an agreement between the holder and us in accordance with the
terms and subject to the conditions set forth in this prospectus and in the
letter of transmittal.
The method of delivery of outstanding notes, the letter of transmittal and
all other required documents to the exchange agent is at the holder's election
and risk. Rather than mail these items, we recommend that holders use an
overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure delivery to the exchange agent before the expiration
date. Holders should not send the letter of transmittal or outstanding notes to
us. Holders may request their respective brokers, dealers, commercial banks,
trust companies or other nominees to effect the above transactions for them.
Any beneficial owner whose outstanding notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct it to
tender on the owner's behalf. If the beneficial owner wishes to tender on its
own behalf, it must, prior to completing and executing the letter of transmittal
and delivering its outstanding notes, either:
o make appropriate arrangements to register ownership of the outstanding
notes in such owner's name; or
o obtain a properly completed bond power from the registered holder of
outstanding notes.
The transfer of registered ownership may take considerable time and may not
be completed prior to the expiration date.
Signatures on a letter of transmittal or a notice of withdrawal described
below must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or another "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Exchange Act, unless the outstanding notes are tendered:
o by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal; or
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o for the account of an eligible guarantor institution.
If the letter of transmittal is signed by a person other than the
registered holder of any outstanding notes listed on the outstanding notes, the
outstanding notes must be endorsed or accompanied by a properly completed bond
power. The bond power must be signed by the registered holder as the registered
holder's name appears on the outstanding notes and an eligible guarantor
institution must guarantee the signature on the bond power.
If the letter of transmittal or any outstanding notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, these persons should so indicate when signing. Unless waived by us,
they should also submit evidence satisfactory to us of their authority to
deliver the letter of transmittal.
The exchange agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may use DTC's Automated Tender Offer
Program to tender. Participants in the program may, instead of physically
completing and signing the letter of transmittal and delivering it to the
exchange agent, transmit their acceptance of the exchange offer electronically.
They may do so by causing DTC to transfer the outstanding notes to the exchange
agent in accordance with its procedures for transfer. DTC will then send an
agent's message to the exchange agent. The term "agent's message" means a
message transmitted by DTC, received by the exchange agent and forming part of
the book-entry confirmation, to the effect that:
o DTC has received an express acknowledgment from a participant in its
Automated Tender Offer Program that is tendering outstanding notes that
are the subject of such book-entry confirmation;
o the participant has received and agrees to be bound by the terms of the
letter of transmittal, or, in the case of an agent's message relating to
guaranteed delivery, that the participant has received and agrees to be
bound by the applicable notice of guaranteed delivery; and
o the agreement may be enforced against the participant.
We will determine in our sole discretion all questions as to the validity,
form, eligibility including time of receipt, acceptance of tendered outstanding
notes and withdrawal of tendered outstanding notes. Our determination will be
final and binding. We reserve the absolute right to reject any outstanding notes
not validly tendered or any outstanding notes the acceptance of which would, in
the opinion of our counsel, be unlawful. We also reserve the right to waive any
defects, irregularities or conditions of tender as to particular outstanding
notes. Our interpretation of the terms and conditions of the exchange offer,
including the instructions in the letter of transmittal, will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of outstanding notes must be cured within such time as
we shall determine. Although we intend to notify holders of defects or
irregularities with respect to tenders of outstanding notes, neither we, the
exchange agent nor any other person will incur any liability for failure to give
such notification. Tenders of outstanding notes will not be deemed made until
the defects or irregularities have been cured or waived. Any outstanding notes
received by the exchange agent that are not validly tendered and as to which the
defects or irregularities have not been cured or waived will be returned to the
exchange agent without cost to the tendering holder, unless otherwise provided
in the letter of transmittal, as soon as practicable following the expiration
date.
In all cases, we will issue exchange notes for outstanding notes that we
have accepted for exchange under the exchange offer only after the exchange
agent timely receives:
o outstanding notes or a timely book-entry confirmation of such outstanding
notes into the exchange agent's account at DTC; and
o a properly completed and duly executed letter of transmittal and all
other required documents or a properly transmitted agent's message.
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By signing the letter of transmittal, each tendering holder of outstanding
notes will represent to us that, among other things:
o any exchange notes that the holder receives will be acquired in the
ordinary course of its business;
o the holder has no arrangement or understanding with any person or entity
to participate in the distribution of the exchange notes;
o if the holder is not a broker-dealer, that it is not engaged in and does
not intend to engage in the distribution of the exchange notes;
o if the holder is a broker-dealer that will receive exchange notes for its
own account in exchange for outstanding notes that were acquired as a
result of market-making activities, that it will deliver a prospectus, as
required by law, in connection with any resale of such exchange notes;
and
o the holder is not an "affiliate," as defined in Rule 405 of the
Securities Act, of Republic Technologies or, if the holder is an
affiliate, it will comply with any applicable registration and prospectus
delivery requirements of the Securities Act.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the outstanding notes at DTC for purposes of the exchange offer promptly
after the date of this prospectus. Any financial institution participating in
DTC's system may make book-entry delivery of outstanding notes by causing DTC to
transfer such outstanding notes into the exchange agent's account at DTC in
accordance with DTC's procedures for transfer. Holders of outstanding notes who
are unable to deliver confirmation of the book-entry tender of their outstanding
notes into the exchange agent's account at DTC or all other documents required
by the letter of transmittal to the exchange agent on or prior to the expiration
date must tender their outstanding notes according to the guaranteed delivery
procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders wishing to tender their outstanding notes but whose outstanding
notes are not immediately available or who cannot deliver their outstanding
notes, the letter of transmittal or any other required documents to the exchange
agent or comply with the applicable procedures under DTC's Automated Tender
Offer Program prior to the expiration date may tender if:
o the tender is made through an eligible guarantor institution;
o prior to the expiration date, the exchange agent receives from such
eligible guarantor institution either a properly completed and duly
executed notice of guaranteed delivery by facsimile transmission, mail or
hand delivery or a properly transmitted agent's message and notice of
guaranteed delivery:
o setting forth the name and address of the holder, the registered
number(s) of such outstanding notes and the principal amount of
outstanding notes tendered;
o stating that the tender is being made by notice of guaranteed delivery;
o guaranteeing that, within three (3) New York Stock Exchange trading days
after the expiration date, the letter of transmittal, or a facsimile of
the letter of transmittal, together with the outstanding notes or a
book-entry confirmation, and any other documents required by the letter
of transmittal will be deposited by the eligible guarantor institution
with the exchange agent; and
o the exchange agent receives such properly completed and executed letter
of transmittal, or a facsimile of the letter of transmittal, as well as
all tendered outstanding notes in proper form
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for transfer or a book-entry confirmation, and all other documents
required by the letter of transmittal, within three (3) New York Stock
Exchange trading days after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their outstanding notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, holders of outstanding
notes may withdraw their tenders at any time prior to the expiration date.
For a withdrawal to be effective:
o the exchange agent must receive a written notice, which may be by
telegram, telex, facsimile transmission or letter, of withdrawal at one
of the addresses set forth below under "--Exchange Agent;" or
o holders must comply with the appropriate procedures of DTC's Automated
Tender Offer Program system.
Any such notice of withdrawal must:
o specify the name of the person who tendered the outstanding notes to be
withdrawn;
o identify the outstanding notes to be withdrawn, including the principal
amount of such outstanding notes; and
o where certificates for outstanding notes have been transmitted, specify
the name in which such outstanding notes were registered, if different
from that of the withdrawing holder.
If certificates for outstanding notes have been delivered or otherwise
identified to the exchange agent, then, prior to the release of such
certificates, the withdrawing holder must also submit:
o the serial numbers of the particular certificates to be withdrawn; and
o a signed notice of withdrawal with signatures guaranteed by an eligible
guarantor institution unless the holder is an eligible guarantor
institution.
If outstanding notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at DTC to be credited with the withdrawn
outstanding notes and otherwise comply with the procedures of such facility. We
will determine all questions as to the validity, form and eligibility, including
time of receipt, of such notices, and our determination shall be final and
binding on all parties. We will deem any outstanding notes so withdrawn not to
have validly tendered for exchange for purposes of the exchange offer. Any
outstanding notes that have been tendered for exchange but that are not
exchanged for any reason will be returned to their holder without cost to the
holder, or, in the case of outstanding notes tendered by book-entry transfer
into the exchange agent's account at DTC according to the procedures described
above, such outstanding notes will be credited to an account maintained with DTC
for outstanding notes, as soon as practicable after withdrawal, rejection of
tender or termination of the exchange offer. Properly withdrawn outstanding
notes may be retendered by following one of the procedures described under
"--Procedures for Tendering" above at any time on or prior to the expiration
date.
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EXCHANGE AGENT
United States Trust Company of New York has been appointed as exchange
agent for the exchange offer. You should direct questions and requests for
assistance, requests for additional copies of this prospectus or of the letter
of transmittal and requests for the notice of guaranteed delivery to the
exchange agent addressed as follows:
For Delivery by Registered or Certified Mail:
United States Trust Company of
New York
P.O. Box 843 Cooper Station
New York, New York 10276
Attention: Corporate Trust Services
By Hand before 4:30 p.m.: By Overnight Courier and By Hand
United States Trust Company of after 4:30 p.m. on the Expiration Date:
New York United States Trust Company of
111 Broadway New York
New York, New York 10006 770 Broadway, 13th Floor
Attention: Lower LevelCorporate Trust Window New York, New York 10003
By Facsimile Transmission:
(212) 420-6211
Attention: Customer Service
Confirm by Telephone to:
(800) 548-6565
Delivery of the letter of transmittal to an address other than as set forth
above or transmission via facsimile other than as set forth above does not
constitute a valid delivery of such letter of transmittal.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, we may make additional solicitation by
telegraph, telephone or in person by our officers and regular employees and
those of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses.
We will pay the cash expenses to be incurred in connection with the
exchange offer. The expenses are estimated in the aggregate to be approximately
$ . They include:
o Commission registration fees;
o fees and expenses of the exchange agent and trustee;
o accounting and legal fees and printing costs; and
o related fees and expenses.
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We will pay all transfer taxes, if any, applicable to the exchange of
outstanding notes under the exchange offer. The tendering holder, however, will
be required to pay any transfer taxes, whether imposed on the registered holder
or any other person, if:
o certificates representing outstanding notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of
outstanding notes tendered;
o tendered outstanding notes are registered in the name of any person other
than the person signing the letter of transmittal; or
o a transfer tax is imposed for any reason other than the exchange of
outstanding notes under the exchange offer.
If satisfactory evidence of payment of these taxes is not submitted with
the letter of transmittal, the amount of the transfer taxes will be billed to
that tendering holder.
TRANSFER TAXES
Holders who tender their outstanding notes for exchange will not be
required to pay any transfer taxes. However, holders who instruct us to register
exchange notes in the name of, or request that outstanding notes not tendered or
not accepted in the exchange offer be returned to, a person other than the
registered tendering holder will be required to pay any applicable transfer tax.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of outstanding notes who do not exchange their outstanding notes
for exchange notes under the exchange offer will remain subject to the
restrictions on transfer of the outstanding notes:
o as set forth in the legend printed on the notes as a consequence of the
issuance of the outstanding notes pursuant to the exemptions from, or in
transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws; and
o otherwise set forth in the offering memorandum distributed in connection
with the private offering of the outstanding notes.
In general, you may not offer or sell the outstanding notes unless they are
registered under the Securities Act or the offer or sale is exempt from
registration under the Securities Act and applicable state securities laws.
Except as required by the notes exchange and registration rights agreement, we
do not intend to register resales of the outstanding notes under the Securities
Act. Based on interpretations of the Commission staff, exchange notes issued
pursuant to the exchange offer may be offered for resale, resold or otherwise
transferred by their holders, other than any such holder that is our "affiliate"
within the meaning of Rule 405 under the Securities Act, without compliance with
the registration and prospectus delivery provisions of the Securities Act,
provided that the holders acquired the exchange notes in the ordinary course of
the holders' business and the holders have no arrangement or understanding with
respect to the distribution of the exchange notes to be acquired in the exchange
offer. Any holder who tenders in the exchange offer for the purpose of
participating in a distribution of the exchange notes:
o cannot rely on the applicable interpretations of the Commission; and
o must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
ACCOUNTING TREATMENT
We will record the exchange notes in its accounting records at the same
carrying value as the outstanding notes, which is the aggregate principal amount
as reflected in our accounting records on the date of exchange. Accordingly, we
will not recognize any gain or loss for accounting purposes in connection with
the exchange offer.
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OTHER
Participation in the exchange offer is voluntary, and you should carefully
consider whether to accept. You are urged to consult your financial and tax
advisors in making your own decision on what action to take.
We may in the future seek to acquire untendered outstanding notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. We have no present plans to acquire any outstanding notes that are
not tendered in the exchange offer or to file a registration statement to permit
resales of any untendered outstanding notes.
DESCRIPTION OF THE NOTES
The outstanding notes were issued, and the exchange notes will be issued,
under an Indenture dated as of August 13, 1999 among Republic Technologies
International, LLC, RTI Capital Corp., the guarantors and United States Trust
Company of New York, as trustee. While Republic Technologies and RTI Capital,
which together we refer to as the "issuers," are jointly and severally liable
for the obligations under the notes, RTI Capital has only nominal assets, does
not conduct any operations and was formed solely to act as co-issuer of the
notes. All references to the "notes" include the exchange notes, unless the
context otherwise requires. Upon the issuance of the exchange notes, or the
effectiveness of a shelf registration statement, the Indenture will be subject
to and governed by the Trust Indenture Act of 1939.
The following discussion includes a summary of the material provisions of
the indenture and the exchange notes. For further information regarding the
terms and provisions of the indenture and exchange notes, including the
definitions of certain terms, and terms made part of the indenture by the Trust
Indenture Act, please refer to the indenture and form of exchange notes which we
have filed as exhibits to the registration statement of which this prospectus is
part. We urge you to read these documents. The definitions of certain
capitalized terms used in the following summary are set forth below under
"--Certain Definitions."
GENERAL
The exchange notes will be issued only in registered form, without coupons,
in denominations of $1,000 and integral multiples of $1,000. Principal of,
premium, if any, and interest on the exchange notes will be payable, and the
exchange notes will be transferable, at the corporate trust office or agency of
the trustee in The City of New York maintained for such purposes. In addition,
at the issuers' option, interest may be paid by wire transfer or check mailed to
the person entitled thereto as shown on the register for the exchange notes. No
service charge will be made for any registration of transfer or exchange of the
exchange notes, except that the issuers may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with the registration.
MATURITY, INTEREST AND PRINCIPAL OF THE NOTES
The outstanding notes are, and the exchange notes will be, senior secured
obligations of the issuers, limited to $425.0 million aggregate principal
amount, and will mature on July 15, 2009. Interest on the notes will accrue at
the rate of 13 3/4% per annum and will be payable semi-annually on each
January 15 and July 15, commencing January 15, 2000, to the Holders of record of
notes at the close of business on January 1 and July 1 immediately preceding
such interest payment date. Interest on the notes will accrue from the most
recent date which interest has been paid or, if no interest has been paid, from
the original date of issuance of the notes, which we refer to as the "Issue
Date." Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months and the actual number of days elapsed.
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OPTIONAL REDEMPTION
The notes will be redeemable, in whole or in part, at the option of the
issuers, at any time on or after July 15, 2004, at the redemption prices, which
are expressed as percentages of principal amount, set forth below, plus accrued
and unpaid interest and liquidated damages, if any, to the redemption date, if
redeemed during the 12-month period beginning on of the years indicated below:
YEAR PERCENTAGE
- ------------------------------------------------------------- ----------
2004......................................................... 106.875%
2005......................................................... 105.156%
2006......................................................... 103.438%
2007......................................................... 101.719%
2008 and thereafter.......................................... 100.000%
In addition, at any time and from time to time prior to July 15, 2002, the
issuers may, at their option, following one or more Public Equity Offerings
redeem up to an aggregate of 35% of the principal amount of notes originally
issued from the Holders, on a pro rata basis, at a redemption price equal to
113.750% of the principal amount thereof, plus accrued and unpaid interest and
liquidated damages, if any, to the date of redemption; provided at least 65%
aggregate principal amount of notes would remain outstanding immediately after
giving effect to any such redemption; provided, further, that if the Public
Equity Offering is by Parent Guarantor, RTI or any other direct or indirect
parent company of Republic Technologies, the net proceeds thereof shall have
been contributed to Republic Technologies or used to buy Capital Stock of
Republic Technologies, other than Disqualified Capital Stock, on or prior to the
date of redemption. Notice of any such redemption must be mailed to Holders no
later than 60 days after the applicable Public Equity Offering.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the notes are to be redeemed at any time
pursuant to an optional redemption, selection of notes for redemption will be
made by the trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the notes are listed or, if the
notes are not then listed on a national securities exchange, on a pro rata
basis, by lot or by such method as the trustee shall deem fair and appropriate;
provided that no notes of a principal amount of $1,000 or less shall be redeemed
in part; provided, further, that if a partial redemption is made with the net
cash proceeds of a Public Equity Offering, selection of the notes or portions
thereof for redemption shall be made by the trustee only on a pro rata basis or
on as nearly a pro rata basis as is practicable, unless such method is otherwise
prohibited. However, no notes of a principal amount of $1,000 or less shall be
redeemed in part and any redemption may be subject to the procedures of DTC.
Notice of redemption shall be mailed by first-class mail at least 30 but
not more than 60 days before the redemption date to each Holder of notes to be
redeemed at its registered address. See "Book-entry; Delivery and Form." If any
note is to be redeemed in part only, the notice of redemption that relates to
such note shall state the portion of the principal amount thereof to be
redeemed. In the event of the partial redemption of a certificated note, a new
note in a principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original note.
On and after the redemption date, interest will cease to accrue on notes or
portions thereof called for redemption as long as the issuers have deposited
with the paying agent for the notes funds in satisfaction of the applicable
redemption price pursuant to the indenture.
OFFER TO PURCHASE UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, either or both of the issuers
shall notify the Holders, in the manner prescribed by the indenture, of such
occurrence and shall make an offer to purchase all notes then outstanding at a
purchase price equal to 101% of the principal amount thereof plus accrued and
unpaid interest and liquidated damages, if any, to payment date for the
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offer. Either or both of the issuers must offer to purchase all of the notes on
a business day that is not later than 60 days following the date of the
occurrence of a Change of Control. We refer to the date by which the purchase
must be made as the "Change of Control Payment Date." The Change of Control
offer is required to remain open for at least 20 business days and until the
close of business on the Change of Control Payment Date.
If a Change of Control offer is made, there can be no assurance that the
issuers or the Guarantors will have available funds sufficient to pay for all of
the notes that might be delivered by Holders seeking to accept the Change of
Control offer. The issuers shall not be required to make a Change of Control
offer following a Change of Control if a third party makes the Change of Control
offer in the manner, at the times and otherwise in compliance with the
requirements applicable to a Change of Control offer made by the issuers and
purchases all notes validly tendered and not properly withdrawn under such
Change of Control offer.
Alternatively, the issuers may assign all or part of their obligations to
purchase all notes validly tendered and not properly withdrawn under a Change of
Control offer to a third party. In the event of such an assignment, the issuers
shall be released from their obligations to purchase the notes as to which the
assignment relates subject to the third party purchasing such notes.
A Change of Control offer may be made in advance of a Change of Control,
and conditioned upon such Change of Control to the extent a definitive agreement
is in place for the Change of Control at the time of making of the Change of
Control offer. Notes repurchased by either issuer pursuant to a Change of
Control offer will have the status of notes issued but not outstanding or will
be retired and cancelled, at the option of Republic Technologies. Notes
purchased by a third party upon assignment will have the status of notes issued
and outstanding.
The New Credit Facility contains, and other debt that may be incurred in
the future could contain, prohibitions of certain events that would constitute a
Change of Control. Moreover, the exercise by the Holders of their right to
require the issuers to repurchase the notes could cause a default under such
indebtedness even if the Change of Control itself does not, due to the financial
effect of such repurchase on the issuers. In the event that a Change of Control
occurs at a time when the issuers are prohibited from purchasing notes under the
terms of any such indebtedness, the issuers could seek the consent of their
lenders to purchase the notes or could attempt to refinance such indebtedness.
If the issuers do not obtain such consent or refinance such indebtedness, the
issuers will remain prohibited from purchasing the notes and/or making the
Change of Control offer. In such case, the issuers' failure to make the Change
of Control offer or purchase tendered notes would constitute an Event of Default
under the indenture which would, in turn, constitute a default under the New
Credit Facility.
If the issuers are required to make a Change of Control offer, the issuers
will comply with all applicable tender offer laws and regulations, including, to
the extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and
any other applicable securities laws and regulations and any applicable
requirements of any securities exchange on which the notes are listed and shall
not be deemed to have breached its obligations under the indenture by virtue
thereof.
THE GUARANTEES
Each of the Parent Guarantor and Subsidiary Guarantors will fully and
unconditionally guarantee on a joint and several basis all of the issuers'
obligations under the notes and the indenture, including their obligations to
pay principal, premium, if any, and interest with respect to the notes. We refer
to the guarantors' guarantees of the notes and the indenture as the
"Guarantees." Except as provided in "--Certain Covenants" below, the issuers are
not restricted from selling or otherwise disposing of any of the Subsidiary
Guarantors.
Pursuant to the Guarantees, if the issuers default in payment of any amount
owing in respect of any notes, each guarantor will be obligated to duly and
punctually pay the same. Pursuant to the terms of the indenture, each of the
guarantors has agreed that its obligations under its Guarantee
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will be unconditional, irrespective of the absence of any action to enforce the
same or any other circumstance which might otherwise constitute a legal or
equitable discharge or defense of a guarantor.
Notwithstanding the foregoing, the obligations of each guarantor will be
limited to an amount not to exceed the maximum amount that can be guaranteed, as
it relates to such guarantor, without being voidable under applicable law
relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally.
If no Default exists or would exist under the indenture, concurrently with
any sale or disposition of any Subsidiary Guarantor by merger, sale of all or
substantially all of its assets, liquidation or otherwise which is in compliance
with the terms of the indenture, other than a transaction subject to the
provisions described under the first paragraph of "--Consolidation, Merger, Sale
of Assets," such Subsidiary Guarantor and each Subsidiary of such Guarantor that
is also a Subsidiary Guarantor will automatically and unconditionally be
released from all obligations under its Guarantee. In addition, subject to the
foregoing conditions, any Subsidiary Guarantor and each Subsidiary of such
Subsidiary Guarantor that is also a Subsidiary Guarantor will automatically and
unconditionally be released from all obligations under its Guarantee, unless the
issuers otherwise elect, if such Subsidiary Guarantor is designated as an
Unrestricted Subsidiary in compliance with the terms of the indenture and all
other guarantees of such Subsidiary Guarantor of Indebtedness of the issuers and
the Restricted Subsidiaries are released in connection therewith. A sale of
assets or Capital Stock of a Subsidiary Guarantor may constitute an Asset Sale
subject to the covenant regarding "Disposition of Proceeds of Asset Sales."
RANKING
The indebtedness of the issuers evidenced by the notes will rank senior in
right of payment to all indebtedness of the issuers which is expressly
subordinate in right of payment to the notes and will rank pari passu in right
of payment with all other existing or future unsubordinated indebtedness of the
issuers. The indebtedness of each guarantor evidenced by its Guarantee will rank
senior in right of payment to all indebtedness of such guarantor which is
expressly subordinated in right of payment to its Guarantee and will rank pari
passu in right of payment with all other existing and future unsubordinated
indebtedness of such guarantor. The notes will be effectively subordinate in
right of payment to all existing and future liabilities, including trade
payables, of any of the issuers' future subsidiaries which are not Subsidiary
Guarantors.
SECURITY
For a summary description of the material terms of the Collateral securing
the notes and the Guarantees and the Intercreditor Agreements which establish
the relative rights and priorities of specified creditors, including Holders, in
and to the Collateral, see "Description of Collateral and Intercreditor
Agreements."
CERTAIN COVENANTS
Set forth below are certain covenants which will be contained in the
indenture.
Limitation on Additional Indebtedness and Certain Preferred Stock. The
indenture provides that the issuers will not (A) incur any Indebtedness,
including any Acquired Indebtedness, and (B) permit any of the Restricted
Subsidiaries to incur any Indebtedness, including Acquired Indebtedness, or
issue any Preferred Stock; provided that (1) the issuers and the Subsidiary
Guarantors will be permitted to incur Indebtedness, including Acquired
Indebtedness, and the Subsidiary Guarantors may issue Preferred Stock and (2) a
Restricted Subsidiary that is not a Subsidiary Guarantor will be permitted to
incur Acquired Indebtedness if, in either case, immediately after giving pro
forma effect to the incurrence thereof, the Consolidated Fixed Charge Coverage
Ratio of Republic Technologies would be greater than or equal to (a) 2.25 to 1,
if such Indebtedness is to be incurred on or prior to July 15, 2001, and
(b) 2.50 to 1, if such Indebtedness is to be incurred after July 15, 2001.
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Notwithstanding the foregoing, the issuers and the Restricted Subsidiaries,
as applicable, may incur or issue each and all of the following:
(a) Indebtedness under the notes, the exchange notes, the Guarantees
and the indenture;
(b) Indebtedness of Republic Technologies and the Restricted
Subsidiaries outstanding on the Issue Date;
(c) Indebtedness of Republic Technologies and the Restricted
Subsidiaries outstanding from time to time pursuant to the New Credit
Facility in a principal amount not to exceed the sum of
(1) the greater of (A) $325.0 million and (B) the sum of (x) 85% of
the aggregate book value of the accounts receivable of Republic
Technologies and the Restricted Subsidiaries, which shall be determined
in accordance with GAAP, and (y) 60% of the aggregate book value of the
inventory of Republic Technologies and the Restricted Subsidiaries,
which shall be determined in accordance with GAAP, and
(2) if such Indebtedness is secured by the CAST-ROLL Facility and
related assets, $125.0 million less amounts incurred and outstanding
under clause (d) below;
(d) if Indebtedness outstanding under clause (c) above is not secured
by the CAST-ROLL Facility and related assets, Indebtedness of Republic
Technologies and the Restricted Subsidiaries secured by the CAST-ROLL
Facility in an amount not to exceed 80% of the liquidation value-in place,
which term has the meaning given to it in the appraisals delivered in
connection with the Transactions, of the CAST-ROLL Facility plus the
appraised Fair Market Value of the related real estate, which value shall
be determined within 30 days of the date of any incurrence of Indebtedness
secured by the CAST-ROLL Facility;
(e) Indebtedness of a Restricted Subsidiary owed to and held by
Republic Technologies or another Restricted Subsidiary, in each case which
is not subordinated in right of payment to any Indebtedness of such
Restricted Subsidiary, except that
(1) any transfer of such Indebtedness by Republic Technologies or a
Restricted Subsidiary, other than to Republic Technologies or to a
Restricted Subsidiary, and
(2) the sale, transfer or other disposition by Republic
Technologies or any Restricted Subsidiary of Capital Stock of or the
occurrence of any other event which results in any Restricted Subsidiary
which is owed Indebtedness of another Restricted Subsidiary ceasing to
be a Restricted Subsidiary
shall, in each such event, be deemed an incurrence of Indebtedness subject
to the other provisions of this covenant;
(f) Indebtedness of an issuer owed to and held by a Restricted
Subsidiary; provided that if such Indebtedness is owed to and held by a
Restricted Subsidiary that is not a Subsidiary Guarantor, other than RTI
Capital, it shall be unsecured and subordinated in right of payment to the
payment and performance of such issuer's obligations under the indenture
and the notes; provided, further, in any such case, that
(1) any transfer of such Indebtedness by a Restricted Subsidiary,
other than to another Restricted Subsidiary, and
(2) the sale, transfer or other disposition by an issuer or any
Restricted Subsidiary of Capital Stock or the occurrence of any other
event which results in any Restricted Subsidiary which holds
Indebtedness of such issuer ceasing to be a Restricted Subsidiary
shall, in each such event, be deemed an incurrence of Indebtedness subject
to the other provisions of this covenant;
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(g) shares of Preferred Stock of a Restricted Subsidiary issued to and
held by an issuer or a Restricted Subsidiary; provided that
(1) any transfer of such shares, other than to another Restricted
Subsidiary, and
(2) the sale, transfer or other disposition by an issuer or any
Restricted Subsidiary of Capital Stock of any Restricted Subsidiary or
the occurrence of any other event which results in any Restricted
Subsidiary which holds such shares such that it ceases to be a
Restricted Subsidiary
shall, in each such event, be an issuance of Preferred Stock subject to the
other provisions of this covenant;
(h) Interest Rate Protection Obligations of Republic Technologies or a
Restricted Subsidiary relating to Indebtedness of Republic Technologies or
a Restricted Subsidiary; provided that
(x) any Indebtedness to which any such Interest Rate Protection
Obligations relate is otherwise permitted to be incurred under this
covenant and
(y) the notional principal amount of any such Interest Rate
Protection Obligations at the time of incurrence does not exceed the
principal amount of the Indebtedness to which such Interest Rate
Protection Obligations relate;
(i) Indebtedness of Republic Technologies or any of the Restricted
Subsidiaries under
(1) Currency Agreements relating to Indebtedness or other
obligations of Republic Technologies or one of the Restricted
Subsidiaries entered into to hedge actual currency exposure or
(2) commodities hedging agreements entered into to hedge actual
commodity price exposure;
(j) Indebtedness of Republic Technologies or any of the Restricted
Subsidiaries, including Indebtedness represented by letters of credit for
the account of Republic Technologies or a Restricted Subsidiary, in respect
of financing workers' compensation, health, disability or other employee
benefits, social security payments, property, casualty or liability
insurance or other claims, payment obligations in connection with
self-insurance or similar requirements in the ordinary course of business;
(k) Indebtedness representing obligations in respect of performance
bonds, bid bonds, appeal bonds, surety bonds, completion guarantees and
similar obligations and trade-related letters of credit, in each case
provided in the ordinary course of business, including those incurred to
secure health, safety and environmental obligations in the ordinary course
of business, and any extension, renewal or refinancing thereof to the
extent not provided to secure the repayment of other Indebtedness and to
the extent that the amount of refinancing Indebtedness is not greater than
the amount of Indebtedness being refinanced;
(l) Indebtedness arising from agreements of an issuer or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price,
earnouts or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or a Restricted
Subsidiary, other than guarantees of Indebtedness incurred by any Person
acquiring all or any portion of such business, assets or Restricted
Subsidiary for the purpose of financing such acquisition;
(m) Indebtedness extinguished within five Business Days of incurrence
arising from the honoring by a bank or other financial institution of a
check, draft or similar instrument inadvertently, except in the case of
daylight overdrafts, drawn against insufficient funds;
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(n) Government Assisted Indebtedness of Republic Technologies or any
of the Restricted Subsidiaries; provided such Government Assisted
Indebtedness does not have a Stated Maturity prior to the final Stated
Maturity of the notes and is not secured by any Lien on any Collateral that
would not constitute a Permitted Collateral Lien with respect to such
Collateral;
(o) Indebtedness secured by purchase money liens on equipment in an
amount not to exceed $50.0 million at any time outstanding;
(p) Indebtedness of Republic Technologies or any of the Restricted
Subsidiaries, in addition to that described in clauses (a) through (o)
above or clause (q) below, in an aggregate principal amount not to exceed
$50.0 million at any time outstanding; and
(q) Refinancing Indebtedness.
Each of the foregoing exceptions shall be given independent effect.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of permitted Indebtedness described in clauses (a) through (q) above
or is entitled to be incurred pursuant to the first paragraph of this covenant,
Republic Technologies shall, in its sole discretion, classify or reclassify such
item of Indebtedness in any manner that complies with this covenant and such
item of Indebtedness will be treated as having been incurred pursuant to only
one of such clauses or pursuant to the first paragraph of this covenant. Accrual
of interest, the accretion of accreted value and the payment of interest in the
form of additional Indebtedness will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant.
Limitation on Restricted Payments. The indenture provides that the issuers
will not, and will not permit any of the Restricted Subsidiaries to, directly or
indirectly:
(a) declare or pay any dividend or make any other distribution or
payment on or in respect of Capital Stock of Republic Technologies or any
payment made to the direct or indirect holders of Capital Stock of Republic
Technologies in their capacities as stockholders, other than dividends or
distributions payable solely in Capital Stock of Republic Technologies
which is not Disqualified Capital Stock or in options, warrants or other
rights to purchase Capital Stock of Republic Technologies which is not
Disqualified Capital Stock;
(b) purchase, redeem, defease or otherwise acquire or retire for value
any Capital Stock of Republic Technologies, other than any such Capital
Stock owned by a Restricted Subsidiary;
(c) make any principal payment on, or purchase, defease, repurchase,
redeem or otherwise acquire or retire for value, in each case, prior to any
scheduled maturity, scheduled repayment, scheduled sinking fund payment or
other Stated Maturity, any Subordinated Indebtedness, other than
(A) the payment, redemption, repurchase, defeasance, acquisition or
retirement of Subordinated Indebtedness in anticipation of satisfying a
sinking fund obligation, principal installment or final maturity, in
any case due within one year of the date of such payment, redemption,
repurchase, defeasance, acquisition or retirement and
(B) any such Subordinated Indebtedness owned by Republic Technologies or a
Restricted Subsidiary; or
(d) make any Investment in any person other than a Permitted
Investment
(such payments or Investments described in the preceding clauses (a), (b), (c)
and (d) are collectively referred to as "Restricted Payments"), unless, at the
time of and after giving effect to the proposed Restricted Payment,
(A) no Default shall have occurred and be continuing,
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(B) immediately after giving effect to such Restricted Payment, the
Consolidated Fixed Charge Coverage Ratio of Republic Technologies would
be equal to or greater than 2.5 to 1, and
(C) the aggregate amount of all Restricted Payments declared or made from
and after the Issue Date would not exceed the sum of, without
duplication,
(1) 50% of the Consolidated Net Income of Republic Technologies
accrued on a cumulative basis during the period, taken as one accounting
period, beginning on October 1, 1999 and ending on the last day of the
fiscal quarter of Republic Technologies immediately preceding the date of
such proposed Restricted Payment or, if such aggregate cumulative
Consolidated Net Income of Republic Technologies for such period shall be a
deficit, minus 100% of such deficit, plus
(2) 100% of the aggregate net cash proceeds and the Fair Market Value
of property other than cash received by Republic Technologies, other than
net cash proceeds received as part of the Transactions, either
(x) from the issuance or sale of Capital Stock, excluding
Disqualified Capital Stock, but including Capital Stock issued upon the
conversion of convertible Indebtedness or from the exercise of options,
warrants or rights to purchase Capital Stock of Republic Technologies
which is not Disqualified Capital Stock, after the Issue Date or
(y) as a capital contribution in respect of Capital Stock of
Republic Technologies which is not Disqualified Capital Stock after the
Issue Date, in each case to or from any person (other than (a) to or
from a Restricted Subsidiary or (b) to or from any employee, officer,
director or employee stock ownership trust qualified under the Internal
Revenue Code to the extent the issuance and sale was directly or
indirectly funded by a loan or advance by Republic Technologies or any
Subsidiary of Republic Technologies to such trust or such persons) plus
(3) 100% of the aggregate net cash proceeds and the Fair Market Value
of property, other than property constituting Investments that would be
Restricted Payments, that are received upon the sale, liquidation or other
disposition or other return of capital for cash in respect of any
Investment constituting a Restricted Payment made after the Issue Date to
the extent included in the calculation of this clause (C), less the cost of
the disposition of such Investment plus
(4) so long as the Designation thereof was treated as a Restricted
Payment made after the Issue Date, with respect to any Unrestricted
Subsidiary that has been redesignated as a Restricted Subsidiary after the
Issue Date in accordance with the "Limitation on Designations of
Unrestricted Subsidiaries" covenant below, the Fair Market Value of the
interests of Republic Technologies and any of the Restricted Subsidiaries
in such Subsidiary; provided that such amount shall not in any case exceed
the Designation Amount with respect to such Subsidiary upon its
Designation.
For purposes of the preceding clause (C)(2), upon the issuance of Capital Stock
either from the conversion of convertible Indebtedness or in exchange for
outstanding Indebtedness or upon the exercise of options, warrants or rights,
the amount counted as net cash proceeds received will be the cash amount
received by Republic Technologies at the original issuance of the Indebtedness
that is so converted or exchanged or from the issuance of options, warrants or
rights, as the case may be, plus the incremental amount of cash received by
Republic Technologies, if any, upon the conversion, exchange or exercise
thereof, in each case when so received.
The amount of any Restricted Payment, if other than cash, shall be the Fair
Market Value on the date of such Restricted Payment of the asset or assets
proposed to be transferred by Republic Technologies or such Restricted
Subsidiary, as the case may be, pursuant to such Restricted Payment.
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None of the foregoing provisions will prohibit:
(1) the payment of any dividend within 60 days after the date of its
declaration, if at the date of declaration such payment would be permitted
by the foregoing paragraph;
(2) the redemption, the repurchase or other acquisition or retirement
of any shares of any class of Capital Stock of Republic Technologies or any
Restricted Subsidiary in exchange for, or out of the net cash proceeds of,
(x) a substantially concurrent issue and sale of other shares of
Capital Stock of Republic Technologies which is not Disqualified Capital
Stock to any person, other than to a Subsidiary of Republic
Technologies, or
(y) a capital contribution in respect of Capital Stock which is not
Disqualified Capital Stock;
provided that the amount of any such net cash proceeds that are
utilized for any such redemption, repurchase or other acquisition or
retirement shall be excluded from clause (C) of the preceding
paragraph;
(3) any redemption, repurchase or other acquisition or retirement of
(1) Subordinated Indebtedness in exchange for, or out of the net
cash proceeds, excluding net cash proceeds received as part of the
Transactions, of a substantially concurrent issue and sale of
(x) Capital Stock of Republic Technologies which is not
Disqualified Capital Stock to any person, other than to a Subsidiary
of Republic Technologies, or
(y) a capital contribution from Republic Technologies; provided
that the amount of any such net cash proceeds that are utilized for
any such redemption, repurchase or other acquisition or retirement
shall be excluded from clause (C) of the preceding paragraph; or
(2) Indebtedness of Republic Technologies issued to any person,
other than a Subsidiary of Republic Technologies, so long as such
Indebtedness is Subordinated Indebtedness which
(x) has no scheduled principal payments earlier than the 91st
day after the final maturity date of the notes and
(y) is subordinated to the notes in the same manner and at least
to the same extent as the Subordinated Indebtedness so purchased,
exchanged, redeemed, acquired or retired;
(4) Investments made out of the net cash proceeds, excluding net cash
proceeds received as part of the Transactions, of a substantially
concurrent issue and sale of shares of Capital Stock of Republic
Technologies which is not Disqualified Capital Stock to any person, other
than to a Subsidiary of Republic Technologies; provided that the amount of
any such net cash proceeds shall be excluded from clause (C) of the
preceding paragraph;
(5) payments to Parent Guarantor, RES Holding Corporation and RTI to
allow Parent Guarantor, RES Holding Corporation and RTI to pay their
operating and administrative expenses, including, without limitation,
directors fees, legal and audit expenses, SEC compliance expenses and
corporate franchise and other taxes that are directly attributable to
Republic Technologies and the Restricted Subsidiaries;
(6) payments made to Parent Guarantor, RES Holding Corporation and RTI
or by Republic Technologies to permit the purchase or redemption of their
Capital Stock, including related stock
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appreciation rights or similar securities, held by present or former
officers, employees or consultants of RTI or Republic Technologies or any
of its Subsidiaries or by any employee pension benefit plan or management
equity or stock option plan or agreement upon such Person's death,
disability, retirement or termination of employment or under the terms of
any such employee pension benefit plan or any other agreement under which
such Capital Stock or related rights were issued; provided that the
aggregate amount of such purchases or redemptions that may be made under
this clause (6) shall not exceed $3.0 million per year; provided that, to
the extent that less than the $3.0 million yearly base amount is utilized
in any year, the unused portion of such base amount may be carried forward
to and be deemed part of the base amount only for the immediately
subsequent year and not any succeeding year;
(7) provided that Republic Technologies is then treated as a
partnership or a pass-through or disregarded entity for federal or state
income tax purposes, distributions in respect of Capital Stock of Republic
Technologies or Investments by Republic Technologies to the extent
necessary to permit direct or indirect beneficial holders to receive tax
distributions, as provided for in the limited liability company agreement
of the Parent Guarantor not to exceed the tax liabilities payable by such
owners in respect of income of Republic Technologies and any of its
Subsidiaries that, for tax purposes, are treated as pass-through or
disregarded entities; provided that nothing in this clause (7) will be
deemed to permit any such distribution
(a) in excess of amounts that a consolidated group that includes
Republic Technologies as the "parent" and any of its Subsidiaries that,
for tax purposes, are treated as pass-through or disregarded entities
would be required to pay on a stand-alone basis were such entities
taxable as a consolidated group of corporations, except for
distributions to the extent necessary to permit such holders to pay
their tax liabilities attributable to the disproportionate sharing of
income or loss of Republic Technologies and its Subsidiaries, and
(b) to pay any tax liabilities of direct or indirect investors in
Republic Technologies or the Parent Guarantor resulting from the
conversion of Republic Technologies from a limited liability company to
corporate form, including pursuant to a Roll-up Transaction;
(8) the declaration and payment of dividends or distributions to
holders of any class or series of Disqualified Capital Stock issued or
incurred in compliance with the "Limitation on Additional Indebtedness and
Certain Preferred Stock" covenant;
(9) Restricted Payments made in connection with the completion of the
Transactions;
(10) so long as no Default shall have occurred and be continuing,
Restricted Payments made in order to enable RTI to make dividend payments
on, and the scheduled redemption of, the Bethlehem Preferred Stock, as in
effect on the Issue Date;
(11) so long as no Default shall have occurred and be continuing,
Restricted Payments the proceeds of which are or will be used to pay or to
fund the payment of management fees and monitoring fees in an amount not to
exceed $4.0 million in any calendar year; provided that
(a) if such Restricted Payment is to be made on or after
January 15, 2001, the Consolidated Fixed Charge Coverage Ratio of
Republic Technologies would equal or exceed 1.75 to 1 at the time such
payment and
(b) payments which are not permitted under this clause (11) by
reason of a Default or the preceding clause (1) may be accrued and
carried forward to subsequent periods;
(12) repurchases of Capital Stock deemed to occur, upon exercise of
stock options if such Capital Stock represents a portion of the exercise
price of such options; and
(13) the exchange of an Investment constituting a Restricted Payment
which was included in clause (C) of the preceding paragraph for another
Investment which would constitute a Restricted Payment of approximately
equal or greater Fair Market Value.
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In computing the amount of Restricted Payments previously made for purposes
of clause (C) of the second preceding paragraph, Restricted Payments made under
clauses (1), (4), (5), (6), (8), (10) and, without duplication to the extent
deducted in arriving at Consolidated Net Income, (7) and (11) of the preceding
paragraph shall be included and clauses (2), (3), (9), (12) and (13) shall not
be so included.
Limitation on Liens. The indenture provides that the issuers will not, and
will not cause or permit any of the Restricted Subsidiaries to directly or
indirectly, create, incur, assume, affirm or permit or suffer to exist or remain
in effect any Liens:
(a) upon any item of Collateral or upon the New Bar Mill other than
Permitted Collateral Liens, and
(b) upon any other properties or assets of Republic Technologies or of
any of the Restricted Subsidiaries, whether owned on the Issue Date or
acquired after the Issue Date, not constituting Collateral, except for the
following: (1) Liens existing on the Issue Date, to the extent and in the
manner such Liens are in effect on the Issue Date; and (2) Permitted Liens.
Republic Technologies and the Pledgors will be permitted to incur and
suffer to exist purchase money Liens to finance the acquisition or construction
of personal property or fixtures of Republic Technologies or any Restricted
Subsidiary free of the Liens securing the Notes under the Security Documents for
so long as the related Indebtedness shall be outstanding, notwithstanding any
contrary provision of the Security Documents or the indenture; provided that
(1) the aggregate principal amount of all related purchase money
Indebtedness (and refinancings thereof) contemplated by this sentence shall
not exceed $15.0 million,
(2) the related Indebtedness shall not be secured by any property or
assets of an issuer or any of its Subsidiaries other than the property or
assets so acquired or constructed and
(3) each such purchase money Lien shall either (x) exist at the time
of acquisition or construction or (y) be created within 180 days of such
acquisition or construction.
Limitation on Sale-Leaseback Transactions. The indenture will provide that
the issuers will not, and will not permit any of the Restricted Subsidiaries to,
enter into any Sale-Leaseback Transaction with respect to any property of
Republic Technologies or any of the Restricted Subsidiaries. Notwithstanding the
foregoing, Republic Technologies and the Restricted Subsidiaries may enter into
Sale-Leaseback Transactions with respect to property not constituting Collateral
which is acquired or constructed after the Issue Date; provided that
(a) the Attributable Value of such Sale-Leaseback Transaction shall be
deemed to be Indebtedness of Republic Technologies or such Restricted
Subsidiary, as the case may be,
(b) after giving pro forma effect to any such Sale-Leaseback
Transaction and the foregoing clause (a), Republic Technologies would be
able to incur $1.00 of additional Indebtedness pursuant to the first
paragraph of the covenant described under "Limitation on Additional
Indebtedness and Certain Preferred Stock" above or, in the case of a
Sale-Leaseback Transaction involving the CAST-ROLL Facility, in accordance
with clause (c) or (d) of the "Limitations on Incurrence of Additional
Indebtedness and Certain Preferred Stock" covenant, and
(c) such Sale-Leaseback Transaction shall be in compliance with the
covenant "Limitation on Liens." Notwithstanding the foregoing, Republic
Technologies and the Restricted Subsidiaries may enter into and assume
certain safe harbor leases to which USS/Kobe is a party in connection with
the Transactions.
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Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The indenture provides that the issuers will not, and will not
permit any of the Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to
(a) pay dividends, in cash or otherwise, or make any other
distributions on or in respect of its Capital Stock or any other interest
or participation in, or measured by, its profits,
(b) pay any Indebtedness owed to an issuer or any other Restricted
Subsidiary,
(c) make loans or advances to, or any investment in, an issuer or any
other Restricted Subsidiary, or
(d) sell, lease or transfer any of its properties or assets to an
issuer or any other Restricted Subsidiary, except for such encumbrances or
restrictions existing under or by reason of
(1) the indenture, the New Credit Facility and the Security
Documents,
(2) any restrictions existing under or contemplated by agreements
in effect on the Issue Date,
(3) with respect to a Restricted Subsidiary of an issuer that is
not a Restricted Subsidiary of such issuer on the Issue Date,
in existence at the time such Person becomes a Restricted
Subsidiary of such issuer, provided that such restrictions are
not created in contemplation of such Person becoming a
Restricted Subsidiary,
(4) applicable law or any applicable rule, regulation or order,
(5) customary restrictions arising from Liens permitted under the
"Limitation on Liens" covenant to the extent related to the
assets subject to such Liens,
(6) restrictions on cash or other deposits imposed by customers
under contracts entered into in the ordinary course of
business,
(7) customary provisions contained in leases and other agreements
entered into in the ordinary course of business,
(8) any restrictions existing under any agreement that refinances
or replaces an agreement containing a restriction permitted by
clauses (1), (2) and (3) above; provided that the terms and
conditions of any such restrictions under this clause (8) are
not materially less favorable to the Holders than those under
or pursuant to the agreement being replaced or the agreement
evidencing the Indebtedness refinanced,
(9) provisions contained in agreements or instruments which
prohibit the transfer of all or substantially all of the assets
of the obligor and its Subsidiaries unless the transferee shall
assume the obligations of the obligor under such agreement or
instrument, and
(10) customary restrictions in any sale contract relating to any
asset, including Capital Stock, which is the subject of the
completed sale.
Disposition of Proceeds of Asset Sales. The indenture provides that the
issuers will not, and will not permit any of the Restricted Subsidiaries to,
make any Asset Sale unless
(1) such Asset Sale is for Fair Market Value,
(2) at least 75% of the proceeds therefrom consist of cash and/or Cash
Equivalents; provided that
(x) if such Asset Sale does not involve the sale, transfer or other
disposition of any Collateral, Indebtedness of Republic Technologies or
any of the Restricted Subsidiaries assumed by the purchaser, other than
Subordinated Indebtedness, shall be counted as cash for such purposes if
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Republic Technologies and the Restricted Subsidiaries are
unconditionally released from any liability therefor,
(y) if such Asset Sale involves the sale, transfer or other
disposition of any Collateral, Indebtedness of any Pledgor secured by a
Permitted Collateral Lien upon such Collateral that ranks prior to the
notes assumed by the purchaser shall be treated as cash for such
purposes if such Pledgor is unconditionally released from any liability
therefor and
(z) to the extent such Asset Sale involves the Specialty Steel
Assets or the Closed Facilities, this clause (2) need not be complied
with,
(3) if such Asset Sale involves the sale, transfer or other
disposition of any Collateral, it shall be in compliance with the
provisions described under "--Possession, Use and Release of Collateral"
and
(4) the issuers shall apply the Net Cash Proceeds of such Asset Sale
within 365 days of receipt thereof, as follows:
(A) first, to the extent such Net Cash Proceeds are received from
an Asset Sale (x) not involving the sale, transfer or disposition of any
Collateral, which proceeds we refer to as "Non-Collateral Proceeds," or
(y) involving the sale, transfer or disposition of Collateral which is
subject to a Permitted Collateral Lien which is prior to the Lien
granted to the Collateral Agent for the benefit of the trustee and the
Holders, which proceeds we refer to as "Senior Collateral Proceeds," to
satisfy all mandatory repayment obligations arising by reason of such
Asset Sale under the terms of any instrument governing any Indebtedness
or related security agreement which is secured by the assets which are
the subject of such Asset Sale; provided that any available borrowings
under, and the outstanding amount, of such Indebtedness, shall be
permanently reduced to the extent such Non-Collateral Proceeds or Senior
Collateral Proceeds are so applied;
(B) second, to the extent such Net Cash Proceeds are received from
an Asset Sale involving the sale, transfer or disposition of Collateral
which is subject to a Permitted Collateral Lien which ranks pari passu
with the Lien granted to the Collateral Agent for the benefit of the
trustee and the Holders, which proceeds we refer to as "Pari Passu
Proceeds," that portion of the Pari Passu Proceeds not constituting the
noteholders' Pro Rata Share thereof to satisfy all mandatory prepayment
obligations arising by reason of such Asset Sale under the terms of the
New Credit Facility; provided that the available borrowings under, and
the outstanding amount of, such Indebtedness shall be permanently
reduced to the extent such Pari Passu Proceeds are so applied; and
(C) third, with respect to any Non-Collateral Proceeds, Senior
Collateral Proceeds and Pari Passu Proceeds remaining after application
pursuant to the preceding paragraphs (A) and (B) and any Net Cash
Proceeds received from an Asset Sale involving the sale, transfer or
other disposition of any Collateral, other than Net Cash Proceeds from
an Asset Sale of Collateral subject to a Permitted Collateral Lien that
is prior to or pari passu with the Lien of the Trustee and the Holders,
which proceeds we refer to as "Junior Collateral Proceeds," (any such
remaining Non-Collateral Proceeds, remaining Senior Collateral Proceeds,
Junior Collateral Proceeds and Pari Passu Proceeds are referred to
herein as the "Available Amount"), either or both of the issuers shall
make an offer to purchase from all Holders, up to a maximum principal
amount equal to a multiple of $1,000 of notes plus accrued and unpaid
interest thereon, if any, equal to the Available Amount at a purchase
price equal to 100% of the principal amount thereof plus accrued and
unpaid interest thereon, if any, to the date of purchase.
Notwithstanding the foregoing, the issuers will not be required to apply
pursuant to this paragraph (C) any Available Amount received from any
Asset Sale if, and only to the extent that,
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(x) such Net Cash Proceeds are applied by the issuers or any
Restricted Subsidiary to acquire or construct property or assets in
lines of business related to the issuers' and the Restricted
Subsidiary's business at such time (a "Permitted Related
Acquisition") and
(y) if any of the Available Amount so invested pursuant to a
Permitted Related Acquisition derived directly or indirectly from an
Asset Sale of Collateral, the property and assets so acquired are
made subject to a Lien securing the notes and any other Indebtedness
secured by such Collateral having the same relative priorities
pursuant to the Intercreditor Agreements as the Lien on the
Collateral subject to the Asset Sale pursuant to, and subject to, the
provisions described under "--Possession, Use and Release of
Collateral--Substitute Collateral" below and the relevant pledgor
becomes a Subsidiary Guarantor.
The issuers may defer the Asset Sale offer until there is an aggregate
unutilized Available amount equal to or in excess of $25.0 million resulting
from one or more Asset Sales, at which time, the entire unutilized Available
Amount, and not just the amount in excess of $25.0 million, shall be applied as
required pursuant to this paragraph. The Asset Sale offer shall remain open for
a period of at least 20 business days. To the extent the Asset Sale Offer is not
fully subscribed to by the Holders, Republic Technologies or the Restricted
Subsidiary, as the case may be, may retain such unutilized portion of the
Available Amount free and clear of the Lien of the Security Documents.
Notwithstanding the foregoing, neither Republic Technologies nor any
Restricted Subsidiary shall be subject to the terms of paragraphs (A) through
(C) above
(x) with respect to any tax distributions as determined under
paragraph (7) of "Limitations on Restricted Payments" with respect to
income from Asset Sales, without duplication for amounts deducted in
arriving at the amount of Net Cash Proceeds, and
(y) to the extent that the Net Cash Proceeds received by Republic
Technologies or a Restricted Subsidiary in connection with any Asset Sale
involving Specialty Steel Assets or the Closed Facilities are applied to
repay Indebtedness under the New Credit Facility or to make capital
expenditures or to acquire tangible assets.
Whenever Net Cash Proceeds from an Asset Sale of Collateral are received by
Republic Technologies or any Restricted Subsidiary, the issuers shall deposit,
or cause to be deposited, such Net Cash Proceeds with the Collateral Agent as
Trust Moneys subject to disposition as provided in this covenant or as provided
under the "--Possession, Use and Release of Collateral" and such Net Cash
Proceeds shall be set aside by the Collateral Agent pending application to
either the purchase of notes or its other permitted applications. At the
direction of the issuers, such Net Cash Proceeds shall be required to be
invested by the Collateral Agent in Cash Equivalents. Republic Technologies or
the Restricted Subsidiary, as applicable, shall be entitled to any interest or
dividends accrued, earned or paid on such investments.
If the issuers are required to make an Asset Sale offer, the issuers will
comply with all applicable tender offer laws and regulations, including, to the
extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any
other applicable securities laws and regulations and any applicable requirements
of any securities exchange on which the notes are listed and shall not be deemed
to have breached its obligations under the Indenture by virtue thereof.
Limitation on Transactions with Affiliates. The issuers shall not, and
shall not permit, cause or suffer any of the Restricted Subsidiaries to, conduct
any business or enter into any transaction or series of transactions with or for
the benefit of any of their respective Affiliates, unless
(a) such transaction or series of related transactions is on terms
reasonably believed to be no less favorable to such issuer or such
Restricted Subsidiary, as the case may be, than those
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which could have been obtained in a comparable transaction at such time
with an unrelated Person, and
(b) with respect to a transaction or series of related transactions
involving aggregate payments or Fair Market Value equal to or greater than
$10.0 million, the issuers shall have delivered an officers' certificate to
the trustee certifying that such transaction or series of related
transactions complies with the preceding clause (a) and that such
transaction or series of related transactions has been approved by the
Requisite Managers; provided that, in lieu of complying with clause (b),
the issuers may obtain a written opinion from an Independent Financial
Advisor qualified to pass upon the required matters stating that the terms
of such transaction or series of transactions are fair to such issuer or
such Restricted Subsidiary, as the case may be, from a financial point of
view;
provided that this covenant will not restrict the issuers or the Restricted
Subsidiaries from
(a) making Restricted Payments permitted under "Limitation on
Restricted Payments";
(b) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the Board
of Directors of Republic Technologies;
(c) transactions among an issuer and Restricted Subsidiaries and
transactions among Restricted Subsidiaries of an issuer otherwise permitted
by the indenture;
(d) the making of loans and advances and the payment of fees and
indemnities to directors, officers and employees of the issuers and the
Restricted Subsidiaries in the ordinary course of business;
(e) transactions pursuant to agreements in existence on the Issue
Date, including, without limitation, the limited liability company
agreement for Republic Technologies, or any amendment thereto, provided
that any such amendment is not disadvantageous to the Holders in any
material respect;
(f) any employment agreements entered into by an issuer or any of the
Restricted Subsidiaries in the ordinary course of business;
(g) any sale of Capital Stock of an issuer which is not Disqualified
Capital Stock;
(h) so long as no Default has occurred and is continuing, the payment
of management, consulting, monitoring and advisory fees and related
expenses to Blackstone, Veritas, USX and Kobe and their Affiliates not to
exceed $4.0 million in the aggregate in any calendar year to the extent
that it would be permitted under clause (11) of the second paragraph of the
covenant "Limitation on Restricted Payments";
(i) payments by an issuer or any of the Restricted Subsidiaries to
Blackstone, Veritas, USX and Kobe and their Affiliates made for any
financial advisory, underwriting or placement services or in respect of
other investment banking activities consistent with past customary practice
of Blackstone and Veritas, respectively, with respect to their portfolio
companies, including, without limitation, in connection with acquisitions
or divestitures, which payments are approved by a majority of the Board of
Directors of the issuer in good faith;
(j) transactions with customers, clients, suppliers, or purchasers or
sellers of goods or services, in each case in the ordinary course of
business and otherwise in compliance with the terms of the indenture;
(k) transactions and payments pursuant to the Supply and Service
Agreements and any other agreements in effect as of the Issue Date or any
amendment thereto, so long as any such amendment is not disadvantageous
from the perspective of the Holders in any material respect, or any
transaction explicitly contemplated thereby;
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(l) transactions pursuant to the management agreement with Haynes
International, Inc. relating to the Specialty Steel Assets;
(m) an Asset Sale of the Specialty Steel Assets made in compliance
with the covenant "Disposition of Proceeds of Asset Sales"; and
(n) the provision of reasonable assistance to any Affiliates of the
issuers in connection with processing financing transactions, including,
without limitation, offerings of securities by RTI and its stockholders.
RTI Capital Corp. The indenture provides that Republic Technologies will
at all times own 100% of the Capital Stock of RTI Capital Corp. and that RTI
Capital Corp. will not hold any operating assets or other properties or conduct
any business other than to serve as an issuer and co-obligor with respect to the
notes and will not own any Capital Stock of any other person.
Limitation on Designations of Unrestricted Subsidiaries. The indenture
provides that an issuer may designate any Subsidiary of Republic Technologies,
other than RTI Capital Corp., a Subsidiary Guarantor or any Subsidiary which
owns or holds any Collateral, as an "Unrestricted Subsidiary" under the
indenture only if:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such designation;
(b) Republic Technologies would be permitted under the indenture to
make an Investment at the time of designation, assuming the effectiveness
of such designation, in an amount, which we refer to as the "Designation
Amount", equal to the Fair Market Value of the Capital Stock of such
Subsidiary on such date; and
(c) Republic Technologies would be permitted under the indenture to
incur $1.00 of additional Indebtedness pursuant to the first paragraph of
the covenant described under "--Limitation on Additional Indebtedness and
Certain Preferred Stock" at the time of designation, assuming the
effectiveness of such designation.
In the event of any such designation, Republic Technologies shall be deemed
to have made an Investment constituting a Restricted Payment pursuant to the
covenant "--Limitation on Restricted Payments" for all purposes of the indenture
in the Designation Amount. The indenture will further provide that
(1) the issuers shall not and shall not permit any Restricted
Subsidiary to, at any time (x) provide credit support for, or a guarantee
of, any Indebtedness of any Unrestricted Subsidiary, including any
undertaking, agreement or instrument evidencing such Indebtedness, (y) be
directly or indirectly liable for any Indebtedness of any Unrestricted
Subsidiary or (z) be directly or indirectly liable for any Indebtedness
which provides that the holder thereof may, upon notice, lapse of time or
both, declare a default thereon or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity upon the
occurrence of a default with respect to any Indebtedness of any
Unrestricted Subsidiary, including any right to take enforcement action
against such Unrestricted Subsidiary, except in the case of clause (x) or
(y) to the extent permitted under the covenant described under
"--Limitation on Restricted Payments," and
(2) no Unrestricted Subsidiary shall at any time guarantee or
otherwise provide credit support for any obligation of Republic
Technologies or any Restricted Subsidiary, other than Indebtedness not
under the New Credit Facility in amounts not to exceed $50.0 million in
aggregate for all Unrestricted Subsidiaries.
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The indenture further provides that the issuers may revoke any designation
of a Subsidiary as an Unrestricted Subsidiary if:
(a) no Default shall have occurred and be continuing at the time of
and after giving effect to such revocation; and
(b) all Liens, Indebtedness and Affiliate Transactions of or involving
such Unrestricted Subsidiary outstanding immediately following such
revocation would, if incurred at such time, have been permitted to be
incurred for all purposes of the indenture.
All designations and revocations of Subsidiaries as Restricted Subsidiaries
or Unrestricted Subsidiaries must be evidenced by Board Resolutions of the
issuers delivered to the trustee certifying compliance with the foregoing
provisions.
Provision of Financial Information. Whether or not Republic Technologies
is subject to Section 13(a) or 15(d) of the Exchange Act, or any successor
provision thereto, Republic Technologies shall file with the Commission the
annual reports, quarterly reports and other documents which Republic
Technologies would have been required to file with the Commission pursuant to
such Section 13(a) or 15(d) or any successor provision thereto if Republic
Technologies was so subject, such documents to be filed with the Commission on
or prior to the respective dates (the "Required Filing Dates") by which Republic
Technologies would have been required so to file such documents if Republic
Technologies was so subject, provided that such reports must be filed with the
Commission only to the extent that the Commission accepts such reports. If, at
any time prior to the consummation of the Exchange Offer when Republic
Technologies is not subject to such Section 13(a) or 15(d), the information
which would be required in an Exchange Act report is included in a public filing
of Republic Technologies under the Securities Act at the applicable Required
Filing Date, such public filing shall fulfill the filing requirement with the
Commission with respect to the applicable Exchange Act report.
Republic Technologies shall also in any event
(a) within 15 days of each Required Filing Date, whether or not
permitted or required to be filed with the Commission,
(1) transmit, or cause to be transmitted, by mail to all
Holders, as their names and addresses appear in the note register,
without cost to such Holders, and
(2) file with the trustee, copies of the annual reports,
quarterly reports and other documents which Republic Technologies is
required to file with the Commission pursuant to this covenant, or,
if such filing is not so permitted or, prior to the consummation of
the Exchange Offer when Republic Technologies is not subject to
Section 13(a) or 15(d) of the Exchange Act, information and data of a
similar nature, and
(b) if, notwithstanding the preceding sentence, filing such documents
by Republic Technologies with the Commission is not permitted by Commission
practice or applicable law or regulations, promptly upon written request
supply copies of such documents to any Holder.
Notwithstanding the foregoing, if Parent Guarantor remains a guarantor with
ownership of 100% of the Capital Stock of Republic Technologies and with no
material assets other than its interests in Republic Technologies, all of the
information, reports and filings otherwise required of Republic Technologies may
instead be supplied by and relate to Parent Guarantor and none of the
information or reporting obligations shall apply with respect to the period
ended June 30, 1999. In addition, for so long as any notes remain outstanding,
Republic Technologies will furnish to the Holders and prospective investors,
upon their request, the information required to be delivered pursuant to
Rule 144A(d)(4) under the Securities Act.
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CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
Republic Technologies will not, in any transaction or series of
transactions, merge or consolidate with or into, or sell, assign, convey,
transfer, lease or otherwise dispose of all or substantially all of its
properties and assets as an entirety to, any person or persons, and Republic
Technologies will not permit any of the Restricted Subsidiaries to enter into
any such transaction or series of transactions if such transaction or series of
transactions, in the aggregate, would result in a sale, assignment, conveyance,
transfer, lease or other disposition of all or substantially all of the
properties and assets of Republic Technologies and the Restricted Subsidiaries,
taken as a whole, to any other person or persons, unless at the time of and
after giving effect thereto
(a) either
(1) if the transaction or series of transactions is a merger or
consolidation, Republic Technologies shall be the surviving person of
such merger or consolidation, or
(2) the person formed by any such consolidation or into which
Republic Technologies or such Restricted Subsidiary is merged or to
which the properties and assets of Republic Technologies and/or any
Restricted Subsidiary, as the case may be, are transferred, which
surviving person or transferee person we refer to as the "Surviving
Entity", shall be a corporation or limited liability company
organized and existing under the laws of the United States of
America, any state thereof or the District of Columbia and shall
expressly assume by a supplemental indenture executed and delivered
to the trustee in form reasonably satisfactory to the trustee, all
the obligations of Republic Technologies under the notes, and the
indenture and the Security Documents, and in each case, the indenture
shall remain in full force and effect;
(b) immediately before and immediately after giving effect to such
transaction or series of transactions on a pro forma basis, including,
without limitation, any Indebtedness incurred or anticipated to be incurred
in connection with or in respect of such transaction or series of
transactions, no Default shall have occurred and be continuing;
(c) immediately after giving effect to such transaction or series of
transactions on a pro forma basis, including, without limitation, any
Indebtedness incurred or anticipated to be incurred by Republic
Technologies and the Restricted Subsidiaries in connection with or in
respect of such transaction or series of transactions, Republic
Technologies or the Surviving Entity, as the case may be,
(1) could incur $1.00 of additional Indebtedness pursuant to the
proviso of the first paragraph of the covenant described under
"--Certain Covenants--Limitation on Additional Indebtedness and
Certain Preferred Stock" above and
(2) has a Consolidated Fixed Charge Coverage Ratio that is
either (x) 3.0 to 1 or greater or (y) greater than the Consolidated
Fixed Charge Coverage Ratio of Republic Technologies before giving
effect to such transaction or series of transactions on a pro forma
basis;
(d) each Subsidiary Guarantor, other than a guarantor whose Guarantee
is to be released in accordance with the terms of the indenture, unless it
is the other party to the transaction, shall have by supplemental indenture
confirmed that after consummation of such transaction its Subsidiary
Guarantee shall apply, as such Subsidiary Guarantee applied on the date it
was granted under the notes to the obligations of Republic Technologies
under the notes, to the obligations of Republic Technologies or such
Person, as the case may be, under the indenture and the notes; and
(e) Republic Technologies or the surviving entity shall have delivered
to the trustee an officer's certificate and an opinion of counsel stating
that such consolidation, merger, conveyance, transfer or lease and, if a
supplemental indenture is required in connection with such transaction or
series of transactions, such supplemental indenture complies with
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"--Consolidation, Merger, Sale of Assets, Etc.", and that all conditions
precedent in the indenture relating to the transaction or series of
transactions have been satisfied; the provisions of clause (c) shall not
prevent a Roll-up Transaction.
The indenture provides that upon any consolidation, combination or merger
or any transfer of all or substantially all of the assets of Republic
Technologies in accordance with the previous paragraph, in which Republic
Technologies is not the continuing corporation, the successor Person formed by
such consolidation or into which Republic Technologies is merged or to which
such conveyance, lease or transfer is made shall succeed to, and be substituted
for, and may exercise every right and power of, Republic Technologies under the
indenture and the notes with the same effect as if such surviving entity had
been named as such.
Except in the case in which a Subsidiary Guarantor's guarantee is subject
to release as described under "--The Guarantees," each guarantor will not, and
the issuers will not cause or permit any Subsidiary Guarantor to, consolidate
with or merge with or into any person other than an issuer or any other
guarantor unless:
(1) the entity formed by or surviving any such consolidation or
merger, if other than the guarantor, or to which such sale, lease,
conveyance or other disposition shall have been made is a corporation
organized and existing under the laws of the United States or any State
thereof or the District of Columbia;
(2) such entity assumes by supplemental indenture all of the
obligations of the guarantor on the Guarantee; and
(3) immediately after giving effect to such transaction, no Default
shall have occurred and be continuing.
Any merger or consolidation of a guarantor with and into an issuer, with an
issuer being the surviving entity, or another guarantor need only comply with
clauses (b) and (e) of the first paragraph of this covenant.
EVENTS OF DEFAULT
The following are "Events of Default" under the indenture:
(a) default in the payment of any interest on the notes when it
becomes due and payable and continuance of such default for a period of
30 days; or
(b) default in the payment of the principal of, or premium, if any, on
the notes when due and payable, at maturity, upon acceleration, redemption,
pursuant to a required offer to purchase or otherwise; or
(c) the failure by the issuers to comply with their obligations under
the covenant described under "--Consolidation, Merger, Sale of Assets,
Etc." above, continued for 30 days after notice, or the failure by issuers
to comply for 30 days after notice with any of its obligations under the
covenants described under "--Offer to Purchase upon Change of Control"; or
(d) default in the performance of or compliance with, or breach of,
any term, covenant, condition or provision of the notes, the indenture, or
the Intercreditor Agreements, other than defaults specified in clause (a),
(b) or (c) above, and continuance of such default or breach for a period of
60 days after written notice to the issuers by the trustee or to the
issuers and the trustee by the Holders of at least 25% in aggregate
principal amount of the outstanding notes; or
(e) default in the performance of or compliance with, or breach of,
any term, covenant, condition, or provision of the Security Documents,
which default or breach shall continue unremedied for 45 days after written
notice to the issuers and the applicable Pledgor by the trustee or to the
issuers and the applicable Pledgor and the trustee by Holders of at least
25% in aggregate principal amount of the outstanding notes unless the
remedy or cure of such default requires work to be performed, acts to be
done or conditions to be removed which cannot, by their nature, reasonably
be performed, done or removed within such 45-day period, or if such remedy
or cure is prevented by causes outside of the control or responsibility of
the
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issuers, in which case no "Event of Default" shall be deemed to exist so
long as the issuers shall have commenced cure within such 45-day period and
shall diligently prosecute the same to completion, but in no event longer
than 90 days thereafter; or
(f) either
(1) default or defaults in the payment of any principal, premium
or interest under one or more agreements, instruments, mortgages,
bonds, debentures or other evidences of Indebtedness under which
Republic Technologies or one or more Restricted Subsidiaries or
Republic Technologies International and one or more Restricted
Subsidiaries then have outstanding Indebtedness in excess of
$25.0 million, individually or in the aggregate within five days
after the date such payment was due and after the expiration of any
applicable grace period, or
(2) any other default or defaults under one or more agreements,
instruments, mortgages, bonds, debentures or other evidences of
Indebetedness under which Republic Technologies or one or more
Restricted Subsidiaries or Republic Technologies and one or more
Restricted Subsidiaries then have outstanding Indebtedness in excess
of $25.0 million, individually or in the aggregate, and in the case
of this clause, either (x) such Indebtedness is already due and
payable in full or (y) such default or defaults have resulted in the
acceleration of such Indebtedness prior to its express maturity; or
(g) one or more judgments, orders or decrees of any court or
regulatory or administrative agency of competent jurisdiction for the
payment of money in excess of $25.0 million, either individually or in the
aggregate, shall be entered against Republic Technologies or any Restricted
Subsidiary of Republic Technologies or any of their respective properties
and shall not be discharged or fully bonded and there shall have been a
period of 60 days after the date on which any period for appeal has expired
and during which a stay of enforcement of such judgment, order or decree
shall not be in effect; or
(h) either
(1) the collateral agent under the New Credit Facility,
(2) any holder of Indebtedness secured by any of the Collateral
or
(3) any holder of at least $25.0 million in aggregate principal
amount of Indebtedness of Republic Technologies or any of the
Restricted Subsidiaries shall commence, or have commenced on its
behalf, judicial proceedings to foreclose upon assets of Republic
Technologies or any of the Restricted Subsidiaries having an
aggregate Fair Market Value, individually or in the aggregate, in
excess of $25.0 million or shall have exercised any right under
applicable law or applicable security documents to take ownership of
any such assets in lieu of foreclosure; or
(i) any Guarantee ceases to be in full force and effect or is declared
null and void or any guarantor denies that it has any further liability
under any Guarantee or gives notice to such effect, other than by reason of
the termination of the indenture or the release of any such guarantee in
accordance with the indenture; or
(j) except as contemplated by their terms, any of the Security
Documents or the Intercreditor Agreements ceases to be in full force and
effect or any of the Security Documents or the Intercreditor Agreements
ceases to give the Collateral Agent or the trustee, in any material
respect, the Liens, rights, powers and privileges purported to be created
thereby; or
(k) certain events of bankruptcy, insolvency or reorganization with
respect to an issuer, any guarantor, or any Significant Subsidiary of
Republic Technologies.
If an Event of Default, other than an Event of Default with respect to an
issuer or any guarantor specified in clause (k) above, occurs and is continuing,
then the Holders of at least 25% in aggregate principal amount of the
outstanding notes may, by written notice, and the trustee upon the request of
the Holders of not less than 25% in aggregate principal amount of the
outstanding notes
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shall, declare the principal of, premium, if any, and accrued interest on, all
the notes to be due and payable immediately. Upon any such declaration such
principal shall become due and payable immediately. If an Event of Default
specified in clause (k) above with respect to an issuer or any guarantor occurs
and is continuing, then the principal of, premium, if any, and accrued interest
on, all the notes shall as a result become and be immediately due and payable
without any declaration or other act on the part of the trustee or any Holder.
After a declaration of acceleration under the indenture, but before a
judgment or decree for payment of the money due has been obtained by the trustee
and before any foreclosure, whether pursuant to judicial proceedings or
otherwise, or the taking of ownership instead of foreclosure, upon any
Collateral by the Collateral Agent acting on behalf of the trustee or Holders,
by the trustee or at the direction of the Holders, the Holders of not less than
a majority in aggregate principal amount of outstanding notes, by written notice
to the issuers and the trustee, may rescind such declaration if
(a) the issuers have paid or deposited with the trustee or the
Collateral Agent a sum sufficient to pay
(1) all sums paid or advanced by the trustee or the Collateral
Agent under the indenture, the Security Documents and the
Intercreditor Agreements and the reasonable compensation, expenses,
disbursements and advances of the trustee and the Collateral Agent
and their respective agents and counsel,
(2) all overdue interest on all notes,
(3) the principal of and premium, if any, on any notes which
have become due otherwise than by such declaration of acceleration
and interest thereon at the rate borne by the notes, and
(4) to the extent that payment of such interest is lawful,
interest upon overdue interest and overdue principal at the rate
borne by the notes which has become due otherwise than by such
declaration of acceleration;
(b) the rescission would not conflict with any judgment or decree of a
court of competent jurisdiction; and
(c) all Events of Default, other than the non-payment of principal of,
premium, if any, and interest on the notes that have become due solely by
such declaration of acceleration, have been cured or waived.
The Holders of not less than a majority in aggregate principal amount of
the outstanding notes may on behalf of the Holders of all the notes waive any
past Defaults under the indenture, except a Default in the payment of the
principal of, premium, if any, or interest on any note, or in respect of a
covenant or provision which under the indenture cannot be modified or amended
without the consent of the Holder of each note outstanding.
No Holder has any right to institute any proceeding with respect to the
indenture, the Security Documents, the Intercreditor Agreements, the notes or
the Guarantees or any remedy thereunder, unless the Holders of at least 25%, or,
in the case of the Security Documents and the Intercreditor Agreements only, a
majority, in aggregate principal amount of the outstanding notes have made
written request, and offered reasonable security or indemnity, to the trustee
and, if requested, the Collateral Agent to institute such proceeding as trustee
or Collateral Agent, as applicable, the trustee or Collateral Agent, as
applicable, has failed to institute such proceeding within 60 days after receipt
of such notice and the trustee, within such 60-day period, has not received
directions inconsistent with such written request by Holders of a majority in
aggregate principal amount of the outstanding notes and, if applicable, the
Collateral Agent, within such 60-day period, has not received directions
inconsistent with such written request by the trustee. Such limitations do not
apply, however, to a suit instituted by a holder of a note for the enforcement
of the payment of the principal of, premium, if any, or interest on such note on
or after the respective due dates expressed in such note.
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During the existence of an Event of Default, the trustee is required to
exercise such rights and powers vested in it under the indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the indenture relating to the duties of the
trustee, whether or not a Default shall occur and be continuing, the trustee
under the indenture is not under any obligation to exercise any of its rights or
powers under the indenture at the request or direction of any of the Holders
unless such Holders shall have offered to such trustee reasonable security or
indemnity. Subject to certain provisions concerning the rights of the trustee,
the Holders of a majority in aggregate principal amount of the outstanding notes
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the trustee, or exercising any trust or power
conferred on the trustee under the indenture.
If a Default occurs and is continuing and is known to the trustee, the
trustee shall mail to each holder of the notes notice of the Default within 30
days after obtaining knowledge thereof. Except in the case of a Default in
payment of principal of, premium, if any, or interest on any notes, the trustee
may withhold the notice to the Holders of such notes if a committee of its trust
officers in good faith determines that withholding the notice is in the interest
of the Holders of the notes.
The issuers are required to furnish to the trustee annual statements as to
the performance by the issuers of their obligations under the indenture and as
to any default in such performance. The issuers are also required to notify the
trustee within ten days of any Default.
LEGAL DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The issuers may, at their option and at any time, terminate the obligations
of the issuers and the guarantors with respect to the outstanding notes and
Guarantees by way of a "legal defeasance" . Such defeasance means that the
issuers shall be deemed to have paid and discharged the entire Indebtedness
represented by the outstanding notes, except for
(a) the rights of Holders of outstanding notes to receive payment in
respect of the principal of, premium, if any, and interest on such notes
when such payments are due,
(b) the issuers' obligations to issue temporary notes, register the
transfer or exchange of any notes, replace mutilated, destroyed, lost or
stolen notes and maintain an office or agency for payments in respect of
the notes,
(c) the rights, powers, trusts, duties and immunities of the trustee,
and
(d) the defeasance provisions of the Indenture.
In addition, the issuers may, at their option and at any time, elect to
terminate the obligations of the issuers and the Subsidiary Guarantors with
respect to certain covenants that are set forth in the indenture, some of which
are described under "--Certain Covenants" above and any subsequent failure to
comply with such obligations shall not constitute a Default or an Event of
Default with respect to the notes by way of a "covenant defeasance" .
In order to exercise either legal defeasance or covenant defeasance,
(a) the issuers must irrevocably deposit with the trustee, in trust,
for the benefit of the Holders of the notes, cash in United States dollars,
U.S. government obligations, or a combination thereof, in such amounts as
will be sufficient, in the opinion of an Independent Financial Adviser, to
pay the principal of, premium, if any, and interest on the outstanding
notes to redemption or maturity, except lost, stolen or destroyed notes
which have been replaced or paid;
(b) the issuers shall have delivered to the trustee an opinion of
counsel to the effect that the Holders of the outstanding notes will not
recognize income, gain or loss for U.S. federal income tax purposes as a
result of such legal defeasance or covenant defeasance and will be subject
to U.S. federal income tax on the same amounts, in the same manner and at
the same
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times as would have been the case if such legal defeasance or covenant
defeasance had not occurred, except that in the case of legal defeasance,
such opinion must refer to and be based upon a ruling of the Internal
Revenue Service or a change in applicable U.S. federal income tax laws;
(c) no Default shall have occurred and be continuing on the date of
such deposit;
(d) such legal defeasance or covenant defeasance shall not cause the
trustee to have a conflicting interest with respect to any securities of
the Issuers;
(e) such legal defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, any material
agreement or instrument to which an Issuer or any of its Subsidiaries is a
party or by which it is bound;
(f) the issuers shall have delivered to the trustee an opinion of
counsel to the effect that after the 91st day following the deposit, the
trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally or to the rights of any creditor of an issuer or any guarantor
other than those continuing rights of the noteholders; and
(g) the issuers shall have delivered to the trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent under the Indenture to either legal defeasance or covenant
defeasance, as the case may be, have been complied with.
In the event of a legal defeasance or covenant defeasance, all rights of
the trustee and the Holders in and to the Collateral under the Security
Documents and the Intercreditor Agreement shall be released, except those
related to the deposit provided above.
SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect,
except as to surviving rights or registration of transfer or exchange of the
notes, as expressly provided for in the indenture, as to all outstanding notes
and all rights of the trustee and the Holders in and to the Collateral under the
Security Documents and the Intercreditor Agreements shall be released when
(a) either
(i) all the notes theretofore authenticated and delivered (except
lost, stolen or destroyed notes which have been replaced or repaid and
notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the issuers and thereafter repaid to the
issuers or discharged from such trust) have been delivered to the
trustee for cancellation or
(ii) all notes not theretofore delivered to the trustee for
cancellation, except lost, stolen or destroyed notes which have been
replaced or paid, have been called for redemption pursuant to the terms
of the notes or have otherwise become due and payable and the Issuers
have irrevocably deposited or caused to be deposited with the trustee
funds in an amount sufficient to pay and discharge the entire
Indebtedness on the notes theretofore delivered to the trustee for
cancellation, for principal of, premium, if any, and interest on the
notes to the date of deposit together with irrevocable instructions from
the issuers directing the trustee to apply such funds to the payment
thereof at maturity or redemption, as the case may be;
(b) the issuers and the guarantors have paid all other sums payable
under the indenture, the notes, the Guarantees, the Security Documents and
the Intercreditor Agreements, so long as such agreements relate to the
notes, by the issuers and the guarantors;
(c) there exists no Default under the indenture; and
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(d) the issuers have delivered to the trustee an officers' certificate
and an opinion of counsel stating that all conditions precedent under the
indenture relating to satisfaction and discharge of the indenture, the
notes and the Guarantees have been complied with.
AMENDMENTS AND WAIVERS
From time to time, the issuers and the guarantors, when authorized by Board
Resolutions of their respective Boards of Directors, and the trustee may,
without the consent of the Holders of any outstanding notes, amend, waive or
supplement, or, if applicable, authorize the Collateral Agent to amend, waive or
supplement, the indenture, the notes, the Guarantees, the Security Documents
and/or the Intercreditor Agreements for certain specified purposes, including,
among other things, curing ambiguities, defects or inconsistencies, qualifying,
or maintaining the qualification of, the Indenture under the Trust Indenture Act
or making any other change that does not adversely affect the rights of any
holder of notes.
Other amendments and modifications of the indenture, the notes, the
Guarantees, the Security Documents and the Intercreditor Agreements may be made
by the issuers, the guarantors, the trustee and, if applicable, the Collateral
Agent with the consent of the Holders of not less than a majority of the
aggregate principal amount of the outstanding notes; provided that
(1) no such modification or amendment may, without the consent of the
Holder of each outstanding note affected thereby,
(a) reduce the principal amount of, extend the fixed maturity of or
alter the redemption provisions of the notes,
(b) change the currency in which any notes or any premium or the
interest thereon is payable or make the principal of, premium, if any,
or interest on any note payable in a currency other than that stated in
the note,
(c) reduce the percentage in principal amount of outstanding notes
that must consent to an amendment, supplement or waiver or consent to
take any action under the indenture, any Guarantee, the notes, the
Security Documents or the Intercreditor Agreements,
(d) impair the right to institute suit for the enforcement of any
payment on or with respect to the notes or any Guarantee,
(e) waive a default in payment with respect to the notes or any
Guarantee,
(f) following the occurrence of a Change of Control or the
execution of a definitive agreement with respect to a Change of Control
or the occurrence of an Asset Sale (subject to clause (2) below), as
applicable, amend, change or modify the obligations of the Issuers to
make and consummate a Change of Control offer with respect to such
Change of Control or make and consummate the Asset Sale offer with
respect to such Asset Sale or modify any of the provisions or
definitions with respect thereto,
(g) reduce or change the rate or time for payment of interest on
the notes,
(h) modify or change any provision of the indenture, the Security
Documents or the Intercreditor Agreements affecting the ranking of the
notes or any Guarantee or the priority of the claims of the Holders in
and to the Collateral in any manner adverse to the Holders or
(i) release any Guarantor from any of its obligations under its
Guarantee or the indenture other than in compliance with the indenture
and
(2) no such modification or amendment may, without the consent of the
Holders of 95% of the aggregate principal amount of outstanding notes,
directly or indirectly release any Lien on the Collateral except in
compliance with the terms of the indenture, the notes, the Security
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Documents and the Intercreditor Agreements, for so long as such agreements
relate to the notes.
POSSESSION, USE AND RELEASE OF COLLATERAL
Unless an Event of Default shall have occurred and be continuing, the
Pledgors will have the right to remain in possession and retain exclusive
control of the Collateral securing the notes, other than any cash, securities,
obligations and Cash Equivalents constituting part of the Collateral and
deposited or required to be deposited with the Collateral Agent and other than
as set forth in the Security Documents and the Intercreditor Agreements, and to
freely operate the Collateral and to collect, invest and dispose of any income
therefrom.
Release of Collateral. The Pledgors will have the right to sell, exchange
or otherwise dispose of any of the Collateral, other than Trust Moneys (but not
other than Trust Moneys constituting Net Cash Proceeds from an Asset Sale, which
Trust Moneys are subject to release from the Lien of the Security Documents as
provided under "--Use of Trust Moneys" below or upon substituting Substitute
Collateral therefor as provided under "--Substitute Collateral" below), upon
compliance with the requirements and conditions of the provisions described
below, and the Trustee shall promptly instruct the Collateral Agent to promptly
release the same from the Lien of any of the Security Documents upon receipt by
the trustee, other than in the case of paragraph (d) below, and the Collateral
Agent of a notice requesting such release and describing the property to be so
released, together with delivery of the following, among other matters:
(a) If the property to be released has a book value of at least $10.0
million, a Board Resolution of the issuers and any other Pledgor, if
applicable, requesting such release and authorizing an application to the
trustee and the Collateral Agent therefor.
(b) An officers' certificate of the issuers and any other Pledgor, as
applicable, dated not more than 30 days prior to the date of the
application for such release, and signed also, in the case of the following
clauses (2) and (4), by an Independent Appraiser or, if such property
consists of securities, by an Independent Financial Advisor, in each case
stating in substance as to certain matters, including the following:
(1) that, in the opinion of the signers, the security afforded by the
Security Documents will not be impaired by such release in contravention of the
provisions of the indenture, and that either
(a) other property, including, in the case of a Permitted Related
Acquisition, the property so acquired, is to be substituted as
Substitute Collateral in accordance with the "Substitute Collateral"
provisions described below or
(b) the Collateral to be released is not Net Cash Proceeds from an
Asset Sale and is not being replaced by comparable property, has a book
value of less than $1.0 million and is not necessary for operation of
the remaining property of Republic Technologies and the Restricted
Subsidiaries or in the conduct of the business of Republic Technologies
and the Restricted Subsidiaries as conducted immediately prior thereto
or
(c) the Collateral to be released is Trust Moneys representing Net
Cash Proceeds from an Asset Sale that are not required, or cannot be
required through the passage of time or otherwise, to be used to
purchase notes under the covenant described under "--Certain
Covenants--Disposition of Proceeds of Asset Sales" or
(d) the Collateral to be released is being released in connection
with an Asset Sale of such Collateral and the net proceeds, as defined
in paragraph (d) below, from such Asset Sale are being delivered to the
Collateral Agent, if required by the covenant described under "--Certain
Covenants--Disposition of Proceeds of Asset Sales", in accordance with,
and to the extent required by, the provisions of clause (2) of paragraph
(d) below or
(e) the Collateral to be released represents Specialty Steel Assets
or Closed Facilities, subject to an Asset Sale;
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(2) except in the case of a release referred to in the preceding paragraph
(b)(1)(B), (b)(1)(C) or (b)(1)(E), that Republic Technologies or any other
Pledgor, as applicable, has either disposed of or will dispose of the Collateral
so to be released in compliance with all applicable terms of the indenture and
for a consideration representing, in the opinion of the signers, its Fair Market
Value, which consideration may, subject to any other provision of the Indenture,
consist of any one or more of the following: (A) cash or Cash Equivalents,
(B) obligations secured by a purchase money Lien upon the property so to be
released and (C) any other property or assets that in each case, upon
acquisition thereof by Republic Technologies or the applicable other Pledgor,
will be subject to the Lien of the Security Documents, except as provided in
clause (ii) of paragraph (d) below, and subject to no Lien other than certain
Liens which, under the applicable provisions of the Security Documents and
Intercreditor Agreements relating thereto, are permitted to be superior to the
Lien of the Collateral Agent for the benefit of the trustee and the Holders
therein, all of such consideration to be briefly described in the certificate;
(3) that no Default has occurred and is continuing;
(4) the Fair Market Value, in the opinion of the signers, of the property
to be released at the date of such application for release; provided that it
shall not be necessary under this clause (4) to state the Fair Market Value of
any property whose Fair Market Value is certified in a certificate of an
Independent Appraiser or Independent Financial Advisor under paragraph
(c) below; and
(5) that all conditions precedent in the indenture, the Security Documents
and the Intercreditor Agreements relating to the release of the Collateral in
question have been complied with.
(c) Other than in connection with an Asset Sale involving Specialty
Steel Assets or Closed Facilities, if (1) the Fair Market Value of the
property to be released and of all other property released from the Lien of
the Security Documents since the commencement of the then current calendar
year is 10% or more of the aggregate principal amount of the notes
outstanding on the date of the application and (2) the Fair Market Value of
the Collateral to be so released is at least $25,000, or such greater
amount not to exceed $1.0 million permitted by the Trust Indenture Act, and
at least 1% of the aggregate principal amount of the notes outstanding on
the date of the application, a certificate of an Independent Appraiser or,
if such property consists of securities, a certificate of an Independent
Financial Advisor stating (A) the then Fair Market Value, in the opinion of
the signer, of the property to be released; and (B) that such release, in
the opinion of the signer, will not impair the security interests under any
of the Security Documents in contravention of their terms.
(d) Except in the case of any release of the Specialty Steel Assets or
the Closed Facilities, either (1) possession of the Substitute Collateral,
if and to the extent the Substitute Collateral consists of property the
possession of which is necessary for the perfection by the Collateral Agent
of a Lien thereon, and all documents required by the "Substitute
Collateral" provisions below or (2) the net proceeds from any Asset Sale
involving Collateral, excluding any Net Cash Proceeds from any Asset Sale
which are not required, or cannot be required through the passage of time
or otherwise, to be used to purchase or redeem notes under the covenant
described under "--Certain Covenants--Disposition of Proceeds of Asset
Sales", or, if the Collateral so to be released is subject to a prior Lien
permitted by the Security Documents, a certificate of the trustee,
mortgagee or other holder of such prior Lien that it has received such net
proceeds and has been irrevocably authorized by the applicable Pledgor to
pay over to the Collateral Agent any balance of such net proceeds remaining
after the discharge of such Indebtedness secured by such prior Lien; and,
if any property other than cash, Cash Equivalents or obligations is
included in such net proceeds, such instruments of conveyance, assignment
and transfer, if any, as may be necessary, in the opinion of counsel, to
subject to the Lien of the Security Documents all the right, title and
interest of Republic Technologies or any other Pledgor, as applicable, in
and to such property. For purposes of this paragraph (d), "net proceeds"
shall mean any cash, Cash Equivalents, obligations or other property
received from the sale, transfer, exchange or other disposition of
Collateral to be released, less a
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proportionate share of (A) brokerage commissions and any other reasonable
fees and expenses related to such transaction and (B) any provision for
federal, state or local taxes paid or payable as a result of such sale,
transfer, exchange or other disposition.
(e) One or more opinions of counsel which, when considered
collectively, shall be substantially to the effect
(1) that any obligation included in the consideration for any
property so to be released and to be received by the Collateral Agent
pursuant to paragraph (d) above is a valid and binding obligation
enforceable in accordance with its terms, subject to such customary
exceptions regarding equitable principles and creditors' rights
generally as shall be reasonably acceptable to the trustee in its sole
judgment, and is effectively pledged under the Security Documents,
(2) that any Lien granted by a purchaser to secure a purchase money
obligation is a fully perfected first priority Lien and such instrument
granting such Lien is enforceable in accordance with its terms,
(3) either
(x) that such instruments of conveyance, assignment and transfer
as have been or are then delivered to the Collateral Agent are
sufficient to subject to the Lien of the Security Documents all the
right, title and interest of Republic Technologies or any other
Pledgor, as applicable, in and to any property, other than cash, Cash
Equivalents and obligations, that is included in the consideration
for the Collateral so to be released and to be received by the
Collateral Agent pursuant to paragraph (d) above, subject to no Lien
other than Liens permitted on Collateral by the covenant described
under "--Certain Covenants--Limitation on Liens," or
(y) that no instruments of conveyance, assignment or transfer
are necessary for such purpose, (4) that Republic Technologies or any
other Pledgor, as applicable, has corporate power to own all property
included in the consideration for such release,
(5) if any part of the money or obligations referred to in
paragraph (d) above has been deposited with a trustee or other holder of
any prior Lien permitted by the Security Documents, that the Collateral
to be released, or a specified portion thereof, is or immediately before
such release was subject to such prior Lien and that such deposit is
required by such prior Lien, and
(6) that all conditions precedent provided in the Indenture, the
Security Documents and the Intercreditor Agreements relating to the
release of such Collateral have been complied with;
provided that, in the case of clauses (1) and (2) above, such opinion of
counsel may be subject to such qualifications as to Liens which may be imposed
as a matter of law or such assumptions as to the actual knowledge of any person
as may be reasonably acceptable to the trustee and the Collateral Agent.
Notwithstanding the foregoing, the issuers and the other Pledgors will be
granted a release of (1) Available Amounts required to purchase notes pursuant
to an Asset Sale Offer by directing the Collateral Agent in writing to cause to
be applied such Available Amounts to such purchase in accordance with the
covenant described under "--Certain Covenants--Disposition of Proceeds of Asset
Sales" and (2) any Closed Facility by directing the Collateral Agent in writing
in connection with any disposition, scrapping, dismantling or abandonment
thereof following the discontinuance of operations thereat, in each case,
without complying with paragraphs (a)-(e) above.
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In case an Event of Default shall have occurred and be continuing, the
issuers and the other Pledgors, while in possession of the Collateral, other
than cash and other personal property held by, or required to be deposited or
pledged with, the Collateral Agent under the indenture or under any Security
Document or any Intercreditor Agreement, or with any trustee, mortgagee or other
holder of a prior Lien permitted under the Security Documents, may do any of the
things enumerated in these "--Release of Collateral" provisions only if the
trustee, in its discretion, or the Holders of a majority in aggregate principal
amount of the outstanding notes shall consent to such action, in which event any
certificate filed under these "Release of Collateral" provisions shall omit the
statement to the effect that no Default has occurred and is continuing.
All cash or Cash Equivalents received by the Collateral Agent pursuant to
the provisions described under "Release of Collateral" will be held by the
Collateral Agent as Trust Moneys under the Indenture and the Principal
Intercreditor Agreement subject to application as provided in these "--Release
of Collateral" provisions, in the case of any Net Cash Proceeds from Asset
Sales, or in "--Use of Trust Moneys" below. All purchase money and other
obligations received by the Collateral Agent pursuant to these "Release of
Collateral" provisions shall be held by the Collateral Agent.
Any releases of Collateral made in strict compliance with these "Release of
Collateral" provisions shall be deemed not to impair the security interests
created by the Security Documents in favor of the Collateral Agent, on behalf of
the trustee for the benefit of the Holders, in contravention of the provisions
of the indenture.
Substitute Collateral. Republic Technologies or any other Pledgor may, at
its option, obtain a release of any of the Collateral, excluding the Capital
Stock of the issuers or of any of the Restricted Subsidiaries but including (x)
any Trust Moneys (other than Trust Moneys representing Net Cash Proceeds which
are required or may, through the passage of time or otherwise, possibly be
required to be used to purchase or redeem notes pursuant to the covenant
described under "--Certain Covenants--Disposition of Proceeds of Asset Sales")
and (y) any Trust Moneys representing Net Cash Proceeds to be applied to a
Permitted Related Acquisition, by subjecting other property related to or used
in the principal businesses of Republic Technologies and the Restricted
Subsidiaries, if such substitute property, which we refer to as the "Substitute
Collateral", has a Fair Market Value equal to or greater than the Collateral to
be released, to the Lien of any Security Document or a similar instrument in
place of and in exchange for any of the Collateral to be released upon
presentation to the Collateral Agent and the trustee of, the following
documents:
(a) an application of the issuers and any other Pledgor, as
applicable, requesting such substitution of Substitute Collateral and
describing the property to be so released and the property to be
substituted therefor;
(b) the resolutions, certificates, opinions and other statements
required by the "Release of Collateral" provisions summarized above, as
applicable, in respect of any of the Collateral to be released;
(c) an officers' certificate of the issuers and any other Pledgor, as
applicable, also signed by an Independent Appraiser or, if the property to
be released consists of securities, by an Independent Financial Advisor,
stating in substance the fair value, in the opinion of the signers, of the
Substitute Collateral; and
(d) an instrument or instruments in recordable form sufficient for the
Lien of the Security Documents to cover the Substitute Collateral together
with, in the case of personal property, an opinion of counsel, which
opinion may be subject to the qualifications enumerated in the proviso to
clause (e) in "--Possession, Use and Release of Collateral" above, stating
that the Lien of the Security Documents in favor of the trustee and the
Holders constitutes a direct and valid first priority Lien on such
Substitute Collateral, together with an officers' certificate stating that
any specific exceptions to such Lien are Liens of the character which,
under the provisions of the Security Documents, are permitted to be prior
to the Lien of the Security Documents and, in the case of real property, a
policy of title insurance, or a commitment to issue title insurance,
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insuring that the Lien of the Security Documents constitutes a direct and
valid and perfected mortgage Lien on such Substitute Collateral and certain
other documentation with respect thereto, together with, among other
things, an officers' certificate stating that any specific exceptions to
such title insurance are Liens permitted to be on Collateral pursuant to
the covenant described under "--Certain Covenants--Limitation on Liens."
Disposition of Collateral Without Release. Notwithstanding the provisions
of "--Release of Collateral" or "--Substitute Collateral" above, so long as no
Event of Default shall have occurred and be continuing, Republic Technologies
and any other Pledgor may, without any release or consent by the Collateral
Agent or the trustee, do any number of ordinary course activities, in limited
dollar amounts specified by the Trust Indenture Act and not to exceed
$10.0 million in aggregate of Fair Market Value of Collateral during the term of
the notes, upon satisfaction of certain conditions. For example, among other
things, subject to such dollar limitations and conditions, Republic Technologies
would be permitted to
(1) sell or otherwise dispose of any machinery, equipment, furniture,
tools, materials or supplies or other similar property subject to the Lien
of the Security Documents which may have become worn out or obsolete;
(2) grant rights-of-way and easements over or in respect of any real
property;
(3) abandon, terminate, cancel, release or make alterations in or
substitutions of any leases, contracts or rights-of-way;
(4) surrender or modify any franchise, license or permit subject to
the Lien of any of the Security Documents which it may own or under which
it may be operating;
(5) alter, repair, replace, change the location or position of and add
to it plants, structures, machinery, systems, equipment, fixtures and
appurtenances; and
(6) demolish, dismantle, tear down or scrap any Collateral or abandon
any thereof other than land or interests in land, other than leases.
Provision of Additional Collateral. The issuers are required to pledge or
to cause a Restricted Subsidiary to pledge, on a first priority perfected basis,
all right, title and interest in and to the New Bar Mill as such interest is
acquired by taking such actions as would be required for the provision of
Substitute Collateral above, to the extent relevant, subject to any prior Liens
constituting a Permitted Collateral Lien on the New Bar Mill in relation to
obligations, other than obligations under the New Credit Facility, providing
financing for the construction or acquisition of the New Bar Mill.
Use of Trust Moneys. All Trust Moneys, including, without limitation, all
Net Cash Proceeds required to be deposited with the Collateral Agent, shall be
held by the Collateral Agent as a part of the Collateral securing the notes and,
so long as no Default shall have occurred and be continuing, may either
(1) be released in accordance with "--Release of Collateral" above if
such Trust Moneys represent Net Cash Proceeds from an Asset Sale or
(2) at the direction of the issuers and any other applicable Pledgor,
be applied by the Collateral Agent from time to time to the acquisition of
assets to be made subject to the Lien of the Security Documents pursuant to
the "Substitute Collateral" provisions above, to the payment of the
principal, premium, if any, and interest on any notes at maturity or upon
redemption or to the purchase of notes upon tender or in the open market or
at private sale or upon any exchange or in any one or more of such ways, in
each case in accordance with the terms of the Indenture.
The issuers and any other applicable Pledgor may also withdraw Trust Moneys
constituting the proceeds of insurance upon any part of the Collateral or an
award for any Collateral taken by eminent domain to reimburse the issuers or
such other Pledgor for repair or replacement of such Collateral, subject to
certain conditions.
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REGARDING THE TRUSTEE AND THE COLLATERAL AGENT
United States Trust Company of New York will serve as trustee under the
indenture and will act as Collateral Agent under the Intercreditor Agreements
and the Security Documents. Neither the trustee or the Collateral Agent nor any
other person is acting as a collateral agent with respect to the CAST-ROLL
Facility, inventory, accounts receivable, intellectual property and related
collateral. United States Trust Company of New York will also, in its capacity
as Collateral Agent, be serving as a collateral agent for the other Secured
Creditors, under the Intercreditor Agreements. The Indenture provides that,
except during the continuance of an Event of Default, the trustee thereunder
will perform only such duties as are specifically set forth in the indenture. If
an Event of Default has occurred and is continuing, the trustee will exercise
such rights and powers vested in it under the indenture and use the same degree
of care and skill in their exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
The Intercreditor Agreements provide that the Collateral Agent will perform
only such duties as are specifically set forth in the Intercreditor Agreements.
See "Description of Collateral and Intercreditor Agreements."
The indenture and the provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the trustee thereunder,
should it become a creditor of an issuer or any Guarantor, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The trustee is permitted
to engage in other transactions; provided that it must eliminate such conflict
or resign if it acquires any "conflicting interest," as such term is defined in
the Trust Indenture Act.
GOVERNING LAW
The indenture, the notes, the Guarantees and the Intercreditor Agreements
are each governed by the laws of the State of New York. The Security Documents
are governed by the laws of the State of New York except to the extent otherwise
set forth therein with respect to matters relating to the Collateral. The
Security Documents relating to Collateral located in Ontario, Canada, are
governed by the laws of Ontario, Canada without regard to principles of conflict
of law.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms to be used in the
indenture. Reference is made to the Indenture for the full definition of all
such terms.
"Acquired Indebtedness" means
(1) Indebtedness of any Person existing at the time such Person is or
became a Restricted Subsidiary or is assumed in an Asset Acquisition by
Republic Technologies excluding Indebtedness incurred in connection with,
or in anticipation of, such Person becoming a Restricted Subsidiary or such
Asset Acquisition and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
Republic Technologies or any Restricted Subsidiary.
"Affiliate" as applied to any Person, means any other Person directly or
indirectly controlling, controlled by, or under common control with, that
Person. For the purposes of this definition, "control," including with
correlative meanings, the terms "controlling," "controlled by" and "under common
control with," as applied to any Person, means the possession, directly or
indirectly, of the power to cause the direction of the management or policies of
that Person, whether through the ownership of voting securities or by contract
or otherwise.
"Asset Acquisition" means
(a) any capital contribution, by means of transfers of cash or other
property to others or payments for property or services for the account or
use of others, or otherwise, or purchase or
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acquisition of Capital Stock, by Republic Technologies or any of the
Restricted Subsidiaries in any other Person, in either case pursuant to
which such Person shall become a Restricted Subsidiary of an issuer or
shall be merged with or into Republic Technologies or any of the Restricted
Subsidiaries or
(b) any acquisition by Republic Technologies or any of the Restricted
Subsidiaries of the assets of any Person which constitute substantially all
of an operating unit or business of such Person.
"Asset Sale" means
(1) any direct or indirect sale, conveyance, transfer, lease or other
disposition of property or assets, including by way of a sale and
leaseback, of Republic Technologies or any Restricted Subsidiary, each
referred to in this definition as a "disposition", or
(2) the direct or indirect issuance or sale of Capital Stock of any
Restricted Subsidiary,
in each case, other than:
(a) a disposition of Cash Equivalents, Investment Grade
Securities, or obsolete, worn out or surplus equipment in the
ordinary course of business;
(b) the disposition of all or substantially all of the assets of
Republic Technologies in a manner permitted pursuant to the
provisions described above under "--Merger, Consolidation, Sale of
Assets, Etc.";
(c) any Restricted Payment that is permitted to be made, and is
made, under the covenant described above under "Limitation on
Restricted Payments";
(d) any disposition or series of related dispositions of assets
not constituting Collateral with an aggregate Fair Market Value of
less than $1.0 million;
(e) any disposition of property or assets, including an issuance
of Capital Stock, by a Restricted Subsidiary to Republic Technologies
or by Republic Technologies or a Restricted Subsidiary to a
Restricted Subsidiary;
(f) any financing transaction with respect to the CAST-ROLL
Facility and any other property not constituting Collateral built or
acquired by Republic Technologies or any Restricted Subsidiary after
the Issue Date, including, without limitation, sale-leasebacks and
asset securitizations, made in compliance with the covenant
"Limitation on Sale-Leaseback Transactions";
(g) any sale of Capital Stock in, or Indebtedness or other
securities of, an Unrestricted Subsidiary;
(h) dispositions of inventory and work-in-process in the
ordinary course of business;
(i) issuances of Capital Stock, other than Disqualified Stock,
as directors' qualifying shares or as investments by foreign
nationals mandated by applicable law;
(j) the sale, conveyance or transfer of inventory in the
ordinary course of business; and
(k) the incurrence of any Permitted Lien.
"Asset Sale Offer" has the meaning ascribed to that term under "--Certain
Covenants--Disposition of Proceeds of Asset Sales."
"Attributable Value" means, as to any particular lease under which any
Person is at the time liable other than a Capitalized Lease Obligation, and at
any date as of which the amount thereof is to be determined, the total net
amount of rent required to be paid by such Person under such lease during the
initial term thereof as determined in accordance with GAAP, discounted from the
last date
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of such initial term to the date of determination at a rate per annum equal to
the discount rate which would be applicable to a Capitalized Lease Obligation
with a like term in accordance with GAAP. The net amount of rent required to be
paid under any such lease for any such period shall be the aggregate amount of
rent payable by the lessee with respect to such period after excluding amounts
required to be paid on account of insurance, taxes, assessments, utility,
operating and labor costs and similar charges. In the case of any lease which is
terminable by the lessee upon the payment of a penalty, such net amount shall
also include the amount of such penalty, but no rent shall be considered as
required to be paid under such lease subsequent to the first date upon which it
may be so terminated. "Attributable Value" means, as to a Capitalized Lease
Obligation under which any Person is at the time liable and at any date as of
which the amount thereof is to be determined, the capitalized amount thereof
that would appear on the face of a balance sheet of such Person in accordance
with GAAP.
"Available Amount" has the meaning ascribed to that term under "--Certain
Covenants--Disposition of Proceeds of Asset Sales."
"Average Life to Stated Maturity" means, with respect to any Indebtedness,
as at any date of determination, the quotient obtained by dividing (a) the sum
of the products of (1) the number of years, or any fraction thereof, from such
date to the date or dates of each successive scheduled principal payment,
including, without limitation, any sinking fund requirements, of such
Indebtedness multiplied (2) the amount of each such principal payment by
(b) the sum of all such principal payments.
"Blackstone" means Blackstone Capital Partners II Merchant Banking Fund
L.P., Blackstone Capital Partners III Merchant Banking Fund L.P. and their
respective Affiliates.
"Board Resolution" means with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person, to have
been duly adopted by the Board of Directors or comparable governing body, which
may be the Board of Directors of a managing general partner of a partnership or
managing member of a limited liability company, of such Person and to be in full
force and effect on the date of such certification, and delivered to the
trustee.
"Capital Expenditures" means, with respect to Republic Technologies, for
any period, on a consolidated basis for Republic Technologies and the Restricted
Subsidiaries, the aggregate of all expenditures during such period which, as
determined in accordance with GAAP, are required to be included in property,
plant or equipment or a similar fixed asset account.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in, or other equivalents, however designated
and whether voting or non-voting, of, such person's capital stock, including,
without limitation, partnership or membership interests in a partnership or a
limited liability company or any other interest or participation that confers on
a Person the right to receive a share of the profits and loss of, or
distributions of assets of, the issuing Person, whether outstanding on the Issue
Date or issued after the Issue Date, and any and all rights, warrants or options
exchangeable for or convertible into such capital stock.
"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of, or other agreement conveying the right to use, any
property, whether real, personal or mixed, that is required to be classified and
accounted for as a capital lease obligation under GAAP, and, for the purpose of
the Indenture, the amount of such obligation at any date shall be the
capitalized amount thereof at such date, determined in accordance with GAAP.
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"Cash Equivalents" means, at any time,
(1) any evidence of Indebtedness with a maturity of 365 days or less
issued or directly and fully guaranteed or insured by the United States of
America or any agency or instrumentality thereof provided that the full
faith and credit of the United States of America is pledged in support
thereof;
(2) certificates of deposit or acceptances with a maturity of
365 days or less of any financial institution that is a member of the
Federal Reserve System having combined capital and surplus and undivided
profits of not less than $250.0 million;
(3) commercial paper with a maturity of 365 days or less issued by a
corporation (except an Affiliate of Republic Technologies) organized under
the laws of any state of the United States or the District of Columbia and
rated at least A-1 by Standard & Poor's Corporation or at least P-1 by
Moody's Investors Service, Inc.;
(4) repurchase agreements and reverse repurchase agreements relating
to marketable direct obligations issued or unconditionally guaranteed by
the United States Government or issued by any agency thereof and backed by
the full faith and credit of the United States, in each case maturing
within one year from the date of acquisition; provided, however, that the
terms of such agreements comply with the guidelines set forth in the
Federal Financial Agreements of Depository Institutions with Securities
Dealers and Others, as adopted by the Comptroller of the Currency;
(5) investment funds investing 95% of their assets in securities of
the types described in clauses (1)-(4) above; and
(6) readily marketable direct obligations issued by any state of the
United States of America or any political subdivision thereof having one of
the two highest rating categories obtainable from either Moody's or S&P.
"CAST-ROLL Facility" means
(1) all now owned or after acquired real property and equipment,
including, without limitation, the No. 4(A) electric arc furnace used in
connection therewith, of Republic Technologies used in connection with the
facility commonly known as the "CAST-ROLL Facility" and located at 3707
Georgetown Road, N.E., Canton, Ohio, and used primarily in connection with
Republic Technologies' business and operations at such location,
(2) all existing buildings, structures and other improvements located
or erected thereon,
(3) all fixtures attached thereto,
(4) all permits, licenses, franchises, certificates, consents,
approvals and authorizations furnished in respect of the real property and
improvements located thereon including, without limitation, building
permits, certificates of occupancy and environmental certificates,
(5) all leases, licenses and occupancy and concession agreements in
respect of the real property and improvements located thereon and all
rents, receipts, fees and other amounts payable thereunder, and
(6) all general intangibles, documents and proceeds, within the
meaning of the Uniform Commercial Code, relating to the foregoing.
"Change of Control" means the occurrence of one or more of the following
events:
(1) the sale, lease or transfer, in one or a series of related
transactions, of all or substantially all the assets of Republic
Technologies and its Subsidiaries, taken as a whole, to a Person other than
the Permitted Holders; or
(2) (A) Republic Technologies becomes aware, by way of a report or any
other filing pursuant to Section 13(d) of the Exchange Act, proxy, vote,
written notice or otherwise, of the
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acquisition by any Person or group, within the meaning of
Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor
provision, including any group acting for the purpose of acquiring, holding
or disposing of securities, within the meaning of Rule 13d-5(b)(1) under
the Exchange Act, other than the Permitted Holders, in a single transaction
or in a related series of transactions, by way of merger, consolidation or
other business combination or purchase of beneficial ownership, within the
meaning of Rule 13d-3 under the Exchange Act, or any successor provision,
of 35% or more of the total voting power of the Capital Stock of Republic
Technologies and (B) the Permitted Holders beneficially own, directly or
indirectly, in the aggregate a lesser percentage of the total voting power
of the Voting Stock of Republic Technologies than such other Person or
group and do not have the right or ability by voting power, contract or
otherwise to elect or designate for election a majority of the Board of
Directors.
"Change of Control Date" has the meaning ascribed to that term under
"--Offer to Purchase upon Change of Control."
"Change of Control Offer" has the meaning ascribed to that term under
"--Offer to Purchase upon Change of Control."
"Change of Control Payment Date" has the meaning ascribed to that term
under "--Offer to Purchase upon Change of Control."
"Closed Facilities" means, upon their shut down or closure and subsequent
sale, scrapping or other disposition as contemplated by the Consolidation Plan,
the No. 4 Blast Furnace, the No. 1 Billet Caster and the 4 Stand Billet Mill at
the Lorain facility, the No. 4(B) and No. 4(C) Electric Arc Furnaces, the
Blooming Mill and the ingot teeming facility at the Canton facility, the 12" bar
mill in Canton, Ohio, the cold-finishing facilities in Medina, Ohio and Batavia,
Illinois, the 18" bar mill in Masillon, Ohio and the 11" bar mill in Chicago,
Illinois and one additional cold-finishing facility, in each case to the extent
separable and identifiable and not in impairment in any material respect of any
other Collateral.
"Collateral" means, collectively, all of the property and assets,
including, without limitation, Trust Moneys, that are from time to time subject
or required to be made subject to the Lien of the Security Documents.
"Collateral Agent" means United States Trust Company of New York, as
collateral agent under the Intercreditor Agreements and the Security Documents.
"Common Stock" means, with respect to any Person, any and all shares,
interests or other participations in, and other equivalents, however designated
and whether voting or nonvoting, of, such Person's common stock, whether
outstanding on the Issue Date or issued after the Issue Date, and includes,
without limitation, all series and classes of such common stock.
"Consolidated Cash Flow Available for Fixed Charges" means, with respect to
Republic Technologies for any period,
(a) the sum of, without duplication, the amounts for such period,
taken as a single accounting period, of
(1) Consolidated Net Income,
(2) Consolidated Non-cash Charges,
(3) Consolidated Interest Expense,
(4) Consolidated Income Tax Expense,
(5) any fees, expenses or non-recurring charges related to any
issuance of Capital Stock, Permitted Investments, acquisitions, the
acquisition or recapitalization of Indebtedness, in each case, whether
or not successful, and fees, expenses or charges related to the
acquisition of Republic Engineered Steels, Inc. by RES Holdings and the
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Transactions, including fees to Blackstone, Veritas, USX and Kobe, to
the extent reducing Consolidated Net Income for such period,
(6) the amount of any nonrecurring expenses associated with early
retirement buy outs as part of the Consolidation Plan to the extent
reducing Consolidated Net Income for such period,
(7) non-cash OPEB expense determined in accordance with GAAP to the
extent reducing Consolidated Net Income for such period, and
(8) the amount of annual management, monitoring, consulting and
advisory fees and related expenses paid to Blackstone, Veritas, USX and
Kobe and their Affiliates consistent with past customary practices of
Blackstone and Veritas with respect to portfolio companies, less
(b) any non-cash items to the extent increasing Consolidated Net
Income for such period.
"Consolidated Fixed Charge Coverage Ratio" as of any date of determination
means the ratio of
(1) the aggregate amount of Consolidated Cash Flow Available for Fixed
Charges for the four quarter period of the most recent four consecutive
fiscal quarters ending prior to the date of such determination, which date
we refer to as the "Calculation Date", for which financial statements are
available, which period we refer to as the "Four Quarter Period", to
(2) Consolidated Fixed Charges for such Four Quarter Period.
In addition to and without limitation of the foregoing, for purposes of
this definition, "Consolidated Cash Flow Available for Fixed Charges" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a pro
forma basis for the period of such calculation to, without duplication,
(a) the incurrence of any Indebtedness by Republic Technologies or any
of the Restricted Subsidiaries, and the application of the net proceeds
thereof, during the period commencing on the first day of the Four Quarter
Period to and including the Calculation Date, which period we refer to as
the "Reference Period", including, without limitation, the incurrence of
the Indebtedness giving rise to the need to make such calculation, and the
application of the net proceeds thereof, as if such incurrence and
application occurred on the first date of the Reference Period,
(b) an adjustment to eliminate or include, as the case may be, the
Consolidated Cash Flow Available for Fixed Charges and Consolidated Fixed
Charges of such person directly or indirectly attributable to assets which
are the subject of any Asset Sale or Asset Acquisition, including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of Republic Technologies or one of the Restricted
Subsidiaries, including any person who becomes a Restricted Subsidiary as a
result of the Asset Acquisition, incurring, assuming or otherwise being
liable for Acquired Indebtedness, occurring during the Reference Period, as
if such Asset Sale, after giving effect to any Designation of Unrestricted
Subsidiaries, or Asset Acquisition occurred on the first day of the
Reference Period,
(c) the retirement of Indebtedness during the Reference Period which
cannot thereafter be reborrowed occurring as if retired on the first day of
the Reference Period,
(d) an adjustment to eliminate any net after-tax extraordinary gains
or losses, and
(e) an adjustment to eliminate any charges arising out of the
Transactions.
For purposes of calculating "Consolidated Fixed Charges" for this
"Consolidated Fixed Charge Coverage Ratio",
(a) interest on outstanding Indebtedness determined on a fluctuating
basis as of the Calculation Date and which will continue to be so
determined thereafter shall be deemed to
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have accrued at a fixed rate per annum equal to the rate of interest on
such Indebtedness in effect on the Calculation Date,
(b) if interest on any Indebtedness actually incurred on the
Calculation Date may optionally be determined at an interest rate based
upon a factor of a prime or similar rate, a eurocurrency interbank offered
rate, or other rates, then the interest rate in effect on the Calculation
Date will be deemed to have been in effect during the Reference Period and
(c) notwithstanding clauses (a) and (b) of this sentence, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest
is covered by agreements relating to Interest Rate Protection Obligations
for the twelve month period following the Calculation Date, shall be deemed
to have accrued at the rate per annum resulting after giving effect to the
operation of such agreements to the extent then applicable.
If Republic Technologies or any of the Restricted Subsidiaries directly or
indirectly guarantees Indebtedness of a third person, this definition shall give
effect to the incurrence of such guaranteed Indebtedness as if such person or
such Restricted Subsidiary had directly incurred or otherwise assumed such
guaranteed Indebtedness. Notwithstanding the foregoing, for the purposes of
making the computation referred to above, interest on any Indebtedness under a
revolving credit facility computed on a pro forma basis shall be computed based
upon the average daily balance of such Indebtedness during the applicable
period.
In addition, for purposes of this definition, whenever pro forma effect is
to be given to an Asset Acquisition or Investment, pro forma calculations,
including, without limitation, with respect to cost savings and synergies, shall
be determined in accordance with Regulation S-X under the Securities Act and the
interpretations thereof by the Commission; provided that such computation shall
be adjusted from time to time following the Asset Acquisition to eliminate cost
savings and synergies that have either been realized and are reflected in actual
results, or cannot reasonably be expected to be realized, whether based upon
information and results obtained following the applicable Asset Acquisition or
Investment or otherwise, by Republic Technologies and the Restricted
Subsidiaries. In no event shall the Consolidated Fixed Charge Coverage Ratio
reflect any anticipated, but unrealized, cost savings resulting from the
Consolidation Plan, whether or not determined in accordance with Regulation S-X
under the Securities Act and the interpretations thereof by the Commission.
"Consolidated Fixed Charges" means, with respect to Republic Technologies
for any period, the sum of, without duplication, the amounts for such period of
(a) the Consolidated Interest Expense of Republic Technologies and (b) the
aggregate amount of dividends and other distributions paid or accrued during
such period in respect of Disqualified Capital Stock of Republic Technologies
and the Restricted Subsidiaries and Preferred Stock of Restricted Subsidiaries
on a consolidated basis.
"Consolidated Income Tax Expense" means, with respect to Republic
Technologies for any period, the provision for federal, state, local and foreign
income taxes of Republic Technologies and the Restricted Subsidiaries for such
period as determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to Republic
Technologies for any period, without duplication, the sum of
(1) the interest expense, whether cash or non-cash, of Republic
Technologies and the Restricted Subsidiaries for such period as determined
on a consolidated basis in accordance with GAAP to the extent deducted in
calculating Consolidated Net Income, including, without limitation,
(a) any amortization of debt discount,
(b) the net cost under Interest Rate Protection Obligations
relating to interest, including any amortization of discounts,
(c) the interest portion of any deferred payment obligation,
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(d) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing and
(e) all capitalized interest and all accrued interest and
(2) the interest component of Capitalized Lease Obligations or any
other obligations representative of interest expense associated with any
Sale-Leaseback Transaction paid, accrued and/or scheduled to be paid or
accrued by Republic Technologies and the Restricted Subsidiaries during
such period as determined on a consolidated basis in accordance with GAAP
to the extent deducted in calculating Consolidated Net Income.
"Consolidated Net Income" means, with respect to Republic Technologies, for
any period, the consolidated net income or loss of Republic Technologies and the
Restricted Subsidiaries for such period as determined in accordance with GAAP,
adjusted, to the extent included in calculating such net income, by excluding,
without duplication,
(a) all net after-tax extraordinary gains or losses, including any net
after-tax income or loss from the Closed Facilities or the Specialty Steel
Assets and any net after-tax gains or losses on disposal of discontinued
operations,
(b) the portion of net income, but not losses, of Republic
Technologies and the Restricted Subsidiaries allocable to minority
interests in unconsolidated persons to the extent that cash dividends or
distributions have not actually been received by Republic Technologies or
one of the Restricted Subsidiaries,
(c) net income or loss of any person combined with Republic
Technologies or one of the Restricted Subsidiaries on a "pooling of
interests" basis attributable to any period prior to the date of
combination,
(d) any gain or loss realized upon the termination of any employee
pension benefit plan, on an after-tax basis,
(e) gains or losses in respect of any Asset Sales by Republic
Technologies or one of the Restricted Subsidiaries,
(f) the cumulative non-cash effect of any change in any accounting
principle,
(g) the net income of any Unrestricted Subsidiary, except, for
purposes of the covenant "--Limitation on Restricted Payments," to the
extent that cash dividends or distributions have been actually received by
Republic Technologies or one of the Restricted Subsidiaries,
(h) the non-cash effect of compensation expense related to the
contribution of shares held by any qualified employee stock ownership trust
formed for employees of Republic Technologies and the Restricted
Subsidiaries and
(i) the net income of any Restricted Subsidiary of such person to the
extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is not at the time permitted, directly
or indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, law, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholder or
stockholders.
"Consolidated Non-cash Charges" means, the aggregate depreciation,
amortization and other non-cash expenses of Republic Technologies and the
Restricted Subsidiaries, including any non-cash charges related to any employee
stock ownership plan and workforce reduction charges, reducing Consolidated Net
Income of Republic Technologies and the Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP, excluding any such
charges constituting an extraordinary item or loss or any such charge which
required an accrual of or a reserve for cash charges for any future period.
"Consolidated Tangible Assets" means, as of any date of determination, the
total assets, less goodwill and other intangibles shown on the balance sheet of
the Republic Technologies and the
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Restricted Subsidiaries as of the most recent date for which such a balance
sheet is available, determined on a consolidated basis in accordance with GAAP.
"Consolidation Plan" means the consolidation plan described in the offering
memorandum dated August 6, 1999 with respect to the private offering of the
outstanding notes, as such plan may be modified from time to time.
"covenant defeasance" has the meaning ascribed to such term under "--Legal
Defeasance or Covenant Defeasance of Indenture."
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect against
fluctuations in currency values.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designation" has the meaning ascribed to that term under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"Designation Amount" has the meaning ascribed to that term under "--Certain
Covenants Limitation on Designations of Unrestricted Subsidiaries."
"Disinterested Director" means, with respect to any transaction or series
of transactions, a member of the Board of Directors of a particular Person other
than a director who has any material direct or indirect financial interest in or
with respect to such transaction or series of transactions.
"Disqualified Capital Stock" means, with respect to any Person, any Capital
Stock which, by its terms, or by the terms of any security into which it is
convertible or for which it is exchangeable, or upon the happening of any event,
matures or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or is exchangeable for Indebtedness, or is redeemable at the option
of the holder thereof, in whole or in part, on or prior to the final Stated
Maturity of the notes, but only to the extent such Capital Stock so matures or
is exchangeable or redeemable.
"Events of Default" has the meaning ascribed to that term under "--Events
of Default."
"Existing Liens" has the meaning ascribed to that term under the definition
of "Permitted Collateral Liens."
"Existing Secured Creditors" means, collectively, Johnstown Industrial
Development Corporation, the County of Cambria, Pennsylvania and the City of
Johnstown, Pennsylvania.
"Fair Market Value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction. Fair Market Value shall be
determined by the Board of Directors of Republic Technologies acting in good
faith and shall be evidenced by a Board Resolution of Republic Technologies
delivered to the Trustee except
(a) any determination of Fair Market Value or fair value made with
respect to any parcel of real property and related fixtures constituting a
part of, or proposed to be made a part of, the Collateral shall be made by
an Independent Appraiser,
(b) any determination of Fair Market Value with respect to any assets
to be valued at $10.0 million or more that is contributed as or received in
exchange for Capital Stock of Republic Technologies that is to be included
in clause (C) of the first paragraph of "Limitation on Restricted Payments"
shall be made by an Independent Financial Advisor and
(c) as otherwise indicated in the indenture, the Security Documents or
the Intercreditor Agreements.
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"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States of America, which are applicable on the Issue
Date.
"Government Assisted Indebtedness" means Indebtedness of Republic
Technologies or any of the Restricted Subsidiaries incurred from any federal,
state or local governmental authority, agency or instrumentality, or for which
any such authority, agency or instrumentality provides direct or indirect credit
support, including under any industrial revenue bonds.
"Government Assisted Refinancing Indebtedness" means Refinancing
Indebtedness borrowed from any federal, state or local governmental authority,
agency or instrumentality, or for which any such authority, agency or
instrumentality provides direct or indirect credit support.
"Guarantee" has the meaning ascribed to that term under "--The Guarantees."
"guarantee" means, as applied to any obligation, (a) a direct or indirect
guarantee, other than by endorsement of negotiable instruments for collection in
the ordinary course of business, in any manner, of any part or all of such
obligation and (b) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or
performance, or payment of damages in the event of non-performance, of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit.
"guarantor" means any of the Parent Guarantor or Subsidiary Guarantors.
"incur" means, with respect to any Indebtedness, to directly or indirectly,
create, incur, assume, issue, guarantee or otherwise become liable for or with
respect to such Indebtedness, and the terms "incurred," "incurrence" and
"incurring" having meanings correlative to the foregoing.
"Indebtedness" means, with respect to any Person, without duplication,
(a) all liabilities of such person for borrowed money or for the
deferred purchase price of property or services, excluding
(1) any trade accounts payables and other accrued current
liabilities incurred in the ordinary course of business and which are
not overdue by more than 180 days and
(2) other payables owed to USX, Kobe and their respective
Affiliates in amounts not to exceed amounts outstanding on the Issue
Date, after giving effect to the Transactions, but including, without
limitation, all obligations, contingent or otherwise, of such Person in
connection with any letter of credit, bankers' acceptance or other
similar credit transaction,
(b) all obligations of such Person evidenced by bonds, notes,
debentures or other similar instruments,
(c) all indebtedness created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such
Person, even if the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of
such property, but excluding trade accounts payable arising in the ordinary
course of business,
(d) all Capitalized Lease Obligations of such Person,
(e) all Indebtedness referred to in the preceding clauses of other
persons and all dividends of other Persons, the payment of which is secured
by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien, other than statutory
Liens, upon property, including, without limitation, accounts and contract
rights, owned by such Person, even though such Person has not assumed or
become liable for the payment of such Indebtedness, the amount of such
obligation being deemed to be the lesser of the value of such property or
asset or the amount of the obligation so secured,
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(f) all guarantees of Indebtedness referred to in this definition by
such Person,
(g) all Disqualified Capital Stock of such Person valued at the
greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued dividends,
(h) all Interest Rate Protection Obligations of such Person and
(i) any amendment, supplement, modification, deferral, renewal,
extension, refinancing or refunding of any liability of the types referred
to in clauses (a) through (h) above.
For purposes hereof, the "maximum fixed repurchase price" of any
Disqualified Capital Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined in good faith by the
Board of Directors of the issuers of such Disqualified Capital Stock.
For purposes of the covenant "Limitation on Additional Indebtedness and
Certain Preferred Stock," in determining the principal amount of any
Indebtedness
(a) to be incurred by Republic Technologies or a Restricted Subsidiary
or which is outstanding at any date, (x) the principal amount of any
Indebtedness which provides that an amount less than the principal amount
thereof shall be due upon any declaration of acceleration thereof shall be
the accreted value thereof at the date of determination and (y) effect
shall be given to the impact of any Currency Agreements with respect to
such Indebtedness and
(b) outstanding at any time under any Currency Agreement of Republic
Technologies or any Restricted Subsidiary shall be the net payment
obligation under such Currency Agreement at such time.
When any person becomes a Restricted Subsidiary, there shall be deemed to
have been an incurrence by such Restricted Subsidiary of all Indebtedness for
which it is liable at the time it becomes a Restricted Subsidiary. If Republic
Technologies or any of the Restricted Subsidiaries, directly or indirectly,
guarantees Indebtedness of a third person, there shall be deemed to be an
incurrence of such guaranteed Indebtedness as if Republic Technologies or such
Restricted Subsidiary had directly incurred or otherwise assumed such guaranteed
Indebtedness.
"Independent Appraiser" means a Person who in the ordinary course of its
business appraises property and, where real property is involved, is a member in
good standing of the American Institute of Real Estate Appraisers, recognized
and licensed to do business in the jurisdiction where such real property is
situated who (a) does not, and whose directors, officers and employees and
Affiliates do not, have a direct or indirect material financial interest in
Republic Technologies or any of its Subsidiaries and (b) in the judgment of the
Board of Directors of Republic Technologies, is otherwise independent and
qualified to perform the task for which it is to be engaged.
"Independent Financial Advisor" means a nationally recognized investment
banking, appraisal, consulting or public accounting firm (a) which does not, and
whose directors, officers and employees and Affiliates do not, have a direct or
indirect material financial interest in the issuers or any of its Subsidiaries
and (b) which, in the judgment of the Board of Directors of the issuers, is
otherwise independent and qualified to perform the task for which it is to be
engaged.
"Intercreditor Agreements" means (a) the Principal Intercreditor Agreement
and (b) the Stock Intercreditor Agreement, as each may be amended, modified or
waived in accordance with its respective terms.
"Interest Rate Protection Obligations" means the obligations of any Person
pursuant to any arrangement with any other person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such Person
calculated by
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applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person,
(1) any direct or indirect loan, advance, other than advances to
customers and employees for moving, entertainment, travel expenses and
commissions, drawing accounts and similar expenditures in the ordinary
course of business, extension of credit, other than trade credit, or
capital contribution to any Person, by means of any transfer of cash or
other property to others or any payment for property or services for the
account or use of others, or
(2) any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness
issued by, any other Person.
"Investments" shall not include (x) accounts receivable and extensions of
credit by any Person in the ordinary course of business and (y) Investments to
the extent made with consideration which consists of Capital Stock of Republic
Technologies which is not Disqualified Capital Stock. In addition to the
foregoing, any Currency Agreement shall constitute an Investment hereunder.
"Investment Grade Securities" means
(1) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality thereof,
other than Cash Equivalents,
(2) debt securities or debt instruments with a rating of BBB- or
higher by Standard & Poor's Corporation or Baa3 or higher by Moody's
Investors Service Inc. or the equivalent of such rating by such rating
organization, or, if no rating of Standard & Poor's Corporation or Moody's
Investors Service, Inc. then exists, the equivalent of such rating by any
other nationally recognized securities rating agency, but excluding any
debt securities or instruments constituting loans or advances among
Republic Technologies and its Subsidiaries, and
(3) investments in any fund that invests 95% of their assets in
securities of the type described in clauses (1) and (2) above.
"Issue Date" has the meaning ascribed to that term under "--Maturity,
Interest and Principal."
"Junior Collateral Proceeds" has the meaning ascribed to that term under
"--Certain Covenants--Disposition of Proceeds of Asset Sales."
"Kobe" means Kobe Steel, Ltd.
"legal defeasance" has the meaning ascribed to that term under "Legal
Defeasance or Covenant Defeasance."
"Lien" means any mortgage, lease, lien, pledge, security interest,
encumbrance, claim, hypothecation, assignment for security, deposit arrangement
or preference or other security agreement of any kind or nature whatsoever. For
purposes of the indenture, a person shall be deemed to own subject to a Lien any
property which it has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement. In no event shall an operating lease be deemed to
constitute a Lien.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents, including payments in respect
of deferred payment obligations when received in the form of cash or Cash
Equivalents net of
(a) brokerage commissions and other reasonable fees and expenses,
including fees and expenses of counsel and investment bankers, related to
such Asset Sale;
(b) provisions for all taxes payable as a result of such Asset Sale,
including without limitation any tax distributions payable as determined
under paragraph (vii) of "Limitations on Restricted Payments" with respect
to income from Asset Sales;
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(c) amounts required to be applied to the repayment of principal,
premium (if any) and interest on Indebtedness required, other than required
by "Disposition of Proceeds of Asset Sales", to be paid as a result of such
transaction to the extent secured by a Lien on such Property that is
permitted hereunder or under the applicable Security Document and to the
extent the operative agreement relating to such Indebtedness requires or
otherwise permits such a repayment; and
(d) appropriate amounts to be provided by Republic Technologies or any
of the Restricted Subsidiaries, as the case may be, as a reserve, in
accordance with GAAP, against any liabilities associated with such Asset
Sale and retained by Republic Technologies or any of the Restricted
Subsidiaries, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
representation, warranties or indemnification obligations associated with
such Asset Sale.
"New Bar Mill" means the new large size bar mill to be built as part of the
Consolidation Plan.
"New Credit Facility" means, the Credit Agreement, dated as of the Issue
Date, among Republic Technologies, and BankBoston, N.A. and Bank America
National Trust & Savings Association, as Co-Agents, Bank of America National
Trust & Savings Association, as Syndication Agent, and The Chase Manhattan Bank,
N.A., as Documentation Agent, BancBoston Robertson Stephens Inc. and Bank of
America National Trust & Savings Association, as Co-Arrangers the lending
institutions parties thereto, and their respective successors and assigns,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith that are permitted under the
indenture, each as the same may at any time be amended, amended and restated,
supplemented or otherwise modified, including any refinancing, refunding,
replacement or extension thereof and whether by the same or any other lender or
group of lenders.
"Non-Collateral Proceeds" has the meaning ascribed to that term under
"--Certain Covenants--Disposition of Proceeds of Asset Sales."
"Noteholders' Pro Rata Share" means a fraction, (1) the numerator of which
is the aggregate principal amount of Notes outstanding on the date the
applicable Net Cash Proceeds are received and (2) the denominator of which is
the sum of (x) the aggregate principal amount of Notes outstanding on such
applicable date and (y) if the New Credit Facility requires such Net Cash
Proceeds to be applied to repay or collateralize, in the case of letters of
credit, extensions of credit thereunder, the aggregate principal amount of
Indebtedness outstanding under the New Credit Facility on such applicable date.
"Parent Guarantor" means Republic Technologies International Holdings, LLC
in its capacity as a Guarantor and any successors.
"Pari Passu Proceeds" has the meaning ascribed to that term under
"--Certain Covenants--Disposition of Proceeds of Asset Sales."
"Permitted Collateral Liens" means
(1) the Liens created by the notes, the Guarantees, the indenture and
the Security Documents;
(2) Liens existing on the Issue Date to the extent and in the manner
such Liens are in effect on the Issue Date, but after giving effect to the
Transactions which we refer to as "Existing Liens";
(3) Liens on Collateral other than Capital Stock of Republic
Technologies or any of its Subsidiaries securing Government Assisted
Refinancing Indebtedness incurred to refinance Indebtedness which has been
secured by Existing Liens; provided that (x) such Liens are junior in
priority to the Lien on such Collateral of the Trustee and the Holders, and
(y) such Liens do
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not extend to or cover any Non-Shared Collateral which term is defined in
the Principal Intercreditor Agreement, or any property or assets not
subject to Existing Liens;
(4) Liens on Collateral other than Capital Stock of Republic
Technologies or any of its Subsidiaries securing Government Assisted
Indebtedness incurred in accordance with "--Certain Covenants--Limitation
on Additional Indebtedness and Certain Preferred Stock" above and not to
exceed $20.0 million in aggregate principal amount outstanding at any time;
provided (x) that such Liens are junior in priority to the Lien on such
Collateral in favor of the Trustee and the Holders, except that a Lien in
favor of any holder of such Government Assisted Indebtedness providing
financing for the construction or acquisition of the New Bar Mill may be a
prior Lien subject to the provisions of the Principal Intercreditor
Agreement, and (y) such Liens do not extend to or cover any Non-Shared
Collateral, other than the New Bar Mill;
(5) Liens set forth in the preceding clauses (2), (3) and (4) as
permitted to be altered under the terms of the Intercreditor Agreements and
the provisions described under "--Possession, Use and Release of
Collateral--Substitute Collateral";
(6) pari passu Liens on the Pledged Interests to secure the New Credit
Facility, provided such Liens are subject to the agreements set forth in
the applicable Stock Intercreditor Agreement;
(7) Liens on the New Bar Mill to secure Indebtedness, other than
Indebtedness under the New Credit Facility, incurred to finance the
construction or acquisition of the New Bar Mill, or to refinance such
Indebtedness if not under the New Credit Facility, in an aggregate
principal amount not to exceed 65% of the aggregate cost of construction or
acquisition of the New Bar Mill and
(8) any other Liens expressly permitted by the applicable Security
Documents.
"Permitted Holders" means (1) Blackstone Capital Partners II Merchant
Banking Fund L.P., a Delaware limited partnership, Blackstone Offshore Capital
Partners II L.P., a Cayman Islands exempted limited partnership, and Blackstone
Family Investment Partnership II L.P., a Delaware limited partnership, (2) each
general partner of any of the foregoing who is a partner or employee of The
Blackstone Group L.P, (3) USX, (4) Kobe and (5) any Affiliate of the persons
specified in clauses (1)-(4) of this definition; provided that to the extent a
Change of Control occurs that results in a Change of Control Offer being made
and consummated in accordance with "Offer to Purchase upon Change of Control,"
the Person or group deemed to have acquired control which triggered such Change
of Control shall thenceforth, together with its Affiliates, be deemed to
constitute additional Permitted Holders.
"Permitted Investments" means any of the following:
(a)(1) Investments in any Restricted Subsidiary, including any Person
that pursuant to such Investment becomes a Restricted Subsidiary, and
(2) Investments in any Person that is merged or consolidated with or into,
or transfers or conveys all or substantially all of its assets to, Republic
Technologies or any Restricted Subsidiary at the time such Investment is
made;
(b) Investments in Cash Equivalents or Investment Grade Securities;
(c) Investments in deposits with respect to leases or utilities
provided to third parties in the ordinary course of business;
(d) Investments in the notes;
(e) Investments in Currency Agreements, Interest Rate Protection
Obligations and commodities hedging arrangements permitted by clause (h) or
(i) of the covenant "--Limitation on Additional Indebtedness and Certain
Preferred Stock";
(f) loans or advances to officers or employees of Republic
Technologies and the Restricted Subsidiaries in the ordinary course of
business for bona fide business purposes, of Republic
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Technologies and the Restricted Subsidiaries, including travel and moving
expenses, not in excess of $2.0 million in the aggregate at any one time
outstanding;
(g) Investments in evidences of Indebtedness, securities or other
property received from another person by Republic Technologies or any of
the Restricted Subsidiaries in connection with any bankruptcy proceeding or
by reason of a composition or readjustment of debt or a reorganization of
such Person or as a result of foreclosure, perfection or enforcement of any
Lien in exchange for evidences of Indebtedness, securities or other
property of such Person held by Republic Technologies or any of the
Restricted Subsidiaries, or for other liabilities or obligations of such
other person to Republic Technologies or any of the Restricted Subsidiaries
that were created in accordance with the terms of the indenture;
(h) so long as no Default has occurred and is continuing, Investments
in an amount not to exceed the greater of (1) $15.0 million and (2) 1.0% of
Consolidated Tangible Assets of Republic Technologies at the time of such
Investment, with the Fair Market Value of each Investment being measured at
the time made and without giving effect to subsequent changes in value,
less the amount of any Investment under clause (j) below;
(i) any Investment constituting a Restricted Payment received pursuant
to and in compliance with the covenant "Disposition of Proceeds of Asset
Sales";
(j) Investments in Unrestricted Subsidiaries not to exceed
$5.0 million at any time outstanding;
(k) Investments consisting of the licensing or contribution of
intellectual property pursuant to joint marketing arrangements with other
persons;
(l) Investments consisting of purchases and acquisitions of inventory,
supplies, materials and equipment or licenses or leases of intellectual
property, in any case, in the ordinary course of business;
(m) any Investment in securities or other assets not constituting cash
or Cash Equivalents and received in connection with an Asset Sale made
pursuant to the provisions of "--Disposition of Proceeds of Asset Sales" or
any other disposition of assets not constituting an Asset Sale; and
(n) any Investment existing on the Issue Date.
"Permitted Liens" means, with respect to any Person,
(a) Liens to secure the New Credit Facility,
(b) Liens for taxes, assessments or other governmental charges or
levies not yet delinquent, or which are for less than $10.0 million in the
aggregate, or which are being validly contested in good faith by
appropriate proceedings or for property taxes on property that Republic
Technologies or any of its Restricted Subsidiaries has determined to
abandon if the sole recourse for such tax, assessment, charge, levy or
claim is to such property;
(c) carriers', warehousemen's, mechanics', materialmen's, repairmen's,
laborers', employees' or suppliers' or other like Liens on property of
Republic Technologies or any of the Restricted Subsidiaries arising in the
ordinary course of business and securing obligations that are not due and
payable or that are being contested in good faith by negotiations or
appropriate proceedings and in respect of which, if applicable, Republic
Technologies or the relevant Restricted Subsidiary shall have set aside on
its books reserves in accordance with GAAP;
(d) pledges and deposits made in the ordinary course of business by
Republic Technologies or any of the Restricted Subsidiaries in compliance
with the Federal Employers Liability Act or any other workmen's
compensation, unemployment insurance and other social security laws or
regulations and deposits securing liability to insurance carriers under
insurance or self-insurance arrangements in respect of such obligations;
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(e) deposits by Republic Technologies or any of the Restricted
Subsidiaries to secure the performance of tenders, bids, contracts other
than for Indebtedness, leases other than Capitalized Lease Obligations,
statutory obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of business,
including those incurred to secure health, safety and environmental
obligations in the ordinary course of business;
(f) zoning restrictions, easements, trackage rights, leases other than
Capitalized Lease Obligations, licenses, special assessments,
rights-of-way, restrictions on use of Real Property and other similar
encumbrances incurred by Republic Technologies or any of the Restricted
Subsidiaries in the ordinary course of business which, individually and in
the aggregate, are not substantial in amount and do not materially detract
from the value of the property subject thereto or interfere with the
ordinary conduct of the business of Republic Technologies or any of the
Restricted Subsidiaries;
(g) Liens consisting of interests of lessors under capital or
operating leases permitted by "Limitation on Additional Indebtedness and
Certain Preferred Stock";
(h) Liens securing judgments, decrees or orders against Republic
Technologies or any of the Restricted Subsidiaries, so long as such Lien is
being contested in good faith and is adequately bonded, any appropriate
legal proceedings which may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have
expired;
(i) any leases or subleases to other Persons of properties or assets
owned or leased by Republic Technologies or any of the Restricted
Subsidiaries;
(j) any Lien arising by operation of law pursuant to
Section 107(1) of CERCLA, 42 U.S.C. Section 9607(1), or pursuant to
analogous state law, for costs or damages which are not yet due, by virtue
of a written demand for payment by a government authority, or which are
being contested in good faith by appropriate proceedings, or on property
that Republic Technologies or any of the Restricted Subsidiaries has
determined to abandon if the sole recourse for such costs or damages is to
such property; provided that the liability of Republic Technologies and the
Restricted Subsidiaries with respect to the matter giving rise to all such
Liens shall not, in the reasonable estimate of Republic Technologies, in
the light of all attendant circumstances, including the likelihood of
contribution by third parties, exceed $25.0 million;
(k) Liens that are contractual rights of setoff (1) relating to the
establishment by Republic Technologies or any of its Subsidiaries of
depository relations with banks not given in connection with the issuance
of Indebtedness or (2) pertaining to pooled deposit and/or sweep accounts
of Republic Technologies and/or any of the Restricted Subsidiaries to
permit satisfaction of overdraft or similar obligations incurred in the
ordinary course of business of Republic Technologies and the Restricted
Subsidiaries;
(l) Liens securing obligations in respect of trade-related letters of
credit permitted under "Limitation on Additional Indebtedness and Certain
Preferred Stock" and covering the goods, or the documents of title in
respect of such goods, financed by such letters of credit;
(m) the sale of accounts receivable in connection with collection in
the ordinary course of business;
(n) construction Liens arising in the ordinary course of business,
including Liens for work performed for which payment has not been made,
securing obligations that are not due and payable or are being contested in
good faith by appropriate proceedings and in respect of which, if
applicable, Republic Technologies or the relevant Restricted Subsidiary
shall have set aside on its books reserves in accordance with GAAP;
(o) Liens securing Currency Agreements, Interest Rate Protection
Obligations and commodity hedging agreements;
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(p) any other Liens encumbering deposits made to secure obligations
arising from statutory, regulatory, contractual or warranty requirements,
including rights of offset and set off;
(q) purchase money Liens to finance the acquisition of property or
assets of Republic Technologies or any Restricted Subsidiary of Republic
Technologies acquired in the ordinary course of business; provided that
(1) the related purchase money Indebtedness shall not be secured by or
extend to any Collateral or any other property or assets of Republic
Technologies or any Restricted Subsidiary other than the property or assets
so acquired, (2) the amount of Indebtedness secured by any such Lien shall
not exceed the purchase price of the property or assets acquired and
(3) Lien securing such Indebtedness either (x) exists at the time of such
acquisition or construction or (y) shall be created within 180 days of such
acquisition;
(r) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(s) Liens securing Indebtedness which is incurred to refinance
Indebtedness which has been secured by a Lien or Liens permitted under the
indenture and which has been incurred in accordance with the provisions of
the indenture; provided that such Liens do not extend to or cover any
property or assets of Republic Technologies or any of the Restricted
Subsidiaries not securing the Indebtedness so refinanced;
(t) Liens upon specific items of inventory or other goods and proceeds
of any person securing such person's obligations in respect of bankers'
acceptances issued or created for the account of such person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(u) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(v) Liens securing Acquired Indebtedness incurred in accordance with
the "Limitation on Additional Indebtedness and Certain Preferred Stock"
covenant; provided that
(1) such Liens secured such Acquired Indebtedness at the time of
and prior to the incurrence of such Acquired Indebtedness by Republic
Technologies or a Restricted Subsidiary thereof and were not granted in
connection with, or in anticipation of, the incurrence of such Acquired
Indebtedness by Republic Technologies or a Restricted Subsidiary thereof
and
(2) such Liens do not extend to or cover any property or assets of
Republic Technologies or any of the Restricted Subsidiaries other than
the property or assets that secured the Acquired Indebtedness prior to
the time such Indebtedness became Acquired Indebtedness of Republic
Technologies or such Restricted Subsidiary and are no more favorable to
the Lienholders than those securing the Acquired Indebtedness prior to
the incurrence of such Acquired Indebtedness by Republic Technologies or
such Restricted Subsidiary; and
(w) Liens on assets acquired or constructed after the Issue Date and
not constituting Collateral securing Indebtedness not to exceed 70% of the
lower of the cost of construction or acquisition of such assets or the fair
market value of such assets, in each case determined at the time of
incurrence of such Indebtedness.
"Permitted Related Acquisition" has the meaning ascribed to that term under
"--Certain Covenants--Disposition of Proceeds of Asset Sales."
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust, charitable
foundation, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
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"Pledged Interests" has the meaning ascribed to that term under
"Description of Collateral and Intercreditor Agreements--Collateral."
"Pledgor" means each of Republic Technologies, Holdings, RTI Capital Corp.,
Bliss & Laughlin LLC, Canadian Drawn Steel Company Inc., Nimishillen and
Tuscarawas, LLC and each other Restricted Subsidiary that becomes a "Pledgor"
under any Security Document.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents, however designated, of such
Person's preferred or preference stock, whether now outstanding or issued after
the date of the indenture, and including, without limitation, all classes and
series of preferred or preference stock of such Person.
"Principal Intercreditor Agreement" has the meaning ascribed to that term
under "Description of Collateral and Intercreditor Agreements--Intercreditor
Agreements."
"Public Equity Offering" means a public offering of Common Stock of
Republic Technologies, Parent Guarantor, RTI or any other direct or indirect
parent company of Republic Technologies pursuant to an effective registration
statement filed under the Securities Act, excluding registration statements
filed on Form S-8.
"Refinancing Indebtedness" means
(a) Indebtedness of an issuer or a Subsidiary Guarantor to the extent
the proceeds thereof are used solely to refinance, whether by amendment,
renewal, extension or refunding, all or any part of any Indebtedness of an
issuer or any of the Restricted Subsidiaries and
(b) Indebtedness of any Restricted Subsidiary which is not a
Subsidiary Guarantor, to the extent the proceeds thereof are used solely to
refinance, whether by amendment, renewal, extension or refunding, all or
any part of any Indebtedness of a Restricted Subsidiary which is not a
Subsidiary Guarantor,
in each such event, incurred under the first paragraph of the covenant described
under "--Certain Covenants--Limitation on Additional Indebtedness and Certain
Preferred Stock" or clause (a) or (b), other than the Indebtedness refinanced,
redeemed or retired as described under "--Use of Proceeds" herein, of the second
paragraph of such covenant; provided that
(1) the principal amount of Indebtedness incurred pursuant to this
definition or, if such Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration of the maturity thereof, the accreted value of such
Indebtedness, shall not exceed the sum of the principal amount of
Indebtedness so refinanced, less any discount from principal amount due
upon payment pursuant to the terms of such Indebtedness, plus the amount of
any premium required to be paid in connection with such refinancing
pursuant to the terms of such Indebtedness or the amount of any premium
reasonably determined by the Board of Directors of Republic Technologies as
necessary to accomplish such refinancing by means of a tender offer or
privately negotiated purchase, plus the amount of reasonable expenses in
connection therewith,
(2) in the case of Indebtedness incurred pursuant to this definition
by Republic Technologies or any Subsidiary Guarantor, such Indebtedness
(x) has no scheduled principal payment prior to the earlier of (A)
the final maturity of the corresponding portion of the Indebtedness
being refinanced or (B) the 91st day after the final maturity date of
the notes and
(y) has an Average Life to Stated Maturity greater than either
(A) the Average Life to Stated Maturity of the Indebtedness refinanced
or (B) the remaining Average Life to Stated Maturity of the notes and
(3) if the Indebtedness to be refinanced is Subordinated Indebtedness,
the Indebtedness to be incurred pursuant to this definition shall also be
Subordinated Indebtedness.
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"Requisite Managers" means a majority of the Board of Directors, including
a majority of the Disinterested Directors of Republic Technologies, or if it has
no such governing body, then a majority of the Board of Directors, including a
majority of the Disinterested Directors, of the managing member of Republic
Technologies or the managing member of the Parent Guarantor.
"Restricted Payments" has the meaning ascribed to that term under
"--Certain Covenants--Limitation on Restricted Payments."
"Restricted Subsidiary" means any Subsidiary of Republic Technologies that
has not been designated by the Board of Directors of Republic Technologies, by a
Board Resolution of Republic Technologies delivered to the trustee, as an
Unrestricted Subsidiary pursuant to and in compliance with the covenant
described under "--Certain Covenants--Limitation on Designations of Unrestricted
Subsidiaries." Any such designation may be revoked by a Board Resolution of
Republic Technologies delivered to the trustee, subject to the provisions of
such covenant. For purposes of the definitions of "Consolidated Income Tax
Expense," "Consolidated Interest Expense" and "Consolidated Net Income," RTI
Capital shall be considered a Restricted Subsidiary.
"Revocation" has the meaning ascribed to that term under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"Roll-up Transaction" means any merger or consolidation of Republic
Technologies with, or any transfer of all of the assets of, or Capital Stock of,
Republic Technologies to, any newly organized Affiliate thereof which has no
material liabilities other than Investments in or liabilities with respect to
Republic Technologies or the Restricted Subsidiaries, or to RTI, provided RTI
has no material liabilities other than Investments in or liabilities with
respect to Republic Technologies and the Restricted Subsidiaries, if such
transaction and any series of related transactions are for the sole purpose of
creating or having a corporation that will own all of the assets that Republic
Technologies owned immediately prior to such transaction.
"Sale-Leaseback Transaction" of any Person means an arrangement with any
lender or investor or to which such lender or investor is a party providing for
the leasing by such Person of any property or asset of such Person which has
been or is being sold or transferred by such Person after the acquisition
thereof or the completion of construction or commencement of operation thereof
to such lender or investor or to any Person to whom funds have been or are to be
advanced by such lender or investor on the security of such property or asset.
The stated maturity of such arrangement shall be the date of the last payment of
rent or any other amount due under such arrangement prior to the first date on
which such arrangement may be terminated by the lessee without payment of a
penalty.
"Secured Creditors" shall mean, for so long as they are entitled to the
benefits of the security interests in the Collateral pursuant to the terms of
the Principal Intercreditor Agreement, the trustee, on its behalf and on behalf
of the Holders, the Existing Secured Creditors, any holders of Secured
Refinancing Indebtedness, any holders of Secured Government Assisted
Indebtedness and the New Bar Mill lenders.
"Secured Government Assisted Indebtedness" means Indebtedness incurred
pursuant to clause (n) of the covenant described under "--Certain
Covenants--Limitation on Additional Indebtedness and Certain Preferred Stock"
secured by a Lien on Collateral permitted by the covenant described under
"--Certain Covenants--Limitation on Liens."
"Secured Refinancing Indebtedness" means Refinancing Indebtedness secured
by a Lien on Collateral permitted by the covenant described under "--Certain
Covenants--Limitation on Liens."
"Security Documents" means, collectively, (1) the security agreement among
Republic Technologies, the Subsidiary Guarantors and the Collateral Agent,
(2) the master pledge agreement among Holdings, Republic Technologies, each
Subsidiary Guarantor and the Collateral Agent, (3) the mortgages made by or to
be made by Republic Technologies in favor of the Collateral Agent, (4) the
mortgages made by Bliss & Laughlin, LLC and Canadian Drawn Steel Company, Inc.
in favor of the Collateral Agent and (5) all security agreements, mortgages,
deeds of trust, pledges, collateral assignments and other agreements or
instruments evidencing or creating any security in favor of the Collateral Agent
in any or all of the Collateral and the New Bar Mill, in each case as amended,
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amended or restated, supplemented or otherwise modified from time to time in
accordance with their terms.
"Senior Collateral Proceeds" has the meaning ascribed to that term under
"--Certain Covenants--Disposition of Proceeds of Asset Sales."
"Significant Subsidiary" shall have the same meaning as in Rule 1.02(v) of
Regulation S-X under the Securities Act.
"Specialty Steel Assets" means those assets associated exclusively with the
Specialty Steel business of Republic Engineered Steels, Inc., including the
equipment of No. 3 Melt Shop and No. 4 Grinding Department in the Canton, Ohio
8th Street Plant, the equipment and property of the Canton, Ohio Harrison Road
Specialty Plant and the equipment and property of the Baltimore, Maryland
specialty steels plant.
"Stated Maturity" means, when used with respect to any note or any
installment of interest thereon, the date specified in such note as the fixed
date on which the principal of such note or such installment of interest is due
and payable, and when used with respect to any other Indebtedness, means the
date specified in the instrument governing such Indebtedness as the fixed date
on which the principal of such Indebtedness, or any installment of interest
thereon, is due and payable.
"Stock Intercreditor Agreement" has the meaning ascribed to that term under
"Description of Collateral and Intercreditor Agreements--Intercreditor
Agreements."
"Subordinated Indebtedness" means Indebtedness of an issuer or a Subsidiary
Guarantor which is expressly subordinated in right of payment to the notes or
the guarantee of such Guarantor, as the case may be.
"Subsidiary" means, with respect to any person,
(a) a corporation a majority of whose Voting Stock is at the time,
directly or indirectly, owned by such person, by one or more Subsidiaries
of such person or by such person and one or more Subsidiaries thereof and
(b) any other person, other than a corporation, including, without
limitation, a joint venture, in which such person, one or more Subsidiaries
thereof or such person and one or more Subsidiaries thereof, directly or
indirectly, at the date of determination thereof, have at least majority
ownership interest entitled to vote in the election of directors, managers
or trustees thereof or other persons performing similar functions.
For purposes of this definition, any directors' qualifying shares or
investments by foreign nationals mandated by applicable law shall be disregarded
in determining the ownership of a Subsidiary.
"Subsidiary Guarantor" means (a) each subsidiary of Republic Technologies
that owns or holds any Collateral and (b) any other subsidiary of Republic
Technologies that guarantees the Notes, but shall not include RTI Capital,
Oberlin Insurance Company or the Utility Unrestricted Subsidiaries.
"Substitute Collateral" has the meaning ascribed to that term under
"--Possession, Use and Release of Collateral."
"Supply and Services Agreements" means (1) the Round Supply Agreement dated
on or about the Issue Date between Republic Technologies, the new tubular steel
products joint venture between Kobe and USX and U.S. Steel Group, (2) the Coke
Supply Agreement dated on or about the Issue Date between Republic Technologies
and U.S. Steel Group, (3) the Pellet Supply Agreement dated on or about the
Issue Date between U.S. Steel Group and Republic Technologies, (4) the
Transition Services Agreement between Republic Technologies and USX Corporation,
(5) the Tubular Utilities Agreement and certain related agreements between
Republic Technologies and the new tubular steel products joint venture between
Kobe and USX, (6) the Technology Transfer Agreements and certain related
agreements each dated on or about the Issue Date among Republic Technologies,
Kobe and one of its affiliates and (7) the Safe Harbor Lease Matters Agreement
relating to the Safe Harbor Lease Property.
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"Surviving Entity" has the meaning ascribed to that term under
"--Consolidation, Merger, Sale of Assets, Etc."
"Trust Moneys" means all cash or Cash Equivalents received by the trustee
or the Collateral Agent, as the case may be:
(a) upon the release of property from the Lien of any of the Security
Documents, including all moneys received in respect of the principal of all
purchase money, governmental and other obligations;
(b) as compensation for, or proceeds of the sale of all or any part of
the Collateral taken by eminent domain or purchased by, or sold pursuant to
any order of, a governmental authority or otherwise disposed of;
(c) as proceeds of insurance upon any, all or part of the Collateral,
other than any liability insurance proceeds payable to the trustee or the
Collateral Agent, as the case may be, for any loss, liability or expense
incurred by it;
(d) pursuant to certain provisions of the Mortgages;
(e) as proceeds of any other sale or other disposition of all or any
part of the Collateral by or on behalf of the trustee or the Collateral
Agent, as the case may be, or any collection, recovery, receipt,
appropriation or other realization of or from all or any part of the
Collateral pursuant to the Security Documents or otherwise; or
(f) for application under the indenture as provided in the indenture,
any Security Document or the Intercreditor Agreements, or whose disposition
is not otherwise specifically provided for in the indenture, any Security
Document or the Intercreditor Agreements,
provided, however, that "Trust Moneys" shall not include any property deposited
with the trustee pursuant to the covenant "--Disposition of Proceeds of Asset
Sales," the redemption provisions, the defeasance provisions or the priority or
default provisions under the indenture.
"Unrestricted Subsidiary" means any Subsidiary of Republic Technologies
(other than a Subsidiary Guarantor or a Subsidiary of Republic Technologies
which owns or holds any Collateral) designated as such pursuant to and in
compliance with the covenant described under "--Certain Covenants--Limitation on
Designations of Unrestricted Subsidiaries." Any such designation may be revoked
by a Board Resolution of an issuer delivered to the trustee, subject to the
provisions of such covenant.
"USX" means USX Corporation.
"Voting Stock" means any class or classes of Capital Stock of a person
pursuant to which the holders thereof have the general voting power under
ordinary circumstances to vote in the election of the Board of Directors,
managers or trustees of such person, irrespective of whether or not, at the
time, Capital Stock of any other class or classes shall have, or might have,
voting power by reason of the happening of any contingency.
"Wholly-Owned Restricted Subsidiary" means any Restricted Subsidiary of
which 100% of the outstanding Capital Stock is owned by an issuer or one or more
Wholly-Owned Restricted Subsidiaries of an issuer. For purposes of this
definition, any directors' qualifying shares or investments by foreign nationals
mandated by applicable law shall be disregarded in determining the ownership of
a Subsidiary.
"Wholly-Owned Subsidiary" means any Subsidiary of an issuer 99%, other than
shares of Capital Stock representing any director's qualifying shares or
investments by foreign nationals mandated by applicable law, of the total voting
power of Capital Stock entitled to vote in the election of directors, managers
or trustees thereof without regard to the occurrence of any contingency is at
the time owned by Republic Technologies, by a Wholly-Owned Subsidiary of
Republic Technologies or by Republic Technologies and a Wholly-Owned Subsidiary
of Republic Technologies.
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DESCRIPTION OF COLLATERAL AND INTERCREDITOR AGREEMENTS
The following discussion includes a summary description of the Collateral
and a summary of the material terms of the Security Documents and the
Intercreditor Agreements. For further information regarding the terms and
provisions of the Security Documents and the Intercreditor Agreements, please
refer to the copies of the Security Documents and the Intercreditor Agreements
which we have filed as exhibits to the registration statement of which this
prospectus is part. We urge you to read these documents. In addition, you should
also refer to "Description of the Notes--Possession, Use and Release of
Collateral" for the provisions of the indenture relating to releases and
substitutions of Collateral. Capitalized terms used below but not defined below
are defined in "Description of the Notes--Certain Definitions."
COLLATERAL
Pursuant to the Security Documents, the Pledgors granted to the Collateral
Agent, for the benefit of the trustee and the holders of the notes, security
interests in the real and personal property summarized below. Except as
expressly provided below, these security interests do not extend to acquired
property located at the facilities constituting Collateral or any separable
plants or independent facilities acquired or constructed by us or any of our
Subsidiaries after the Issue Date. The Collateral for the notes and the
Guarantees currently represents
(1) substantially all of the real and personal properties of Republic
Technologies and the Subsidiary Guarantors, other than real and personal
property located at the CAST-ROLL Facility and the Cartersville, Georgia
facility and inventory, accounts receivable, intellectual property and
related assets and
(2) all of the Capital Stock of Republic Technologies and the
Restricted Subsidiaries outstanding on the Issue Date.
For a description of the Intercreditor Agreements, which govern the
relationships among the various creditors with interests in the Collateral, see
"--Intercreditor Agreements" below.
The obligations of the issuers and the guarantors under the notes and the
Guarantees were initially secured by Liens on all of the following assets:
o substantially all of the real property, other than the real property
on which the CAST-ROLL Facility and the Cartersville, Georgia facility are
located, owned or leased by Republic Technologies and the Subsidiary
Guarantors on the Issue Date, together with all additions, accessions,
improvements, alterations, replacements and repairs to this property,
o the New Bar Mill upon the acquisition and construction of the same,
but subject to a prior Lien of up to 65% of the aggregate cost of
acquisition and construction to secure Indebtedness used to finance such
acquisition or construction,
o machinery and equipment located at the real property referred to in
the first bullet point above, whether owned on the Issue Date or acquired
after that date, other than after-acquired equipment securing Indebtedness
of up to $15.0 million in principal amount, of Republic Technologies and
the Subsidiary Guarantors, together with all additions, accessions,
improvements, alterations, replacements and repairs to this machinery and
equipment,
o all of the Capital Stock of Republic Technologies outstanding from
time to time,
o all of the outstanding shares of Capital Stock of each of the
existing Restricted Subsidiaries and of each of the future Wholly-Owned
Restricted Subsidiaries of Republic Technologies incorporated in the United
States, any state in the United States or the District of Columbia and 65%
of the outstanding Capital Stock of each of the future foreign Wholly-Owned
Restricted Subsidiaries, of Republic Technologies which collectively, with
the items of Collateral referred to in the preceding bullet point, are
referred to as the "Pledged Interests" ,
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o all right, title and interest of Republic Technologies and the
Subsidiary Guarantors in, to and under the documents executed in connection
with (1) the acquisition by Bar Technologies Inc. of the Bethlehem BRW
Division pursuant to the contribution agreement, dated as of December 22,
1993 between Bethlehem and Bar Technologies Inc., including, without
limitation, all rights in respect of representations, warranties and
indemnities thereunder, (2) the amended and restated agreement and plan of
merger, dated as of October 18, 1995, by and among B&L Acquisition
Corporation, Bliss & Laughlin and Bar Technologies, Inc., including,
without limitation, all rights in respect of representations, warranties
and indemnities thereunder and (3) the master restructuring agreement to be
dated on or about the Issue Date, among BarTech, RES Holding Corporation,
Republic, USX, RTI, USS/Kobe Steel Company and certain of their affiliates,
including, without limitation, all rights of Republic and Holdings in
respect of representations, warranties and their indemnities thereunder,
o assets deposited in the Collateral Account pursuant to the indenture
and subject to the Intercreditor Agreements,
o all general intangibles relating to any and all of the above,
subject to the same exceptions and limitations as the above,
o all documents relating to any and all of the above, subject to the
same exceptions and limitations as the above, and
o all proceeds and products of any and all of the above, subject to
the same exceptions and limitations as the above.
For further summary information concerning the facilities included in the
Collateral, see "Business--Our Facilities."
The Pledgors pledged the personal property Collateral to be pledged by them
to the Collateral Agent for the benefit of the Collateral Agent, the trustee and
the Holders pursuant to a securities pledge agreement and a security agreement
which we refer to collectively as the "Security Agreements" . The real property
Collateral was pledged to the Collateral Agent for the benefit of the Collateral
Agent, the trustee and the holders of the Notes pursuant to mortgages, deeds of
trust or deeds to secure debt which we refer to collectively as the
"Mortgages" . In general, the Liens on the Collateral granted to the Collateral
Agent, for its benefit and the benefit of the Trustee and the Holders, may be
subject to
(1) in the case of real property Collateral, certain easements,
rights-of-way, zoning restrictions and other similar charges or
encumbrances which do not, in any case, materially detract from the value
of the real property affected thereby or do not interfere in any material
respect with the ordinary conduct of the business of Republic Technologies
or the applicable Subsidiary Guarantor at such real property,
(2) in the case of certain of the personal property Collateral other
than Pledged Interests, certain existing purchase money liens,
(3) in the case of certain of the Collateral referred to in clause
(1), Liens in favor of various Secured Creditors,
(4) in the case of the Pledged Interests, a pari passu Lien securing
repayment of Indebtedness under the New Credit Facility and
(5) in the case of all of the Collateral, certain tax liens and
landlords', warehousemens', materialmens' and other liens which may, as a
matter of law, have priority over the Lien granted to the Collateral Agent
or the trustee.
The real property Collateral pledged by the Pledgors at our Johnstown,
Pennsylvania and Lackawanna, New York facilities includes certain easements and
other recorded agreements made by Bethlehem Steel Company in favor of us
relating to, among other things, our use of certain oxygen pipelines, engine
rooms, sanitary and storm sewers, water pipelines, natural gas and
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compressed air distribution systems, railroad tracks and bridges, access roads,
fire hydrants and electrical equipment. Bethlehem may terminate our rights in
the event we cease to use these rights for a period of more than one year. It is
possible that, in connection with a foreclosure or bankruptcy or otherwise, we
may cease to use all or a portion of such rights under some or all of the
recorded instruments for a period of more than one year and Bethlehem could
elect to terminate some or all of these rights. These rights are essential to
the use and operation of these facilities and, because of the location of these
facilities and their proximity to Bethlehem's property and facilities, may only
be provided or granted by Bethlehem. In the event of a termination of any of
these rights, we could be required to cease some or all of our operations at the
affected facility. Bethlehem may not be willing to grant these rights and the
cost of obtaining these rights from Bethlehem may be significant. Also, these
rights are only assignable without the consent of Bethlehem in connection with a
sale or transfer of the entire facility benefited by the applicable recorded
instrument. A consent would be required if a facility were to be sold pursuant
to two or more separate transactions. The value or marketability of each
affected facility to Noteholders as Collateral may be impaired by these matters.
The collateral release provisions of the indenture permit the release of
certain Collateral without substitution of Collateral of equal value under
certain circumstances. See "Description of the Notes--Possession, Use and
Release of Collateral." For example, Collateral may be released in connection
with Asset Sales and new collateral need not be substituted for this Collateral
under various circumstances. As described under "Description of the
Notes--Certain Covenants--Disposition of Proceeds of Asset Sales," the Net Cash
Proceeds of such Asset Sales may be required to be utilized to make an offer to
purchase notes. To the extent an offer to purchase notes is not subscribed to by
Holders, the unutilized Net Cash Proceeds may be retained by us free of the Lien
of the Security Documents. In addition, the Specialty Steel Assets and,
following their shut-down or closure, the Closed Facilities may be released in
connection with their sale, scrapping or other disposition and the proceeds
therefrom used to repay amounts outstanding under the New Credit Facility. Also,
certain unimproved, vacant land which is not material to the value or utility of
the mortgaged property may be released from the lien of the applicable mortgage
so that the Pledgors may develop such land through the construction of new
facilities which will not constitute Collateral.
The Closed Facilities are
o the No. 4 Blast Furnace, the No. 1 Billet Caster and the 4 Stand
Billet Mill at the Lorain facilities;
o the No. 4(B) and No. 4(C) Electric Arc Furnaces, the Blooming Mill
and the ingot teaming facility at the Canton facility;
o the 12" bar mill in Canton, Ohio, the 18" bar mill in Masillon, Ohio
and the 11" bar mill in Chicago, Illinois; and
o the cold-finishing facilities in Medina, Ohio and Batavia, Illinois
and one additional cold-finishing facility.
If an Event of Default occurs under the indenture, the trustee, on behalf
of the Holders, in addition to any rights or remedies available to it under the
indenture, may, subject to the provisions of the Intercreditor Agreements, cause
the Collateral Agent to take such action as the trustee deems advisable to
protect and enforce its rights in the Collateral, including the institution of
foreclosure proceedings. The proceeds received by the Collateral Agent, after
payment of the expenses of such foreclosure and fees and other amounts then
payable to the Collateral Agent and any prior lienholder, whether pursuant to
either Intercreditor Agreement or otherwise, to which the trustee and the
Holders are entitled from any foreclosure in respect of any Collateral by which
the notes are secured will be applied by the trustee under the indenture, first,
to pay the expenses and other amounts payable to the trustee and, thereafter, to
pay the principal of, premium, if any, and interest on the notes.
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We obtained appraisals of most of our of the real and personal property in
the first half of 1999 from nationally recognized appraisal firms. The
appraisals were not prepared for purposes of the offering of the notes, do not
separately value the assets comprising the Collateral and do not take account of
the impact of the Consolidation Plan. Excluding the Specialty Steel Assets, the
Cartersville, Georgia facility, the two cold finished bar mills that have
already been closed and the value assigned to the CAST-ROLL Facility by the New
Credit Facility, the aggregate value assigned to our remaining real and personal
property, fixtures and equipment was approximately $495 to $510 million. All of
the referenced assets in the appraisals may not be included in the Collateral.
In addition, included in this value are facilities, equipment and fixtures to be
scrapped, shut down or sold as part of the Consolidation Plan. These assets are
subject to release without substitution of Collateral. Excluded from such value
is any security interest you may receive in the New Bar Mill. An appraisal of
the value of the Collateral on the same basis as set forth in the appraisals,
after giving effect to the Consolidation Plan and the contemplated releases of
Collateral, may not exceed the principal amount of the notes and the stated
value in any event may not be realized.
The stated personal property value was determined on a Liquidation Value-In
Place basis and the stated real property value was determined on a Real Property
Market Value basis. Other approaches to valuation were utilized, but we do not
consider them to be as appropriate. Such methods indicated significantly lower,
on an orderly liquidation basis, and higher, on an fair market value in
continued use basis, values. Liquidation Value-In Place is defined in the
appraisals as the estimated gross amount expressed in terms of money which is
projected to be obtainable from a failed facility assuming that the entire
facility would be sold intact within a limited time to complete the sale.
Liquidation Value-In Place further considers that "fair market value" as
normally defined could not be obtained due to the time consideration, as well as
the probable condition of the business under forced sale conditions. Real
Property Market Value is defined in the appraisals as the most probable price
which a property should bring in a competitive and open market under all
conditions requisite to a fair sale with the buyer and seller each acting
prudently. In our opinion the information above concerning the appraised value
of the Collateral should not be viewed as representative of the value of the
Collateral.
The proceeds of any sale of the Collateral in whole or in part pursuant to
the indenture, the Security Documents and the Intercreditor Agreements following
an Event of Default may not be sufficient to satisfy payments due on the notes
and the complexity of the Intercreditor Agreements may result in material delays
in the ability of the Collateral Agent to realize upon all or any of the
Collateral. The ability of the Collateral Agent or the Trustee, for the benefit
of the Holders, to realize upon the Collateral will also be subject to
bankruptcy law limitations in the event of a bankruptcy and other contractual
limitations contained in the Intercreditor Agreements. See "--Bankruptcy
Limitations" below.
INTERCREDITOR AGREEMENTS
Prior to the issuance of the notes, the Collateral Agent entered into an
(1) Amended and Restated Intercreditor and Subordination Agreement,
which we refer to as the "Principal Intercreditor Agreement," dated as of
August 13, 1999 among Republic Technologies, Holdings, RTI Capital Corp.,
the guarantors, the trustee, BankBoston, N.A., which we refer to as the
"Agent" , and each of the existing secured creditors named in the
agreement, which relates primarily to the Shared Collateral described
below, and
(2) a Pledge Intercreditor Agreement dated as of August 13, 1999 among
the trustee, as collateral agent thereunder, and the Secured Parties named
in the agreement, which we refer to as the "Stock Intercreditor Agreement,"
and which we refer to collectively with the Principal Intercreditor
Agreement as the "Intercreditor Agreements" , which relates to the Pledged
Interests.
The Principal Intercreditor Agreement provides that, without the consent of
the Noteholders or the trustee, future holders of Secured Refinancing
Indebtedness and Secured Government Assisted
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Indebtedness may become parties to the Principal Intercreditor Agreement. The
principal purposes of the Principal Intercreditor Agreement are to
(1) establish the duties, obligations and rights of the Collateral
Agent thereunder, in its capacity as such,
(2) provide access rights to the Agent with respect to the inventory
and books and records related to accounts receivable and intellectual
property located at certain of the facilities of Republic Technologies, and
(3) provide for the relative rights, priorities and remedies of the
Secured Creditors with respect to the Shared Collateral.
The principal purposes of the Stock Intercreditor Agreement are to
(1) establish the duties, obligations and rights of the Collateral
Agent thereunder, in its capacity as such, and
(2) provide for the relative rights, priorities and remedies of the
lenders under the New Credit Facility and the trustee with respect to the
Pledged Interests.
There are a number of Secured Creditors representing a total of
approximately $17.9 million of Indebtedness in addition to the trustee, for the
benefit of itself and the Holders, that initially will have interests in the
Shared Collateral. The initial Shared Collateral is comprised principally of the
following:
(1) all of the real estate of Republic Technologies located in
Johnstown, Pennsylvania;
(2) all of the equipment of Republic Technologies that is located at
or used in connection with the operation of the business conducted in
Johnstown, Pennsylvania;
(3) all existing and future property and assets of Republic
Technologies, whether tangible or intangible, fixed or liquid, upon which
any other Secured Creditor has been granted a Lien pursuant to the Security
Documents, other than inventory, accounts and other categories of
Collateral specifically identified,
(4) all general intangibles relating to the foregoing,
(5) all documents relating to the foregoing and
(6) all proceeds relating to any of the foregoing.
The New Bar Mill may also become Shared Collateral in which the trustee and the
Holders have a junior claim.
Pursuant to the Principal Intercreditor Agreement, the Secured Creditors
have agreed that the priority of the claims of the trustee, for the benefit of
itself and the noteholders, in respect of the proceeds of the Shared Collateral
relative to the other applicable Secured Creditors will be a first priority
claim, disregarding the New Bar Mill. The Principal Intercreditor Agreement
provides that the First Priority Majority Secured Creditors, which is, as
defined below, as to any Collateral other than the Pledged Interests shall have
the exclusive right to direct the Collateral Agent to manage, perform and
enforce the terms of the security documents to which they are a party with
respect to this Collateral, to exercise and enforce all privileges and rights
thereunder according to their direction, including to take or retake control or
possession of such Collateral and to hold, prepare for sale, process, sell,
lease, dispose of or liquidate this Collateral, which we refer to collectively
as "Enforcement" . In addition, Secured Creditors, other than the First Priority
Majority Secured Creditors with respect to an item of Collateral acting by
direction to the Collateral Agent, will agree not to, directly or indirectly,
seek to foreclose or realize upon, judicially or nonjudicially, any Collateral
other than the Pledged Interests or take any other enforcement action against or
in respect of the Collateral.
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The Indebtedness under the New Credit Facility, which provides for
$425 million of commitments, is secured by Liens ranking evenly with the Liens
in favor of the Holders on the Pledged Interests. The New Bar Mill may also
become Shared Collateral in which the trustee and Holders have a junior claim.
The Stock Intercreditor Agreement relating to the Pledged Interests provides
that each Secured Creditor will have the non-exclusive right to notify the
Collateral Agent and the other Secured Creditor in writing, which notice we
refer to as an "Enforcement Notice" of its intention to realize upon its
security interest in the Pledged Interests. Within 45 days of a notification,
the First Priority Majority Secured Creditor with respect to the Pledged
Interests will have the right to direct the Collateral Agent to commence
Enforcement and, to the extent such direction is so given, shall thereafter have
the exclusive right to direct the Collateral Agent in the management, exercise
and performance of the Enforcement. To the extent this direction is not given by
the First Priority Majority Secured Creditor within such 45 days period, the
Secured Creditor responsible for the delivery of the Enforcement Notice may
direct the Collateral Agent to commence Enforcement and will thereafter have the
exclusive right to direct the Collateral Agent in the management, exercise and
performance of the Enforcement. Any Secured Creditor so directing the Collateral
Agent will be subject to the requirement that such direction be with a good
faith view toward maximizing the proceeds from the Enforcement for all Secured
Creditors having a Security Interest in the Pledged Interests. The Stock
Intercreditor Agreement permits the holders of one or more refinancings or
replacements of the New Credit Facility to share in the Pledged Interests with
Holders, subject to the foregoing.
The Collateral Agent is not required to take any action with respect to the
Collateral, unless it receives indemnity satisfactory to it in its sole
discretion.
"First Priority Majority Secured Creditors" is defined in the applicable
Intercreditor Agreement to mean
(1) with respect to any item of Collateral other than the Pledged
Interests, Secured Creditors holding an aggregate principal amount of
outstanding Indebtedness under debt instruments representing a majority of
the aggregate principal amount of outstanding Indebtedness secured by a
Lien or Liens on such item of Collateral entitled to a first priority under
the Principal Intercreditor Agreement and
(2) with respect to the Pledged Interests, Secured Creditors holding
an aggregate principal amount of outstanding Indebtedness, or the trustee
for, or other representative of, such holders, under debt instruments
representing a majority of the aggregate principal amount of outstanding
Indebtedness secured by a Lien or Liens on the Pledged Interests entitled
to a first priority under the Stock Intercreditor Agreement, provided that
for purposes of this subclause (2) any amounts available for borrowing by
Republic Technologies under the New Credit Facility, after giving effect to
any effective waivers of any conditions to borrowing thereunder, shall be
deemed to be outstanding Indebtedness under the New Credit Facility.
With respect to a release of Collateral, other than pursuant to actions
taken by a Secured Creditor upon an event of default under its debt instruments
with the Pledgors, the Collateral Agent shall effect such release, or a
substitution of Collateral, in accordance with and upon receipt of (1) written
instructions from the trustee, on behalf of the holders of notes, and each other
Secured Creditor known to the Collateral Agent to hold a security interest in
such Collateral and (2) an Officers' Certificate of the applicable Pledgor to
the effect that such release or substitution would be permitted under the terms
of all debt instruments and security documents of the Secured Creditors.
The Principal Intercreditor Agreement provides that for up to 210 days
following the issuance of a notice by the Agent that it seeks to enforce its
rights with respect to the accounts receivable or inventory of Republic
Technologies or the guarantors, the Agent and its designees are granted the
right and license by the applicable Pledgors and the Collateral Agent to:
(1) enter upon any or all of such Pledgor's premises, either leased or
owned; provided, that the Agent shall compensate the Collateral Agent in
cash for any damage to the Collateral
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caused by the Agent in connection with its entry into and use of the
Collateral and shall pay the Collateral Agent for all the Collateral
Agent's direct and incremental costs relating to the provision of the
access to the Collateral and
(2) use the Collateral to the extent necessary to complete the
manufacture of the inventory, collect the accounts receivable and to sell
or otherwise dispose of the inventory, accounts receivable and intellectual
property.
The Principal Intercreditor Agreement provides that it may be amended and
modified without the consent of the trustee or the Holders
(a) to permit certain holders of Indebtedness incurred in accordance
with the covenant described under "Description of the Notes--Certain
Covenants" to become a party thereto and recognize the Liens of such
holders on specified items of Collateral,
(b) to provide for the relative priorities of the Secured Parties in
assets and property constituting Substitute Collateral as provided under
"Possession, Use and Release of Collateral--Substitute Collateral" and
(c) permit changes in the priority of Liens of Secured Parties with
respect to the Collateral, provided, in the case of this clause (c) that
such changes relate only to Liens junior in priority to the Liens of the
trustee and the Holders with respect to such Collateral.
Any other amendment or modification to the Principal Intercreditor
Agreement, other than amendments and modifications for certain specified
purposes, including curing ambiguities, defects or inconsistencies, shall
require the written consent of the trustee, at the direction of the Holders of a
majority of the aggregate principal amount of outstanding notes.
CERTAIN BANKRUPTCY LIMITATIONS
The right of the trustee or the Collateral Agent, as the case may be, to
repossess and dispose of the Collateral upon the occurrence of an Event of
Default is likely to be significantly impaired by applicable bankruptcy law if a
bankruptcy proceeding were to be commenced by or against Republic Technologies
or a guarantor, whether by a noteholder or another creditor, prior to the
trustee or the Collateral Agent, as the case may be, having repossessed and
disposed of the Collateral. Under federal bankruptcy laws, a secured creditor
such as the trustee or the Collateral Agent is prohibited from repossessing its
security from a debtor in a bankruptcy case, or from disposing of security
repossessed from such debtor, without bankruptcy court approval. Moreover, the
U.S. Bankruptcy Code permits the debtor to continue to retain and to use
collateral even though the debtor is in default under the applicable debt
instruments, provided that the secured creditor is given "adequate protection."
The meaning of the term "adequate protection" may vary according to
circumstances, but it is intended in general to protect the value of the secured
creditor's interest in the collateral and may include cash payments or the
granting of additional security, if and at such times as the court in its
discretion determines, for any diminution in the value of the collateral as a
result of the stay of repossession or disposition or any use of the collateral
by the debtor during the pendency of the bankruptcy case. In view of the lack of
a precise definition of the term "adequate protection" and the broad
discretionary powers of a bankruptcy court, it is impossible to predict
(1) if payments under the notes or the guarantees would be made
following commencement of and during a bankruptcy case,
(2) whether or when the Collateral Agent or the trustee, as the case
may be, could foreclose upon or sell any of the Collateral, or
(3) whether or to what extent holders of the notes would be
compensated for any delay in payment or loss of value of the Collateral
through the requirement of "adequate protection."
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Furthermore, in the event that the bankruptcy court determines the value of
the Collateral is not sufficient to repay all amounts due on the notes, the
holders of notes would hold "undersecured claims." Applicable federal bankruptcy
laws do not permit the payment and/or accrual of interest, costs and attorney's
fees for "undersecured claims" during the pendency of a debtor's bankruptcy
case.
CERTAIN ENVIRONMENTAL LAW CONSIDERATIONS
Real property pledged as security to a lender may be subject to known and
unforeseen environmental risks. Under the federal Comprehensive Environmental
Response, Compensation and Liability Act, a secured lender may be held liable,
in certain limited circumstances, for the costs of remediating or preventing
releases or threatened releases of hazardous substances at a mortgaged property.
There may be similar risks under various state laws and common law theories. If
a lender takes title to property by foreclosure, it may, under certain
circumstances, lose the security interest exemption contained in CERCLA and may
therefore be held liable for remediation costs. Such liability has seldom been
imposed, and finding a lender liable generally has been based on the lender
having become sufficiently involved in the operations of the borrower so that
its "participation in the management" of the borrower meets the test set out in
CERCLA and elaborated in a number of court decisions.
Under the indenture and the Principal Intercreditor Agreement, the trustee
and the Collateral Agent may, prior to taking certain actions, request that
holders of notes provide an indemnification against its costs, expenses and
liabilities. It is possible that CERCLA or similar remediation costs could
become a liability of the trustee or the Collateral Agent and cause a loss to
any holders of Notes that provided an indemnification. In addition, such holders
may act directly rather than through the trustee or the Collateral Agent, in
specified circumstances, in order to pursue a remedy under the indenture or the
Principal Intercreditor Agreement. If holders of notes exercise that right, they
could be deemed to be lenders that are subject to the risks discussed above.
Included in the Collateral are certain indemnification rights relating to
environmental liability at certain real property Collateral described under
"--Collateral" above. However, there can be no assurance as to their
availability to eliminate or mitigate any such costs, expenses or liabilities.
The U.S. Environmental Protection Agency promulgated a rule which would
have allowed lenders to participate in work-out situations and foreclosure, and
to exercise some control over the borrower's business following foreclosure,
without risking liability under CERCLA as a current owner or operator. That rule
was subsequently declared to be invalid by the Court of Appeals for the District
of Columbia on the grounds that the rulemaking was not within the EPA's
statutory authority. While a number of recent court decisions appear to be
consistent with the EPA's interpretation of CERCLA under this rule, the
uncertain state of current law does not provide an assurance that lenders can
avoid the risk of liability under CERCLA if they foreclose on properties or
become involved in work-outs or similar situations that may entail some
involvement in, or influence over, facility operations.
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NOTES EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
The issuers, the guarantors and the initial purchasers entered into the
notes exchange and registration rights agreement concurrent with the issuance of
the notes. Pursuant to the notes exchange and registration rights agreement, the
issuers and the guarantors agreed to do both of the following:
o file with the Securities and Exchange Commission on or prior to 90 days
after the date of issuance of the notes a registration statement on an
appropriate form, if the use of such form is then available relating to a
registered exchange offer for the notes under the Securities Act; and
o use their reasonable best efforts to cause this exchange registration
statement to be declared effective under the Securities Act within
210 days after the issue date of the notes.
As soon as practicable after the effectiveness of the exchange registration
statement, the issuers and the guarantors will offer to the holders of Transfer
Restricted Securities, which is defined below, who are not prohibited by any law
or policy of the Commission from participating in the exchange offer the
opportunity to exchange their Transfer Restricted Securities for an issue of a
second series of notes that are identical in all material respects to the notes,
except that these exchange notes will not contain terms with respect to transfer
restrictions or the payment of liquidated damages, and that are registered under
the Securities Act. The issuers and the guarantors will keep the exchange offer
open for not less than 20 business days after the date on which notice of the
exchange offer is mailed to the holders of Transfer Restricted Securities.
The issuers and the guarantors will file with the Commission a shelf
registration statement to cover resales of Transfer Restricted Securities by the
holders of notes who satisfy conditions relating to the provision of information
in connection with the shelf registration statement, if any of the following
situations apply:
o because of any change in law or applicable interpretations of these laws
by the staff of the Commission, the issuers and the guarantors are not
permitted to effect the exchange offer as contemplated by this
prospectus;
o any initial purchaser requests a shelf registration statement with
respect to notes not eligible to be exchanged for exchange notes in the
exchange offer;
o any applicable law or interpretations do not permit any holder of notes
to participate in the exchange offer and any of these holders notifies
the Issuers of this fact within 30 days of the completion of the exchange
offer; or
o any holder of notes that participates in the exchange offer does not
receive freely transferable exchange notes in exchange for tendered
Transfer Restricted Securities and any of these holders notifies the
issuers of this fact within 30 days of the completion of the exchange
offer.
For purposes of the paragraphs above, "Transfer Restricted Securities"
means the notes upon original issuance thereof and at all times subsequent
thereto, until in the case of any such note
(1) a registration statement covering such note has been declared
effective and such note has been disposed of in accordance with such
effective registration statement,
(2) it is sold in compliance with Rule 144 or may be sold pursuant to
Rule 144(k),
(3) it shall have been otherwise transferred and a new certificate for
any such note not bearing a legend restricting further transfer shall have
been delivered or
(4) it ceases to be outstanding.
The issuers and the guarantors will use their reasonable best efforts to
have the exchange registration statement or, if applicable, the shelf
registration statement declared effective by the Commission as promptly as
practicable after the filing of the applicable registration statement.
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Unless the exchange offer would not be permitted by a policy of the Commission,
the issuers and the guarantors will commence the exchange offer and will use
their reasonable best efforts to consummate the exchange offer as promptly as
practicable, but in any event prior to 240 days after the issue date of the
notes. If applicable, the issuers and the guarantors will use their reasonable
best efforts to keep the shelf registration statement effective until the date
which is two years from the issue date of the notes, which is subject to
extension in certain circumstances, or such shorter period ending when all
Transfering Restricted Securities covered by the shelf registration statement
have been sold in the manner set forth and as contemplated by the shelf
registration statement.
The issuers and the guarantors will be required to pay liquidated damages
to each holder of Transfer Restricted Securities if any of the following
registration defaults occurs:
o the exchange registration statement is not filed with the Commission on
or prior to 90 days after the issue date of the notes or a shelf
registration statement is not filed with the Commission on or prior to
90 days after the date that filing obligation arises;
o the exchange offer registration statement is not declared effective by
the Commission within 210 days after the issue date of the notes or, if
obligated to file a shelf registration statement, the shelf registration
statement is not declared effective within 240 days after the obligation
to file the shelf registration statement arises;
o the exchange offer is not consummated on or prior to 240 days after the
issue date of the notes, other than in the event of the filing of a shelf
registration statement; or
o the shelf registration statement is filed and declared effective on a
timely basis but thereafter ceases to be effective, at any time that the
issuers and the guarantors are obligated to maintain the effectiveness of
the shelf registration statement, without being succeeded within 45 days
by a post-effective amendment or an additional registration statement
being filed and declared effective by the Commission.
The issuers and the guarantors will be required to pay the liquidated damages
during any of the registration default periods described above in an amount
equal to $.192 per week per $1,000 principal amount of the notes constituting
Transfer Restricted Securities held by each holder until the applicable
registration statement is filed or the exchange registration statement is
declared effective and the exchange offer is consummated or the shelf
registration statement is declared effective or again becomes effective, as the
case may be. All accrued liquidated damages shall be paid to holders of Transfer
Restricted Securities in the same manner as interest payments on the notes on
semi-annual payment dates which correspond to interest payment dates for the
notes. Following the cure of all registration defaults, the accrual of
liquidated damages will cease.
The notes exchange and registration rights agreement also provides that the
issuers and the guarantors
(1) shall make available for a period of 180 days after the
consummation of the exchange offer a prospectus meeting the requirements of
the Securities Act to any broker-dealer for use in connection with any
resale of any exchange notes and
(2) shall pay all expenses incident to the exchange offer and will
indemnify specified holders of the notes, including any broker-dealer,
against various liabilities, including liabilities under the Securities
Act.
A broker-dealer which delivers a prospectus to purchasers in connection
with resales will be subject to civil liability provisions under the Securities
Act and will be bound by the provisions of the notes exchange and registration
rights agreement, including indemnification rights and obligations.
Each Holder who wishes to exchange notes for exchange notes in the exchange
offer will be required to make representations, including each of the following:
o any exchange notes to be received by it will be acquired in the ordinary
course of its business;
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o it has no and will have no arrangement or understanding with any person
to participate in the distribution of the exchange notes; and
o it is not an "affiliate," as defined in Rule 405 under the Securities
Act, of the issuers and the guarantors, or if it is an affiliate, that it
will comply with the registration and prospectus delivery requirements of
the Securities Act, to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
exchange notes. If the holder is a broker-dealer that will receive exchange
notes for its own account in exchange for notes that were acquired as a result
of market-making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
these exchange notes.
Holders will be required to make representations to the issuers and the
guarantors, as described above, in order to participate in the exchange offer
and will be required to deliver information to be used in connection with the
shelf registration statement in order to have their notes included in the shelf
registration statement and benefit from the provisions regarding liquidated
damages set forth in the preceding paragraphs. A holder who sells notes pursuant
to the shelf registration statement generally will be required to be named as a
selling securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to civil liability provisions under the Securities
Act in connection with the sales and will be bound by the provisions of the
notes exchange and registration rights agreement which are applicable to the
holder, including indemnification obligations.
For so long as the notes are outstanding, the issuers will continue to
provide to Holders and to prospective purchasers of the notes the information
required by Rule 144A(d)(4) under the Securities Act.
The description of the notes exchange and registration rights agreement
given above is a summary of the material terms of that agreement. For further
information regarding the terms and provisions of the note exchange and
registration rights agreement, please refer to copy of the note exchange and
registration rights agreement, which we have filed as an exhibit to the
registration statement of which this prospectus is part. We urge you to read
this document.
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BOOK-ENTRY; DELIVERY AND FORM
The exchange notes will initially be represented by one or more permanent
global notes in definitive, fully registered book-entry form, without interest
coupons that will be deposited with, or on behalf of, DTC and registered in the
name of DTC or its nominee, on behalf of the acquirers of exchange notes
represented thereby for credit to the respective accounts of the acquirers, or
to such other accounts as they may direct, at DTC, or Morgan Guaranty Trust
Company of New York, Brussels Office, as operator of the Euroclear System, or
Cedel Bank, societe anonyme. See "The Exchange Offer-Book Entry Transfer."
Except as set forth below, the global notes may be transferred, in whole
and not in part, solely to another nominee of DTC or to a successor of DTC or
its nominee. Beneficial interests in the global notes may not be exchanged for
notes in physical, certificated form except in the limited circumstances
described below.
All interests in the global notes, including those held through Euroclear
or Cedel, may be subject to the procedures and requirements of DTC. Those
interests held through Euroclear or Cedel may also be subject to the procedures
and requirements of such systems.
BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES
The descriptions of the operations and procedures of DTC, Euroclear and
Cedel set forth below are provided solely as a matter of convenience. These
operations and procedures are within the sole control of the respective
settlement systems and are subject to change by them. We take no responsibility
for these operations or procedures, and you are urged to contact the relevant
system or its participants directly to discuss these matters.
DTC has advised us that it is
(1) a limited purpose trust company organized under the laws of the
State of New York,
(2) a "banking organization" within the meaning of the New York
Banking Law,
(3) a member of the Federal Reserve System,
(4) a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended and
(5) a "clearing agency" registered pursuant to Section 17A of the
Exchange Act.
DTC was created to hold securities for its participants and facilitates the
clearance and settlement of securities transactions between participants through
electronic book-entry changes to the accounts of its participants, thereby
eliminating the need for physical transfer and delivery of certificates. DTC's
participants include securities brokers and dealers, including the initial
purchasers under the offering of outstanding notes, banks and trust companies,
clearing corporations and certain other organizations. Indirect access to DTC's
system is also available to other entities such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly. Investors who are not participants
may beneficially own securities held by or on behalf of DTC only through
participants or indirect participants.
We expect that pursuant to procedures established by DTC, ownership of the
notes will be shown on, and the transfer of ownership thereof will be effected
only through, records maintained by DTC, with respect to the interests of
participants, and the records of participants and the indirect participants,
with respect to the interests of persons other than DTC participants.
The laws of some jurisdictions may require that purchasers of securities
take physical delivery of such securities in definitive form. Accordingly, the
ability to transfer interests in the notes represented by a global note to such
persons may be limited. In addition, because DTC can act only on behalf of its
participants, who in turn act on behalf of persons who hold interests through
participants, the ability of a person having an interest in notes represented by
a global note to pledge or transfer
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such interest to persons or entities that do not participate in DTC's system, or
to otherwise take actions in respect of such interest, may be affected by the
lack of a physical definitive security in respect of such interest.
So long as DTC or its nominee is the registered owner of a global note, DTC
or such nominee, as the case may be, will be considered the sole owner or holder
of the notes represented by the global note for all purposes under the
indenture. Except as provided below, owners of beneficial interests in a global
note
o will not be entitled to have notes represented by a global note
registered in their names,
o will not receive or be entitled to receive physical delivery of
certificated notes, and
o will not be considered the owners or holders of the global note under the
indenture for any purpose.
We understand that under existing industry practice, in the event that we
request any action of holders of notes, or a holder that is an owner of a
beneficial interest in a global note desires to take any action, DTC would
authorize the participants to take such action and the participants would
authorize holders owning through such participants to take such action or would
otherwise act upon the instruction of such holders. Neither we nor the trustee
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of notes by DTC, or for maintaining, supervising
or reviewing any records of DTC relating to the notes.
Payments of the principal of, premium, if any, and interest on, any notes
represented by a global note registered in the name of DTC or its nominee on a
record date will be payable by the trustee to or at the direction of DTC or its
nominee. Accordingly, neither we nor the trustee has or will have any
responsibility or liability for the payment of such amounts to owners of
beneficial interests in a global note. Payments by the participants and the
indirect participants to the owners of beneficial interests in a global note
will be governed by standing instructions and customary industry practice and
will be the responsibility of the participants or the indirect participants and
DTC.
Transfers between participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear or Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
notes, cross-market transfers between the participants in DTC, on the one hand,
and Euroclear or Cedel participants, on the other hand, will be effected through
DTC in accordance with DTC's rules on behalf of Euroclear or Cedel, as the case
may be, by its depositary. However, such cross-market transactions will require
delivery of instructions to Euroclear or Cedel, as the case may be, by the
counterparty in such system in accordance with the rules and procedures and
within the established deadlines (Brussels time) of such system. Euroclear or
Cedel, as the case may be, will, if the transaction meets its settlement
requirements, deliver instructions to its depositary to take action to effect
final settlement on its behalf by delivering or receiving interests in the
relevant global notes in DTC, and making or receiving payment in accordance with
normal procedures for same-day funds settlement applicable to DTC. Euroclear
participants and Cedel participants may not deliver instructions directly to the
depositories for Euroclear or Cedel.
Although DTC, Euroclear and Cedel have agreed to the procedures described
above to facilitate transfers of interests in the global notes among
participants in DTC, Euroclear and Cedel, they are under no obligation to
perform or to continue to perform such procedures, and such procedures may be
discontinued at any time. Neither we nor the trustee will have any
responsibility for the performance by DTC, Euroclear or Cedel or their
participants or indirect participants of their obligations under the rules and
procedures governing their operations.
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CERTIFICATED NOTES
If
o we notify the trustee in writing that DTC is no longer willing or able to
act as a depositary or DTC ceases to be registered as a clearing agency
under the Exchange Act and a successor depositary is not appointed within
90 days of such notice or cessation,
o we, at our option, notify the trustee in writing that we elect to cause
the issuance of notes in definitive form under the indenture or
o upon the occurrence of other events as provided in the indenture,
then, upon surrender by DTC of the global notes, certificated notes will be
issued to each person that DTC identifies as the beneficial owner of the notes
represented by the global notes. Upon any such issuance, the trustee is required
to register such certificated notes in the name of such person or persons, or
the nominee of any thereof, and cause the same to be delivered thereto.
Neither we nor the trustee shall be liable for any delay by DTC or any
participant or indirect participant in identifying the beneficial owners of the
related notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes, including with
respect to the registration and delivery, and the respective principal amounts,
of the notes to be issued.
YEAR 2000
DTC management is aware that some computer applications, systems, and the
like for processing data that are dependent upon calendar dates, including dates
before, on, and after January 1, 2000, may encounter "year 2000 problems." DTC
has informed its participants and other members of the financial community that
it has developed and is implementing a program so that its systems, as the same
relate to the timely payment of distributions, including principal and income
payments, to securityholders, book-entry deliveries, and settlement of trades
within DTC, continue to function appropriately. This program includes a
technical assessment and a remediation plan, each of which is complete.
Additionally, DTC's plan includes a testing phase, which is expected to be
completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed its participants and other members of the
financial community that it is contacting, and will continue to contact, third
party vendors from whom DTC acquires services to:
(1) impress upon them the importance of such services being year 2000
compliant; and
(2) determine the extent of their efforts for year 2000 remediation
and, as appropriate, testing of their services.
In addition, DTC is in the process of developing such contingency plans as it
deems appropriate.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the material United States federal income
tax consequences of participation in the exchange offer and of the ownership of
notes to holders who purchased the units comprised of outstanding notes and
warrants in the initial offering at their issue price. Except where noted, it
deals only with notes held as capital assets and does not deal with special
situations, such as those of dealers in securities or currencies, financial
institutions, tax-exempt entities, life insurance companies, traders who elect
to use a mark-to-market method of accounting with respect to their securities,
persons holding notes as a part of a hedging, integrated, conversion or
constructive sale transaction or a straddle or holders of notes whose
"functional currency" is not the U.S. dollar. Furthermore, the discussion below
is based upon the provisions of the Internal Revenue Code, and regulations,
rulings and judicial decisions under the Code as of the date of this prospectus,
and such authorities may be repealed, revoked or modified. YOU SHOULD CONSULT
YOUR OWN TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IN LIGHT OF YOUR PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES
ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
As used in this prospectus, a "U.S. holder" means a holder of a note that
is:
o a citizen or resident of the United States;
o a corporation or partnership created or organized in or under the laws of
the United States or any political subdivision of the United States;
o an estate the income of which is subject to United States federal income
taxation regardless of its source; or
o a trust (X) that is subject to the supervision of a court within the
United States and the control of one or more United States persons as
described in section 7701(a)(30) of the Code or (Y) that has a valid
election in effect under applicable U.S. Treasury regulations to be
treated as a United States person.
A "Non-U.S. holder" is a holder of a note that is not a U.S. holder.
EXCHANGE OF NOTES
The exchange of outstanding notes for exchange notes in the exchange offer
will not constitute a taxable event to holders. Consequently, no gain or loss
will be recognized by a holder upon receipt of an exchange note, the holding
period of the exchange note will include the holding period the outstanding note
and the basis of the exchange note will be the same as the basis of the
outstanding note immediately before the exchange.
ALLOCATION OF PURCHASE PRICE BETWEEN NOTES AND WARRANTS
Each outstanding note was issued with a warrant as an investment unit. The
issue price of each unit for U.S. federal income tax purposes is the first price
at which a substantial amount of the units were sold for cash, excluding sales
to bond houses or similar persons acting as underwriters, placement agents or
wholesalers and is $987.10. As required by U.S. Treasury regulations, we
allocated the issue price of each unit between the note and warrant based on
their relative fair market values. The amount we allocated to each note is
$878.98. On the basis of this allocation, the notes were issued with "original
issue discount." Under U.S. Treasury regulations you are bound by such
allocation for U.S. federal income tax purposes unless you disclose a different
allocation on a statement attached to your return for the taxable year that
includes the acquisition date of such unit. No assurance can be given that the
IRS will accept our allocation. If the IRS successfully challenges our
allocation, the issue price, the amount of original issue discount accrual on
the note and gain or loss on the sale or disposition of a note would be
different from that resulting under our allocation.
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U.S. HOLDERS
Payments of Interest
Except as described below under "Original Issue Discount," stated interest
on the notes will generally be taxable to you as ordinary income at the time it
is paid or accrued in accordance with your method of accounting for tax
purposes.
Original Issue Discount
The outstanding notes were issued with original issue discount in an amount
equal to the difference between the principal amount of the notes and the issue
price of the notes as described under "--Allocation of Purchase Price Between
Notes and Warrants." You should be aware that you generally must include
original issue discount in gross income in advance of the receipt of cash
attributable to that income.
The amount of original issue discount includible in your income is the sum
of the "daily portions" of original issue discount with respect to the note for
each day during the taxable year or portion of the taxable year in which you
held the note ("accrued original issue discount"). The daily portion is
determined by allocating to each day in any "accrual period" a pro rata portion
of the original issue discount allocable to that accrual period. The "accrual
period" for a note must be 6 months or less and may vary in length over the term
of the note, provided that each scheduled payment of principal or interest
occurs on the first day or the final day of an accrual period. The amount of
original issue discount allocable to any accrual period is an amount equal to
the excess, if any, of:
o the product of the note's adjusted issue price at the beginning of such
accrual period and its yield to maturity, determined on the basis of
compounding at the close of each accrual period and properly adjusted for
the length of the accrual period, over
o the sum of any stated interest allocable to the accrual period.
Original issue discount allocable to a final accrual period is the
difference between the amount payable at maturity, other than a payment of
stated interest, and the adjusted issue price at the beginning of the final
accrual period. The "adjusted issue price" of a note at the beginning of any
accrual period is equal to its issue price increased by the accrued original
issue discount for each prior accrual period. Under these rules, you will have
to include in income increasingly greater amounts of original issue discount in
successive accrual periods. We are required to provide information returns
stating the amount of original issue discount accrued on notes held of record by
persons other than corporations and other exempt holders.
You may elect to treat all interest on any note as original issue discount
and calculate the amount includible in gross income under the constant yield
method described above. For the purposes of this election, interest includes
stated interest, acquisition discount, original issue discount, de minimis
original issue discount and unstated interest. The election is to be made for
the taxable year in which you acquired the note, and may not be revoked without
the consent of the IRS. You should consult with your own tax advisors about this
election.
Sale, Exchange and Retirement of Notes
Your tax basis in a note is, in general, the amount you paid for the note
increased by accrued original issue discount. Upon the sale, exchange,
retirement or other disposition of a note, you will recognize gain or loss equal
to the difference between the amount realized upon the sale, exchange,
retirement or other disposition, less any accrued stated interest, which will be
taxable as such if not previously included in income, and your tax basis in the
note. Such gain or loss will be capital gain or loss. Capital gains of
individuals derived in respect of capital assets held for more than one year are
eligible for reduced rates of taxation. The deductibility of capital losses is
subject to limitations.
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Information Reporting and Backup Withholding
In general, unless you are an exempt recipient such as a corporation,
information reporting will apply to payments that we make to you and to the
proceeds from the sale of a note. Additionally, if you fail to provide your
taxpayer identification number, or in the case of interest payments, fail to
either report in full dividend and interest income or to make certain
certifications, you will be subject to backup withholding at a 31% rate.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against your U.S. federal income tax liability provided the
required information is furnished to the IRS.
NON-U.S. HOLDERS
U.S. Federal Withholding Tax
The 30% U.S. federal withholding tax will not apply to any payment of
principal or interest, including original issue discount, on your notes provided
that:
o you do not actually, or constructively, own 10% or more of the total
combined voting power of all classes of our voting stock within the
meaning of the Code and the U.S. Treasury regulations;
o you are not a controlled foreign corporation that is related to us
through stock ownership;
o you are not a bank whose receipt of interest on the notes is described in
Section 881(c)(3)(A) of the Code; and
o (a) you provide your name and address on an IRS Form W-8BEN, or successor
form, and certify, under penalty of perjury, that you are not a U.S.
person or (b) a financial institution holding the notes on your behalf
certifies, under penalty of perjury, that it has received an IRS Form
W-8BEN, or successor form, from the beneficial owner and provides us with
a copy.
If you cannot satisfy the requirements described above, payments of
premium, and interest, including original issue discount, made to you will be
subject to the 30% U.S. federal withholding tax, unless you provide us with a
properly executed (1) IRS Form W-8BEN, or successor form, claiming an exemption
from or reduction in withholding under the benefit of an applicable tax treaty
or (2) IRS Form W-8ECI, or successor form, stating that interest paid on your
note is not subject to withholding tax because it is effectively connected with
your conduct of a trade or business in the United States.
The 30% U.S. federal withholding tax will not apply to any gain that you
realize on the sale, exchange, retirement or other disposition of a note.
U.S. Federal Estate Tax
Your estate will not be subject to U.S. federal estate tax on notes owned
by you at the time of your death, provided that (1) you do not own 10% or more
of the total combined voting power of all classes of our voting stock, within
the meaning of the Code and the U.S. Treasury Regulations, and (2) interest on
your note would not have been, if received at the time of your death,
effectively connected with the conduct by you of a trade or business in the
United States.
U.S. Federal Income Tax
If you are engaged in a trade or business in the United States and interest
on your note, including OID, is effectively connected with the conduct of that
trade or business, although exempt from the 30% withholding tax, you will be
subject to U.S. federal income tax on that interest or dividend on a net income
basis in the same manner as if you were a U.S. person. In addition, if you are a
foreign corporation, you may be subject to a branch profits tax equal to 30%, or
lower applicable treaty rate, of your earnings and profits for the taxable year,
subject to adjustments, that
185
are effectively connected with the conduct by you of a trade or business in the
United States. For this purpose, interest on your notes, including original
issue discount, will be included in earnings and profits.
Any gain realized on the disposition of a note generally will not be
subject to U.S. federal income tax unless (1) that gain is effectively connected
with the conduct of a trade or business in the United States by you or (2) you
are an individual who is present in the United States for 183 days or more in
the taxable year of that disposition and other conditions are met.
Information Reporting And Backup Withholding
In general, you will not be subject to information reporting and backup
withholding with respect to payments that we make to you provided that we do not
have actual knowledge that you are a U.S. person and we have received from you
the statement described above under "U.S. Federal Withholding Tax."
In addition, you will not be subject to information reporting and backup
withholding with respect to the proceeds of the sale of a note within the United
States or conducted through certain U.S.-related financial intermediaries, if
the payor receives the statement described above and does not have actual
knowledge that you are a U.S. person, as defined under the Code, or you
otherwise establish an exemption.
U.S. Treasury regulations effective after December 31, 2000 generally
modify the information reporting and backup withholding rules applicable to
certain payments made. In general, the U.S. Treasury regulations would not
significantly alter the present rules discussed above, except in special
situations.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against your U.S. federal income tax liability provided the
required information is furnished to the IRS.
186
PLAN OF DISTRIBUTION
Until , 2000, which is 90 days after the date of this
prospectus, all dealers effecting transactions in the exchange notes, whether or
not participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for outstanding notes only where such outstanding notes were acquired
as a result of market-making activities or other trading activities. We have
agreed that we will make this prospectus, as amended or supplemented, available
to any broker-dealer for use in connection with any such resale for a period of
90 days from the date on which the exchange offer is consummated, or such
shorter period as will terminate when all outstanding notes acquired by
broker-dealers for their own accounts as a result of market-making activities or
other trading activities have been exchanged for exchange notes and such
exchange notes have been resold by such broker-dealers.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any exchange notes. Any broker-dealer that
resells exchange notes that were received by it for its own account pursuant to
the exchange offer and any broker or dealer that participates in a distribution
of such exchange notes may be deemed to be an "underwriter" within the meaning
of the Securities Act and any profit on any such resale of exchange notes and
any commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 90 days from the date on which the exchange offer is
consummated, or such shorter period as will terminate when all outstanding notes
acquired by broker-dealers for their own accounts as a result of market-making
activities or other trading activities have been exchanged for exchange notes
and such exchange notes have been resold by such broker-dealers, we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to the
exchange offer other than commissions or concessions of any brokers or dealers
and the fees of any counsel or other advisors or experts retained by the holders
of outstanding notes, except as expressly set forth in the notes exchange and
registration rights agreement, and will indemnify the holders of outstanding
notes, including any broker-dealers, against certain liabilities, including
liabilities under the Securities Act.
187
LEGAL MATTERS
The validity of the exchange notes offered by this prospectus will be
passed upon for the issuers by Simpson Thacher & Bartlett, New York, New York.
EXPERTS
The consolidated financial statements of Republic as of June 30, 1998 and
for each of the years in the two-year period ended June 30, 1998 and the related
financial statement schedule included in this prospectus have been audited by
KPMG LLP, independent auditors, to the extent indicated in their report with
respect to such financial statements and the related financial statement
schedule, and have been so included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Republic as of June 30, 1999 and
for the period from September 8, 1998 to June 30, 1999 and the period from July
1, 1998 to September 7, 1998 and the related financial statement schedule
included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing in this prospectus,
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The consolidated financial statements of BarTech as of January 3, 1998 and
for the year ended January 3, 1998, for the three month period ended
December 28, 1996 and for the year ended September 30, 1996 and the related
financial statement schedule included in this prospectus have been audited by
Arthur Andersen LLP, independent public accountants, to the extent and for the
periods indicated in their report with respect to such financial statements and
the related financial statement schedule, and have been so included in reliance
upon the authority of said firm as experts in accounting and auditing in giving
said report.
The consolidated financial statements of BarTech as of and for the year
ended January 2, 1999 and the related financial statement schedule included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing in this prospectus, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The financial statements of the Bar Products Line of USS/Kobe Steel Company
as of December 31, 1998 and 1997 and for each of the three years in the period
ended December 31, 1998 included in this prospectus have been audited by Ernst &
Young LLP, independent auditors, as stated in their report appearing in this
prospectus, and have been so included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
The issuers and guarantors have filed with the Securities and Exchange
Commission a registration statement on Form S-4, which includes amendments,
exhibits, schedules and supplements, under the Securities Act and the rules and
regulations under the Securities Act, for the registration of the exchange notes
offered by this prospectus. Although this prospectus, which forms a part of the
registration statement, contains all material information included in the
registration statement, parts of the registration statement have been omitted
from this prospectus as permitted by the rules and regulations of the
Commission. For further information with respect to the issuers and the exchange
notes offered by this prospectus, please refer to the registration statement. We
urge you to read the registration statement.
Pursuant to the indenture, Republic Technologies or, under specified
circumstances, Holdings will file with the Commission and provide the trustee
and any holder of notes or prospective holder of notes, upon the request of such
holder or prospective holder, with annual reports and such information,
documents and other reports as are specified in Sections 13 and 15(d) of the
Exchange
188
Act and applicable to a U.S. corporation subject to these Sections, the
information, documents and other reports to be so filed and provided at the
times specified for the filing of the information, documents and reports under
these Sections. In addition to filings made by the issuers, BarTech until
October 13, 1999 and Republic until September 14, 1999 were subject to the
periodic reporting and other information requirements of the Exchange Act. These
reports, the registration statement on Form S-4 filed by the issuers and the
guarantors and any other registration statements or reports publicly filed by
the issuers or the guarantors, can be inspected and copied at prescribed rates
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. The public may obtain information regarding the Washington, D.C.
Public Reference Room by calling the Commission at 1-800-SEC-0330. In addition,
such public filings are publicly available through the Commission's site on the
Internet's World Wide Web, located at "http://www.sec.gov."
189
INDEX TO FINANCIAL STATEMENTS
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC
Unaudited
Consolidated/Combined Balance Sheets as of September 30, 1999 and December 31, 1998............... F-3
Consolidated/Combined Statements of Operations for the period from August 13, 1999 to
September 30, 1999, the period from January 1, 1999 to August 12, 1999 and the nine month
period ended September 30, 1998................................................................ F-5
Consolidated/Combined Statements of Members' Interest/Stockholders' Equity (Deficit) for the year
ended December 31, 1998, the period from January 1, 1999 to August 12, 1999 and the period from
August 13, 1999 to
September 30, 1999............................................................................. F-6
Consolidated/Combined Statements of Cash Flows for the period from August 13, 1999 to
September 30, 1999, the period from January 1, 1999 to August 12, 1999 and the nine month
period ended September 30, 1998................................................................ F-7
Notes to Consolidated/Combined Financial Statements for the period from August 13, 1999 to
September 30, 1999, the period from January 1, 1999 to August 12, 1999 and the nine month
period ended September 30, 1998................................................................ F-8
REPUBLIC ENGINEERED STEELS, INC.
Independent Auditors' Report........................................................................ F-34
Independent Auditors' Report........................................................................ F-35
Consolidated Balance Sheets as of June 30, 1999 and 1998............................................ F-36
Consolidated Statements of Operations for the period from September 8, 1998 to June 30, 1999, the
period from July 1, 1998 to September 7, 1998 and the years ended June 30, 1998 and 1997.......... F-37
Consolidated Statements of Shareholders' Equity (Deficit) for the period from September 8, 1998 to
June 30, 1999, the period from July 1, 1998 to September 7, 1998 and the years ended June 30,
1998 and 1997..................................................................................... F-38
Consolidated Statements of Cash Flows for the period from September 8, 1998 to June 30, 1999, the
period from July 1, 1998 to September 7, 1998 and the years ended June 30, 1998 and 1997.......... F-39
Notes to Consolidated Financial Statements for the period from September 8, 1998 to June 30, 1999,
the period from July 1, 1998 to September 7, 1998 and the years ended June 30, 1998 and 1997...... F-40
Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts.................................................... F-63
BAR TECHNOLOGIES INC.
Independent Auditors' Report........................................................................ F-64
Report of Independent Public Accountants............................................................ F-65
Consolidated Balance Sheets as of January 2, 1999 and January 3, 1998............................... F-66
Consolidated Statements of Operations for the years ended January 2, 1999 and January 3, 1998, the
three months ended December 28, 1996 and the year ended September 30, 1996........................ F-68
F-1
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended January 2, 1999 and
January 3, 1998, the three months ended December 28, 1996 and the year ended September 30, 1996... F-69
Consolidated Statements of Cash Flows for the years ended January 2, 1999 and January 3, 1998, the
three months ended December 28, 1996 and the year ended September 30, 1996........................ F-70
Notes to Consolidated Financial Statements for the years ended January 2, 1999 and January 3, 1998,
the three months ended December 28, 1996 and the year ended September 30, 1996.................... F-71
Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts.................................................... F-95
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
Report of Independent Auditors...................................................................... F-96
Balance Sheets as of December 31, 1997 and 1998..................................................... F-97
Statements of Operations for the years ended December 31, 1996, 1997 and 1998 (audited)............. F-98
Statements of Changes in Partners' Investment for the years ended December 31, 1996, 1997 and 1998
(audited)......................................................................................... F-99
Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 (audited)............. F-100
Notes to Financial Statements....................................................................... F-101
Unaudited
Balance Sheets as of June 30, 1999 and December 31, 1998.......................................... F-111
Statements of Operations for the six months ended June 30, 1998 and 1999.......................... F-112
Statement of Changes in Partners' Investment for the six months ended June 30, 1999............... F-113
Statements of Cash Flows for the six months ended June 30, 1998 and 1999.......................... F-114
Notes to Financial Statements..................................................................... F-115
F-2
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED/COMBINED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
THE THE
COMPANY-- PREDECESSOR--
CONSOLIDATED COMBINED
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ----------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 3,807 $ 5,948
Accounts receivable, less allowances of $14,783 and
$6,897, respectively........................................................ 182,935 82,053
Inventories (Note 5)........................................................... 275,597 203,244
Assets held for sale (Note 17)................................................. 15,091 14,722
Prepaid expenses and other current assets...................................... 10,839 22,408
---------- ----------
Total current assets............................................................. 488,269 328,375
---------- ----------
Property, plant and equipment:
Land and improvements.......................................................... 14,599 12,496
Buildings and improvements..................................................... 57,553 49,614
Machinery and equipment........................................................ 651,651 295,159
Construction in-progress....................................................... 18,857 13,366
---------- ----------
Total property, plant and equipment.............................................. 742,660 370,635
Accumulated depreciation......................................................... (55,223) (18,579)
---------- ----------
Net property, plant and equipment................................................ 687,437 352,056
Assets held for sale (Note 17)................................................... 11,687 11,687
Intangible assets, net of accumulated amortization of $8,272 and $10,456,
respectively (Note 6).......................................................... 184,215 173,377
Other assets..................................................................... 8,622 9,520
---------- ----------
Total assets..................................................................... $1,380,230 $ 875,015
---------- ----------
---------- ----------
continued
F-3
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED/COMBINED BALANCE SHEETS--(CONTINUED)
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
THE THE
COMPANY-- PREDECESSOR--
CONSOLIDATED COMBINED
SEPTEMBER 30, DECEMBER 31,
1999 1998
LIABILITIES AND MEMBERS' INTEREST/STOCKHOLDERS' EQUITY (DEFICIT) ------------ ----------------
Current liabilities:
Accounts payable............................................................... $ 222,343 $ 98,988
Accrued interest............................................................... 9,257 4,885
Accrued compensation and benefits.............................................. 46,585 29,272
Other postretirement benefits (Note 10)........................................ 14,462 4,200
Defined benefit pension obligations (Note 10).................................. 40,723 62,001
Other accrued liabilities...................................................... 49,162 43,430
Current maturities of long-term debt (Note 7).................................. 2,149 3,805
Revolving credit facilities (Note 8)........................................... 300,205 147,200
---------- ----------
Total current liabilities........................................................ 684,886 393,781
---------- ----------
Long-term debt (Note 7).......................................................... 480,944 422,483
Deferred income taxes (Note 11).................................................. -- 5,001
Accrued environmental liabilities (Note 16)...................................... 16,248 13,057
Other postretirement benefits (Note 10).......................................... 158,778 91,512
Defined benefit pension obligations (Note 10).................................... 32,988 7,339
Other liabilities................................................................ 1,638 6,411
---------- ----------
Total liabilities................................................................ 1,375,482 939,584
---------- ----------
Redeemable stock:
Series A preferred stock; $0.001 par value; authorized, 1,100 shares; issued
and outstanding, 1,100 shares............................................... 5,500
Commitments and contingencies (Notes 15 and 16)
Members' interest/stockholders' equity (deficit):
Members' interest.............................................................. 5,525 --
Bar Technologies Inc.
Series B preferred stock; $.001 par value; authorized, issued and
outstanding, 1 share...................................................... --
Class A common stock; $.001 par value; authorized, 1,000,000 shares; issued
and outstanding, 204,458 shares........................................... --
Class B common stock; $.001 par value; authorized, 600,000 shares; issued
and outstanding, 536,829 shares........................................... 1
Class C common stock, non-voting; $.001 par value; authorized, 600,000
shares; issued and outstanding, 536,865 shares............................ 1
Warrants outstanding........................................................ 5,119
Republic Engineered Steels, Inc.:
Common stock; $.01 par value; 1,000 shares authorized; 1 share issued and
outstanding................................................................. --
Additional paid-in capital....................................................... 158,510
Accumulated deficit.............................................................. (230,018)
Accumulated other comprehensive loss............................................. (777) (3,682)
---------- ----------
Total members' interest/stockholders' equity (deficit)........................... 4,748 (70,069)
---------- ----------
Total liabilities and members' interest/stockholders' equity (deficit)........... $1,380,230 $ 875,015
---------- ----------
---------- ----------
The accompanying notes are an integral part of the consolidated/combined
financial statements.
F-4
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED/COMBINED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM AUGUST 13, 1999 TO SEPTEMBER 30, 1999,
THE PERIOD FROM JANUARY 1, 1999 TO AUGUST 12, 1999
AND THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
THE COMPANY-- THE PREDECESSOR--COMBINED
CONSOLIDATED -------------------------------------------
PERIOD FROM PERIOD FROM NINE MONTH
AUGUST 13, 1999 TO JANUARY 1, 1999 TO PERIOD ENDED
SEPTEMBER 30, 1999 AUGUST 12, 1999 SEPTEMBER 30, 1998
------------------ --------------------- ------------------
Net sales............................................. $ 209,768 $ 474,565 $ 275,462
Cost of goods sold.................................... 208,972 446,771 265,232
---------- --------- ----------
Gross profit.......................................... 796 27,794 10,230
Selling, general and administrative expense........... 20,911 31,429 18,729
Depreciation and amortization expense................. 13,366 20,801 7,047
Other postretirement benefits (Note 10)............... 2,572 4,198 596
Workforce reduction charges (Note 10)................. 10,598 42,018 --
---------- --------- ----------
Operating loss........................................ (46,651) (70,652) (16,142)
Interest expense, net................................. 17,207 43,801 22,691
Other (income) loss, net.............................. (282) 40 (1,163)
---------- --------- ----------
Loss before income taxes and extraordinary item....... (63,576) (114,493) (37,670)
Provision for income taxes (Note 11).................. 205 420 63
---------- --------- ----------
Loss before extraordinary item........................ (63,781) (114,913) (37,733)
Extraordinary loss from early extinguishment of debt
(Note 4)............................................ 23,342 -- --
---------- --------- ----------
Net loss............................................ $ (87,123) (114,913) (37,733)
---------- --------- ----------
----------
Preferred stock dividends............................. 224 289
--------- ----------
Net loss applicable to
common shares.................................... $(115,137) $ (38,022)
--------- ----------
--------- ----------
The accompanying notes are an integral part of the consolidated/combined
financial statements.
F-5
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED/COMBINED STATEMENTS OF MEMBERS' INTEREST/STOCKHOLDERS' EQUITY
(DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1998,
THE PERIOD FROM JANUARY 1, 1999 TO AUGUST 12, 1999
AND THE PERIOD FROM AUGUST 13, 1999 TO SEPTEMBER 30, 1999
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
BAR TECHNOLOGIES INC. REPUBLIC
------------------------------------------------------------- ENGINEERED
CLASS CLASS CLASS STEELS,
SERIES B A B C INC. ADDITIONAL
MEMBER'S PREFERRED COMMON COMMON COMMON WARRANTS COMMON PAID-IN
INTEREST STOCK STOCK STOCK STOCK OUTSTANDING STOCK CAPITAL
-------- --------- ------ ------ ------ ----------- ---------- ----------
Balance, January 1, 1998...... $ -- $ -- $ 1 $ 1 $ 5,119 $ 63,055
Initial capitalization of
Republic as of September 8,
1998........................ $ -- 95,455
Net loss......................
Preferred stock dividends.....
Other comprehensive loss......
-------- ------- ------ ------ ------ ------- ------ ----------
Balance, December 31, 1998.... -- -- 1 1 5,119 -- 158,510
Net loss......................
Preferred stock dividends.....
Other comprehensive income....
-------- ------- ------ ------ ------ ------- ------ ----------
Balance, August 12, 1999...... -- -- 1 1 5,119 -- 158,510
Exchange of members' interest
to effect combination....... $92,648 (1) (1) (5,119) (158,510)
Net loss...................... (87,123)
Other comprehensive income....
-------- ------- ------ ------ ------ ------- ------ ----------
Balance, September 30, 1999... $ 5,525 $ -- $ -- $ -- $ -- $ -- $ -- $ --
-------- ------- ------ ------ ------ ------- ------ ----------
-------- ------- ------ ------ ------ ------- ------ ----------
TOTAL
MEMBER'S
ACCUMULATED INTEREST/
OTHER STOCKHOLDERS'
ACCUMULATED COMPREHENSIVE EQUITY COMPREHENSIVE
DEFICIT INCOME (LOSS) (DEFICIT) INCOME (LOSS)
----------- ------------- ------------- -------------
Balance, January 1, 1998...... $(116,061) $ (494) $ (48,379)
Initial capitalization of
Republic as of September 8,
1998........................ 95,455
Net loss...................... (113,572) (113,572) $(113,572)
Preferred stock dividends..... (385) (385)
Other comprehensive loss...... (3,188) (3,188) (3,188)
--------- ------- --------- ---------
Balance, December 31, 1998.... (230,018) (3,682) (70,069) $(116,760)
---------
---------
Net loss...................... (114,913) (114,913) $(114,913)
Preferred stock dividends..... (224) (224)
Other comprehensive income.... 2,648 2,648 2,648
--------- ------- --------- ---------
Balance, August 12, 1999...... (345,155) (1,034) (182,558) $(112,265)
---------
---------
Exchange of members' interest
to effect combination....... 345,155 274,172
Net loss...................... (87,123) $ (87,123)
Other comprehensive income.... 257 257 257
--------- ------- --------- ---------
Balance, September 30, 1999... $ -- $ (777) $ 4,748 $ (86,866)
--------- ------- --------- ---------
--------- ------- --------- ---------
The accompanying notes are an integral part of the consolidated/combined
financial statements.
F-6
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM AUGUST 13, 1999 TO SEPTEMBER 30, 1999,
THE PERIOD FROM JANUARY 1, 1999 TO AUGUST 12, 1999
AND THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
THE PREDECESSOR--COMBINED
THE COMPANY-- ----------------------------------------
CONSOLIDATED PERIOD FROM NINE MONTH
PERIOD FROM JANUARY 1, 1999 TO PERIOD ENDED
AUGUST 13, 1999 TO AUGUST 12, SEPTEMBER 30,
SEPTEMBER 30, 1999 1999 1998
------------------ ------------------ ------------------
Cash flows from operating activities:
Net loss.......................................... $ (87,123) $ (114,913) $ (37,733)
Adjustments to reconcile net cash used in
operating activities:
Extraordinary loss from extinguishment of
debt......................................... 23,342 -- --
Depreciation and amortization................... 8,876 32,086 10,171
Decrease in working capital..................... 33,358 14,456 17,998
Other........................................... (63,285) 44,222 (1,283)
---------- ---------- ----------
Net cash used in operating activities............. (84,832) (24,149) (10,847)
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures............................ (16,588) (35,143) (14,684)
Acquisition, net of cash acquired............... -- -- (154,260)
---------- ---------- ----------
Net cash used in investing activities............. (16,588) (35,143) (168,944)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt.................... 419,500 -- 65,045
Capital contributions........................... 155,000 -- 95,455
Net proceeds under revolving credit
facilities................................... 116,424 66,581 25,350
Repayments of long-term debt.................... (561,831) (1,696) (2,383)
Preferred stock dividends....................... -- (224) (7)
Deferred financing costs........................ (30,000) -- --
Other financing activities--net................. (1,185) (4,315) (289)
---------- ---------- ----------
Net cash provided by financing activities......... 97,908 60,346 183,171
---------- ---------- ----------
Effect of exchange rate changes on cash........... 727 (410) (219)
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents..................................... (2,785) 644 3,161
Cash and cash equivalents--beginning of period.... 6,592 5,948 3,391
---------- ---------- ----------
Cash and cash equivalents--end of
period.......................................... $ 3,807 $ 6,592 $ 6,552
---------- ---------- ----------
---------- ---------- ----------
Supplemental cash flow information:
Cash paid for interest, net of amounts
capitalized.................................. $ 10,416 $ 46,236 $ 18,208
---------- ---------- ----------
---------- ---------- ----------
Cash paid for income taxes, net................. $ -- $ 156 $ 181
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of the consolidated/combined
financial statements.
F-7
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
1. NATURE OF OPERATIONS, ORGANIZATION AND OTHER RELATED INFORMATION
Republic Technologies International Holdings, LLC ("RTI" or the "Company")
manufactures and markets special bar quality ("SBQ") steel bar products. SBQ
steel bar 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. The Company produces a wide range of SBQ steel
products and supplies a diverse customer base that includes leading automobile
and industrial equipment manufacturers and their first tier suppliers.
The Company was formed in a combination completed on August 13, 1999 (the
"Combination"). The Combination was completed through a series of mergers, asset
transfers and related steps as set forth in a Master Restructuring Agreement
among Bar Technologies Inc. ("Bar Tech"), Republic Engineered Steels, Inc.
("Republic"), USS/Kobe Steel Company and various of their affiliates. Following
the Combination, a newly formed legal entity, Republic Technologies
International, LLC, a direct wholly-owned subsidiary of the Company, directly or
indirectly owns and operates all of the assets of Bar Tech, Republic and the SBQ
steel products business of the USS/Kobe Steel Company ("USS/Kobe").
Bar Tech and Republic have been operated under common management and
ownership control since prior to the Combination. The consolidated financial
statements of RTI are being presented from the date of the Combination.
Comparative combined financial statements are being presented for Bar Tech and
Republic for the periods that they were under common control prior to the
Combination (the "Predecessor").
Republic has been under common management and control since September 8,
1998, the date acquired. The acquisition of Republic has been accounted for as a
purchase. The combining of Bar Tech and Republic in the Combination is being
accounted for as a common control merger like a pooling of interests. The
acquisition of USS/Kobe as part of the Combination is being accounted for as a
purchase. See Note 4 for additional information related to the common control
combination of Bar Tech and Republic and information related to the acquisitions
of Republic and USS/Kobe.
Prior to the formation of RTI, the individual companies, Bar Tech, Republic
and USS/Kobe, incurred substantial losses. As a result of the Combination, the
Company has substantial indebtedness and is highly leveraged. The Company's
inability to pay interest and principal or to refinance indebtedness could have
a material adverse effect on the Company's financial condition and results of
operations. The Company's future performance is subject to the success of its
consolidation plan pursuant to which RTI expects to create a more efficient,
higher quality network of production facilities operated by a smaller and more
flexible workforce. The success of the consolidation plan will depend upon many
factors including the Company's ability to rationalize its production facilities
and headcount, enhance the productivity of its remaining facilities through
facility specialization and targeted capital investment, eliminate redundant
overhead costs and produce internally more raw materials currently purchased
from third parties. Also contributing to the Company's future success are
general economic conditions and financial, competitive, regulatory, labor and
other factors, many of which may be unforeseen or beyond the Company's control.
In order to implement the consolidation plan or to respond to adverse
developments in factors affecting its business, the Company may need to borrow
additional funds under its revolving credit facility or, to the extent that the
funds are not available thereunder, to obtain additional financing to meet its
cash flow requirements. Restrictive covenants included in the indenture and
other debt obligations may have the effect of limiting the Company's ability to
incur additional indebtedness, or sell assets
F-8
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
1. NATURE OF OPERATIONS, ORGANIZATION AND OTHER RELATED INFORMATION--(CONTINUED)
(most of which are pledged), and may otherwise limit the operational and
financial flexibility of the Company.
2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated/combined financial statements
contain results for Bar Tech for the nine months ended September 30, 1999 and
1998, the results for Republic for the period from September 8, 1998 to
September 30, 1998 and for the nine months ended September 30, 1999, and the
results for USS/Kobe for the period from August 13, 1999 to September 30, 1999.
To conform to the predecessors' fiscal periods for presentation purposes, the
nine month periods ended closest to September 30, 1999 and 1998 and the year
ended December 31, 1998 were used herein. Prior period results are not
comparable with the current periods due to the acquisitions of Republic and
USS/Kobe.
The consolidated/combined financial statements and other financial
information included herein have been prepared by RTI and are unaudited.
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.
The consolidated financial statements include the accounts of RTI and its
wholly owned subsidiaries: Bliss & Laughlin, LLC ("BLI"), Canadian Drawn Steel
Company, Inc. ("CDSC"), Nimishillen & Tuscarawas, LLC ("N&T") and Oberlin
Insurance Company ("OIC"). The combined financial statements include the
accounts of Bar Tech and its wholly owned subsidiaries and Republic and its
wholly owned subsidiaries for the periods that they were under common control
prior to the Combination. All significant intercompany balances have been
eliminated in consolidation/combination.
The Company operates in three reportable segments: hot-rolled,
cold-finished and specialty steels. In connection with the acquisition of
Republic, the Company intends to sell the specialty segment of the business. 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 is in the process of selling its
specialty steels division to Haynes International ("Haynes"). The Company and
Haynes are affiliates as both companies are controlled directly or indirectly by
entities associated with The Blackstone Group. The accompanying
consolidated/combined financial statements reflect the specialty division as a
discontinued business in accordance with Accounting Principles Board Opinion
No. 30. See Note 17 for further information related to discontinued operations.
The combination of USS/Kobe into RTI and the Republic acquisition were
accounted for as purchases as of their respective acquisition dates. Under
purchase accounting, the total purchase price of Republic has been allocated to
the assets acquired and liabilities assumed based on their respective fair
values as of September 8, 1998. Under purchase accounting, the total purchase
price of USS/Kobe will be allocated to the assets acquired and liabilities
assumed as of August 13, 1999, based on valuations and other studies that are
not yet finalized. For the combination of USS/Kobe into RTI, a preliminary
allocation of the purchase price has been made to reduce property, plant and
equipment for the entire amount that the historical net equity of USS/Kobe
exceeds the estimated purchase price (i.e., purchase discount).
F-9
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS--The Company considers all short-term investments
with maturities at the date of purchase of three months or less to be cash
equivalents.
INVENTORIES--Inventories are carried at the lower of cost or market (net
realizable value). Cost is determined using the first-in, first-out (FIFO)
method.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at
cost and include improvements that significantly extend the useful lives of
existing plant and equipment. The Company provides for depreciation of property,
plant and equipment on the straight-line method based upon the estimated useful
lives of the assets. The range of estimated useful lives of the Company's assets
are as follows:
Buildings and improvements..................... 39-40 years
Machinery and equipment........................ 3-30 years
Repairs and maintenance costs are expensed as incurred. Capital
expenditures that are not able to be put into use immediately are included in
construction-in-process. As these projects are completed, they are transferred
to depreciable assets. Net gains or losses related to asset dispositions are
recognized in earnings in the period in which the disposition occurs.
INTANGIBLE ASSETS--Intangible assets consist primarily of goodwill,
trademarks, patented and unpatented technology and other intangible assets
arising from the acquisitions of Bar Tech and Republic by Blackstone Capital
Partners II Merchant Banking Fund L.P. and its affiliates (together,
"Blackstone") and Veritas Capital Fund, L.P. and its affiliates (together,
"Veritas") and the combination with USS/Kobe. Goodwill is being amortized over
the period of expected benefit of 40 years. Other acquisition related intangible
assets are being amortized over the period of expected benefit ranging from
28 months to 40 years. Intangible assets also include deferred loan and bond
fees and intangible pension assets. The deferred loan and bond fees are being
amortized using the effective interest rate method over the lives of the related
debt instruments.
IMPAIRMENT OF LONG-LIVED ASSETS--Long-lived assets, consisting of property,
plant and equipment and intangible assets, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the recovery amount or fair value, as
defined, of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
INCOME TAXES--The Company is a limited liability company that is treated
similar to a partnership for U.S. federal and state income tax purposes and,
accordingly, has no income tax provision or deferred income tax assets or
liabilities related to these jurisdictions. Amounts for income taxes consist
primarily of a provision for foreign taxes relating to the Company's Canadian
subsidiary, CDSC. Prior to the Combination, the Predecessor accounted for income
taxes pursuant to the asset and liability method.
ENVIRONMENTAL COSTS--The Company and other steel companies have in recent
years become subject to increasingly stringent environmental laws and
regulations. It is the policy of the Company to endeavor to comply with
applicable environmental laws and regulations. The Company established a
liability for an amount which the Company believes is adequate, based on
information
F-10
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 judgement, are likely to occur. This estimate is based on currently
available facts, existing technology, and presently enacted laws and
regulations, and it takes into consideration the likely effects of inflation and
other societal and economic factors. The precise timing of such events cannot be
reliably determined at this time due to absence of any deadlines for remediation
under the applicable environmental laws and regulations pursuant to which such
remediation costs will be expended. No claims for recovery are netted against
the stated amount.
REVENUE RECOGNITION--The Company records revenues at the time the product
is shipped to its customers. Sales are made with no right of return.
FOREIGN CURRENCY TRANSLATION--Asset and liability accounts of the Company's
foreign subsidiary, CDSC, are translated into U. S. dollars using current
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period. Translation
adjustments are reflected as a component of member's interest/stockholders'
equity (deficit).
Transaction gains and losses are included in the consolidated/combined
statements of operations as incurred. These amounts were not significant in all
periods presented.
COMPREHENSIVE INCOME (LOSS)--Total comprehensive income (loss) for the
period from August 13, 1999 to September 30, 1999, the period from January 1,
1999 to August 12, 1999 and the nine month period ended September 30, 1998 is as
follows:
THE COMPANY--
------------------ THE PREDECESSOR--COMBINED
CONSOLIDATED ----------------------------------------
PERIOD FROM PERIOD FROM NINE MONTH
AUGUST 13, 1999 TO JANUARY 1, 1999 TO PERIOD ENDED
SEPTEMBER 30, 1999 AUGUST 12, 1999 SEPTEMBER 30, 1998
------------------ ------------------ ------------------
Net loss................................ $(87,123) $ (114,913) $(37,733)
Foreign currency translation
adjustment............................ 257 157 (766)
Minimum pension liability adjustment.... -- 2,491 --
-------- ---------- --------
Total comprehensive loss................ $(86,866) $ (112,265) $(38,499)
-------- ---------- --------
-------- ---------- --------
Other comprehensive loss in each of the periods above is net of $0 income
tax effects.
The accumulated other comprehensive income (loss) balances are as follows:
ACCUMULATED
FOREIGN CURRENCY MINIMUM OTHER
TRANSLATION PENSION LIABILITY COMPREHENSIVE
ADJUSTMENT ADJUSTMENT INCOME (LOSS)
---------------- ----------------- -------------
Balance, December 31, 1998...................... $ (1,191) $(2,491) $(3,682)
Current period change........................... 414 2,491 2,905
-------- ------- -------
Balance, September 30, 1999..................... $ (777) $ -- $ (777)
-------- ------- -------
-------- ------- -------
F-11
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In preparation of the condensed consolidated/combined financial statements
included herein, the Company uses estimates for, among others, defined benefit
pension obligations, other postretirement benefit obligations, environmental
remediation and fair value adjustments related to the acquisition, all of which
are significant to the condensed consolidated/combined financial statements
taken as a whole. Changes in circumstances in the near term could have an impact
on these estimates, and the change in estimate could have a material effect on
the consolidated/combined financial statements.
NEW ACCOUNTING PRONOUNCEMENT--In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and for Hedging Activities,"
("SFAS 133"). This statement establishes accounting and reporting standards
requiring that every derivative instrument be recorded on the balance sheet as
either an asset or liability measured at fair value. SFAS 133 requires that
changes in the fair value of derivatives be recognized currently in earnings
unless specific hedge accounting criteria are met. SFAS 133, as amended, is
effective for fiscal years beginning after June 15, 2000, and cannot be applied
retroactively. The Company has not completed its evaluation of SFAS 133 and,
accordingly, is unable to determine what impact, if any, SFAS 133 will have on
its financial statements.
4. BUSINESS COMBINATIONS
On August 13, 1999, the Combination of Bar Technologies Inc., Republic
Engineered Steels, Inc., and the steelmaking and bar producing assets of the
USS/Kobe Steel Company was completed. The Combination occurred through a series
of mergers, asset transfers and related steps that resulted in the formation of
the Company. Blackstone and Veritas indirectly own approximately 51.5 percent of
the newly combined operations, while USX Corporation and Kobe Steel, Ltd. each
indirectly own approximately 15 percent of the newly combined operations. The
seamless pipe business of the USS/Kobe Steel Company in Lorain, Ohio was not
part of the Combination. In conjunction with the Combination, the Company
entered into a new credit facility and applied proceeds from borrowings under
this new credit facility, together with proceeds of its offering of the senior
secured notes and warrants, including warrants sold separately from the senior
secured notes concurrent with the Combination, and new equity contributions, to
refinance a substantial portion of the indebtedness of Republic, RES Holding,
Bar Tech and USS/Kobe. The combination of Bar Tech and Republic is being
accounted for as a common control merger like a pooling of interests.
F-12
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
4. BUSINESS COMBINATIONS--(CONTINUED)
Combined and separate results of Bar Tech and Republic during the periods
preceding the Combination, while under common control, were as follows:
BAR TECH REPUBLIC ADJUSTMENT COMBINED
-------- -------- ---------- --------
Period from January 1, 1999 to August 12, 1999:
Net sales............................................ $152,494 $360,355 $(38,284) $474,565
Net loss............................................. (25,279) (89,634) -- (114,913)
Nine months ended September 30, 1998:
Net sales............................................ $222,274 $ 53,213 $ (25) $275,462
Net loss............................................. (26,358) (5,299) (6,076) (37,733)
The combined financial results presented above include adjustments made to
conform accounting policies of the two companies. The only adjustment impacting
net loss was the restatement of Republic's cost of goods sold to change the
inventory accounting policy from last-in, first-out (LIFO) to first-in,
first-out (FIFO). Sales from Bar Tech to Republic for the period from January 1,
1999 to August 12, 1999 and the nine month period ended September 30, 1998 were
$23,606 and $0, respectively, and sales from Republic to Bar Tech for the period
from January 1, 1999 to August 12, 1999 and the nine month period ended
September 30, 1998 were $14,678 and $25, respectively. The amount of
intercompany profit in inventory at the end of each period is not significant.
In connection with the combination of Bar Tech and Republic, the Company
recorded one-time charges for investment banking and professional fees in the
quarter ended September 30, 1999 of approximately $6,300. The transaction costs
related to the acquisition of USS/Kobe are included in the purchase price.
The Company also recorded one-time charges for call and tender offer
premiums, prepayment penalties and write-off of unamortized deferred financing
costs associated with the retirement of various borrowings of Bar Tech and
Republic refinanced in connection with the Combination during the quarter ended
September 30, 1999 of approximately $23,300.
Blackstone and Veritas acquired control of Republic on September 8, 1998
for a price of $7.25 per share of Republic common stock with the intent of
combining Bar Tech and Republic, subject to a refinancing of the combined
companies' debt. The purchase price totaled approximately $154,260, including
transaction related expenses and net of cash acquired of $4,041. RES Holding and
its wholly owned subsidiary, RES Acquisition were formed for the purpose of
acquiring Republic. The source of funds contributed to RES Acquisition consisted
of (i) a capital contribution of $95,455 by RES Holding representing proceeds
from the issuance of its common stock to Blackstone, Veritas and HVR Holdings,
L.L.C. and (ii) borrowings of approximately $65,046 under the RES Holding
Facility. RES Acquisition acquired control of Republic on September 8, 1998 and
RES Acquisition merged with and into Republic on September 21, 1998.
The acquisition of Republic has been accounted for as a purchase and,
pursuant to the provisions of SEC Staff Accounting Bulletin No. 54 ("SAB
No. 54") and the rules of pushdown accounting, the acquisition gave rise to a
new basis of accounting. The purchase price and related acquisition expenses
exceeded the fair value of net assets acquired by $72,557 and has been
recognized as goodwill, which is being amortized over 40 years. The results of
Republic's operations are included in the consolidated/combined financial
statements from its September 8, 1998 acquisition date.
F-13
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
4. BUSINESS COMBINATIONS--(CONTINUED)
The acquisition of USS/Kobe has also been accounted for using the purchase
method of accounting. The purchase price for USS/Kobe totaled approximately
$102.5 million, including transaction costs and net of cash acquired of $14.6
million. Consideration in the transaction included equity to the sellers valued
at approximately $83.7 million and seller debt assumed of $23.7 million. Under
purchase accounting, the total purchase cost is allocated to the assets acquired
and liabilities assumed of USS/Kobe based on their respective fair values as of
August 12, 1999. The allocation of the purchase price to the defined benefit
pension obligation, other postretirement benefits obligations and property,
plant and equipment is preliminary and based on valuations and other studies
that are not yet finalized. For the combination of USS/Kobe into Republic
Technologies, a preliminary allocation of the purchase price discount of
$101.0 million has been made to reduce property, plant and equipment for the
entire amount that the historical net equity of USS/Kobe exceeds the estimated
purchase price. The actual allocation of purchase price and the resulting effect
on income from operations may differ significantly from these preliminary
estimates.
The purchase price has been allocated to the assets purchased and
liabilities assumed based upon the fair values on the date of the acquisition as
follows:
REPUBLIC USS/KOBE
-------- --------
Purchase price:
Cash consideration................................................ $143,901
Estimated fair value of equity consideration...................... $ 83,700
Additional seller debt assumed.................................... 23,700
Acquisition fees and expenses..................................... 14,401 9,700
-------- --------
Total purchase price...................................... 158,302 117,100
Book value of net assets acquired................................... 85,100 218,100
-------- --------
Excess purchase price over (discount from) book value of net assets
acquired.......................................................... 73,202 (101,000)
Allocation of purchase price:
(Increase) decrease in property, plant and equipment.............. (6,729) 101,000
Increase in other intangible assets............................... (39,352)
Increase in defined benefit pension obligation.................... 41,357
Decrease in other postretirement benefits......................... (45,344)
Increase in accrued expenses...................................... 10,848
Increase in inventory............................................. (16,980)
Decrease in deferred tax asset.................................... 54,829
Other, net........................................................ 726
-------- --------
Goodwill............................................................ $ 72,557 $ --
-------- --------
-------- --------
F-14
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
5. INVENTORIES
The components of inventories are as follows:
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
Raw materials...................................... $ 42,222 $ 28,506
Work-in-process.................................... 82,307 65,417
Finished goods..................................... 151,068 109,321
-------- ---------
Total.................................... $275,597 $ 203,244
-------- ---------
-------- ---------
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
Goodwill........................................... $ 85,416 $ 12,859
Excess purchase price over net assets acquired..... -- 147,652
Patented and unpatented technology................. 55,300 --
Intangible pension asset........................... 18,673 --
Other intangible assets............................ -- 171
Deferred loan and bond fees........................ 33,098 23,151
-------- ---------
192,487 183,833
Less accumulated amortization.................... (8,272) (10,456)
-------- ---------
Total.................................... $184,215 $ 173,377
-------- ---------
-------- ---------
7. LONG-TERM DEBT
Long-term debt of the Company consists of the following:
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
Republic Technologies International, LLC:
13 3/4% Senior Secured Notes, due 2009........... $425,000
Former Republic:
9% Solid Waste Revenue Bonds, Series 1996, due
June 2021..................................... 53,700 $ 53,700
8 1/4% Solid Waste Revenue Bonds, Series 1994,
due October 1, 2014........................... 20,200 20,200
9 7/8% First Mortgage Notes, due December 15,
2001.......................................... -- 203,615
Republic Revolving Credit Agreement.............. -- 13,700
Other............................................ 482 2,306
F-15
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
7. LONG-TERM DEBT--(CONTINUED)
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
Former Bar Tech:
13 1/2% Senior Secured Notes, due April 1,
2001.......................................... -- $ 91,609
Marine Midland Term Loan, interest rate at Prime
or LIBOR plus 1.0%, due March 1, 2003......... -- 6,929
RDC Loan, interest rate at 7.75%, due July 1,
2004.......................................... -- 411
Economic Development Partnership
("EDP I"), interest at 3.0%, due October 1,
2009.......................................... $ 5,707 5,707
Sunny Day Fund I ("SDF I"), interest rate at
3.0%, due October 1, 2009..................... -- 6,491
Community Development Block Grant Program
("CDBG"), interest rate at 3.0%, due July 1,
2010.......................................... 630 690
Economic Development Partnership
("EDP II"), interest rate at 3.0%, due
July 1, 2010.................................. 1,300 1,300
Housing and Urban Development 108
("HUD") Bonds, interest rates between 6.6% and
8.2%, due on various dates from August 1, 1999
to September 26, 2003......................... 4,500 5,750
Pennsylvania Industrial Development Authority
Note ("PIDA I"), interest rate at 2.0%, due
October 1, 2009............................... -- 1,646
Pennsylvania Industrial Development Authority
Note ("PIDA II"), interest rate at 3.0%, due
March 1, 2011................................. -- 1,797
Bethlehem Subordinated Note, interest rate at
7.0%, due September 26, 2002.................. -- 5,500
Business Infrastructure Development ("BID")
Program, interest rate at 3.0%, due April 1,
2001.......................................... 2,300 2,500
Economic Development Partnership
("EDP III"), interest rate at 3.0%, due
December 1, 2007.............................. 3,000 3,000
Industrial Revenue Bond ("IRB"), interest rate is
variable, calculated weekly, representing
minimum rate required to sell bonds in a
secondary market, due December 1, 2018........ 3,600 3,600
F-16
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
7. LONG-TERM DEBT--(CONTINUED)
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
Former USS/Kobe:
Environmental Bonds:
1984 Series, interest due monthly at a
variable rate based on the average of
thirty-day yield evaluations at par of not
less than twenty issuers of tax-exempt
securities, principal due December 2001..... $ 9,000
1995 Series, variable rate tax-exempt
securities, principal due November 2015..... 4,745
-------- ---------
534,164 $ 430,451
Less original issue discount....................... 5,439 4,163
Less discount on warrants.......................... 45,632 --
Less current maturities............................ 2,149 3,805
-------- ---------
Long-term debt..................................... $480,944 $ 422,483
-------- ---------
-------- ---------
13 3/4% SENIOR SECURED NOTES
On August 13, 1999, the Company's wholly-owned subsidiary, Republic
Technologies International, LLC and its subsidiary, RTI Capital Corp., co-issued
senior secured obligations amounting to $425 million aggregate principal amount
maturing on July 15, 2009 ("Senior Secured Notes") in a private offering.
Interest on the Senior Secured Notes is payable semi-annually on each January 15
and July 15, commencing January 15, 2000, to the holders of record of Senior
Secured Notes at the close of business on January 1 and July 1 immediately
preceding such interest payment date.
The Senior Secured Notes are redeemable, in whole or in part, at the option
of the issuers, at any time on or after July 15, 2004, at the redemption prices,
which are expressed as percentages of principal amount, set forth below, plus
accrued and unpaid interest and liquidated damages, if any, to the redemption
date, if redeemed during the 12-month period beginning on the years indicated
below:
YEAR PERCENTAGE
- ---- ----------
2004 .................................................................................... 106.875%
2005 .................................................................................... 105.156%
2006 .................................................................................... 103.438%
2007 .................................................................................... 101.719%
2008 and thereafter........................................................................ 100.000%
In addition, at any time and from time to time prior to July 15, 2002, the
issuers may, at their option, following one or more Public Equity Offerings (as
defined in the indenture related to the Senior Secured Notes (the "Indenture"))
redeem up to an aggregate of 35% of the principal amount of notes originally
issued from the holders, on a pro rata basis, at a redemption price equal to
113.750% of the principal amount thereof, plus accrued and unpaid interest and
liquidated damages,
F-17
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
7. LONG-TERM DEBT--(CONTINUED)
if any, to the date of redemption; provided at least 65% aggregate principal
amount of Senior Secured Notes would remain outstanding immediately after giving
effect to any such redemption; provided, further, that if the Public Equity
Offering is by the Company, Republic Technologies International, LLC, or any
other direct or indirect parent company of the Company, the net proceeds thereof
shall have been contributed to the Company or used to buy Capital Stock (other
than Disqualified Capital Stock) (as such terms are defined in the Indenture) of
the Company on or prior to the date of redemption.
The Senior Secured Notes are initially secured by, subject to exceptions
and limitations, (1) a first priority lien on, and security interest in,
substantially all of the real and personal properties of the Company and its
restricted subsidiaries, other than real and personal property located at the
Cast-Roll(Trademark) and Cartersville, Georgia facilities and inventory,
accounts receivable, intellectual property and related assets and (2) a first
priority lien, shared on an equal and ratable basis with the lenders of the
Company's new credit facility, on the Company's equity interests and its
restricted subsidiaries. Collateral is subject to release without substitution
under a number of circumstances. The Senior Secured Notes contain affirmative
and negative covenants including provisions for restrictions on additional
borrowings, certain investments, certain payments, sale or disposition of
assets, payment of dividends and change of control provisions.
The Senior Secured Notes are fully and unconditionally guaranteed on a
senior basis, jointly and severally, by the Company and by all of Republic
Technologies International, LLC's subsidiaries, except for RTI Capital Corp., a
co-issuer of the securities, and Oberlin Insurance Company. The Company has no
assets other than its investment in Republic Technologies International, LLC.
Separate condensed consolidating financial information of the guarantor and
non-guarantor subsidiaries is not presented as the non-issuer, non-guarantor
subsidiary represents less than one percent of the Company's consolidated assets
and revenues.
FORMER REPUBLIC LOAN AGREEMENTS
On June 1, 1996, Republic obtained $53.7 million of financing through the
issuance of 9% Solid Waste Revenue Bonds, Series 1996, due June 1, 2021 in
connection with the solid waste disposal facilities installed at its Canton
facility. These bonds were issued in addition to the Solid Waste Revenue, Series
1994 noted below, to assist in financing the facilities. As of September 30,
1999 and December 31, 1998, Republic had available $347 thousand and $337
thousand, respectively, of the $53.7 million which is classified as long-term
restricted cash in the accompanying consolidated/combined balance sheets.
On October 28, 1994, Republic obtained $20.2 million of financing through
the issuance of 8 1/4% Solid Waste Revenue Bonds, Series 1994, due October 1,
2014 in connection with the solid waste disposal facilities installed at the
Canton facility.
On December 15, 1993, Republic issued $200 million aggregate principal
amount of 9 7/8% First Mortgage Notes due December 15, 2001 ("First Mortgage
Notes") in an underwritten public offering. The First Mortgage Notes were
redeemable, in whole or in part, at the option of Republic, on or after
December 15, 1999 at specified premiums set forth therein which declined over
three years. The First Mortgage Notes were secured by a mortgage on
substantially all of Republic's property, plant and equipment as of
December 15, 1993. The proceeds from the First Mortgage Notes were used in part
to repay the balance outstanding under the then existing revolving credit and
term loan
F-18
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
7. LONG-TERM DEBT--(CONTINUED)
agreement and Republic's unsecured subordinated debentures held by LTV Steel
Company, Inc. ("LTV Steel").
As a result of the acquisition of Republic, Republic was required by the
terms of the indenture for the First Mortgage Notes to offer to purchase any and
all of the First Mortgage Notes at a purchase price of $1,010 per $1,000
principal amount plus accrued and unpaid interest (the "Change of Control
Offer"). Such premium has been recorded as a fair value adjustment to the
liabilities assumed in the acquisition of Republic with a corresponding increase
to the excess purchase price over net assets acquired. On October 5, 1998,
Republic commenced the Change of Control Offer, which expired on November 5,
1998. Approximately $28.1 million principal amount of First Mortgage Notes was
tendered with the Change of Control Offer. The purchase of the tender notes was
assigned to affiliates of the Lenders (as defined below).
On October 29, 1998, Republic commenced a new offer to purchase any and all
of the outstanding First Mortgage Notes at a purchase price of $1,042.30 per
$1,000 principal amount plus accrued and unpaid interest (the "Offer"). The
Offer expired on June 30, 1999. Republic accrued the offer premium over the
period of the Offer. For the purpose of funding the Change of Control Offer and
the Offer, Republic entered into an additional senior credit facility (the
"Bridge Facility") with Chase, DLJ Bridge Finance, Inc. and BankBoston N. A.
(the "Lenders") which provided for up to $208.5 million of borrowings. Republic
utilized the Bridge Facility to purchase and retire all of the First Mortgage
Notes on June 30, 1999. The Bridge Facility was then repaid with proceeds of the
financing completed concurrent with the Combination.
On December 21, 1993, Republic entered into a $90 million revolving credit
facility, which had a four-year term expiring in December 1997. Effective
April 25, 1997, Republic amended and restated this $90 million revolving credit
facility ("Republic Revolving Credit Agreement"). The amended and restated
Republic Revolving Credit Agreement permitted borrowings up to $115 million and
was secured by Republic's receivables, inventories, stock of a subsidiary,
short-term investments and certain intangible assets.
The Republic Revolving Credit Agreement, as amended in November 1998,
provided up to $50 million for letters of credit. Borrowings under the Republic
Revolving Credit Agreement bore interest at a per annum rate equal to, at
Republic's option, (i) the higher of the base rate of BankBoston and 1/2% above
the Federal Funds effective rate plus 1/4%; or (ii) LIBOR plus 2 1/4%. The
borrowing base under the Republic Revolving Credit Agreement was the sum of 55%
of eligible inventory (as defined) up to a maximum of $75 million and 85 percent
of eligible accounts receivable (as defined). Fees of 2 1/2% per annum on the
maximum drawing amount of each standby or documentary letter of credit were
payable on the date of issuance of such letter of credit.
On May 6, 1999, the Republic Revolving Credit Agreement was once again
amended (the "Amended Republic Agreement") to reflect the formation of Republic
Technologies International Marketing LLC ("Marketing JV"), a marketing joint
venture owned in equal proportions by Republic and Bar Tech. Under the Amended
Republic Agreement, the Marketing JV became a co-borrower and all borrowings
were secured additionally by the receivables of the Marketing JV. Under the
terms of the Marketing JV agreement, Republic purchased all the receivables of
the Marketing JV on a discounted basis as sales were made to customers. The
Amended Republic Agreement provided a temporary increase to permitted borrowings
from $115 million to $135 million until December 31, 1999. The Amended Republic
Agreement also provided up to $50 million for letters of credit. Interest rates
on borrowings under the Amended Republic Agreement were increased for base rate
loans to
F-19
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
7. LONG-TERM DEBT--(CONTINUED)
base rate plus 3/4% and for LIBOR rate plus 2 3/4%. Fees for standby or
documentary letters of credit were increased to 2 3/4%. As of September 30, 1999
and December 31, 1998, there were no outstanding letters of credit.
As of December 31, 1998, amounts outstanding under the Republic Revolving
Credit Agreement were $13.7 million.
The Republic Revolving Credit Agreement was extinguished on August 13, 1999
with proceeds from the financing completed concurrent with the Combination. The
Marketing JV was terminated as a result of the Combination.
FORMER BAR TECH SENIOR SECURED NOTES
Bar Tech's 13 1/2% Senior Secured Notes due April 1, 2001, consisting of
$91.6 million in aggregate principal amount at December 31, 1998 (the "Bar Tech
Senior Secured Notes"), were fully and unconditionally guaranteed on a senior
basis, jointly and severally, by Bar Tech's wholly-owned subsidiary, BLI and its
wholly-owned subsidiary, CDSC. The subsidiary guarantors comprised all of the
direct and indirect subsidiaries of Bar Tech. In connection with the
Combination, Bar Tech initiated a redemption of the Bar Tech Senior Secured
Notes at a purchase price of 106.75% of their principal amount, plus accrued and
unpaid interest. The Bar Tech Senior Secured Notes were defeased concurrent with
the Combination pending completion of the redemption. Funds for this defeasance
were obtained from proceeds from the financing completed concurrent with the
Combination. The redemption of the Bar Tech Senior Secured Notes was completed
on September 13, 1999.
In connection with the Bar Tech Senior Secured Notes, warrants were issued
which entitled the holders thereof to acquire an aggregate of 91,609 shares of
Class A Common Stock. The warrants are exercisable at a price of $0.01 per share
and, as a result of the completion of the Combination, are exercisable to
purchase shares of Class A common stock of Republic Technologies International,
Inc., the indirect parent of the Company. The warrants become exercisable on
April 1, 2000 and will expire on April 1, 2001.
BAR TECH ECONOMIC DEVELOPMENT FINANCING
In connection with the acquisition of the assets of The Bethlehem Steel
Company ("Bethlehem") Bar, Rod and Wire Division and its original modernization
and expansion plan, Bar Tech entered into loan agreements with lenders in
Pennsylvania and New York to procure a portion of the financing for the
transaction.
PENNSYLVANIA
Bar Tech entered into the Master Agreement with the Commonwealth of
Pennsylvania and various of its agencies (collectively, the "Commonwealth") on
July 18, 1994. Pursuant to the Master Agreement, Bar Tech entered into loan
agreements with the Commonwealth, through its Department of Commerce and
Department of Community Affairs. The total amount committed to Bar Tech by the
Commonwealth pursuant to the Master Agreement was $33.0 million. The loans have
been made through the Sunny Day Fund ("SDF"), the Pennsylvania Industrial
Development Authority ("PIDA"), the Business Infrastructure Development Program
("BID"), the Economic Development Partnership
F-20
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
7. LONG-TERM DEBT--(CONTINUED)
("EDP") and the Community Development Block Grant Program ("CDBG"). (The loans
governed by the Master Agreement are collectively referred to herein as the
"Commonwealth Loans").
Bar Tech has obtained approval from the Pennsylvania Industrial Development
Authority regarding the deferral of principal on its PIDA and BID loans, and
principal and interest deferral on its EDP loans. Bar Tech must resume principal
payments related to PIDA and BID loans and principal and interest payments
related to EDP loans beginning January 2000. All deferred loans are required to
be amortized over their original maturity schedule with no deferral of final
maturity.
As of September 30, 1999 and December 31, 1998, $12.9 million and
$23.1 million, respectively, in aggregate principal amount of Commonwealth Loans
were outstanding.
NEW YORK
JDA GUARANTEED MARINE MIDLAND TERM LOAN--Bar Tech was party to a Loan and
Use Agreement, dated September 21, 1994, with Marine Midland Bank ("Marine
Midland") (the "Marine Midland Loan"), whereby Marine Midland loaned
$10.0 million to Bar Tech for use in connection with the acquisition of
Lackawanna, New York real estate from Bethlehem. The Marine Midland Loan was
guaranteed by the New York Job Development Authority ("JDA"). Interest on the
Marine Midland Loan was prime rate, or the LIBOR rate, as determined by Bar
Tech. The Marine Midland Loan was extinguished with proceeds from the financing
completed concurrent with the Combination.
RDC LOAN--Bar Tech was party to a Loan Agreement with the Buffalo and Erie
County Regional Development Corporation ("RDC") providing for a loan in the
amount of $0.5 million to be used by Bar Tech for working capital needs (the
"RDC Loan"). The RDC Loan had an interest rate of 7.75% per annum until July 1,
1999, and had an adjustable rate thereafter. The RDC Loan was secured by a
Security Agreement, which granted RDC a security interest in equipment,
fixtures, inventory, accounts receivable, chattel paper and general intangibles.
The RDC Loan was extinguished with proceeds from the financing completed
concurrent with the Combination.
BETHLEHEM SUBORDINATED LOAN AGREEMENT
Bar Tech entered into $5.5 million Subordinated Loan Agreement, dated
September 21, 1994, with Bethlehem (the "Bethlehem Loan"). The terms of the
agreement provide for three equal installments on the first day of October in
each of the years 2000, 2001 and 2002 at a rate of 7.0% per annum and is due on
October 1, 2002. The Bethlehem Loan was secured by a subordinated security
interest in certain real and personal property of Bar Tech and any and all
proceeds therefrom. The Bethlehem Loan was extinguished with proceeds from the
financing completed concurrent with the Combination.
INDUSTRIAL REVENUE BONDS
In December 1988, the Development Authority of Cartersville, Georgia issued
$3.6 million in aggregate principal amount of its tax exempt industrial revenue
bonds, or "IRBs," the proceeds of which were loaned to Bar Tech's Bliss &
Laughlin subsidiary and used to partially fund the construction and equipping of
Bliss & Laughlin's Cartersville, Georgia facility. The Cartersville IRBs bear
interest at a rate equal to the minimum rate of interest which, in the opinion
of the remarketing agent for the Cartersville IRBs, would be necessary to sell
Cartersville IRBs in the secondary market. The interest rates paid on the
Cartersville IRBs varied from 3.26% to 4.75% during fiscal
F-21
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
7. LONG-TERM DEBT--(CONTINUED)
1998 and was 4.20% at September 30, 1999. Principal payments of $300,000 are due
on the Cartersville IRBs on each December 1 beginning in 2009 and continuing
through 2012. Thereafter, payments of $400,000 are due on each December 1 until
the final payment on December 1, 2018. The Cartersville IRBs are secured by
Bliss & Laughlin's Cartersville, Georgia facility and the equipment located at
the facility. As of September 30, 1999, $3.6 million of indebtedness was
outstanding under the Cartersville IRBs.
USS/KOBE ENVIRONMENTAL BONDS
1984 EIRBS
In December 1984, the Ohio Water Development Authority issued $9 million in
aggregate principal amount of tax exempt variable rate demand environmental
improvement revenue bonds, or "1984 EIRBs," the proceeds of which were loaned to
USX Corporation and used to finance the cost of pollution control equipment at
the Lorain, Ohio facility, which was contributed by USX Corporation to USS/Kobe
Steel Company in 1989. The 1984 EIRBs are special obligations of the State of
Ohio exempt from various forms of federal, state and local income taxation and
are therefore subject to mandatory redemption upon the occurrence of a
determination of taxability, and are further subject to optional and mandatory
redemption and tender prior to maturity pursuant to the terms of the trust
indenture agreement concerning the 1984 EIRBs.
The interest rates paid on the 1984 EIRBs averaged 3.68% during calendar
year 1998 and was 3.37% at September 30, 1999. The 1984 EIRBs mature on December
1, 2001. As of September 30, 1999, $9.0 million of indebtedness was outstanding
under the 1984 EIRBs.
In connection with the original issuance of the 1984 EIRBs, PNC Bank, N.A.
issued an irrevocable, direct-pay letter of credit to secure payment of the
principal of, interest on and the purchase price of the 1984 EIRBs, in an amount
equal to the principal of the 1984 EIRBs plus an amount equal to 75 days of
interest on the 1984 EIRBs at a rate of 15% per year. Draws on the letter of
credit are secured by a first priority lien on bonds purchased as a result of
the draw pursuant to the terms of the reimbursement agreement and a pledge and
security agreement entered into between PNC and USX Corporation.
In connection with the consummation of the Combination, the Company agreed
to pay the debt service on the 1984 EIRBs, including remarketing fees and
amounts due under the PNC letter of credit. The Company may need to make
payments in respect of the 1984 EIRBs earlier than scheduled if USX Corporation
terminates the PNC letter of credit or otherwise makes early payment in respect
of the 1984 EIRBs.
1995 EIRBS
In November 1995, the Ohio Air Quality Development Authority issued $10.16
million of its tax exempt variable rate environmental improvement revenue bonds,
or "1995 EIRBs," the proceeds of which were loaned to USX Corporation for the
purpose, in part, of refinancing its outstanding $4.745 million Ohio Air Quality
Development Authority Floating Rate Environmental Improvement Revenue Bonds,
Series B. These Series B bonds had been issued in 1980 to finance the cost of
pollution control equipment at the Lorain facility. The 1995 EIRBs are special
obligations of the State of Ohio exempt from various forms of federal, state and
local income taxation and are therefore subject to mandatory redemption upon the
occurrence of a determination of taxability, and are
F-22
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
7. LONG-TERM DEBT--(CONTINUED)
further subject to optional and mandatory redemption and tender prior to
maturity pursuant to the terms of the trust indenture agreement concerning the
1995 EIRBs.
The interest rates paid on the 1995 EIRBs averaged 3.54% during calendar
year 1998 and was 3.36% at September 30, 1999. The 1995 EIRBs mature on November
1, 2015. As of September 30, 1999, $4.7 million of indebtedness was outstanding
under the 1995 EIRBs.
The Wachovia Bank of North Carolina, N.A. has issued an irrevocable,
direct-pay letter of credit to secure payment of the principal of, interest on
and the purchase price of the 1995 EIRBs, in a stated amount equal to the
principal amount of the 1995 EIRBs plus an amount equal to 210 days of interest
on the 1995 EIRBs at a rate of 12% per year. Draws on the letter of credit are
secured by a first priority lien on bonds purchased as a result of the draw
pursuant to the terms of the reimbursement agreement and a pledge and security
agreement entered into between Wachovia and USX Corporation.
In connection with the consummation of the Combination, the Company agreed
to pay 46.7% of the debt service on the 1995 EIRBs, including 46.7% of the
remarketing fees and amounts due under the Wachovia letter of credit. The
Company may need to make payments in respect of the 1995 EIRBs earlier than
scheduled if USX Corporation terminates the Wachovia letter of credit or
otherwise makes early payment in respect of the 1995 EIRBs.
8. REVOLVING CREDIT FACILITIES
In connection with the Combination, the Company entered into a new senior
revolving credit facility ("New Revolver") with BankBoston, N.A. ("BankBoston"),
as administrative agent, and other lenders. The New Revolver is for a total
principal amount of up to $425 million. The amount available at any time is
limited by a borrowing base. The borrowing base equals 60% of eligible inventory
subject to a maximum; plus 85% of eligible accounts receivable; plus the lesser
of (a) 67% of the appraised liquidation in place of the Cast-Roll(Trademark)
facility plus the appraised value of the related real estate in Canton, Ohio,
provided that no downward adjustment will be made prior to March 31, 2001 and,
(b) $125 million, minus the product of $4.5 million and the number of quarters
elapsed beginning with the quarter ended December 31, 2000; minus a reserve of
between $35 million and $50 million, which will be adjusted based on the amount
of undrawn available amounts under the facility. There were $300.2 million of
borrowings under the New Revolver outstanding at September 30, 1999. Amounts
available under the New Revolver at September 30, 1999 were $107.8 million.
Borrowings under the New Revolver bear interest, at the Company's option,
of either: a base rate used by BankBoston, plus an 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 is 1.25% and on
eurodollar loans is 3.25%. The applicable margin on base rate and eurodollar
loans may be increased by .25% under specified circumstances.
The Company must also pay a commitment fee on the unused commitments under
the New Revolver facility equal to 0.50% per annum, payable monthly in arrears.
The New Revolver contains covenants that 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 the notes or any of its
subordinated indebtedness.
F-23
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
8. REVOLVING CREDIT FACILITIES--(CONTINUED)
On September 8, 1998, the acquisition by RES Acquisition of Republic was
partially funded with short-term borrowings of approximately $65.0 million (the
"RES Holding Facility") under the Credit Agreement dated September 8, 1998
between RES Holding and The Chase Manhattan Bank ("Chase"), as administrative
agent. The maturity of the RES Holding Facility was June 8, 1999, however, the
agreement was extended to September 30, 1999. This debt was refinanced with
proceeds of the financing completed concurrent with the Combination.
Bar Tech had a revolving credit agreement with a group of banks with Chase
as agent which originally provided Bar Tech with borrowings in an aggregate
principal amount of up to $90.0 million, of which $5.4 million was in the form
of letters of credit. This revolving credit agreement was subsequently amended
in September 1997 to provide for the addition of a new revolving sub-facility
("Sub-Facility") and amended certain portions of the original revolving credit
agreement. The Sub-Facility component of the amended agreement provided Bar Tech
with up to $15.0 million of additional borrowing capacity based on a higher
receivable and inventory advance rate than in the revolving credit agreement.
On May 5, 1999, Bar Tech further amended its revolving credit agreement
("Bar Tech Amended Agreement") in conjunction with the formation of the
Marketing JV. The Bar Tech Amended Agreement provided for a reduction in Bar
Tech's borrowing capacity to $77.0 million, of which $5.3 million was in the
form of letters of credit. In addition, amounts available under Bar Tech's Sub-
Facility were reduced to $2.0 million with this Bar Tech Amended Agreement. By
July 31, 1999, amounts available under the Bar Tech Amended Agreement were
further reduced to $71.5 million and amounts were no longer available under Bar
Tech's Sub-Facility. The maturity date of the Bar Tech Amended Agreement
remained April 2, 2000 and is secured by certain assets and stock of Bar Tech.
Borrowings under the Bar Tech Amended Agreement bear interest at a rate per
annum equal to, at Bar Tech's option, either a Prime rate plus 2.0% or adjusted
LIBOR plus 3.0%, subject to upward adjustment in certain circumstances.
Sub-Facility borrowings bear interest at a rate per annum equal to, at Bar
Tech's option, either a Prime rate plus 3.5% or LIBOR plus 4.5%. Borrowings
outstanding under the Bar Tech Amended Agreement including the Sub-Facility were
$79.0 million at December 31, 1998. Weighted-average interest rates on
borrowings under the Bar Tech Amended Agreement and the Sub-Facility were 8.79%
and 11.50%, respectively, at December 31, 1998. The Bar Tech Amended Agreement
was extinguished with proceeds of the financing completed concurrent with the
Combination.
9. DEFINED CONTRIBUTION BENEFIT PLANS
The Company has defined contribution retirement plans that cover
substantially all employees. Company contributions to the plans are based on age
and compensation. The Company funds retirement plan contributions as accrued.
Republic had profit sharing plans covering all of its employees, excluding
officers. Amounts provided to the profit sharing pool were based on percentages
of the consolidated excess cash flows of the Company, as defined. There was no
expense relating to these plans for any of the periods presented.
In connection with the defined benefit plan improvements during the term of
the new labor agreement, the Company's contributions to the existing defined
contribution plans covering
F-24
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
9. DEFINED CONTRIBUTION BENEFIT PLANS--(CONTINUED)
employees at former Republic facilities, the former Bliss & Laughlin Harvey,
Illinois facility and former Bar Tech facilities will be discontinued and the
defined contribution plans may be merged into the defined benefit plan (see
Note 10).
10. DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT BENEFITS
Due to the interim nature of the consolidated/combined financial statements
and the different fiscal years of the three predecessor companies, certain
information related to the change in benefit obligation, change in plan assets,
funded status and measurement assumptions are not available for the interim
periods presented. Complete disclosures will be provided in the Company's 1999
year-end financial statements. The amounts recognized in the
consolidated/combined balance sheets related to the Company's pension and
postretirement plans are as follows:
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
----------------------------- -----------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1999 1998 1999 1998
------------- ------------ ------------- ------------
Amounts Recognized in the Statement of Financial
Position Consist of:
Net amount recognized.......................... $55,038 $ 66,849 $ 173,240 $ 95,712
Adjustment required to recognize minimum
liability................................... 18,673 2,491 -- --
------- -------- --------- --------
Accrued benefit costs.......................... $73,711 $ 69,340 $ 173,240 $ 95,712
------- -------- --------- --------
------- -------- --------- --------
Net periodic pension costs for the period from August 13, 1999 to
September 30, 1999, the period from January 1, 1999 to August 12, 1999, and the
nine months ended September 30, 1998 were $1.4 million, $5.3 million and
$0.7 million, respectively.
Net periodic post retirement benefit costs for the period from August 13,
1999 to September 30, 1999, the period from January 1, 1999 to August 12, 1999,
and the nine months ended September 30, 1998 were $2.5 million, $3.9 million,
and $0.5 million, respectively.
In connection with the Republic acquisition in September 1998, a new Master
Collective Bargaining Agreement and settlement agreement (collectively, the
"Master CBA") covering all of the former Republic and Bar Tech facilities with
employees represented by the United Steelworkers union (the "USWA") were entered
into with the USWA. The Master CBA replaced the existing collective bargaining
agreements with the USWA, other than selected plant-specific agreements. In
connection with the Combination, the scope of the Master CBA was extended to
cover the former USS/Kobe Lorain, Ohio facility. The Master CBA expires on
October 31, 2003. The Master CBA provides for improvements in the existing
defined benefit pension plans covering employees at former Republic facilities,
former USS/Kobe facilities and the former Bliss & Laughlin Harvey, Illinois
facility, and the creation of a defined benefit pension plan obligation covering
employees at former Bar Tech facilities. The existing defined benefit pension
plans may be consolidated into one defined benefit pension plan in the future,
which will contain terms found in traditional steel industry defined benefit
pension plans.
The Master CBA allows the Company to reduce the number of job
classifications at all USWA-covered facilities to five from over 34 at certain
facilities thereby permitting employees to be assigned a wider range of
responsibilities.
F-25
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
10. DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT BENEFITS--(CONTINUED)
The Master CBA requires the Company to offer Early Retirement Buyouts
("ERB's") to at least 1,000 employees and permits the Company to offer a
Voluntary Severance Plan ("VSP"). The purpose of these programs is to reduce the
hourly workforce by a net reduction of over 1,900 hourly employees over four
years. These programs are substantially voluntary in nature. Accordingly, the
costs associated with these workforce reductions are being recognized as charges
to operations as the offers for ERB's and VSP's are accepted by the employees
and intended to be awarded by the Company. Through September 30, 1999, 541
voluntary ERB packages were accepted. As such, the Company has recorded
$71.4 million of workforce reduction charges to date for early retirement
benefits, including pension and other postretirement obligations and special
termination payments.
Under the terms of Master CBA, if the ERB's and VSP's do not achieve
targeted headcount reductions, the Company will have the flexibility to reduce
the hourly workforce by approximately 300 employees in addition to the number of
accepted ERB's and VSP's. Pursuant to the Master CBA, USWA represented employees
will be eligible for Supplemental Unemployment Benefits (SUB) and the
continuation of certain health insurance benefits.
The following is a general description of the Company and its predecessors'
defined benefit plans.
REPUBLIC
The Company (formerly Republic) maintains a defined benefit "floor offset"
plan, which covers all former Republic USWA employees. The plan, when combined
with benefits from the Company's (formerly Republic) defined contribution
pension plan and benefits from an LTV Steel Defined Benefit Pension Plan, will
provide a minimum level of pension benefits for USWA employees. Benefits are
based on a combination of employees' age and years of service. The Company's
policy is to fund this plan based on legal requirements and tax considerations.
Republic entered into a memorandum of understanding with the Pension
Benefit Guarantee Corporation (the "PBGC") on November 2, 1998, pursuant to
which (1) the PBGC agreed to forebear from instituting proceedings to terminate
the USWA Defined Benefit Plan as a result of the acquisition of Republic or the
prospective combination with Bar Tech, (2) in January 1999, Republic funded the
pension plan with an approximate $27,000 initial contribution and (3) Republic
made an additional contribution to such pension plan in the amount of $20,000 on
July 1, 1999. Additional quarterly contributions will be made by the Company
commencing October 1, 1999 in accordance with the following schedule: $7,500 per
quarter for the first four payments, $7,600 per quarter for the next four
payments, $9,100 per quarter for the next four payments and $8,500 per quarter
for the final four payments. Of the Company's aggregate pension obligation
relating to these contributions, $30,100 was classified as a current liability
and $33,013 was classified as a long-term liability in the accompanying
consolidated balance sheet as of September 30, 1999.
The Company (formerly Republic) also sponsors postretirement plans for
health care and life insurance that cover most full-time employees. The plans
pay stated percentages of most necessary medical expenses incurred by retirees,
after subtracting payments by Medicare or other providers and after a stated
deductible has been met. Hourly employees become eligible for benefits after
completing 15 years of service and reaching age 60. Salary employees become
eligible for benefits if they retire after reaching age 65.
F-26
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
10. DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT BENEFITS--(CONTINUED)
BAR TECH
BLI maintains defined benefit pension plans covering substantially all
hourly employees of its Harvey, Illinois and Medina, Ohio plants. Employees at
the Batavia, Illinois and Cartersville, Georgia plants are not covered. Benefits
are based on years of service and employee's age at termination. CDSC maintains
pension plans covering substantially all employees. Benefits for the CDSC
salaried employees' plan are based on an average salary for the five most recent
years prior to retirement. Benefits for the CDSC bargaining unit employees' plan
are based on years of service. The Company's policy is to fund pension cost in
accordance with the requirements of the Employee Retirement Income Security Act
of 1974 in the United States and local regulations in Canada.
BLI and CDSC also sponsor postretirement plans for health care and life
insurance that cover most full-time employees. The plans pay stated percentages
of most necessary medical expenses incurred by retirees, after subtracting
payments by Medicare or other providers and after a stated deductible has been
met. Participants become eligible for benefits if they retire from BLI after
reaching age 55 with 10 or more years of service.
USS/KOBE
The Company (formerly USS/Kobe) sponsors two noncontributory defined
benefit plans covering substantially all former USS/Kobe employees. Benefits
under these plans are based upon years of service and final average pensionable
earnings, or a minimum benefit based upon years of service, whichever is
greater. The funding policy for these defined benefit plans provides that
payment to the pension trusts shall be equal to the minimum funding requirements
of the Employee Retirement Income Security Act of 1974 plus such additional
amounts as may be approved from time to time. Assets held by the plans are
invested primarily in corporate equity and debt securities and interest bearing
cash accounts. In addition, pension benefits from USS/Kobe's two defined
contribution plans, which cover participating employees, are based upon years of
service and career earnings.
In connection with the Combination, the Company agreed with the Pension
Benefit Guaranty Corporation to maintain a specified level of funding for the
USS/Kobe Union Eligible Pension Plan, a defined benefit plan for union
employees, based on statutory funding requirements. The agreement with the
Pension Benefit Guaranty Corporation with respect to this plan contemplates that
contributions will be made as follows: for the year 2000, an amount necessary to
avoid an accumulated funding deficiency plus $4 million; for 2001, an amount so
that the December 31, 2001 credit balance equals that of December 31, 2000 with
interest plus $2 million; for 2002, an amount so that the December 31, 2002
credit balance equals that of December 2001 with interest plus $2 million; for
2003, an amount so that the December 31, 2003 credit balance equals that of
December 31, 2002 with interest plus $2 million. The agreement with the Pension
Benefit Guaranty Corporation further contemplates that, beginning with 2004, the
Company will make contributions to maintain the December 31, 2003 credit balance
with interest. As security for such obligation, the Company has provided the
Pension Benefit Guaranty Corporation with a $5 million letter of credit. The
Company currently estimates that approximately $53.6 million of fundings will be
required in connection with these obligations.
11. INCOME TAXES
The Company is a limited liability company that will be treated as a
partnership for income tax purposes and accordingly is not an income taxpaying
entity. However, pursuant to the limited liability
F-27
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
11. INCOME TAXES--(CONTINUED)
company agreement, RTI's parent will be required to make cash distributions to
its members to the extent necessary to satisfy tax obligations regarding
members' investment in RTI. To the extent RTI's parent is required to make these
tax distributions, the Company will be required to make equivalent cash
distributions to its parent. However, we believe that certain of RTI's parent's
members have net operating loss carryforwards which may be available to offset a
significant portion of their taxable income attributable to their investment in
the Company and reduce but not eliminate, the need for tax distributions. Use of
these net operating losses is subject to various limitations and uncertainties
and accordingly, the Company cannot give any assurances that these net operating
loss carryforwards will reduce the need for tax distributions or that they will
not be otherwise utilized.
The provision for income taxes included in the accompanying
consolidated/combined statements of operations for all periods presented
represents a provision for foreign income taxes. Prior to the Combination, a
benefit for domestic income taxes is not included in the accompanying
consolidated/combined statements of operations since the Company's net deferred
tax assets were entirely offset by valuation allowances.
12. SEGMENT INFORMATION
The Company operates in three reportable segments: hot-rolled,
cold-finished and specialty steels. As discussed previously in Note 1, the
Company intends to sell its specialty steel division and accordingly, the
accompanying consolidated/combined financial statements reflect that division as
a discontinued operation in accordance with Accounting Principles Board Opinion
No. 30. As such the following tables do not reflect specialty steels as a
reportable segment. The Company manages the reportable segments as separate
strategic business units. Differences between the segments include manufacturing
techniques and equipment, competition, and end-users. The Company measures
segment performance based on earnings before interest, taxes, depreciation and
amortization, other postretirement benefits, work force reduction charges and
other (income) loss, net ("EBITDA, as defined").
HOT-ROLLED
Hot-rolled bars 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 bars include internal soundness, uniformity of
chemical composition and freedom from surface imperfection. The Company's
hot-rolled bar products include rounds, squares and hexagons, in both
cut-lengths and coils. Customers for hot-rolled bar products include
manufacturers of automotive parts, industrial equipment, independent forgers,
steel service centers and converters. The Company's hot-rolled bars are used in
the manufacture of end-use products such as automotive drive trains, 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. Cold-finished bars 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
F-28
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
12. SEGMENT INFORMATION--(CONTINUED)
Company's cold-finished bar 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 bar products include
manufacturers of automotive parts, industrial equipment, steel service centers
and distributors. The Company's cold-finished bars 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.
Prior to August 13, 1999, intersegment sales were made at current market
prices and were eliminated in consolidation.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
---------------------------------------------------------------------
INTER SEGMENT
HOT- COLD- TOTAL ELIMINATION/
ROLLED FINISHED SEGMENTS OTHER CONSOLIDATED
---------- -------- ---------- ------------- ------------
Net sales............................. $492,476 $247,980 $740,456 $(56,123) $684,333
Depreciation and amortization......... 28,364 5,803 34,167 -- 34,167
Segment profit (EBITDA, as defined)... (20,317) (3,433) (23,750) -- (23,750)
Segment assets........................ 1,055,292 170,351 1,225,643 154,587 1,380,230
Capital expenditures.................. 46,289 5,442 51,731 -- 51,731
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
---------------------------------------------------------------------
INTER SEGMENT
HOT- COLD- TOTAL ELIMINATION/
ROLLED FINISHED SEGMENTS OTHER CONSOLIDATED
---------- -------- ---------- ------------- ------------
Net sales............................. $171,020 $104,467 $275,487 $(25) $275,462
Depreciation and amortization......... 4,957 2,090 7,047 -- 7,047
Segment profit (EBITDA, as defined)... (15,324) 6,825 (8,499) -- (8,499)
Segment assets........................ 515,735 167,594 683,329 191,686 875,015
Capital expenditures.................. 13,506 1,178 14,684 -- 14,684
13. RELATED PARTY TRANSACTIONS
From April 1996 to August 13, 1999, Blackstone and Veritas received annual
monitoring fees from Bar Tech equal to $875 per year pursuant to a monitoring
agreement. Under the terms of the monitoring agreement, Blackstone and Veritas
provide management and financial monitoring services to Bar Tech. Blackstone and
Veritas have split the monitoring fees paid evenly between them. Blackstone and
Veritas have also been reimbursed by Bar Tech for their out-of-pocket expenses
incurred in providing such services.
In connection with the acquisition of Republic in 1998, RES Holding paid
transaction fees of $3,400 to Blackstone and $800 to Veritas and reimbursed them
for all related out-of-pocket expenses. In addition, pursuant to a monitoring
agreement entered into with RES Holding, Blackstone and Veritas were entitled to
receive an annual monitoring fee for providing management and financial
monitoring services equal to $1,125, with Blackstone receiving 75% and Veritas
receiving 25% of this monitoring fee. Blackstone and Veritas have also been
reimbursed by RES Holding and Republic for their out-of-pocket expenses incurred
in providing these services. Approximately $2,400 of accrued but unpaid Bar Tech
and RES Holding monitoring fees were paid following the Combination.
F-29
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
13. RELATED PARTY TRANSACTIONS--(CONTINUED)
In connection with the Combination, the Company paid transaction fees in
the aggregate of $4.0 million to Blackstone, Veritas, USX Corporation and
affiliates of Kobe Steel, Ltd. In addition, the Company reimbursed or is
expected to reimburse Blackstone, Veritas, USX Corporation and Kobe Steel, Ltd.
for their out-of-pocket expenses related to the Combination. Upon consummation
of the Combination, the Company entered into a new monitoring agreement with
Blackstone, Veritas, USX Corporation and Kobe Steel, Ltd. that replaced the
existing monitoring agreements regarding Bar Tech and Republic, with the parties
to receive an aggregate annual fee of $4.0 million.
In addition, in the future, Blackstone, Veritas, USX Corporation and Kobe
Steel, Ltd. or their affiliates may receive customary fees for other advisory
and transactional services rendered to the Company. If such services are
rendered in the future, the fees will be negotiated from time to time on an
arms-length basis and will be based on the services performed and the fees
charged to third parties for comparable services.
During the period from August 13, 1999 to September 30, 1999, the period
from January 1, 1999 to August 12, 1999 and the nine months ended September 30,
1998, the Company had approximately $13.5 million, $54.2 million and
$67.8 million, respectively, of net sales to American Axle & Manufacturing, a
company controlled by Blackstone. All such sales were in the ordinary course of
business.
The Company and Haynes, a company controlled by Blackstone, are parties to
a facilities management agreement dated as of April 15, 1999, by which Haynes
agreed to manage the Company's Baltimore, Maryland and Canton, Ohio specialty
steel finishing facilities. The Company continues to own these facilities and
must approve all material expenditures and financial decisions of Haynes with
respect to these facilities. As compensation for the services provided, Haynes
receives management fees equal to the total compensation costs, including
benefits, of the Haynes personnel providing management services to the Company
that is allocable to the time these personnel devote to these facilities. In
addition, Haynes is reimbursed by the Company for all of its reasonable
out-of-pocket expenses incurred in connection with the provision of management
services. The Company is in the process of selling its specialty steels business
to Haynes.
In connection with the Combination, the Company entered into the following
agreements with USX Corporation, Kobe Steel, Ltd. and FirstEnergy Service Corp.
(another equity investor in the Company's indirect parent) or their affiliates:
ROUND SUPPLY AGREEMENT
The Company entered into a five-year supply agreement with USX Corporation
and the new tubular steel joint venture between USX and Kobe Steel, Ltd., which
provides for the tubular joint venture purchasing all of its requirements for
steel rounds at its Lorain, Ohio pipemill from the Company up to a maximum of
400,000 tons per year for a price equal to our production costs plus an agreed
upon margin per ton. The tubular joint venture also has the right to purchase up
to an additional 200,000 tons per year for a price equal to the Company's fixed
production costs plus an agreed upon margin per ton. If the tubular joint
venture is unable to purchase at least 400,000 tons of steel rounds per year for
its Lorain, Ohio pipemill, USX is required to purchase any shortfall, under
specified circumstances, to satisfy the steel round requirements of its
Fairfield, Alabama pipemill facility that can not be satisfied from USX's
internal production of steel rounds.
F-30
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
13. RELATED PARTY TRANSACTIONS--(CONTINUED)
COKE SUPPLY AGREEMENT
The Company entered into a five-year supply agreement with USX Corporation,
which provides that RTI purchase substantially all of its requirements for coke
for use in its Lorain, Ohio blast furnace from USX Corporation. The purchase
price for coke is based on market prices and adjusted annually, subject to most
favored nations provisions for price and other conditions, which allow the
Company to receive the most favorable terms that USX Corporation grants to any
of its coke customers.
PELLET SUPPLY AGREEMENT
Under this agreement, we agreed to purchase all of our iron ore pellet
requirements for our Lorain, Ohio blast furnace from USX Corporation for a
period of five years. The purchase price for pellets is generally based on
market prices and will be adjusted annually, subject to most favored nation
provisions for price and other conditions, which allow us to receive the most
favorable terms that USX Corporation grants to any of its pellet customers.
TECHNOLOGY TRANSFER AGREEMENTS
The Company entered into technology transfer and related agreements with
Kobe Steel, Ltd. and one of its affiliates which provides us with a license to
use various Kobe technology and requires Kobe to provide us with various
technical assistance in return for annual payments to Kobe of approximately
$1 million.
SAFE HARBOR LEASE MATTERS AGREEMENT
Pursuant to the master restructuring agreement, we received certain
property formerly owned by USS/Kobe that qualifies as "Safe Harbor Lease
Property," thus affording USX Corporation and Kobe with tax benefits. The Safe
Harbor Lease Matters Agreement contains covenants and warranties to ensure that
the property remains qualified as Safe Harbor Lease Property and to ensure the
continuation of the tax benefits.
ENERGY MANAGEMENT AGREEMENT
In connection with the consummation of the Combination, we entered into an
agreement with FirstEnergy Services Corp. under which we appointed FirstEnergy
as our exclusive representative for the procurement of energy supply and
services. As a result of this arrangement, it is likely that much of our energy
purchasing requirements will eventually be filled by FirstEnergy. Also in
connection with the consummation of the Combination, FirstEnergy purchased $30
million of the Series C convertible preferred stock of Republic Technologies
International, Inc. (the Company's parent).
In connection with the Combination, the Company also entered into an
agreement with the new tubular steel joint venture between USX Corporation and
Kobe Steel, Ltd. regarding the provision of various utilities and an agreement
with USX Corporation regarding the provision of various transitional services.
In addition, at the closing of the Combination, the Company entered into an
agreement with USX Corporation regarding payment of certain payables owed by
USS/KOBE Steel Company to USX Corporation.
F-31
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
14. LONG-TERM COMMITMENTS
On December 3, 1998, Republic entered into a technical exchange agreement
with Sanyo Special Steel Company of Japan ("Sanyo") for a total of $6,000. The
forty-eight (48) month agreement involves technical assistance in melting,
refining, and casting technologies. Republic also entered into an agreement to
share in the cost and benefits of a similar agreement between Bar Tech and Sanyo
dated January 25, 1999. The Bar Tech and Sanyo agreement is also for a period of
forty-eight (48) months with total payments of $6,000. Obligations under both
agreements as of September 30, 1999 are as follows: fourth quarter 1999--$600;
2000--$2,400; 2001--$2,400; 2002--$1,200; and 2003--$600.
15. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings, including various
environmental proceedings with governmental authorities, product liability
litigation, and claims by present and former employees under federal and
counterpart state anti-discrimination and other laws relating to employment.
Except for certain environmental proceedings which, if adversely determined,
could have a material adverse effect, the Company does not believe that any of
these proceedings, either individually or in the aggregate, will have a material
adverse effect on the consolidated financial condition, results of operations or
cash flows of the Company.
16. ENVIRONMENTAL COMPLIANCE
The Company is subject to a broad range of federal, state, and local
environmental laws and regulations, including those governing discharges into
the air and water, the handling and disposal of solid and hazardous wastes, and
the remediation of contamination associated with the disposal of waste. The
Company continuously monitors its compliance with such environmental laws and
regulations and, accordingly, believes that it is currently in substantial
compliance with such laws and regulations. The Company anticipates approximately
$5,000 of material expenditures during the next 24 months for environmental
control measures. As is the case with most steel producers, the Company could
incur significant costs related to environmental compliance, in particular those
arising from remediation costs for historical waste disposal practices at
certain of the Company's facilities. The Company believes that these costs are
most likely to be in the range of $10,000 to $24,000 over the lives of the
Company's facilities. This range represents the estimated aggregate cost to
resolve the environmental contingencies. The Company does not anticipate any
third-party recoveries. The reserve to cover potential current and noncurrent
environmental liabilities was approximately $16,700 and $15,400 as of September
30, 1999 and December 31, 1998, respectively, substantially all of which is
classified as a long-term obligation in the accompanying consolidated/combined
balance sheets.
The reserve has been established and is monitored based on continuing
reviews of the reserve, each matter comprising the reserve, and whether any new
matters should be included in the reserve, using currently available information
relative to enacted laws and regulations and existing technology. These reviews
are performed periodically by an in-house committee comprised of representatives
experienced in environmental matters from the environmental, operating, and
accounting departments in consultation with outside legal and technical experts,
as necessary.
F-32
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
17. DISCONTINUED OPERATIONS
In connection with its acquisition of Republic, the Company intends to sell
its specialty steel division and accordingly, the accompanying consolidated
financial statements reflect that division as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30. All revenues and
expenses related to the specialty steels division since the date Republic was
acquired have been reported as adjustments to the allocation of the purchase
price of the Republic acquisition.
In April 1999, the Company entered into an agreement with Haynes, a leading
manufacturer of nickel and cobalt based alloys, to manage the Company's
Specialty Steels division. According to the terms of the agreement, the Company
pays Haynes a management fee based upon the allocable portion of total costs
incurred by Haynes attributable to management activities of the combined
operations. The Company and Haynes are affiliates as both companies are
controlled directly or indirectly by entities associated with The Blackstone
Group. The Company is currently in discussions regarding the sale of its
specialty division to Haynes.
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1999 1998
------- ------
Net sales................................................................................... $35,780 $6,116
Gross profit (loss)......................................................................... (3,114) (129)
Income (loss) before income taxes........................................................... $(5,057) $ (506)
Provision for income taxes.................................................................. -- --
------- ------
Net income (loss)........................................................................... $(5,057) $ (506)
------- ------
------- ------
The components of net assets of discontinued operations included in the
Company's balance sheets as assets held for sale were as follows:
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
Assets held for sale, current--Inventories......... $ 15,091 $ 14,722
-------- ---------
Assets held for sale, non-current--Property, plant
and equipment.................................... $ 11,687 $ 11,687
-------- ---------
18. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment; therefore, they cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
-- Cash equivalents, accounts receivable, and accounts payable--The
carrying amount approximates fair value because of the short-term
maturity of these instruments.
-- Long-term debt--The fair value of the Senior Notes classified under
long-term debt (Note 7, based on quoted market values, was
approximately $399.5 million as of September 30, 1999. The Company
estimates that the fair value of the 8 1/4 percent Solid Waste
Revenue Bonds, Series 1994, and the 9 percent Solid Waste Revenue
Bonds, Series 1997, classified under long-term debt (Note 7) was
approximately $21,210 and $56,385, respectively, as of
September 30, 1999. All other debt classified as long term on
September 30, 1999, is recorded at cost which approximates fair
value.
F-33
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Republic Engineered Steels, Inc.
We have audited the accompanying consolidated balance sheet of Republic
Engineered Steels, Inc. and subsidiaries (the "Company") as of June 30, 1999,
and the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for the period from September 8, 1998 to June 30, 1999
and the period from July 1, 1998 to September 7, 1998 (predecessor company). Our
audit also included the financial statement schedule for the year ended
June 30, 1999 listed in the Index to Financial Statements. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Republic Engineered
Steels, Inc. and subsidiaries as of June 30, 1999 and the results of their
operations and their cash flows for the period from September 8, 1998 to
June 30, 1999 and the period from July 1, 1998 to September 7, 1998 (predecessor
company), in conformity with generally accepted accounting principles. Also, in
our opinion, such fiscal 1999 financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the financial information set forth
therein.
DELOITTE & TOUCHE LLP
Cleveland, Ohio
November 9, 1999
F-34
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Republic Engineered Steels, Inc.:
We have audited the accompanying consolidated balance sheet of Republic
Engineered Steels, Inc. and subsidiaries as of June 30, 1998, and the related
consolidated statements of operations shareholders' equity (deficit), and cash
flows for each of the years in the two-year period ended June 30, 1998. In
connection with our audits of the consolidated financial statements, we also
have audited the related financial statement schedule, as of June 30, 1998 and
for each of the years in the two-year period ended June 30, 1998. These
consolidated financial statements and the related financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and the related
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Republic Engineered
Steels, Inc. and subsidiaries as of June 30, 1998, and the results of their
operations and their cash flows for each of the years in the two-year period
ended June 30, 1998, in conformity with generally accepted accounting
principles. Also in our opinion, based on our audits, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Cleveland, Ohio
July 31, 1998, except as to
Note 20 which is as of
November 12, 1998
F-35
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND 1998
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
PREDECESSOR
COMPANY
(NOTE 1)
-----------
1999 1998
-------- -----------
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 2,388 $ 22,675
Receivables, less allowance for doubtful accounts of $1,980 in 1999 and $1,575 in
1998 (note 6)...................................................................... 103,342 72,633
Receivables due from affiliates (note 21)............................................ 62,365
Inventories (notes 3 and 6).......................................................... 152,913 125,343
Prepaid expenses..................................................................... 4,947 2,844
Deferred income taxes (note 9)....................................................... 7,902
Assets held for sale (note 20)....................................................... 15,988 30,457
Other current assets................................................................. 477 404
-------- ---------
Total current assets................................................................... 342,420 262,258
Property, plant and equipment, net (notes 4 and 6)..................................... 296,227 290,721
Intangibles and other assets, net (notes 5 and 6)...................................... 142,714 24,471
Restricted cash (note 6)............................................................... 1,026 715
Deferred income taxes (note 9)......................................................... 46,927
Assets held for sale (note 20)......................................................... 11,687 11,903
Receivables due from affiliates (note 21).............................................. 197
-------- ---------
Total other assets..................................................................... 451,851 374,737
-------- ---------
Total assets........................................................................... $794,271 $ 636,995
-------- ---------
-------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable..................................................................... $103,194 $ 59,573
Payables due to affiliates (note 21)................................................. 27,946
Accrued compensation and benefits.................................................... 36,626 32,902
Defined benefit pension obligations (note 8)......................................... 42,500 1,000
Accrued liabilities.................................................................. 26,557 13,453
Current maturities of long-term debt (note 6)........................................ 2,627 203
-------- ---------
Total current liabilities.............................................................. 239,450 107,131
Long-term debt (note 6)................................................................ 437,602 273,922
Other postretirement benefits (note 8)................................................. 103,414 128,246
Defined benefit pension obligations (note 8)........................................... 37,009 11,178
Environmental costs (note 16).......................................................... 13,400 13,746
Other liabilities...................................................................... 1,035 1,301
-------- ---------
Total liabilities...................................................................... 831,910 535,524
Commitments and contingencies
(notes 4, 6, 8, 13, 14, 15, and 16)
Shareholders' equity (deficit):
Special preferred stock, $.01 par value; one share authorized, one share issued,
liquidation value of $1,500 at June 30, 1998 (note 10)............................. 2
Common stock, $.01 par value; 1,000 shares authorized, one share issued and
outstanding at June 30, 1999; 27,000,000 shares authorized, 19,707,923 shares
issued, and 19,706,578 shares outstanding at June 30, 1998 (note 11)............... 197
Additional paid in capital........................................................... 95,455 275,270
Accumulated deficit.................................................................. (133,094) (173,990)
-------- ---------
(37,639) 101,479
Less treasury stock, at cost, 1,345 shares at June 30, 1998............................ 8
-------- ---------
Total shareholders' equity (deficit)................................................... (37,639) 101,471
-------- ---------
Total liabilities and shareholders' equity............................................. $794,271 $ 636,995
-------- ---------
-------- ---------
See accompanying notes to consolidated financial statements.
F-36
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS)
PREDECESSOR COMPANY (NOTE 1)
---------------------------------------
PERIOD FROM PERIOD FROM YEARS ENDED
SEPTEMBER 8, JULY 1, 1998 TO JUNE 30,
1998 TO SEPTEMBER 7, --------------------
JUNE 30, 1999 1998 1998 1997
------------- --------------- -------- --------
Net sales............................................. $ 518,942 $ 102,955 $689,870 $627,929
Cost of product sold (including depreciation of
$20,933, $4,178, $24,609 and $24,393,
respectively)....................................... 497,223 97,883 612,526 576,745
--------- --------- -------- --------
Gross profit.......................................... 21,719 5,072 77,344 51,184
Expenses:
Selling expenses.................................... 6,861 1,216 6,794 8,208
General and administrative expenses................. 38,805 17,023 33,687 30,488
Special charges (credits) (note 18)................. (1,097) 1,649
Other postretirement benefits charges (note 8)...... 5,874 2,082 4,951 15,585
Noncash ESOP charges (note 7)....................... 15,616 28,191
Workforce reduction charges (note 8)................ 60,655
Other charges (credits):
Interest charges................................. 43,678 4,588 27,622 28,807
Interest income.................................. (471) (236) (710) (512)
Miscellaneous, net............................... (589) (153) (410) (739)
--------- --------- -------- --------
Total expenses................................. 154,813 24,520 86,453 111,677
--------- --------- -------- --------
Loss from continuing operations before income tax
benefit............................................. (133,094) (19,448) (9,109) (60,493)
Income tax benefit (note 9)........................... 2,661 23,999
--------- --------- -------- --------
Loss from continuing operations....................... (133,094) (19,448) (6,448) (36,494)
Income (loss) from discontinued operations, net of
income tax expense of $--, $--, $2,288 and $1,430,
respectively........................................ (298) 5,544 2,175
--------- --------- -------- --------
Net loss.............................................. $(133,094) $ (19,746) $ (904) $(34,319)
--------- --------- -------- --------
--------- --------- -------- --------
See accompanying notes to consolidated financial statements.
F-37
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT AS INDICATED OTHERWISE)
NUMBER OF SHARES
------------------- SPECIAL ADDITIONAL
PREFERRED COMMON PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK STOCK CAPITAL DEFICIT
--------- ------- --------- ------ ---------- -----------
Balance as of June 30, 1996............................ 1 * 19,707 $ 2 $ 197 $ 275,270 $(138,767)
Net loss............................................... (34,319)
ESOP loan repayment....................................
--- ------- --- ------ ---------- ---------
Balance as of June 30, 1997............................ 1 * 19,707 2 197 275,270 (173,086)
Net loss............................................... (904)
ESOP loan repayment....................................
--- ------- --- ------ ---------- ---------
Balance as of June 30, 1998............................ 1 * 19,707 2 197 275,270 (173,990)
Net loss............................................... (19,746)
--- ------- --- ------ ---------- ---------
Balance as of September 7, 1998........................ 1 * 19,707 $ 2 $ 197 $ 275,270 $(193,736)
--- ------- --- ------ ---------- ---------
--- ------- --- ------ ---------- ---------
Initial capitalization as of
September 8, 1998.................................... 1* $ -- $ 95,455
Net loss............................................... $(133,094)
------- ------ ---------- ---------
Balance as of June 30, 1999............................ 1* $ -- $ 95,455 $(133,094)
------- ------ ---------- ---------
------- ------ ---------- ---------
RECEIVABLE
FROM
EMPLOYEE TOTAL
STOCK SHAREHOLDERS'
OWNERSHIP TREASURY EQUITY
TRUST STOCK (DEFICIT)
---------- -------- -------------
Balance as of June 30, 1996............................ $(47,721) $ (8) $ 88,973
Net loss............................................... (34,319)
ESOP loan repayment.................................... 30,600 30,600
-------- ---- ---------
Balance as of June 30, 1997............................ (17,121) (8) 85,254
Net loss............................................... (904)
ESOP loan repayment.................................... 17,121 17,121
-------- ---- ---------
Balance as of June 30, 1998............................ (8) 101,471
Net loss............................................... (19,746)
-------- ---- ---------
Balance as of September 7, 1998........................ $ -- $ (8) $ 81,725
-------- ---- ---------
-------- ---- ---------
Initial capitalization as of
September 8, 1998.................................... $ 95,455
Net loss............................................... (133,094)
---------
Balance as of June 30, 1999............................ $ (37,639)
---------
---------
- ------------------
* Not in thousands
See accompanying notes to consolidated financial statements.
F-38
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS)
PREDECESSOR COMPANY
-----------------------------------------
PERIOD FROM PERIOD FROM YEARS ENDED
SEPTEMBER 8, JULY 1, 1998 TO JUNE 30,
1998 TO SEPTEMBER 7, ----------------------
JUNE 30, 1999 1998 1998 1997
------------- --------------- --------- ---------
Cash flows from operating activities:
Net loss........................................................... $ (133,094) $ (19,746) $ (904) $ (34,319)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Income (loss) from discontinued operations....................... 298 (5,544) (2,175)
Depreciation and amortization.................................... 29,628 4,645 27,427 27,982
Accretion of call premium........................................ 6,460
Provision for ESOP contribution................................ 15,616 28,191
Deferred income tax benefit...................................... (373) (22,569)
Change in operating assets and liabilities:
Receivables, net............................................... (89,010) (6,935) 37 (1,176)
Inventories.................................................... (6,478) 12,669 (10,800) 911
Other assets................................................... (14,625) (14) 412 (745)
Accounts payable............................................... 76,843 33 745 (3,140)
Accrued liabilities............................................ 2,454 (4,865) (5,673) (754)
Other postretirement benefits.................................. 20,407 1,707 2,752 13,549
Defined benefit pension obligations............................ 26,992 (1,018) (4,707) (3,549)
Environmental costs............................................ 1,751 (3,417) (2,168)
Other liabilities.............................................. (266) (2,220) (29)
----------- --------- --------- ---------
Total adjustments......................................... 54,156 6,520 14,255 34,328
----------- --------- --------- ---------
Net cash provided by (used in) operating activities of
continuing operations................................... (78,938) (13,226) 13,351 9
Net cash provided by discontinued operations....................... 2,146 1,043 18,640 20,380
----------- --------- --------- ---------
Net cash provided by (used in)
operating activities.................................... (76,792) (12,183) 31,991 20,389
----------- --------- --------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment from continuing
operations....................................................... (17,985) (6,115) (15,807) (7,835)
Additions to property, plant and
equipment from discontinued operations........................... (1,472) (24) (520) (1,864)
Acquisition, net of cash acquired of $4,041........................ (154,260)
----------- --------- --------- ---------
Net cash used in investing activities..................... (173,717) (6,139) (16,327) (9,699)
----------- --------- --------- ---------
Cash flow from financing activities:
Revolver activity, net........................................... 89,376 (7,000)
Proceeds from bridge loan........................................ 65,045
Repayment of long-term debt...................................... (17) (17)
Capital contribution............................................. 95,455
Deferred financing costs associated with long-term debt.......... (923)
Other financing activities, net.................................. 3,021 (312) 616 1,588
----------- --------- --------- ---------
Net cash provided by (used in) financing activities....... 252,897 (312) 599 (6,352)
----------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents............... 2,388 (18,634) 16,263 4,338
Cash and cash equivalents,
beginning of period.............................................. 22,675 6,412 2,074
----------- --------- --------- ---------
Cash and cash equivalents, end of period........................... $ 2,388 $ 4,041 $ 22,675 $ 6,412
----------- --------- --------- ---------
----------- --------- --------- ---------
Supplemental disclosure of cash flow information:
Interest paid, net of amounts capitalized........................ $ 43,375 $ 4 $ 26,353 $ 27,072
----------- --------- --------- ---------
----------- --------- --------- ---------
See accompanying notes to consolidated financial statements.
F-39
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND ORGANIZATION--Republic Engineered Steels, Inc.
("Republic" or the "Company") is a major producer of special bar quality steel
and specialty steel bar products for the automotive, heavy equipment
manufacturing, aerospace and power generation industries. Special bar quality
steel bars are higher quality hot-rolled and cold-finished carbon and alloy
steel bars, and specialty steels are stainless, tool and vacuum re-melted
steels. The Company is organized into three operating divisions: hot-rolled,
cold-finished and specialty steels. In connection with its acquisition, as more
fully described below, the Company intends to sell its specialty steels
division, and, accordingly, the accompanying consolidated financial statements
reflect that division as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30. Pursuant thereto, all revenues and expenses
related to the specialty steels division have been segregated from continuing
operations of Republic for all periods presented. In April 1999, the Company
announced that Haynes International ("Haynes"), a leading manufacturer of nickel
and cobalt based alloys, will manage its specialty steels division according to
the terms of an agreement between the respective companies. The Company and
Haynes are associated by common ownership.
The Company's principal customers are manufacturers in the automotive,
machinery, industrial equipment, machine and hand tools and aviation and
aerospace industries, as well as independent forgers who supply finished parts
to the aforementioned industries. The Company also has significant sales to
steel service centers.
Although the Company has a nationwide customer base, approximately 75
percent, 70 percent and 65 percent of its shipments for fiscal years 1999, 1998
and 1997, respectively, were to customers in the States of Indiana, Illinois,
Michigan, New York, Ohio, and Pennsylvania (see Note 12).
On September 8, 1998, Blackstone Management Associates II L.L.C.
("Blackstone") and Veritas Capital Management, L.L.C. ("Veritas"), serving as
general partners for limited partnerships, acquired Republic in a cash tender
offer of $7.25 for each Republic common share (the "Acquisition"). RES Holding
Corporation ("RES Holding") and its wholly owned subsidiary, RES Acquisition
Corporation ("RES Acquisition"), were formed for the purpose of acquiring
Republic. See Note 2 for further discussion of the Acquisition. Blackstone and
Veritas purchased the Company with the intent to combine the Company and Bar
Technologies Inc. ("Bar Tech"), a producer of special bar quality steel, also
owned by Blackstone and Veritas, during 1999, subject to refinancing a
significant portion of the combined companies' debt. Subsequently, in April
1999, the Company's principal owners, Blackstone and Veritas entered into a
letter of intent with the U.S. Steel Group of USX Corporation ("USX") and Kobe
Steel, Ltd. ("Kobe") concerning the combination of USS/Kobe Steel Company's
steelmaking and bar producing assets with those of the Company and Bar Tech (the
"Combination"). The Combination was completed on August 13, 1999. See Note 19
for further discussion of the Combination.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of Republic Engineered Steels, Inc. and its wholly owned
subsidiaries. All significant intercompany balances have been eliminated in
consolidation.
CASH EQUIVALENTS--The Company considers all short-term investments with
maturities at date of purchase of three months or less to be cash equivalents.
F-40
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
INVENTORIES--Inventories are carried at the lower of cost or market, with
cost determined using the last-in, first-out (LIFO) method.
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment is recorded at
cost less depreciation accumulated to date. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets; the range of
useful lives is 39 years for buildings and 3-30 years for machinery and
equipment. Accelerated methods are used for income tax purposes.
INTANGIBLE ASSETS--Intangible assets consist primarily of goodwill,
trademarks, patented and unpatented technology and other intangible assets
arising from the Company's acquisition by Blackstone and Veritas. Goodwill of
$72,557, representing the excess purchase price over estimated fair value of the
net assets acquired, is being amortized over the period of expected benefit of
40 years. Other acquisition related intangible assets are being amortized over
the period of expected benefit of ranging from 28 months to 40 years. Intangible
assets also include deferred loan and bond fees and intangible pension assets.
The deferred loan and bond fees are being amortized using the effective interest
rate method over the lives of the related debt instruments.
IMPAIRMENT OF LONG-LIVED ASSETS--Long-lived assets, consisting of property,
plant and equipment and intangible assets, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the recovery amount or fair value, as
defined, of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
INCOME TAXES--The Company accounts for income taxes pursuant to the asset
and liability method. Under that method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled, and
the effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
ENVIRONMENTAL COSTS--The Company and other basic steel companies have in
recent years become subject to increasingly demanding environmental standards
imposed by federal, state, and local environmental laws and regulations. It is
the policy of the Company to endeavor to comply with applicable environmental
laws and regulations. The Company establishes a liability for an amount which
the Company believes is adequate, based on information currently available, to
cover the costs of remedial actions it will likely be required to take to comply
with existing environmental laws and regulations.
The recorded amount represents 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
F-41
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
and economic factors. The precise timing of such events cannot be reliably
determined at this time due to absence of any deadlines for remediation under
the applicable environmental laws and regulations pursuant to which such
remediation costs will be expended. No claims for recovery are netted against
the stated amount.
REVENUE RECOGNITION--The Company records revenues at the time product is
shipped to its customers. Sales are made with no right of return.
USE OF ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In the preparation of the consolidated financial statements, the Company
uses estimates for, among others, deferred income tax benefits, defined benefit
pension obligations, other postretirement benefit obligations, and environmental
remediation, all of which are significant to the consolidated financial
statements taken as a whole. Changes in circumstances in the near term could
have an impact on these estimates, and the change in estimate could have a
material effect on the consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENT--In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
133 "Accounting for Derivative Instruments and For Hedging Activities," ("SFAS
133"). This statement establishes accounting and reporting standards requiring
that every derivative instrument be recorded on the balance sheet as either an
asset or liability measured at fair value. SFAS 133 requires that changes in the
fair value of derivatives be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS 133, as amended, is effective for fiscal
years beginning after June 15, 2000, and cannot be applied retroactively. The
Company has not completed its evaluation of SFAS 133 and accordingly, is unable
to determine what impact, if any, SFAS 133 will have on its financial
statements.
RECLASSIFICATION--Certain previously reported amounts have been
reclassified to conform with the current presentation.
2. BUSINESS COMBINATION
As discussed in Note 1, the Company was acquired by Blackstone and Veritas
on September 8, 1998 for a price of $7.25 per share of Republic common stock.
The purchase price totaled approximately $154,260, including transaction related
expenses and net of cash acquired of $4,041. The sources of funds contributed to
RES Acquisition consisted of (i) $95,455 in a capital contribution by RES
Holding from the issuance of its common stock to Blackstone and its affiliates,
Veritas and HVR Holdings, L.L.C. and (ii) borrowings of approximately $65,045
under a short term bridge loan credit facility dated September 8, 1998 between
RES Holding and Chase Manhattan Bank, as Administrative Agent. Republic was
acquired by RES Acquisition on September 8, 1998 and subsequently, RES
Acquisition was merged with and into Republic on September 21, 1998.
The Acquisition has been accounted for as a purchase and, pursuant to the
provisions of SEC Staff Accounting Bulletin No. 54 ("SAB No. 54") and the rules
of pushdown accounting, the
F-42
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
2. BUSINESS COMBINATION--(CONTINUED)
Acquisition gave rise to a new basis of accounting. The purchase price and
related acquisition expenses exceeded net assets acquired by approximately
$72,557 and has been recognized as goodwill, which is being amortized over
40 years.
The purchase price has been allocated to the assets purchased and
liabilities assumed based upon the fair values on the date of the acquisition as
follows:
Cash purchase price:
Republic acquisition........................................................... $ 143,901
Acquisition fees and expenses.................................................. 14,401
-----------
Total cash purchase price.............................................. 158,302
Book value of net assets acquired.............................................. (85,100)
-----------
Excess purchase price over book value of net assets acquired................... 73,202
Final allocation of purchase price:
Increase in property, plant and equipment...................................... (6,729)
Increase in other intangible assets............................................ (39,352)
Increase in defined benefit pension obligation................................. 41,357
Decrease in other postretirement benefits...................................... (45,344)
Increase in accrued expenses................................................... 10,848
Increase in inventory.......................................................... (16,980)
Decrease in deferred tax asset................................................. 54,829
Other, net..................................................................... 726
-----------
Adjusted goodwill................................................................ 72,557
Accumulated amortization at June 30, 1999........................................ (1,512)
-----------
Goodwill, net at June 30, 1999................................................... $ 71,045
-----------
-----------
3. INVENTORIES
Inventories consist of the following:
JUNE 30,
------------------------
1999 1998
----------- -----------
Raw materials....................................................... $ 12,349 $ 12,157
Finished and semifinished product................................... 139,078 111,481
Supplies, molds, and stools......................................... 1,486 1,705
----------- -----------
Total............................................................... $ 152,913 $ 125,343
----------- -----------
----------- -----------
In connection with the Acquisition, inventories at June 30, 1999 reflect a
new LIFO base cost as of September 8, 1998. The above inventory amounts are net
of LIFO reserves which increased the value of the inventory by $20,326 as of
June 30, 1999 and decreased the value of the inventory by $2,435 as of June 30,
1998, respectively, and reserves to value inventory at the lower of cost or
market which decreased the value of inventory by $25,479 and $2,165 as of
June 30, 1999 and 1998, respectively.
F-43
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
3. INVENTORIES--(CONTINUED)
During fiscal 1998, inventory quantities were reduced, which resulted in a
liquidation of LIFO inventory layers carried at lower costs, which prevailed in
prior years. The effects of these liquidations were to decrease cost of goods
sold by $706 in fiscal 1998. The LIFO liquidation amounts decreased the net loss
by $282 in fiscal 1998.
Due to continued cost savings associated with the Cast-Roll facility and a
reduction in certain raw material prices, the current cost of inventory
continued to decrease from fiscal 1996 to fiscal 1998. This factor resulted in a
reduction in the LIFO reserve in fiscal 1998 of $4,666.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
JUNE 30,
------------------------
1999 1998
----------- -----------
Land................................................................ $ 9,600 $ 9,898
Buildings........................................................... 11,125 36,628
Machinery and equipment............................................. 283,621 356,036
----------- -----------
304,346 402,562
Less accumulated depreciation....................................... 20,623 127,664
----------- -----------
283,723 274,898
Construction in progress............................................ 12,504 15,823
----------- -----------
Total............................................................... $ 296,227 $ 290,721
----------- -----------
----------- -----------
As of June 30, 1999, the Company was formally committed to spend $8,002 on
capital expenditures.
5. INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following:
JUNE 30,
-----------------------
1999 1998
----------- ----------
Goodwill............................................................. $ 72,557
Patented and unpatented technology................................... 22,900
Intangible pension asset (Note 7).................................... 6,835 $ 15,779
Other intangible assets.............................................. 32,400
Deferred loan and bond fees.......................................... 10,534 10,534
Deposits............................................................. 2,868 2,472
Other assets......................................................... 4,277 218
----------- ----------
152,371 29,003
Less accumulated amortization........................................ 9,657 4,532
----------- ----------
Total................................................................ $ 142,714 $ 24,471
----------- ----------
----------- ----------
F-44
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
6. LONG-TERM DEBT
Long-term debt of the Company consists of the following:
JUNE 30,
------------------------
1999 1998
----------- -----------
9% Solid Waste Revenue Bonds, Series 1996, due June 2021............ $ 53,700 $ 53,700
8 1/4% Solid Waste Revenue Bonds, Series 1994, due October 1,
2014.............................................................. 20,200 20,200
9 7/8% First Mortgage Notes due December 15, 2001................... 208,460 200,000
RES Holding Bridge Facility......................................... 65,045
Revolving Credit Agreement.......................................... 89,375
Other............................................................... 3,449 225
----------- -----------
440,229 274,125
Less current maturities of long-term debt........................... 2,627 203
----------- -----------
Total............................................................... $ 437,602 $ 273,922
----------- -----------
----------- -----------
On June 1, 1996 the Company obtained $53,700 of financing through the
issuance of 9 percent Solid Waste Revenue Bonds, Series 1996, due June 1, 2021
in connection with the solid waste disposal facilities installed at its Canton
facility. These bonds were issued in addition to the Solid Waste Revenue, Series
1994 noted below, to assist in financing the facilities. As of June 30, 1999 and
1998, the Company had available $343 and $715, respectively, of the $53,700
which is classified as long-term restricted cash in the accompanying
consolidated balance sheets.
On October 28, 1994, the Company obtained $20,200 of financing through the
issuance of 8 1/4 percent Solid Waste Revenue Bonds, Series 1884, due
October 1, 2014 in connection with the solid waste disposal facilities installed
at the Canton facility.
On December 15, 1993, the Company issued $200,000 aggregate principal
amount of 9 7/8 percent First Mortgage Notes due December 15, 2001 (the "Notes")
in an underwritten public offering. The Notes are redeemable, in whole or in
part, at the option of the Company, on or after December 15, 1999 at specified
premiums set forth therein which decline over three years. The Notes are secured
by a mortgage on substantially all of the Company's property, plant and
equipment as of December 15, 1993. The Notes contain affirmative and negative
covenants including provisions for restrictions on additional borrowings,
certain investments, certain payments, sale or disposal of assets, payment of
dividends and liens, as well as change of control provisions. The Company is in
compliance with all such covenants as of June 30, 1999. The proceeds from the
Notes were used in part to repay the balance outstanding under the then existing
revolving credit and term loan agreement and the Company's unsecured
subordinated debentures held by LTV Steel Company, Inc. ("LTV Steel").
As a result of the Acquisition, the Company was required by the terms of
the indenture to offer to purchase any and all of the Notes at a purchase price
of $1,010 per $1,000 principal amount plus accrued and unpaid interest (the
"Change of Control Offer"). Such premium has been recorded as a fair value
adjustment to the liabilities assumed in the Acquisition with a corresponding
increase to the excess purchase price over net assets acquired.
F-45
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
6. LONG-TERM DEBT--(CONTINUED)
On October 5, 1998, the Company commenced the Change of Control Offer,
which expired on November 5, 1998. Approximately $28,100 principal amount of
Notes was tendered in accordance with the Change of Control Offer. The purchase
of the tender notes was assigned to affiliates of the Lenders (as defined
below).
On October 29, 1998, the Company commenced a new offer to purchase any and
all of the outstanding Notes at a purchase price of $1,043.30 per $1,000
principal amount plus accrued and unpaid interest (the "Offer"). The Offer
expired on June 30, 1999. The Company accrued the Offer Premium over the period
of the Offer.
For the purpose of funding the Change of Control Offer and the Offer, the
Company entered into an additional senior credit facility (the "Bridge
Facility") with Chase, DLJ Bridge Finance, Inc. and BankBoston N. A. (the
"Lenders") which provides for up to $208,500 of borrowings. As of June 30, 1999,
no amounts were borrowed under the Bridge Facility. The Company utilized the
"Bridge Facility" subsequent to year-end to extinguish the Notes. The Bridge
Facility was then extinguished with proceeds obtained from the Republic
Technologies International private offering (see Note 19). Due to the
refinancing, the Bridge Facility is classified as long-term debt. The Notes
contain affirmative and negative covenants including provisions for restrictions
on additional borrowings, certain investments, certain payments, sale or
disposal of assets, payment of dividends, and change of control provisions. The
Company is in compliance with all such covenants as of June 30, 1999.
On September 8, 1998, the Acquisition by RES Acquisition of Republic was
partially funded with short-term borrowings of approximately $65,046 (the "RES
Holding Facility") under the Credit Agreement dated September 8, 1998 between
RES Holding and The Chase Manhattan Bank ("Chase"), as Administrative Agent. The
maturity of the RES Holding Facility was June 8, 1999, however, the agreement
was extended to September 30, 1999. This debt was refinanced subsequent to
year-end with proceeds obtained from the Republic Technologies International
private offering (see Note 19). Due to the refinancing, the RES Holding Facility
is classified as long-term debt. As of June 30, 1999, restricted cash of $683
was on deposit related to this facility and classified as long-term restricted
cash.
On December 21, 1993, the Company entered into a $90,000 revolving credit
facility, which had a four-year term expiring in December 1997. Effective
April 25, 1997, the Company amended and restated this $90,000 revolving credit
facility (Revolving Credit Agreement). The amended and restated Revolving Credit
Agreement, which expires April 25, 2000, permits borrowings up to $115,000 and
is secured by the Company's receivables, inventories, stock of a subsidiary,
short-term investments and certain intangible assets. Advances under the
facility are limited to specified percentages of the Company's eligible
receivables and inventories. As of June 30, 1999 and 1998, amounts outstanding
under the Revolving Credit Agreement were $89,375 and $0, respectively.
The Revolving Credit Agreement, as amended in November 1998, provided up to
$50,000 for letters of credit. Borrowings under the Revolving Credit Agreement
bear interest at a per annum rate equal to, at the Company's option, (i) the
higher of the base rate of BankBoston and 1/2 percent above the Federal Funds
effective rate plus 1/4 percent; or (ii) LIBOR plus 2 1/4 percent. The borrowing
base under the Revolving Credit Agreement is the sum of 55 percent of eligible
inventory (as defined) up to a maximum of $75,000 and 85 percent of eligible
accounts receivable (as
F-46
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
6. LONG-TERM DEBT--(CONTINUED)
defined). Fees of 2 1/2 percent per annum on the maximum drawing amount of each
standby or documentary letter of credit are payable on the date of issuance of
such letter of credit.
On May 6, 1999, the Revolving Credit Agreement was once again amended (the
"Amended Agreement") to reflect the formation of Republic Technologies
International Marketing LLC ("Marketing JV"), a marketing joint venture owned in
equal proportions by the Company and Bar Tech (see Note 21). Under the Amended
Agreement, the Marketing JV becomes a co-borrower and all borrowings are secured
additionally by the receivables of the Marketing JV. Under the terms of the
Marketing JV agreement, the Company purchases all the receivables of the
Marketing JV on a discounted basis as sales are made to customers. The Amended
Agreement provides a temporary increase to permitted borrowings from $115,000 to
$135,000 until December 31, 1999. The Amended Agreement also provides up to
$50,000 for letters of credit. Interest rates on borrowings under the Amended
Agreement have been increased for base rate loans to base rate plus
3/4 percent and for LIBOR rate plus 2 3/4 percent. Fees for standby or
documentary letters of credit were increased to 2 3/4 percent. As of June 30,
1999 and June 30, 1998, there were $21,500 and $0 outstanding letters of credit,
respectively. The Revolving Credit Agreement contains certain limited negative
and affirmative covenants, including failure to pay interest or principal when
due, inaccurate or false representations or warranties, and limitations on
restricted payments; the Company is in compliance with all such covenants as of
June 30, 1999.
The Revolving Credit Agreement was extinguished subsequent to year end with
funds obtained from the Republic Technologies International, LLC Revolving
Credit Agreement ("RTI Agreement") dated August 13, 1999 established during the
merger between the Company and Bar Tech and USS/Kobe (see Note 19). The
Marketing JV was eliminated due to the merger.
Maturities of the Company's long-term debt obligations were as follows:
2000......................................................... $ 2,627
2001......................................................... 821
2002......................................................... --
2003......................................................... --
2004......................................................... --
Thereafter................................................... 436,781
-----------
$ 440,229
-----------
-----------
7. DEFINED CONTRIBUTION BENEFIT PLANS
The Company has defined contribution pension plans that cover substantially
all employees. Company contributions to the plans are based on age and
compensation. The Company funds retirement plan contributions as accrued.
Company contributions totaled $1,596 for the period from September 8, 1998 to
June 30, 1999, $5,828 for the period from July 1, 1998 to September 7, 1998, and
$7,667 and $8,031 for the fiscal years ended June 30, 1998 and 1997,
respectively.
Prior to the Acquisition, the Company's ESOP covered substantially all
United Steelworkers of America ("USWA") and nonbargained-for employees of
Republic Engineered Steels, Inc. The plan was designed to enable eligible
employees to acquire a beneficial interest in the Company through
F-47
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
7. DEFINED CONTRIBUTION BENEFIT PLANS--(CONTINUED)
the Employee Stock Ownership Trust (the "ESOP Trust"). The Company expensed ESOP
contributions as made or incurred.
With the establishment of a public market for the Company's common stock in
May 1995, distributions from the ESOP Trust were made to participants upon
request following termination of employment or after attaining age 70 1/2 if
still in active employment. Participants who were 55 years of age and had
10 years of participation under the plan could also elect to receive
distributions annually for a portion of their account balance. All distributions
were in the form of one lump sum payment of whole shares (and cash for
fractional shares) allocated to their account in the plan. Upon consummation of
the tender offer, the ESOP Trust was amended to allow in-service distributions
upon request regardless of age or service. As of June 30, 1999 the trust was
completely liquidated.
The Company has profit sharing plans covering all employees, excluding
officers, of Republic Engineered Steels, Inc. and subsidiaries. Amounts provided
to the profit sharing pool are based on percentages of the consolidated excess
cash flows of the Company as defined in the Revolving Credit Agreement (see
Note 6). There was no expense relating to these plans for fiscal 1999, 1998 or
1997.
From its inception, the Company had an executive incentive plan (the
"Executive Plan") which covered key executives and management employees. In
connection with the 1995 IPO, the board of directors of the Company adopted the
1995 Stock Option Plan (the "1995 Plan"), primarily to provide substitute
benefits for plan units previously granted under the Executive Plan. Vesting of
the plan units occurred ratably from the date of grant at the rate of 20 percent
per year. The vesting provisions remained unchanged when the plan units were
converted to stock options. The stock options, totaling 1,764,000 shares, were
exercisable after May 5, 1998 with the majority of such options granted having
an exercise price of $6.67 per share, were set to expire on November 28, 2001.
As a result of the Acquisition, all options were purchased at a price
representing the difference between the tender offer price of $7.25 and the
exercise price. There was no compensation expense relating to these plans for
fiscal 1999, 1998 or 1997.
8. DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT BENEFITS
At June 30, 1999, the Company adopted SFAS 132, Employers' Disclosure about
Pensions and Other Postretirement Benefits ("SFAS 132"). This statement revises
the disclosures for pension and other postretirement benefit plans but does not
change the way obligations or expenses are measured or recognized in the
financial statements. Disclosures for prior periods have been conformed to
requirements of SFAS 132.
The Company maintains a defined benefit "floor offset" plan, which covers
all USWA employees. The plan, when combined with benefits from the Company's
defined contribution pension plan and benefits from an LTV Steel Defined benefit
pension plan, will provide a minimum level of pension benefits for USWA
employees. Benefits are based on a combination of employees' age and years of
service. The Company's policy was to fund this plan based on legal requirements
and tax considerations.
Effective September 8, 1998, the Company entered into a five-year master
collective bargaining agreement (the "Master CBA") and related settlement
agreement (the "Settlement Agreement") with
F-48
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
8. DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT BENEFITS--(CONTINUED)
the United Steelworkers of America (the "USWA"). Management believes that the
Master CBA will offer the Company the flexibility to rationalize its cost
structure so that it may continue to invest in the business to maintain a
position as a low-cost supplier. The Master CBA allows the Company to reduce the
number of job classifications at all USWA-covered facilities to five from over
34 at certain facilities thereby permitting employees to be assigned a wider
range of responsibilities.
The Settlement Agreement requires the Company to offer Early Retirement
Buyouts ("ERB's") to at least 1,000 employees and permits the Company to offer a
Voluntary Severance Plan ("VSP"). The purpose of these programs is to reduce the
hourly workforce at Republic and Bar Tech facilities by a net reduction of over
1,400 hourly employees over four years. These programs are substantially
voluntary in nature. Accordingly, the costs associated with these workforce
reductions are being recognized as charges to operations as the offers for ERB's
and VSP's are accepted by the employees and intended to be awarded by the
Company. These workforce reductions are intended to be implemented over the next
several years. Through June 30, 1999, 468 voluntary ERB packages were accepted.
As such, the Company has recorded $60,655 of workforce reduction charges for
early retirement benefits, including pension and other postretirement
obligations and special termination payments. Under the terms of the Settlement
Agreement, if the ERB's and VSP's do not achieve targeted headcount reductions,
the Company will have the flexibility to reduce the hourly workforce by
approximately 300 employees in addition to the number of accepted ERB's and
VSP's. Pursuant to the Master CBA, USWA represented employees will be eligible
for Supplemental Unemployment Benefits (SUB) and the continuation of certain
health insurance benefits.
The Company has entered into a memorandum of understanding with the Pension
Benefit Guarantee Corporation (the "PBGC") on November 2, 1998, pursuant to
which (1) the PBGC agreed to forebear from instituting proceedings to terminate
the USWA Defined Benefit Plan as a result of the Acquisition or the prospective
combination with Bar Tech, (2) in January 1999, the Company funded the pension
plan with an approximate $27,000 initial contribution and (3) the Company will
make an additional contribution to such pension plan in the amount of
$20 million on or before July 1, 1999 (which is supported by a letter of
credit). Additional quarterly contributions will be made by the Company
commencing October 1, 1999 in accordance with the following schedule: $7,500 per
quarter for the first four payments, $7,600 per quarter for the next four
payments, $9,100 per quarter for the next four payments and $8,500 per quarter
for the final four payments. Of the Company's aggregate pension obligation,
$42,500 was classified as a current liability and $37,009 was classified as a
long-term liability in the accompanying consolidated balance sheet as of
June 30, 1999.
The Company also sponsors postretirement plans for health care and life
insurance that cover most full-time employees. The plans pay stated percentages
of most necessary medical expenses incurred by retirees, after subtracting
payments by Medicare or other providers and after a stated deductible has been
met. Participants become eligible for benefits if they retire after reaching
age 65.
F-49
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
8. DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT BENEFITS--(CONTINUED)
The change in benefit obligation, change in plan assets, funded status and
amounts recognized in the consolidated balance sheets related to the Company's
pension plans and other postretirement benefits are as follows:
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------------- ------------------------
JUNE 30, JUNE 30,
------------------------- ------------------------
1999 1998 1999 1998
----------- ------------ ------------ ---------
CHANGE IN BENEFIT OBLIGATION:
Beginning balance..................................... $ 23,763 $ 24,166 $ 129,890 $ 127,885
Service cost.......................................... 4,779 (1,471) 1,787 3,593
Interest cost......................................... 4,963 1,899 6,858 10,128
Plan amendments....................................... 40,077 (43,782)
Actuarial (gain) loss................................. 10,932 279 3,330 (9,504)
Curtailment loss...................................... 39,152 16,464
Benefits paid......................................... (7,299) (1,110) (3,009) (2,212)
----------- ------------ ------------ ---------
Ending balance........................................ $ 116,367 $ 23,763 $ 111,538 $ 129,890
----------- ------------ ------------ ---------
----------- ------------ ------------ ---------
CHANGE IN PLAN ASSETS:
FV of plan assets at beginning of year................ $ 11,586 $ 7,281
Actual return on plan assets.......................... 2,626 1,215
Employer contribution................................. 28,200 4,199 $ 3,009 $ 2,212
Benefits paid......................................... (7,299) (1,109) (3,009) (2,212)
----------- ------------ ------------ ---------
FV of plan assets at end of year...................... $ 35,113 $ 11,586 $ -- $ --
----------- ------------ ------------ ---------
----------- ------------ ------------ ---------
Funded status--overfunded (underfunded)............... $ (81,254) $ (12,177) $ (111,538) $(129,890)
Unrecognized prior service cost....................... 16,780 (1,366)
Unamortized net (gain) loss........................... 8,582 (1,002) 3,330
----------- ------------ ------------ ---------
Net amount recognized................................. $ (72,672) $ 3,601 $ (108,208) $(131,256)
----------- ------------ ------------ ---------
----------- ------------ ------------ ---------
Amounts recognized in the statement of financial
position consist of:
Net amount recognized................................. $ (72,672) $ 3,601 $ (108,208) $(131,256)
Adjustment required to recognize minimum liability.... (6,837) (15,779)
----------- ------------ ------------ ---------
Accrued benefit costs................................. $ (79,509) $ (12,178) $ (108,208) $(131,256)
----------- ------------ ------------ ---------
----------- ------------ ------------ ---------
WEIGHTED AVERAGE ASSUMPTIONS:
Discount rate......................................... 7% 8% 7% 7%
Expected return on plan assets........................ 8% 8% 8% 8%
Rate of compensation increase......................... 5% 5% 5% 5%
F-50
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
8. DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT BENEFITS--(CONTINUED)
The components of the net periodic pension costs are summarized as follows:
PERIOD FROM PERIOD FROM YEARS ENDED
SEPTEMBER 8, JULY 1, 1998 TO JUNE 30,
1998 TO SEPTEMBER 7, --------------------------
JUNE 30, 1999 1998 1998 1997
------------- --------------- ----------- -----------
NET PERIODIC PENSION COSTS:
Service cost.............................................. $ 4,957 $(178) $(1,471) $(1,498)
Interest cost............................................. 4,691 272 1,899 1,865
Expected return on plan assets............................ (1,817) (181) (732) (993)
Amortization.............................................. 171 269 1,614 2,192
------- ----- ------- -------
Net periodic pension cost................................. $ 8,002 $ 182 $ 1,310 $ 1,566
------- ----- ------- -------
------- ----- ------- -------
Net periodic pension cost--continuing
operations.............................................. $ 7,457 $ 170 $ 1,221 $ 1,459
Net periodic pension cost--discontinued operations........ 545 12 89 107
------- ----- ------- -------
$ 8,002 $ 182 $ 1,310 $ 1,566
------- ----- ------- -------
------- ----- ------- -------
The components of net periodic postretirement benefit costs included the
following components:
PERIOD FROM PERIOD FROM YEARS ENDED
SEPTEMBER 8, JULY 1, 1998 TO JUNE 30,
1998 TO SEPTEMBER 7, --------------------------
JUNE 30, 1999 1998 1998 1997
------------- --------------- ----------- -----------
NET PERIODIC POSTRETIREMENT BENEFIT COSTS:
Service cost of benefit earned........................... $ 1,221 $ 566 $ 3,593 $ 3,759
Interest on accumulated postretirement benefit
obligations............................................ 5,357 1,501 10,114 10,249
Amortization............................................. 196 1,178 1,949
Recognized net actuarial loss (gain)..................... (9,503) 983
------- ------- ------- -------
Net periodic postretirement cost......................... $ 6,578 $ 2,263 $ 5,382 $16,940
------- ------- ------- -------
------- ------- ------- -------
Net periodic postretirement cost--continuing
operations............................................. $ 5,874 $ 2,082 $ 4,951 $15,585
Net periodic postretirement cost--discontinued
operations............................................. 704 181 431 1,355
------- ------- ------- -------
$ 6,578 $ 2,263 $ 5,382 $16,940
------- ------- ------- -------
------- ------- ------- -------
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plan with accumulated benefit obligations
in excess of plan assets were $116,367, $114,621 and $35,113 respectively, as of
June 30, 1999, and $23,764, $23,764 and $11,586, respectively, as of June 30,
1998.
For measurement purposes, a weighted average annual rate of increase in the
per capita cost of covered health care claims of 7 percent was assumed for
fiscal 2000; the rate assumed to decrease gradually to 4.5 percent for fiscal
2004, and remain at that level thereafter. To illustrate the
F-51
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
8. DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT BENEFITS--(CONTINUED)
health care cost trend on amounts reported, changing the assumed health care
cost trend rates by one percentage point in each year would have the following
effects as of and for the fiscal year ended June 30, 1999:
ONE PERCENTAGE POINT
--------------------
INCREASE DECREASE
-------- --------
Effect on total service and interest costs components.................. $ 798 $ (677)
Effect on accumulated postretirement benefit obligation................ 6,766 (6,925)
9. INCOME TAXES
The net income tax benefit for the period from September 8, 1998 to June
30, 1999, the period from July 1, 1998 to September 7, 1998, and the fiscal
years 1998 and 1997, includes a current tax (benefit) charge of $-0- for each
period and year, respectively, which was increased by a deferred benefit of $--
for the period from September 8, 1998 to June 30, 1999, $-- for the period from
July 1, 1998 to September 7, 1998, and $373 and $22,569 in 1998 and 1997,
respectively.
The difference between the statutory U.S. federal income tax rate of
35 percent and the Company's effective tax rate was as follows:
PERIOD FROM PERIOD FROM YEARS ENDED
SEPTEMBER 8, JULY 1, 1998 TO JUNE 30,
1998 TO SEPTEMBER 7, ----------------------------
JUNE 30, 1999 1998 1998 1997
------------- --------------- ----------- -----------
Statutory federal income tax benefit................... $ 48,516 $ 6,807 $ 447 $19,911
State and local income tax benefit..................... 6,931 972 64 2,844
Provision for valuation allowance...................... (55,447) (7,779) -- --
Other.................................................. -- -- (138) (186)
--------- ------- ------- -------
Income tax benefit..................................... $ -- $ -- $ 373 $22,569
--------- ------- ------- -------
--------- ------- ------- -------
Effective book income tax benefit rate................. 0.0 % 0.0 % 29.2 % 39.7 %
--------- ------- ------- -------
--------- ------- ------- -------
Income tax benefit--continuing operations.............. $ -- $ -- $ 2,661 $23,999
Income tax expense--discontinued operations............ -- -- (2,288) (1,430)
--------- ------- ------- -------
Income tax benefit..................................... $ -- $ -- $ 373 $22,569
--------- ------- ------- -------
--------- ------- ------- -------
F-52
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
9. INCOME TAXES--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
JUNE 30,
------------------------
1999 1998
----------- -----------
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful
accounts....................................................... $ 646 $ 630
Postretirement benefits........................................... 13,682 22,901
Environmental costs............................................... 5,491 5,094
Other liabilities................................................. 39,937 9,431
Net operating loss carryforwards.................................. 65,298 111,385
Other............................................................. 1,350 1,180
----------- -----------
Total gross deferred tax assets..................................... 126,404 150,621
Less valuation allowance............................................ 67,907 25,187
----------- -----------
Net deferred tax assets............................................. 58,497 125,434
Deferred tax liabilities:
Inventory valuation............................................... 8,969 10,626
Plant and equipment, principally due to differences in
depreciation................................................... 48,221 57,658
Other............................................................. 1,307 2,321
----------- -----------
Total gross deferred tax liabilities................................ 58,497 70,605
----------- -----------
Net deferred tax assets............................................. $ -- $ 54,829
----------- -----------
----------- -----------
The Company had available as of June 30, 1999, net operating loss (NOL)
carryforwards, for regular federal income tax purposes, totaling approximately
$379 million ($277 million for federal alternative minimum tax purposes) with
expirations of: $131 million in year 2018, $22 million in year 2011, $60 million
in year 2010, $64 million in year 2009, $8 million in year 2008, $14 million in
year 2007, $11 million in year 2006, $26 million in year 2005 and $43 million in
year 2004. As a result of the Acquisition, the above net operating losses are
limited by IRS regulations to approximately $4.7 million per year.
10. SPECIAL PREFERRED STOCK
In connection with the IPO, the Company issued one share of special
preferred stock to the trustee of a trust, the only asset of which is the
special preferred stock. The special preferred stock had the right to vote as a
separate class on any proposed merger or consolidation of the Company (Note 1)
or a sale of all or substantially all of the Company's assets and any additional
issuance of common stock of the Company subsequent to the IPO, other than
issuances pursuant to the 1995 Plan (Notes 7). The agreement with respect to the
trust for the special preferred stock provided that the trustee of such trust
would vote the share of special preferred stock as instructed by ESOP
participants on a one share/one vote basis. Except as provided above, the
special preferred stock had no voting power. The special preferred stock was
redeemable by the Company for $1.5 at such
F-53
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
10. SPECIAL PREFERRED STOCK--(CONTINUED)
time as the ESOP (and/or other benefit arrangement[s]) holds less than 25
percent of the issued and outstanding shares of common stock. As a result of the
Acquisition, the special preferred stock was redeemed for $1.5.
11. COMMON STOCK
As of June 30, 1999, one of the Company's 1,000 authorized shares of common
stock was held by RES Holding Corporation (Note 1). Prior to the Acquisition,
and at June 30, 1998, there were 27,000,000 authorized shares of the Company's
common stock ("Common Stock"); 19,707,923 shares were issued and 19,706,578
shares were outstanding as of June 30, 1998, of which 10,546,010 shares, were
held by the ESOP Trust.
Prior to the Acquisition, holders of Common Stock were entitled to one vote
per share on all matters submitted to a vote of the stockholders with the
exception of the election of board of directors, which, commencing in 1998, was
one person, one vote. Shares of Common Stock which were held by the ESOP Trust
could be voted only by the ESOP trustee. The ESOP provided that the
administrative committee was required to solicit instructions of the
participants in the ESOP and to direct the ESOP trustee to vote the shares of
Common Stock held by the ESOP Trust in accordance with the votes of the
participants.
The Company has not paid dividends on its Common Stock during the last five
fiscal years and does not presently anticipate paying any dividends in the
foreseeable future. The Company intends to reinvest earnings in the development
and expansion of its business. Also, the payment of cash dividends on its Common
Stock is restricted by covenants contained in certain of the Company's financing
arrangements (see Note 6). The payment of dividends in the future will be at the
sole discretion of the board of directors and will depend upon the Company's
profitability, financial condition, capital needs, future prospects, legal
restrictions on the payment of dividends in financing agreements, and other
factors deemed relevant by the board of directors.
12. CONCENTRATION OF CREDIT RISK
The Company has one customer which accounted for approximately 12 percent
of total sales in each of the period from September 8, 1998 to June 30, 1999,
the period from July 1, 1998 to September 7, 1998, and the fiscal years ended
June 30, 1998 and 1997. A majority of the Company's business is directly or
indirectly related to the automobile industry.
F-54
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
13. LEASE COMMITMENTS
Minimum rental payments due under noncancelable operating leases are
estimated to be as follows:
YEAR ENDING JUNE 30
2000............................................................ $ 1,628
2001............................................................ 999
2002............................................................ 812
2003............................................................ 749
2004............................................................ 647
Thereafter...................................................... 1,851
---------
$ 6,686
---------
---------
Rent expense was approximately $4,752, $4,006 and $3,983 for the fiscal
years ended June 30, 1999, 1998 and 1997, respectively.
14. LONG-TERM COMMITMENT
On December 3, 1998, the Company entered into a technical exchange
agreement with Sanyo Special Steel Company of Japan ("Sanyo") for a total of
$6 million. The forty-eight (48) month agreement involves technical assistance
in melting, refining, and casting technologies. The Company also entered into an
agreement to share in the cost and benefits of a similar agreement between Bar
Tech and Sanyo dated January 25, 1999. The Bar Tech and Sanyo agreement is also
for a period of forty-eight (48) months with total payments of $6 million.
Obligations under both agreements as of June 30, 1999 are as follows:
1999--$1,800; 2000--$1,800; 2001--$1,200; and 2002--$600.
15. LITIGATION
The Company is involved in legal proceedings, including various
environmental proceedings with governmental authorities, product liability
litigation, and claims by present and former employees under federal and
counterpart state anti-discrimination and other laws relating to employment. The
Company does not believe that any of these proceedings, either individually or
in the aggregate, will have a material adverse effect on the consolidated
financial condition, results of operations or cash flows of the Company.
16. ENVIRONMENTAL COMPLIANCE
The Company is subject to a broad range of federal, state, and local
environmental laws and regulations, including those governing discharges into
the air and water, the handling and disposal of solid and hazardous wastes, and
the remediation of contamination associated with the disposal of waste. The
Company continuously monitors its compliance with such environmental laws and
regulations and, accordingly, believes that it is currently in substantial
compliance with such laws and regulations. The Company anticipates approximately
$2,000 of material expenditures during the next 24 months for environmental
control measures. As is the case with most steel producers, the Company could
incur significant costs related to environmental compliance, in particular those
arising from remediation costs for historical waste disposal practices at
certain of the Company's facilities. The Company believes that these costs are
most likely to be in the range of $8,900 to
F-55
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
16. ENVIRONMENTAL COMPLIANCE--(CONTINUED)
$22,300 over the lives of the Company's facilities. This range represents the
estimated aggregate cost to resolve the environmental contingencies. The Company
does not anticipate any third-party recoveries. The reserve to cover potential
current and noncurrent environmental liabilities was approximately $16,128 and
$14,377 as of June 30, 1999 and 1998, respectively, substantially all of which
is classified as a long-term obligation in the accompanying consolidated balance
sheets.
The reserve has been established and is monitored based on continuing
reviews of the reserve, each matter comprising the reserve, and whether any new
matters should be included in the reserve, using currently available information
relative to enacted laws and regulations and existing technology. These reviews
are performed periodically by an in-house committee comprised of representatives
experienced in environmental matters from the environmental, operating, and
accounting departments in consultation with outside legal and technical experts,
as necessary.
17. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and matters
of significant judgment; therefore, they cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
o Cash equivalents, accounts receivable, and accounts payable--The carrying
amount approximates fair value because of the short-term maturity of
these instruments.
o Long-term debt--The fair value of the First Mortgage Notes classified
under long-term debt (Note 6), based on quoted market values, was
approximately $207,500 as of June 30, 1999. The Company estimates that
the fair value of the 8 1/4 percent Solid Waste Revenue Bonds, Series
1994, and the 9 percent Solid Waste Revenue Bonds, Series 1997,
classified under long-term debt (Note 6) was approximately $21,210 and
$56,385, respectively, as of June 30, 1999. All other debt classified as
long term on June 30, 1999, is recorded at cost which approximates fair
value.
18. ORGANIZATIONAL RESTRUCTURING
In connection with the Acquisition, the Company has developed plans to
rationalize and discontinue operations at certain manufacturing locations, and
to eliminate certain general and administrative duties. Management has conducted
a detailed evaluation and has finalized the timing and extent of the
rationalization of the operations. Adjustments arising from management's plans
are reported as adjustments to the purchase price of the Acquisition.
Accordingly, the Company recorded as of the Acquisition date a reserve for the
reduction of non-union labor amounting to $4,394. The balance of this reserve at
June 30, 1999 was $3,266. The Company also recorded an fair value adjustment and
shutdown reserves at the Acquisition date related to the manufacturing locations
selected for closure amounting to $12,705 and $1,917, respectively. No activity
was recorded in the shutdown reserve for the period ended June 30, 1999.
See the discussion in Note 8 regarding the Company's plans to reduce the
hourly workforce through retirement and severance programs.
F-56
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
18. ORGANIZATIONAL RESTRUCTURING--(CONTINUED)
On January 29, 1997, the Company announced a plan for organizational
restructuring and cost cutting initiatives including a revision to the salaried
employees retiree health care plan changing eligibility requirements for
receiving retiree health care benefits from age 57 with 30 years service or age
65 with 15 or more years service to age 65 with 15 or more years service. For
the transition to the new plan, the plan would provide retiree health care
benefits under the old plan to employees who were eligible for benefits as of
March 31, 1997. Sixty-eight (68) individuals elected to avail themselves of this
transition provision.
The Company also announced plans to restructure and reduce its salaried
workforce by approximately 200 people and to further reduce the hourly workforce
by more than 300 people as the Company reaches full capacity utilization of its
Cast-RollTM facility and completes other smaller capital projects. The financial
impact of the restructuring of the salaried workforce was estimated to be $1,649
and is reflected as a special charge in the fiscal 1997 financial statements.
However, based on higher voluntary terminations than originally estimated, a
$1,097 reduction in the restructuring reserve was recorded in fiscal 1998.
19. SUBSEQUENT EVENT
In August 1999, the Company's principal owners, Blackstone and Veritas
completed a merger transaction with the U.S. Steel Group of USX Corporation
("USX") and Kobe Steel, Ltd. ("Kobe") concerning the combination of USS/Kobe
Steel Company's steelmaking and bar producing assets with those of the Company
and Bar Tech. The resulting Combination creates one of the nation's biggest
producers of bar steels, Republic Technologies International, LLC ("RTI").
Blackstone and Veritas own 64 percent of the newly combined operations, while
USS/Kobe will have a 30 percent ownership stake. The initial letter of intent
was subject to numerous conditions including the negotiation of a new labor
agreement with the United Steel Workers of America and the refinancing of a
significant portion of the combined companies' debt. The combined companies were
able to obtain ratification of a new four-year labor agreement at the Lorain
plant in August 1999. Additionally the debt refinancing was effective
August 13, 1999. USS/Kobe's seamless pipe business in Lorain is not part of the
combination and will continue to operate as a joint venture of U.S. Steel and
Kobe Steel.
20. DISCONTINUED OPERATIONS
In connection with the Acquisition, the Company intends to sell its
specialty steel division and accordingly, the accompanying consolidated
financial statements reflect that division as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30. The measurement date
for the discontinued operations reporting is September 8, 1998, consistent with
the Acquisition date. All revenues and expenses related to the specialty steels
division since the Acquisition date have been reported as adjustments to the
purchase price of the Acquisition. The assets and liabilities relating to the
specialty steels division were adjusted to fair value in the allocation of the
purchase price of the Acquisition. The assets related to the specialty steels
division are presented as assets held for sale in the accompanying consolidated
balance sheets.
In April 1999, the Company announced that Haynes, a leading manufacturer of
nickel and cobalt based alloys, will manage its specialty steels division
following the termination of discussions to sell
F-57
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
20. DISCONTINUED OPERATIONS--(CONTINUED)
its specialty steels division to a potential acquiror. According to the terms of
an agreement between the respective companies, the Company will pay Haynes a
management fee based upon the allocable portion of total costs incurred by
Haynes attributable to management activities of the combined operations. The
Company and Haynes are associated by common ownership and are currently in
discussions for the sale of the Company's specialty steels division.
Summarized results of discontinued operations for the specialty steels
division were as follows:
PERIOD FROM PERIOD FROM YEARS ENDED
SEPTEMBER 8, JULY 1, 1998 TO JUNE 30,
1998 TO SEPTEMBER 7, --------------------------
JUNE 30, 1999 1998 1998 1997
------------- --------------- ----------- -----------
Net sales............................................. $47,077 $14,533 $ 107,467 $ 120,694
Gross profit (loss)................................... (2,825) 410 12,622 11,033
Income (loss) before income taxes..................... (5,524) (298) 7,832 3,605
Provision for income taxes............................ -- -- (2,288) (1,430)
------- ------- --------- ---------
Net income (loss)..................................... $(5,524) $ (298) $ 5,544 $ 2,175
------- ------- --------- ---------
------- ------- --------- ---------
The components of net assets of discontinued operations included in the
Company's balance sheets as assets held for sale were as follows:
JUNE 30,
----------------------
1999 1998
---------- ----------
Current assets held for sale--inventories............................. $ 15,988 $ 30,457
---------- ----------
---------- ----------
Non-current assets held for sale--property, plant and equipment....... $ 11,687 $ 11,903
---------- ----------
---------- ----------
21. TRANSACTIONS WITH AFFILIATES
Affiliates of Blackstone and Veritas currently provide certain management
and financial monitoring services to the Company pursuant to an agreement
between the respective parties for which the Company pays an annual advisory fee
plus reimbursement of certain out-of-pocket expenses.
The Company and Bar Tech share common management and have begun to perform
certain sales, marketing and administrative functions on a combined basis. This
includes marketing both companies' steel products jointly under the combined
brand name "Republic Technologies International" using a single sales force. The
costs of joint functions have been borne ratably by the Company and Bar Tech
based upon relative sales volumes achieved.
The Company also participates in an inventory purchasing arrangement with
Bar Tech. Under the terms of this arrangement, the Company purchases materials
on behalf of both companies and bills Bar Tech for its respective purchases,
plus an administrative fee. During the period September 8, 1998 through
June 30, 1999, the Company purchased materials for Bar Tech and its subsidiary,
Bliss & Laughlin Steel Company, totaling approximately $52.3 million. A similar
arrangement is in place with regard to insurance. The Company purchased
insurance coverage for the combined company for which the costs are borne
ratably by the Company and Bar Tech based
F-58
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
21. TRANSACTIONS WITH AFFILIATES--(CONTINUED)
on their respective share of coverage. The Company also purchased $25.2 million
of billet and bar products, at market prices, from Bar Tech during the period
September 8, 1998 through June 30, 1999, respectively.
At January 1, 1999, certain salaried employees of Bar Tech became employees
of the Company. Under the terms of an employee leasing and overhead allocation
agreement, the Company and Bar Tech share the costs of common expenses
including, but not limited to sales and marketing services, administrative
services, plant overhead and costs for certain common facilities.
As of January 4, 1999, Republic Technologies International Marketing, LLC
("Marketing JV") was formed to formalize prior efforts of the Company and Bar
Tech to jointly market, advertise, promote and sell both companies' steel
products to each company's existing and potential customers. The Marketing JV is
owned by the Company and Bar Tech in equal proportions and fills purchase orders
for steel products by purchasing such steel products from the Company and/or Bar
Tech, as appropriate for a particular order, and allocating such purchase orders
to the Company or Bar Tech and receiving a sales commission designed to cover
the Marketing JV's operating expenses. Under the terms of the agreement, the
Company purchases all the receivables of the Marketing JV on a discounted basis
as sales are made to customers. At June 30, 1999 the Company's receivables
balance included $30,787 of receivables purchased under the Marketing JV
agreement.
The following information is a result of the Company's transactions with
its affiliates as described above. The following information is as of and for
the periods described below:
JUNE 30,
1999
----------
Accounts receivable due from affiliates:
Bar Technologies Inc............................................................ $ 62,365
----------
----------
Accounts receivable due from affiliates, long-term:
Bar Technologies Inc............................................................ $ 197
----------
----------
Amounts due to affiliates:
Bar Technologies Inc............................................................ $ 3,081
Blackstone Capital Partners II.................................................. 1,125
Republic Technologies International Marketing, LLC.............................. 23,750
----------
$ 27,946
----------
----------
PERIOD FROM
SEPTEMBER 8,
1998 TO
JUNE 30, 1999
--------------
Net sales to affiliates:
Bar Technologies Inc........................................................ $ 10,578
Republic Technologies International Marketing, LLC.......................... 66,859
--------
$ 77,437
--------
--------
F-59
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
22. SEGMENTS AND RELATED INFORMATION
The Company operates in three reportable segments: hot-rolled,
cold-finished, and specialty steels. 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
following is a discussion of the Company's segments:
HOT-ROLLED BARS--Hot-rolled bars 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 bars include internal
soundness, uniformity of chemical composition and freedom from surface
imperfection. The Company's hot-rolled bar products include rounds,
squares, hexagons and flats in both coils and cut-lengths. Customers for
hot-rolled bar products include manufacturers of automotive parts,
machinery and industrial equipment, independent forgers, steel service
centers and converters. The Company's hot-rolled bars are used in the
manufacture of end-use products such as automotive drive trains, engine and
transmission parts, bearings and tractor components.
COLD-FINISHED BARS--Cold-finishing is a value-added process which
improves the physical properties of hot-rolled bars. Cold-finished bars 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 surface finish, that provides customers with a more
efficient means of producing a number of end products by often eliminating
the first processing step in the customer's process. The Company's
cold-finished bar products include rounds, squares, hexagons, flats and
wire, all of which can be further processed by turning, grinding or
polishing, or a combination thereof. Customers for cold-finished bar
products include manufacturers of automotive parts, machinery, industrial
equipment, steel service centers and distributors. The Company's
cold-finished bars 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.
SPECIALTY STEELS--Specialty steels include stainless steels, tool
steels and other steels produced through advanced techniques such as
consumable electrode vacuum remelting and electro-slag remelting. The
remelt process produces ultra-clean steels designed to meet the most
critical requirements and the Company believes these steels are among the
highest quality in the industry. These specialty steel products are
produced in rolled sizes as well as large forged rounds, squares and other
shapes. Stainless steels are used for corrosion resistant applications such
as food processing equipment, marine products and recreational watercraft.
These products are primarily sold through steel service centers. The
Company produces tool steels that are engineered with specific
characteristics which enable them to form, cut, shape and shear other
materials in the manufacturing process. Tool steels are utilized in the
manufacturing of metals, plastics, pharmaceuticals, electronics, optics,
paper and aluminum extrusion. The Company's customer base for tool steels
are distributors, service centers and other tool steel producers who market
or finish the end products. The remelted specialty products are used to
produce aircraft structural parts such as landing gear, solid rocket motor
casings and aircraft engine mounts. The power generation industry uses
parts made of remelted steel in the manufacture of steam and land-based
turbines. As noted in Note 20, the Company intends to sell its specialty
steel division and accordingly, the accompanying consolidated
F-60
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
22. SEGMENTS AND RELATED INFORMATION--(CONTINUED)
financial statements reflect that division as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30. As such the
following tables do not reflect specialty steels as a reportable segment.
The accounting policies of both segments reported below are the same as
those described in the Company's Summary of Significant Accounting Policies. The
Company measures segment performance based on earnings before interest, taxes,
depreciation and amortization OPEB and ESOP expense, and workforce reduction
charges ("EBITDA," as defined).
Hot-rolled accounts for intersegment sales at current market prices as if
the transaction had taken place with a third party.
FOR THE PERIOD SEPTEMBER 8, 1998 THROUGH JUNE 30, 1999
-----------------------------------------------------------------
INTER SEGMENT
HOT- COLD- TOTAL ELIMINATIONS/
ROLLED FINISHED SEGMENTS OTHER CONSOLIDATED
-------- -------- -------- ------------- ------------
Net sales................................. $420,283 $172,796 $593,079 $ (73,779) $519,300
Depreciation and amortization............. 22,440 4,393 26,833 26,833
Segment profit (EBITDA, as defined)....... 4,829 (1,394) 3,435 3,435
Segment assets............................ 578,360 136,241 714,601 80,617 795,218
Capital expenditures...................... 15,076 1,633 16,709 1,276 17,985
FOR THE PERIOD JULY 1, 1998 THROUGH SEPTEMBER 7, 1998
-----------------------------------------------------------------
INTER SEGMENT
HOT- COLD- TOTAL ELIMINATIONS/
ROLLED FINISHED SEGMENTS OTHER CONSOLIDATED
-------- -------- -------- ------------- ------------
Net sales................................. $ 82,815 $ 34,537 $117,352 $ (14,397) $102,955
Depreciation and amortization............. 4,042 382 4,424 4,424
Segment profit (EBITDA, as defined)....... (7,064) (1,526) (8,590) (8,590)
Segment assets............................ 457,322 96,209 553,531 72,896 626,427
Capital expenditures...................... 4,290 424 4,714 1,401 6,115
FOR THE YEAR ENDED JUNE 30, 1998
-----------------------------------------------------------------
INTER SEGMENT
HOT- COLD- TOTAL ELIMINATIONS/
ROLLED FINISHED SEGMENTS OTHER CONSOLIDATED
-------- -------- -------- ------------- ------------
Net sales................................. $586,755 $221,971 $808,726 $(118,856) $689,870
Depreciation and amortization............. 23,829 2,312 26,141 26,141
Segment profit (EBITDA, as defined)....... 62,841 1,670 64,511 64,511
Segment assets............................ 460,260 98,698 558,958 78,037 636,995
Capital expenditures...................... 10,078 5,611 15,689 118 15,807
F-61
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
22. SEGMENTS AND RELATED INFORMATION--(CONTINUED)
FOR THE YEAR ENDED JUNE 30, 1997
-----------------------------------------------------------------
INTER SEGMENT
HOT- COLD- TOTAL ELIMINATIONS/
ROLLED FINISHED SEGMENTS OTHER CONSOLIDATED
-------- -------- -------- ------------- ------------
Net sales................................. $550,998 $209,238 $760,236 $(132,307) $627,929
Depreciation and amortization............. 23,657 2,330 25,987 25,987
Segment profit (EBITDA, as defined)....... 30,784 6,781 37,565 37,565
Segment assets............................ 466,844 92,215 559,059 73,875 632,934
Capital expenditures...................... 6,151 1,785 7,936 (101) 7,835
The reconciliation of segment profit (EBITDA, as defined) to net loss
before extraordinary item is as follows:
PERIOD FROM PERIOD FROM YEARS ENDED
SEPTEMBER 8, JULY 1, 1998 TO JUNE 30,
1998 TO SEPTEMBER 7, --------------------------
JUNE 30, 1999 1998 1998 1997
------------- --------------- ----------- -----------
Segment profit (EBITDA, as defined).................... $ 3,435 $ (8,590) $ 64,511 $ 37,565
Provision for income taxes............................. (2,661) (23,999)
Interest expense, net.................................. 43,201 4,352 26,912 28,295
Depreciation and amortization.......................... 26,799 4,424 26,141 25,987
Other postretirement benefit changes................... 5,874 2,082 4,951 15,585
Noncash ESOP charges................................... 15,616 28,191
Workforce reduction changes............................ 60,655
--------- --------- --------- ---------
Net loss from continuing operations.................... $(133,094) $ (19,448) $ (6,448) $ (36,494)
--------- --------- --------- ---------
--------- --------- --------- ---------
* * * * * *
F-62
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO JUNE 30, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE YEARS ENDED JUNE 30, 1997 AND 1998
(IN THOUSANDS OF DOLLARS)
BALANCE ADDITIONS BALANCE
AT CHARGED TO AT END
BEGINNING COSTS AND (DEDUCTIONS) OF
OF PERIOD EXPENSES RECOVERIES PERIOD
--------- ---------- ------------ -------
Allowance for doubful accounts:
Period from September 8, 1998 to June 30, 1999............... $ 1,575 $ 405 $ -- $ 1,980
Period from July 1, 1998 to September 7, 1998................ $ 1,575 $ -- $ -- $ 1,575
Year Ended June 30, 1998..................................... $ 1,624 $ 0 $ (49) $ 1,575
Year Ended June 30, 1997..................................... $ 1,949 $ 0 $ (325) $ 1,624
Market value reserve for inventories:
Period from September 8, 1998 to June 30, 1999............... $ 2,165 $ 23,314 $ -- $25,479
Period from July 1, 1998 to September 7, 1998................ $ 2,165 $ -- $ -- $ 2,165
Year ended June 30, 1998..................................... $ 1,169 $ 996 $ -- $ 2,165
Year ended June 30, 1997..................................... $ 730 $ 439 $ -- $ 1,169
F-63
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Bar Technologies Inc.
We have audited the accompanying consolidated balance sheet of Bar Technologies
Inc. and subsidiaries as of January 2, 1999, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
year then ended. Our audit also included the financial statement schedule for
the year ended January 2, 1999 listed in the Index to Financial Statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such fiscal 1998 consolidated financial statements present
fairly, in all material respects, the financial position of Bar Technologies
Inc. and subsidiaries as of January 2, 1999, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles. Also, in our opinion, such 1998 financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
Cleveland, Ohio
March 31, 1999
F-64
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Bar Technologies Inc.:
We have audited the accompanying consolidated balance sheet of Bar Technologies
Inc. (a Delaware corporation) and subsidiaries as of January 3, 1998 and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the year ended January 3, 1998, the three month period ended
December 28, 1996 and the year ended September 30, 1996. These consolidated
financial statements and schedule referred to below are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bar Technologies Inc. and
subsidiaries as of January 3, 1998 and the results of their operations and their
cash flows for the year ended January 3, 1998, the three months ended
December 28, 1996 and the year ended September 30, 1996, in conformity with
generally accepted accounting principles.
Our audits of Bar Technologies Inc. and subsidiaries were made for the purpose
of forming an opinion on the basic financial statements taken as a whole.
Schedule II is presented for the purpose of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
March 24, 1998
F-65
BAR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 2, 1999 AND JANUARY 3, 1998
(IN THOUSANDS OF DOLLARS)
JANUARY 2, 1999 JANUARY 3, 1998
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 2,188 $ 3,391
Accounts receivable, less allowances of $1,104 and $817, respectively....... 26,152 34,287
Accounts receivable due from affiliates..................................... 1,935 --
Inventories................................................................. 74,168 58,277
Other current assets........................................................ 2,676 1,977
--------- ---------
Total current assets.......................................................... 107,119 97,932
Property, plant and equipment:
Land and improvements....................................................... 2,580 2,628
Buildings and improvements.................................................. 19,944 20,189
Machinery and equipment..................................................... 72,162 60,058
Construction-in-progress.................................................... 8,396 4,134
--------- ---------
Total property, plant and equipment........................................... 103,082 87,009
Accumulated depreciation.................................................... (12,983) (7,432)
--------- ---------
Net property, plant and equipment............................................. 90,099 79,577
Goodwill, net of accumulated amortization of $891 and $567, respectively...... 11,969 12,293
Restricted debt service fund.................................................. 1,551 1,551
Other assets.................................................................. 11,763 14,325
--------- ---------
Total assets.................................................................. $ 222,501 $ 205,678
--------- ---------
--------- ---------
The accompanying notes are an integral part of these statements.
F-66
BAR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--CONTINUED
AS OF JANUARY 2, 1999 AND JANUARY 3, 1998
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
JANUARY 2, 1999 JANUARY 3, 1998
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................................ $ 44,791 $ 33,339
Amounts due to affiliates................................................... 16,401 1,531
Accrued interest............................................................ 4,885 3,605
Other accrued liabilities................................................... 19,687 12,647
Current maturities of long-term debt........................................ 3,805 3,033
Revolving credit facility................................................... 79,000 53,650
--------- ---------
Total current liabilities..................................................... 168,569 107,805
Long-term debt................................................................ 128,962 130,741
Deferred income taxes......................................................... 5,001 5,047
Amounts due to affiliates, long-term.......................................... 531 --
Other long-term liabilities................................................... 5,377 4,964
--------- ---------
Total liabilities............................................................. 308,440 248,557
Redeemable stock:
Series A preferred stock $0.001 par value
Authorized 5,000 shares
Issued and outstanding, 1,100 shares..................................... 5,500 5,500
Commitments and contingencies (Note 14)
Stockholders' equity (deficit):
Series B preferred stock $0.001 par value
Authorized, issued and outstanding, 1 share.............................. -- --
Class A common stock, $0.001 par value
Authorized, 1,000,000 shares
Issued and outstanding, 204,458 shares................................... -- --
Class B common stock, $0.001 par value
Authorized, 600,000 shares
Issued and outstanding, 536,829 shares................................... 1 1
Class C common stock, non-voting, $0.001 par value,
Authorized, 600,000 shares
Issued and outstanding, 536,865 shares................................... 1 1
Additional paid-in capital.................................................. 63,055 63,055
Warrants outstanding........................................................ 5,119 5,119
Accumulated deficit......................................................... (158,424) (116,061)
Accumulated other comprehensive loss........................................ (1,191) (494)
--------- ---------
Total stockholders' equity (deficit).......................................... (91,439) (48,379)
--------- ---------
Total liabilities and stockholders' equity (deficit).......................... $ 222,501 $ 205,678
--------- ---------
--------- ---------
The accompanying notes are an integral part of these statements.
F-67
BAR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998,
THE THREE MONTHS ENDED DECEMBER 28, 1996
AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE INFORMATION)
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
JANUARY 2, JANUARY 3, DECEMBER 28, SEPTEMBER 30,
1999 1998 1996 1996
---------- ---------- ------------- -------------
Net sales............................................ $271,851 $242,896 $ 40,251 $ 77,163
Cost of sales........................................ 262,462 239,370 43,427 91,995
Depreciation and amortization........................ 5,961 4,523 1,221 2,036
Selling, general and administrative expense.......... 21,107 21,730 4,305 14,592
-------- -------- --------- ---------
Loss from operations................................. (17,679) (22,727) (8,702) (31,460)
Interest expense, net................................ 26,959 23,306 5,148 10,833
Other income......................................... 2,663 1,415 328 1,079
-------- -------- --------- ---------
Loss before provision for income taxes............... (41,975) (44,618) (13,522) (41,214)
Provision for income taxes........................... 3 205 3 205
-------- -------- --------- ---------
Loss before extraordinary item....................... (41,978) (44,823) (13,525) (41,419)
Extraordinary loss on early extinguishment
of debt............................................ -- -- -- 2,214
-------- -------- --------- ---------
Net loss............................................. (41,978) (44,823) (13,525) (43,633)
Preferred stock dividends............................ 385 385 93 385
-------- -------- --------- ---------
Net loss applicable to common shares................. $(42,363) $(45,208) $ (13,618) $ (44,018)
-------- -------- --------- ---------
-------- -------- --------- ---------
Per share data--basic and diluted:
Loss before extraordinary item..................... $ (33.14) $ (50.88) $ (18.37) $ (93.08)
Extraordinary loss on early extinguishment of
debt............................................ -- -- -- (4.93)
-------- -------- --------- ---------
Net loss........................................... $ (33.14) $ (50.88) $ (18.37) $ (98.01)
-------- -------- --------- ---------
-------- -------- --------- ---------
The accompanying notes are an integral part of these statements.
F-68
BAR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998,
THE THREE MONTHS ENDED DECEMBER 28, 1996 AND
THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS)
ADDITIONAL
CLASS A CLASS B CLASS C PAID-IN WARRANTS ACCUMULATED DEFERRED
COMMON STOCK COMMON STOCK COMMON STOCK CAPITAL OUTSTANDING DEFICIT COMPENSATION
------------ ------------ ------------ ---------- ----------- ----------- ------------
Balance, September 30, 1995.... $ -- $ 3,704 $ (13,217) $ (112)
Net loss....................... (43,633)
Preferred stock dividend....... (385)
Other comprehensive income--
foreign currency translation
adjustments..................
Issuance of common stock....... $1 30,002 58
Issuance of warrants........... $ 5,119
Amortization of deferred
compensation................. 54
---- -- -- -------- ------- --------- ------
Balance, September 30, 1996.... $ -- $1 $ 33,706 $ 5,119 $ (57,235) $ --
Net loss....................... (13,525)
Preferred stock dividend....... (93)
Other comprehensive income--
foreign currency translation
adjustments..................
---- -- -- -------- ------- --------- ------
Balance, December 28, 1996..... $ -- $1 $ 33,706 $ 5,119 $ (70,853) $ --
Net loss....................... (44,823)
Preferred stock dividend....... (385)
Other comprehensive income--
foreign currency translation
adjustments..................
Issuance of common stock....... $1 29,349
---- -- -- -------- ------- --------- ------
Balance, January 3, 1998....... $ -- $1 $1 $ 63,055 $ 5,119 $(116,061) $ --
Net loss....................... (41,978)
Preferred stock dividend....... (385)
Other comprehensive income--
foreign currency translation
adjustments..................
---- -- -- -------- ------- --------- ------
Balance, January 2, 1999....... $ -- $1 $1 $ 63,055 $ 5,119 $(158,424) $ --
---- -- -- -------- ------- --------- ------
---- -- -- -------- ------- --------- ------
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE COMPREHENSIVE STOCKHOLDERS'
INCOME (LOSS) INCOME (LOSS) EQUITY (DEFICIT)
------------- ------------- ----------------
Balance, September 30, 1995.... $ (9,625)
Net loss....................... $ (43,633) (43,633)
Preferred stock dividend....... (385)
Other comprehensive income--
foreign currency translation
adjustments.................. $ (49) (49) (49)
Issuance of common stock....... 30,061
Issuance of warrants........... 5,119
Amortization of deferred
compensation................. 54
------- --------- --------
Balance, September 30, 1996.... $ (49) $ (43,682) $(18,458)
---------
---------
Net loss....................... $ (13,525) (13,525)
Preferred stock dividend....... (93)
Other comprehensive income--
foreign currency translation
adjustments.................. (82) (82) (82)
------- --------- --------
Balance, December 28, 1996..... $ (131) $ (13,607) $(32,158)
---------
---------
Net loss....................... $ (44,823) (44,823)
Preferred stock dividend....... (385)
Other comprehensive income--
foreign currency translation
adjustments.................. (363) (363) (363)
Issuance of common stock....... 29,350
------- --------- --------
Balance, January 3, 1998....... $ (494) $ (45,186) $(48,379)
---------
---------
Net loss....................... $ (41,978) (41,978)
Preferred stock dividend....... (385)
Other comprehensive income--
foreign currency translation
adjustments.................. (697) (697) (697)
------- --------- --------
Balance, January 2, 1999....... $(1,191) $ (42,675) $(91,439)
------- --------- --------
------- --------- --------
The accompanying notes are an integral part of these statements.
F-69
BAR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998,
THE THREE MONTHS ENDED DECEMBER 28, 1996
AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS)
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
JANUARY 2, JANUARY 3, DECEMBER 28, SEPTEMBER 30,
1999 1998 1996 1996
---------- ---------- ------------- -------------
Cash flows from operating activities
Net loss.............................................. $(41,978) $(44,823) $ (13,525) $ (43,633)
Adjustments to reconcile net cash used by operating
activities:
Depreciation and amortization...................... 5,961 4,523 1,221 2,036
Extraordinary loss on early extinguishment
of debt.......................................... -- -- -- 2,214
Accretion of original issue discount............... 1,393 1,243 285 633
Amortization of deferred financing cost............ 2,819 2,131 511 1,396
(Increase) decrease in accounts receivable......... 7,657 (16,148) 755 900
Increase in inventory.............................. (16,179) (462) (12,157) (12,016)
(Increase) decrease in other current assets........ (720) 1,159 (67) (1,306)
Increase in accounts payable....................... 11,642 6,504 4,023 5,473
Increase in due to/from affiliates................. 13,466 -- -- --
Increase (decrease) in other current liabilities... 8,494 (4,051) 2,220 12,150
Other.............................................. 232 (930) (242) (129)
-------- -------- --------- ---------
Net cash used by operating activities................... (7,213) (50,854) (16,976) (32,282)
-------- -------- --------- ---------
Cash flows from investing activities
Net capital expenditures.............................. (16,325) (5,813) (186) (21,300)
Acquisition of BLI, net of cash....................... -- -- -- (41,028)
-------- -------- --------- ---------
Net cash used by investing activities................... (16,325) (5,813) (186) (62,328)
-------- -------- --------- ---------
Cash flows from financing activities
Net receipts under revolving credit agreement......... 25,350 13,850 17,300 22,500
Issuance of debt...................................... -- 324 -- 104,363
Repayments of debt.................................... (2,401) (2,588) (4,727) (32,154)
Proceeds from issuance of common stock................ -- 29,350 -- 30,003
Proceeds from issuance of warrants.................... -- -- -- 5,119
Preferred stock dividends............................. (385) (385) (93) (385)
Deferred debt financing costs......................... -- -- -- (12,398)
Deposits into bond interest escrow.................... -- 12,836 6,149 (18,516)
-------- -------- --------- ---------
Net cash provided by financing activities............... 22,564 53,387 18,629 98,532
-------- -------- --------- ---------
Effect of exchange rate changes on cash................. (229) (363) 44 (49)
Net increase (decrease) in cash and cash equivalents.... (1,203) (3,643) 1,511 3,873
Cash and cash equivalents-beginning of year............. 3,391 7,034 5,523 1,650
-------- -------- --------- ---------
Cash and cash equivalents-end of year................... $ 2,188 $ 3,391 $ 7,034 $ 5,523
-------- -------- --------- ---------
-------- -------- --------- ---------
Supplemental cash flow information:
Interest paid......................................... $ 20,584 $ 18,957 $ 5,360 $ 2,976
Income taxes paid..................................... $ 196 $ -- $ -- $ 622
The accompanying notes are an integral part of these statements.
F-70
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED INFORMATION
Nature of Operations and Customer Concentration
Bar Technologies Inc. and subsidiaries ("BarTech" or the "Company") is a
producer of high quality hot rolled engineered and cold finished steel bar
products. The Company was formed on September 26, 1994, when it acquired certain
steelmaking and bar rolling assets of the former Bar, Rod and Wire Division of
Bethlehem Steel Corporation ("Bethlehem"). In February 1996, the Company
restarted its Lackawanna, New York bar mill and began the production of hot
rolled engineered bar products. In conjunction with the acquisition, the Company
developed and implemented a major modernization and expansion plan and
subsequently began commercial steelmaking operations at its Johnstown,
Pennsylvania facility in August 1996.
On April 2, 1996, the Company consummated an amended merger agreement with
Bliss & Laughlin Industries, Inc. ("BLI"), a major independent cold finished
processor of steel bars. The Company financed the acquisition with part of the
proceeds of its recapitalization. (See Note 5--Recapitalization)
The Company's principal owners, Blackstone Capital Partners II Merchant
Banking Fund L. P. and its affiliates ("Blackstone") and certain affiliates of
the successor to Veritas Capital, Inc. ("Veritas") serving as general partners
for limited partnerships, acquired Republic Engineered Steels, Inc. ("Republic")
in September 1998. Blackstone and Veritas intend to combine the Company and
Republic (the "Combination") during 1999, subject to refinancing a significant
portion of the combined companies' debt.
Subsequent to the acquisition of Republic, the Company and Republic share
common management and have begun to perform certain sales, marketing and
administrative functions on a combined basis. This includes marketing both
companies' steel products jointly under the combined brand name "Republic
Technologies International" using a single sales force. However, throughout
fiscal 1998, each customer purchase order for steel products continued to be
placed directly with the Company or Republic, as appropriate, to make the sale.
The costs of joint functions have been borne ratably by the Company and Republic
based upon relative sales volumes achieved. The Company also participates in an
inventory purchasing arrangement with Republic. Under the terms of this
arrangement, Republic purchases inventory products on behalf of both companies
and bills the Company for its respective purchases, plus an administrative fee.
As of January 4, 1999, Republic Technologies International Marketing, LLC
("Marketing JV") was formed. The Company and Republic expect to finalize an
agreement in the second quarter 1999 under which this jointly owned
Marketing JV will market, advertise, promote and sell both companies' steel
products to each company's existing and potential customers. The Company and
Republic will be reimbursed for expenses they incur on behalf of the
Marketing JV, including compensation costs of employees of the Company and
Republic who perform sales and marketing functions for the Marketing JV. Except
for certain prior commitments to customers that will continue to be placed with
the Company or Republic as applicable, it is intended that customer purchase
orders will be placed with the Marketing JV. Pursuant to allocation procedures
to be approved by the boards of directors of both companies, the production of
steel products to fulfill these orders will be allocated between the Company and
Republic. To compensate the Marketing JV for marketing services performed, it is
intended that the Company and Republic will pay commissions at specified
percentages of sales.
F-71
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED
INFORMATION--(CONTINUED)
Since its formation, the Company has incurred substantial losses as a
result of the ongoing start-up activities of its facilities and its general and
administrative expenses. Any substantial delay in achieving or a failure to
bring the facilities up to commercial volumes and productivity levels, or to
sell its products in its target markets could have a material adverse effect on
the Company's financial condition and results of operations. Also, in the event
of a substantial delay in integrating the operations of the Company and Republic
including implementation of the Combination, or the occurrence of any
substantial unanticipated costs related thereto, could have a material adverse
effect on the Company's financial condition and results of operations. In the
event of the above, the Company may need to borrow additional funds under its
Revolving Credit Agreement or, to the extent that the funds were not available
thereunder, to obtain additional financing to meet its cash flow requirements.
The Company is highly leveraged. Restrictive covenants included in the indenture
and other debt obligations may have the effect of limiting the Company's ability
to incur additional indebtedness, sell assets, or acquire other entities and may
otherwise limit the operational and financial flexibility of the Company.
The Company and Republic presently perform certain functions on a combined
basis and intend to further integrate operations in 1999 through the Marketing
JV. As a consequence, management believes that capital resources and liquidity
of the Company and Republic can and will be managed on a combined basis prior to
consummation of the Combination. Management has prepared fiscal 1999 financial
and operational plans on a combined basis for the Company and Republic. Based on
these plans, even if the Combination is not consummated during 1999, management
believes that the aggregate of cash flows from combined operations, available
funds under existing credit agreements and funds expected to be available to
refinance certain acquisition-related debt of Republic, will be sufficient in
1999 to enable both the Company and Republic to meet their debt service
requirements when due and to fund their capital expenditures, working capital
and general corporate requirements, although there can be no assurances with
respect thereto.
The Company has two operating segments: hot-rolled and cold-finished
special quality steel bar products. The Company operates in both the United
States and Canada. Major market areas include the Midwest and Great Lakes
Regions of the United States, with customers that include the automotive,
machinery, and tool industries, as well as, independent forgers and steel
service centers. The Company's ability to generate future revenue may be
dependent on economic conditions in these geographic areas including conditions
that affect those industries.
Principles of Consolidation
The consolidated financial statements include the accounts of Bar
Technologies Inc. and its wholly owned subsidiary, Bliss & Laughlin Industries
Inc. ("BLI") from April 2, 1996, the effective date of the acquisition. All
significant intercompany accounts and transactions have been eliminated.
Fiscal Year Change
Effective with its reporting for fiscal 1999, the Company is changing its
fiscal year from a 4/4/5 week fiscal quarter basis ending the Saturday closest
to December 31 to a calendar quarter basis with the fiscal year ending on
December 31. Accordingly, under the new fiscal year calendar, the Company's
quarters will each be comprised of three calendar months ending March 31, June
30, September 30 and December 31. Previously, each of the Company's quarters
were comprised of
F-72
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED
INFORMATION--(CONTINUED)
thirteen weeks. Due to the relative proximity of the new fiscal year end date
with the Company's former year end date, no transition period will be required.
Effective February 1997, the Company changed its fiscal year from its
previous calendar quarter basis ended September 30 to a 4/4/5 week fiscal
quarter basis ending the Saturday closest to December 31. As a result, the
Company's fiscal year 1997 began on December 29, 1996 and ended on January 3,
1998. Fiscal 1997 included 53 weeks while fiscal 1998 and 1996 each included 52
weeks. The three-month transition period ended December 28, 1996 bridges the gap
between the Company's old and new fiscal year ends.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Restricted Debt Service Fund
The restricted debt service fund consists of a noncurrent escrow amount
required by the Marine Midland Term Loan (see Note 7).
Inventories
Inventories are valued at the lower of cost or market (net realizable
value). Cost is determined using the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and include improvements
that significantly extend the useful lives of existing plant and equipment. The
Company provides for depreciation of property, plant and equipment on the
straight-line method based upon the estimated useful lives of the assets.
Depreciation expense was $5,631 for fiscal 1998, $4,198 for fiscal 1997, $1,140
for the three months ended December 28, 1996 and $1,874 for fiscal 1996. The
range of estimated useful lives of the Company's assets are as follows:
Buildings and improvements.................................. 40 years
Machinery and equipment..................................... 7-20 years
Repairs and maintenance costs are expensed as incurred. Capital
expenditures which cannot be used immediately are included in
construction-in-process. As these projects are completed, they are transferred
to depreciable assets. Net gains or losses related to asset dispositions are
recognized in earnings in the period in which the disposition occurs.
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the amount or fair
value, as defined, of the
F-73
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED
INFORMATION--(CONTINUED)
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Goodwill
Goodwill represents the amount paid for BLI in excess of the fair value of
the identifiable net assets acquired. It is being amortized on a straight-line
basis over 40 years.
Net Loss Per Share
Basic earnings per share are computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflect the potential dilution that
could occur if common stock equivalents (i.e., warrants and stock options) were
exercised and then shared in the earnings of the Company. For the years ended
January 2, 1999 and January 3, 1998, the three months ended December 28, 1996,
and the year ended September 30, 1996, the reported basic and diluted earnings
per share were the same; however, securities totaling 91,609, 137,416, 132,606,
and 114,512, respectively for the above periods, were excluded from the diluted
earnings per share calculations due to their antidilutive effect.
The weighted average number of common shares used in the calculation of net
loss per common share were 1,278,152 and 888,581 for the years ended January 2,
1999 and January 3, 1998, respectively, 741,287 for the three month period ended
December 28, 1996 and 449,114 for the year ended September 30, 1996.
Income Taxes
Deferred income taxes are provided for all temporary differences between
the book and tax basis of assets and liabilities.
Foreign Currency Translation
Asset and liability accounts of the Company's foreign subsidiary, Canadian
Drawn Steel Company, Inc. ("CDSC"), are translated into U. S. dollars in
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation". Balance sheet accounts are translated using current
exchange rates in effect at the balance sheet date and revenue and expense
accounts are translated using a weighted average exchange rate during the
period. Translation adjustments are reflected as other comprehensive income
(loss) in shareholders' equity and had no tax effects for any of the periods
presented.
Transaction gains and losses are included in the consolidated statements of
operations as incurred. These amounts were not significant in all periods
presented.
F-74
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED
INFORMATION--(CONTINUED)
Revenue Recognition
The Company records revenues at the time product is shipped to its
customers. Sales are made with no right of return.
Accounting Estimates
The presentation of the consolidated financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and disclosure of contingent assets and
liabilities. The estimates and assumptions used in the accompanying consolidated
financial statements are based upon management's evaluation of the relevant
facts and circumstances as of the date of the financial statements. Actual
results may differ from the estimates and assumptions used in preparing the
accompanying consolidated financial statements.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and For Hedging Activities," ("SFAS 133"). This statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at fair value. SFAS 133 requires that changes in the fair value of
derivatives be recognized currently in earnings unless specific hedge accounting
criteria are met. SFAS 133 is effective for fiscal years beginning after
June 15, 2000, and cannot be applied retroactively. The Company has not
completed its evaluation of SFAS 133 and accordingly, is unable to determine
what impact, if any, SFAS 133 will have on its financial statements.
Reclassifications
Certain amounts for prior periods have been reclassified to conform with
the current year presentation.
NOTE 2--INVENTORIES
Inventories consisted of the following: (in thousands)
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
Raw materials....................................................... $ 13,965 $ 14,569
Work-in-process..................................................... 21,812 22,341
Finished goods...................................................... 38,391 21,367
-------- --------
Total............................................................... $ 74,168 $ 58,277
-------- --------
-------- --------
F-75
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 3--OTHER ASSETS
Other assets consisted of the following: (in thousands)
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
Deferred financing costs, net of accumulated amortization of $7,170
and $4,351, respectively.......................................... $ 6,557 $ 9,188
Deferred income taxes............................................... 1,214 1,214
Other............................................................... 3,992 3,923
-------- --------
Total............................................................... $ 11,763 $ 14,325
-------- --------
-------- --------
NOTE 4--ACQUISITION
On April 2, 1996, the Company consummated an amended merger agreement with
BLI, a major independent cold finished processor of steel bars. The Company
acquired BLI for $9.50 per common share in cash for an aggregate equity purchase
price of approximately $38.0 million, plus the assumption of $3.6 million of
debt and the refinancing of $16.8 million of debt. The Company financed the
acquisition with part of the proceeds of its recapitalization. (See Note 5--
Recapitalization)
The acquisition was accounted for as a purchase, and accordingly, the
results of operations of BLI have been included in the consolidated financial
statements since April 2, 1996. The purchase price, including acquisition
expenses, was allocated to assets acquired and liabilities assumed based on fair
market values at the date of acquisition. The excess of the purchase price over
the fair market value of the net assets acquired was recognized as goodwill and
is being amortized over 40 years. The fair value of assets acquired and
liabilities assumed are summarized as follows: (in thousands)
Current assets................................................ $ 53,743
Property, plant and equipment................................. 21,468
Other assets.................................................. 5,165
Goodwill...................................................... 12,860
Current liabilities........................................... (38,142)
Long-term liabilities......................................... (13,064)
----------
Total......................................................... $ 42,030
----------
----------
NOTE 5--RECAPITALIZATION AND EQUITY CONTRIBUTIONS
On April 2, 1996, the Company completed a recapitalization
("Recapitalization) which included the following:
o The issuance of $91.6 million in aggregate principal amount of
13 1/2% Senior Secured Notes due 2001 for proceeds of
$90.0 million.
o The issuance of 536,829 shares of Class B Common Stock in
consideration of $30.0 million in cash provided by Blackstone ("the
Blackstone Investment").
o The establishment of a new senior revolving credit agreement ("the
Revolving Credit Agreement") among the Company and a syndicate of
banks with Chase Manhattan Bank
F-76
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 5--RECAPITALIZATION AND EQUITY CONTRIBUTIONS--(CONTINUED)
(formerly Chemical Bank), as agent, which provides the Company with
a revolving credit facility in an aggregate principal amount of up
to $90.0 million, of which a portion will be available in the form
of letters of credit.
o The consummation of an amended merger agreement with BLI, a major
independent cold finished processor of steel bars. The Company
acquired BLI for $9.50 per common share in cash for an aggregate
equity purchase price of approximately $38.0 million, plus the
assumption of $3.6 million of debt and the refinancing of $16.8
million of debt. The Company financed the acquisition with part of
the proceeds of the Recapitalization.
o The repayment of the following indebtedness: (i) approximately $16.8
million aggregate principal amount of outstanding loans under BLI
Revolving Credit Facilities; (ii) approximately $5.8 million
aggregate principal amount of outstanding loans under the Existing
Bar Tech Credit Facilities; and (iii) approximately $6,100 aggregate
principal amount of outstanding loans under the Master Agreement
with the Commonwealth of Pennsylvania and various of its agencies
(the "Master Agreement").
On September 11, 1997, the Company's principal owners, Blackstone and
Veritas purchased 536,865 shares of Class C non-voting common stock for
$30.0 million. The proceeds were used to fund the Company's capital program
aimed at enhancing the productive capacity of its steelmaking facilities.
Approximately $14.0 million was for improvements to the Company's Johnstown,
Pennsylvania mill facility to produce enhanced machinability (including leaded)
and bearing steel grades. An additional $14.0 million was for several projects
at the Company's Lackawanna, New York 13" bar mill. The remaining amounts were
for various projects at the Company's cold-finishing subsidiary, BLI. These
projects are expected to be completed during the second half of fiscal 1999.
NOTE 6--REVOLVING CREDIT AGREEMENT
In April 1996, the Company entered into a $90.0 million Revolving Credit
Agreement with a group of banks with Chase Manhattan Bank as agent. The
revolving facility provided the Company with an aggregate principal amount of up
to $90.0 million, of which $5.4 million is in the form of letters of credit. The
Credit Agreement matures April 2, 2000 and is initially secured by (i) all of
the inventory, accounts receivable, related intangibles and documents and the
proceeds of the foregoing; (ii) all of the Common Stock of the Company
outstanding as of April 2, 1996, subject to dilution and release under certain
circumstances, and; (iii) all of the Capital Stock of each direct or indirect
subsidiary of the Company. The pledges of Capital Stock referred to in (ii) and
(iii) will be made on a first priority basis and will be equal and ratable with
the liens on such capital stock in favor of holders of Senior Notes. Borrowings
under the Credit Agreement bear interest at a rate per annum equal to, at the
Company's option, either a prime rate plus 2.0% or an adjusted LIBOR rate plus
3.0%, subject to upward adjustment in certain circumstances.
The Credit Agreement contains a number of covenants that, among other
things, restrict the ability of the Company to dispose of assets, incur
additional indebtedness, prepay other indebtedness or amend other debt
instruments, pay dividends, create liens on assets, enter into sale and
leaseback transactions, make investments, loans or advances, make acquisitions,
engage in mergers or consolidations, change the business conducted by the
Company, make capital expenditures above certain levels or engage in certain
transactions with affiliates and otherwise restrict corporate activities. In
addition, under the Credit Agreement, the Company is required to
F-77
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 6--REVOLVING CREDIT AGREEMENT--(CONTINUED)
maintain a minimum Consolidated Interest Coverage Ratio. The Credit Agreement
also contains provisions that prohibit any modifications of the Indenture
Agreement dated April 2, 1996 to the Senior Notes in any manner adverse to the
Lenders and that limit the Company's ability to refinance the Senior Notes
without the consent of such Lenders. In the third quarter of 1997, the Company
and its commercial banks negotiated an amendment to its existing $90.0 million
Revolving Credit Agreement (the "Amended Agreement"). The Amended Agreement
provides for the addition of a new revolving Sub-Facility ("Sub-Facility") and
amends certain portions of its original Revolving Credit Agreement. The
Sub-Facility component of the Amended Agreement provides the Company with up to
$15.0 million of additional borrowing capacity based on a higher receivable and
inventory advance rate than in the Revolving Credit Agreement. The Sub-Facility
component of the Amended Agreement expires on September 1, 1999. The maturity
date of the Amended Agreement remains April 2, 2000.
Borrowings under the Amended Agreement bear interest at a rate per annum
equal to, at the Company's option, either a prime rate plus 2.0% or adjusted
LIBOR plus 3.0%, subject to upward adjustment in certain circumstances.
Sub-Facility borrowings bear interest at a rate per annum equal to, at the
Company's option, either a prime rate plus 3.5% or LIBOR plus 4.5%. Borrowings
outstanding under the Amended Agreement including the Sub-Facility were $79.0
million at January 2, 1999 and $53.7 million at January 3, 1998, respectively.
There were no amounts available under the Amended Agreement and Sub-Facility at
January 2, 1999 based on the applicable borrowing base under its Amended
Agreement. Weighted-average interest rates on borrowings under the Amended
Agreement and the Sub-Facility at January 2, 1999 were 8.79% and 11.50%,
respectively. At January 3, 1998, weighted-average interest rates were 8.98% and
11.00%, respectively.
The Amended Agreement contains a number of covenants similar to those in
the Revolving Credit Agreement. Additionally, under the Amended Agreement, the
Company is required to maintain a minimum Consolidated Interest Coverage Ratio
beginning with annualized results for the quarter ended September 30, 1998. The
Amended Agreement also contains provisions that prohibit any modifications of
the Indenture Agreement dated April 2, 1996 to the Senior Notes in any manner
adverse to the Lenders and that limit the Company's ability to refinance the
Senior Notes without the consent of such Lenders.
F-78
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 7--FINANCING ARRANGEMENTS
The Company had the following long-term debt obligations outstanding:
JANUARY 2, JANUARY 3,
1999 1998
------------- -------------
13 1/2% Senior Secured Notes, due April 1, 2001..................... $ 91,609 $ 91,609
Marine Midland Term Loan, interest rate at Prime or LIBOR plus 1.0%,
due March 1, 2003................................................. 6,929 7,578
RDC Loan, interest rate at 7.75%, due July 1, 2004.................. 411 482
Economic Development Partnership ("EDP I"), interest at 3.0%, due
October 1, 2009................................................... 5,707 5,707
Sunny Day Fund I ("SDF I"), interest rate at 3.0%, due October 1,
2009.............................................................. 6,491 6,607
Community Development Block Grant Program ("CDBG"), interest rate at
3.0%, due July 1, 2010............................................ 690 690
Economic Development Partnership ("EDP II"), interest rate at 3.0%,
due July 1, 2010.................................................. 1,300 1,300
Housing and Urban Development 108 ("HUD") Bonds, interest rates
between 6.6% and 8.2%, due on various dates from August 1, 1999 to
September 26, 2003................................................ 5,750 7,000
Pennsylvania Industrial Development Authority Note ("PIDA I"),
interest rate at 2.0%, due October 1, 2009........................ 1,646 1,646
Pennsylvania Industrial Development Authority Note ("PIDA II"),
interest rate at 3.0%, due March 1, 2011.......................... 1,797 1,797
Bethlehem Subordinated Note, interest rate at 7.0%, due
September 26, 2002................................................ 5,500 5,500
Business Infrastructure Development ("BID") Program, interest rate
at 3.0%, due April 1, 2001........................................ 2,500 2,500
Economic Development Partnership ("EDP III"), interest rate at 3.0%,
due December 1, 2007.............................................. 3,000 3,000
Industrial Revenue Bond ("IRB"), interest rate is variable,
calculated weekly, representing minimum rate required to sell
bonds in a secondary market, due December 1, 2018................. 3,600 3,600
U.S. Bank Mortgage Note, interest at 9.35%, due April 1, 2002....... -- 315
--------- ---------
136,930 139,331
Less: Original issue discount....................................... 4,163 5,557
--------- ---------
Total............................................................... 132,767 133,774
Less: Current maturities............................................ 3,805 3,033
--------- ---------
Long-term debt...................................................... $ 128,962 $ 130,741
--------- ---------
--------- ---------
F-79
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 7--FINANCING ARRANGEMENTS--(CONTINUED)
The Company incurred an extraordinary charge of $2.2 million during the
third quarter of fiscal 1996, to reflect the recognition of premium and
previously deferred charges resulting from the repayment of debt as part of the
Recapitalization.
Senior Secured Notes
In April 1996, the Company completed a Recapitalization which included the
issuance of $91.6 million in aggregate principal amount Senior Secured Notes
("Senior Notes"). Interest on the Senior Notes is at 13 1/2% per annum and is
payable semi-annually on each April 1 and October 1, to the holders of record of
Senior Notes at the close of business on March 15 and September 15 immediately
preceding such interest payment date.
The Senior Notes are callable after three years at the following redemption
prices:
YEAR PERCENTAGE
- ------------------------------------------------------------- ----------
1999......................................................... 106.750%
2000......................................................... 103.375%
The Senior Notes are fully and unconditionally guaranteed (the "Guarantee")
on a senior basis, jointly and severally, by the Company's wholly-owned
subsidiary, BLI and its wholly-owned subsidiary, CDSC. The subsidiary guarantors
comprise all of the direct and indirect subsidiaries of the Company.
The following is the condensed information of the subsidiary guarantors on
a combined basis. The separate financial statements and other disclosures
concerning the subsidiary guarantors are not presented because management does
not believe they would be material to investors. The following information is as
of and for the years ended January 2, 1999 and January 3, 1998, the three months
ended December 28, 1996 and the period ended September 30, 1996: (in thousands)
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED PERIOD ENDED
JANUARY 2, JANUARY 3, DECEMBER 28, SEPTEMBER 30,
1999 1998 1996 1996
---------- ---------- ------------ -------------
Current assets............................. $ 48,465 $ 56,948 $ 48,814 $52,082
Noncurrent assets.......................... 37,745 37,868 39,229 39,871
Current liabilities........................ 33,152 43,180 37,811 41,117
Noncurrent liabilities..................... 13,979 13,611 13,244 13,209
Net sales.................................. 157,764 159,120 35,369 73,120
Gross profit............................... 15,562 17,026 3,419 5,118
Operating income........................... 3,519 3,307 105 3,165
Net income (loss).......................... 1,751 1,035 (497) (4,414)
The Senior Notes and the Guarantee are collateralized by liens on
(i) interests in certain real properties owned or leased by the Company and the
Guarantors on the issue date, (ii) interest in machinery and equipment owned on,
or acquired after, the issue date by the Company and the Guarantors located at
such real properties, (iii) all of the Common Stock of the Company outstanding
on the issue date (which was pledged on a non-recourse basis and will be subject
to dilution for issuances of Common Stock subsequent to the Offering and release
upon the occurrence of certain events), (iv) all of the outstanding capital
stock of the Company's existing subsidiaries, (v) certain
F-80
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 7--FINANCING ARRANGEMENTS--(CONTINUED)
contract and intellectual property rights of the Company and the Guarantor,
(vi) the Interest Escrow Account, and (vii) proceeds of the foregoing.
The Indenture contains certain restrictive covenants including
(i) limitations on additional indebtedness, (ii) limitations on issuances and
sales of preferred stock of certain subsidiaries, (iii) limitations on
restricted payments, (iv) limitations on liens, (v) limitations on
sale-leaseback transactions, (vi) limitations on payment restrictions affecting
the subsidiaries, (vii) limitations on the disposition of proceeds from asset
sales, (viii) limitations on transactions with interested persons and
(ix) limitations on designations of Unrestricted Subsidiaries (as defined). In
addition, the indenture limits the ability of the Company and the guarantors to
consolidate, merge or sell all or substantially all of their assets. These
covenants are subject to important exceptions and qualifications.
If the Company has Excess Cash Flow for any fiscal year, it will be
required, subject to certain exceptions and limitations (including its ability
to retain the first $10.0 million of Excess Cash Flow), to use 75% of such
Excess Cash Flow to make an offer to purchase Senior Notes at a price equal to
100% of the principal amount thereof plus accrued and unpaid interest, if any,
to the date of the purchase.
Issued in connection with the Senior Notes are warrants which entitle the
holders thereof to acquire an aggregate of 91,609 shares of Class A Common
Stock, representing approximately 10% of the Company's outstanding common stock
on a fully diluted basis immediately after giving effect to the consummation of
the Recapitalization and certain other agreed to issuances of common stock.
The warrants can be exercised at a price of $0.01 per share of common stock
on or after July 1, 1996 and after the occurrences of certain other events. The
warrants expire on April 1, 2001. The recording of these warrants created an
original issue discount on the Senior Notes.
Economic Development Financing
In connection with the acquisition of the assets of Bethlehem BRW Division
and its original modernization and expansion plan, the Company entered into loan
agreements with lenders in Pennsylvania and New York to procure financing for
the transaction.
Pennsylvania
The Company entered into the Master Agreement with the Commonwealth of
Pennsylvania and various of its agencies (collectively, the "Commonwealth") on
July 18, 1994. Pursuant to the Master Agreement, the Company entered into loan
agreements with the Commonwealth, through its Department of Commerce and
Department of Community Affairs. The total amount committed to the Company by
the Commonwealth pursuant to the Master Agreement was $33.0 million. The loans
have been made through the Sunny Day Fund ("SDF"), the Johnstown Industrial
Development Corporation ("IDC"), the Pennsylvania Industrial Development
Authority ("PIDA"), the Business Infrastructure Development Program ("BID"), the
Economic Development Partnership ("EDP"), the Community Development Block Grant
Program ("CDBG") and the Enterprise Zone Competitive Program ("ECP"). (The loans
governed by the Master Agreement are collectively referred to herein as the
"Commonwealth Loans").
The Company has obtained approval from the Pennsylvania Industrial
Development Authority regarding the deferral of principal on its PIDA and BID
loans, and principal and interest deferral on
F-81
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 7--FINANCING ARRANGEMENTS--(CONTINUED)
its EDP loans. The Company must resume principal payments related to PIDA and
BID loans and principal and interest payments related to EDP loans beginning
January 2000. All deferred loans are required to be amortized over their
original maturity schedule with no deferral of final maturity.
As of January 2, 1999 and January 3, 1998, $23.1 million and
$23.2 million, respectively, in aggregate principal amount of Commonwealth Loans
were outstanding.
New York
JDA Guaranteed Marine Midland Term Loan--The Company is party to a Loan and
Use Agreement, dated September 21, 1994, with Marine Midland Bank ("Marine
Midland") (the "Marine Midland Loan"), whereby Marine Midland loaned $10.0
million to the Company for use in connection with the acquisition of Lackawanna,
New York real estate from Bethlehem. The Marine Midland Loan is guaranteed by
the New York Job Development Authority ("JDA"). Interest on the Marine Midland
Loan is the Prime rate, or the LIBOR rate, as determined by the Company.
RDC Loan--The Company is party to a Loan Agreement with the Buffalo and
Erie County Regional Development Corporation ("RDC") providing for a loan in the
amount of $0.5 million to be used by the Company for working capital needs (the
"RDC Loan"). The RDC Loan has an interest rate of 7.75% per annum until July 1,
1999, and has an adjustable rate thereafter. The RDC Loan is secured by a
Security Agreement which grants RDC a security interest in equipment, fixtures,
inventory, accounts receivable, chattel paper and general intangibles.
Bethlehem Subordinated Loan Agreement
The Company entered into $5.5 million Subordinated Loan Agreement, dated
September 21, 1994, with Bethlehem (the "Bethlehem Loan"). The terms of the
agreement provide for three equal installments on the first day of October in
each of the years 2000, 2001 and 2002 at a rate of 7.0% per annum and is due on
October 1, 2002. The Bethlehem Loan is secured by a subordinated security
interest in certain real and personal property of the Company and any and all
proceeds therefrom. The outstanding principal amount under the Bethlehem Loan
has been reduced by an original issue discount.
Other
In March 1999, the Company obtained waivers of default provisions under the
terms of the Marine Midland Loan and certain Commonwealth Loans in exchange for
payment of certain amounts the lenders considered delinquent. The Company also
agreed, subject to consummation of the Combination, to refinance the SDF, PIDA I
and PIDA II loans and to modify the terms of certain other Commonwealth Loans.
F-82
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 7--FINANCING ARRANGEMENTS--(CONTINUED)
Maturities of the Company's long-term debt obligations were as follows: (in
thousands)
1999......................................................... $ 3,805
2000......................................................... 6,239
2001......................................................... 98,219
2002......................................................... 7,079
2003......................................................... 3,514
Thereafter................................................... 18,074
-----------
Total........................................................ $ 136,930
-----------
-----------
NOTE 8--SEGMENTS AND RELATED INFORMATION
The Company operates in two reportable segments: hot-rolled and
cold-finished. 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's hot-rolled
engineered bar products include rounds, squares and hexagons in both cut lengths
and coils. The Company produces hot rolled engineered bar products up to 3 1/4"
in diameter which are generally used by its customers in critical applications
where product strength, integrity and durability are imperative considerations
such as cam shafts, axles, roller bearings, automotive suspension parts, large
fasteners, hydraulic hose fittings, transmission gears, and forged hand tools.
The Company also produces cold finished bars which are used in machined and
shafting products that require superior straightness, tolerance, finish and
mechanical properties. Cold finished bars are processed from hot rolled bars, by
a process that cleans, draws and straightens the raw material and cuts it to
specific lengths. Products include round bars from 9/16" to 3 1/2" in diameter
and hexagonal bars from 1" to 1 13/16" thick. End users of cold finished bars
incorporate them in a wide range of products including electrical and
non-electrical machinery and equipment and a wide variety of vehicular equipment
including automobiles, trucks, sport-utility vehicles, off-road vehicles and
agricultural equipment.
Both segments operate in similar markets within the United States and
Canada. Major market areas include the Midwest, Southeast and Great Lakes
Regions of the United States, with customers that include automotive, machinery
and tool industries as well as independent forgers and steel service centers.
The accounting policies of both segments are the same as those described in
the Company's Summary of Significant Accounting Policies. The Company measures
segment performance based on earnings before interest, taxes, depreciation and
amortization ("EBITDA").
F-83
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 8--SEGMENTS AND RELATED INFORMATION--(CONTINUED)
Hot-rolled accounts for intersegment sales at current market prices as if
the transaction had taken place with a third party.
FOR THE YEAR ENDED JANUARY 2, 1999
(IN THOUSANDS)
------------------------------------------------------------------
INTER
COLD- TOTAL SEGMENT
HOT-ROLLED FINISHED SEGMENTS ELIMINATIONS CONSOLIDATED
---------- -------- -------- ------------ ------------
Net sales................................... $164,016 $157,764 $321,780 $(49,929) $271,851
Depreciation and amortization............... 3,780 2,181 5,961 -- 5,961
Segment profit (EBITDA)..................... (14,759) 5,704 (9,055) -- (9,055)
Segment assets.............................. 153,661 86,210 239,871 (17,370) 222,501
Capital expenditures........................ 14,228 2,097 16,325 -- 16,325
FOR THE YEAR ENDED JANUARY 3, 1998
(IN THOUSANDS)
------------------------------------------------------------------
INTER
COLD- TOTAL SEGMENT
HOT-ROLLED FINISHED SEGMENTS ELIMINATIONS CONSOLIDATED
---------- -------- -------- ------------ ------------
Net sales................................... $140,494 $159,120 $299,614 $(56,718) $242,896
Depreciation and amortization............... 2,518 2,005 4,523 -- 4,523
Segment profit (EBITDA)..................... (22,102) 5,313 (16,789) -- (16,789)
Segment assets.............................. 138,509 94,816 233,325 (27,647) 205,678
Capital expenditures........................ 4,590 1,223 5,813 -- 5,813
FOR THE THREE MONTHS ENDED DECEMBER 28, 1996
(IN THOUSANDS)
------------------------------------------------------------------
INTER
COLD- TOTAL SEGMENT
HOT-ROLLED FINISHED SEGMENTS ELIMINATIONS CONSOLIDATED
---------- -------- -------- ------------ ------------
Net sales................................... $ 12,304 $ 35,369 $ 47,673 $ (7,422) $ 40,251
Depreciation and amortization............... 599 622 1,221 -- 1,221
Segment profit (EBITDA)..................... (7,880) 727 (7,153) -- (7,153)
Segment assets.............................. 139,303 88,043 227,346 (21,059) 206,287
Capital expenditures........................ 50 136 186 -- 186
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
------------------------------------------------------------------
INTER
COLD- TOTAL SEGMENT
HOT-ROLLED FINISHED SEGMENTS ELIMINATIONS CONSOLIDATED
---------- -------- -------- ------------ ------------
Net sales................................... $ 12,531 $ 73,120 $ 85,651 $ (8,488) $ 77,163
Depreciation and amortization............... 838 1,198 2,036 -- 2,036
Segment profit (EBITDA)..................... (26,378) (1,967) (28,345) -- (28,345)
Segment assets.............................. 126,368 91,953 218,321 (17,342) 200,979
Capital expenditures........................ 20,400 900 21,300 -- 21,300
F-84
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 8--SEGMENTS AND RELATED INFORMATION--(CONTINUED)
The reconciliation of segment profit (EBITDA) to net loss before
extraordinary item is as follows: (in thousands)
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
JANUARY 2, JANUARY 3, DECEMBER 28, SEPTEMBER 30,
1999 1998 1996 1996
---------- ---------- ------------ -------------
Segment profit (EBITDA).................... $ (9,055) $(16,789) $ (7,153) $ (28,345)
Provision for income taxes................. 3 205 3 205
Interest expense, net...................... 26,959 23,306 5,148 10,833
Depreciation and amortization.............. 5,961 4,523 1,221 2,036
-------- -------- -------- ---------
Net loss before extraordinary item......... $(41,978) $(44,823) $(13,525) $ (41,419)
-------- -------- -------- ---------
-------- -------- -------- ---------
The Company operates in both the United States and Canada. Net sales from
external customers in Canada were approximately $22.0 million, $34.0 million,
$8.0 million and $31.0 million for the years ended January 2, 1999 and January
3, 1998, the three months ended December 28, 1996 and the year ended September
30, 1996, respectively. Principal long-lived assets, consisting of property,
plant and equipment, were $4.1 million and $4.5 million at January 2, 1999 and
January 3, 1998, respectively.
NOTE 9--PENSIONS AND OTHER POSTRETIREMENT BENEFIT PLANS
At January 2, 1999, the Company adopted SFAS 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits" ("SFAS 132"). This statement
revises the disclosures for pension and other postretirement benefit plans but
does not change the way obligations or expense are measured or recognized in the
financial statements. Disclosures for prior periods have been conformed to the
requirements of SFAS 132.
BLI maintains defined benefit pension plans covering substantially all
hourly employees of its Harvey, Illinois and Medina, Ohio plants. Employees at
the Batavia, Illinois and Cartersville, Georgia plants are not covered. Benefits
are based on years of service and employee's age at termination. The Company's
Canadian subsidiary, CDSC, maintains pension plans covering substantially all
employees. Benefits for the CDSC salaried employees' plan are based on an
average salary for the five most recent years prior to retirement. Benefits for
the CDSC bargaining unit employees' plan are based on years of service. The
Company's policy is to fund pension cost in accordance with the requirements of
the Employee Retirement Income Security Act of 1974 in the United States and
local regulations in Canada.
BLI and CDSC also sponsor postretirement plans for health care and life
insurance that cover most full-time employees. The plans pay stated percentages
of most necessary medical expenses incurred by retirees, after subtracting
payments by Medicare or other providers and after a stated deductible has been
met. Participants become eligible for benefits if they retire from BLI after
reaching age 55 with 10 or more years of service.
In addition, the Company and its subsidiaries maintain various defined
contribution plans, including salary savings plans, profit sharing plans and a
supplemental incentive compensation plan. Expense related to these plans was
approximately $317, $171, $44 and $56 in fiscal 1998, fiscal 1997, the three
months ended December 28, 1996 and fiscal 1996, respectively.
F-85
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 9--PENSIONS AND OTHER POSTRETIREMENT BENEFIT PLANS--(CONTINUED)
At January 2, 1999 and January 3, 1998, the plan assets for all plans were
invested in various trust funds administered by a trustee.
The components of the net periodic pension costs are summarized as follows:
(in thousands)
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED PERIOD ENDED
JANUARY 2, JANUARY 3, DECEMBER 28, SEPTEMBER 30,
1999 1998 1996 1996
---------- ---------- ------------ -------------
Service cost............................... $ 394 $ 393 $ 183 $ 186
Interest cost on projected benefit
obligations.............................. 1,283 1,254 645 614
Expected return on plan assets............. (1,718) (1,633) (780) (896)
Amortization of prior service cost......... 40 35 -- --
Recognized net actuarial loss (gain)....... 21 22 9 188
-------- -------- ------ -----
Net periodic pension cost.................. $ 20 $ 71 $ 57 $ 92
-------- -------- ------ -----
-------- -------- ------ -----
Net periodic postretirement benefit cost included the following components:
(in thousands)
THREE MONTHS
YEAR ENDED YEAR ENDED ENDED PERIOD ENDED
JANUARY 2, JANUARY 3, DECEMBER 28, SEPTEMBER 30,
1999 1998 1996 1996
---------- ---------- ------------ -------------
Service cost of benefit earned............. $ 202 $ 161 $ 41 $ 66
Interest on accumulated postretirement
benefit
obligations.............................. 431 415 105 184
Recognized net actuarial loss.............. 42 10 -- --
-------- -------- ------ -----
Net periodic postretirement cost........... $ 675 $ 586 $ 146 $ 250
-------- -------- ------ -----
-------- -------- ------ -----
F-86
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 9--PENSIONS AND OTHER POSTRETIREMENT BENEFIT PLANS--(CONTINUED)
The change in benefit obligation, change in plan assets, funded status and
amounts recognized in the consolidated balance sheets related to the Company's
pension plans and other postretirement benefits are as follows: (in thousands)
PENSION PLANS OTHER BENEFITS
------------------------ ------------------------
JANUARY 2, JANUARY 3, JANUARY 2, JANUARY 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year............ $ 19,142 $ 17,115 $ 6,579 $ 5,426
Service cost....................................... 394 393 202 161
Interest cost...................................... 1,283 1,254 431 415
Amendments......................................... -- 68 -- --
Foreign currency exchange rate change.............. (654) (371) (456)
Actuarial (gain) loss.............................. (90) -- (33) --
Change in discount rate............................ 418 1,718 75 913
Benefits paid...................................... (1,300) (1,035) (320) (336)
-------- -------- -------- --------
Benefit obligation at end of year.................. $ 19,193 $ 19,142 $ 6,478 $ 6,579
CHANGE IN PLAN ASSETS
Fair value of plant assets at beginning of year.... $ 20,946 $ 19,735 -- --
Actual return on plan assets....................... 2,384 2,364 -- --
Employer contribution.............................. 508 332 $ 320 $ 336
Foreign currency exchange rate change.............. (712) (450) -- --
Benefits paid...................................... (1,300) (1,035) (320) (336)
-------- -------- -------- --------
Fair value of plan assets at end of year........... $ 21,826 $ 20,946 $ -- $ --
Funded status--overfunded (underfunded)............ $ 2,633 $ 1,804 $ (6,478) $ (6,579)
Unrecognized net actuarial loss.................... 19 484 1,346 1,445
Unrecognized prior service cost.................... 502 574 -- --
-------- -------- -------- --------
Prepaid (accrued) benefit cost..................... $ 3,154 $ 2,862 $ (5,132) $ (5,134)
-------- -------- -------- --------
-------- -------- -------- --------
WEIGHTED AVERAGE ASSUMPTIONS:
Discount rate...................................... 6.83% 7.00% 6.81% 6.93%
Expected return on plan assets..................... 8.50% 8.50%
Rate of compensation increase...................... 4.59% 4.59%
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plan with accumulated benefit obligations
in excess of plan assets were $1,321, $1,289 and $1,231, respectively as of
January 2, 1999, and $1,172, $1,144 and $1,083, respectively, as of January 3,
1998.
For measurement purposes, a weighted average annual rate of increase in the
per capita cost of covered health care claims of 7.56% was assumed for fiscal
1999; the rate assumed to decrease by approximately 0.5% per year to 5.40% for
fiscal 2003, and remain at that level thereafter. To illustrate the health care
cost trend on amounts reported, changing the assumed health care cost
F-87
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 9--PENSIONS AND OTHER POSTRETIREMENT BENEFIT PLANS--(CONTINUED)
trend rates by one percentage point in each year would have the following
effects as of and for the fiscal year ended January 2, 1999: (in thousands)
ONE PERCENTAGE POINT
--------------------------------------------
INCREASE DECREASE
-------------------- --------------------
Effect on total service and interest cost components............... $ 123 $ 112
Effect on postretirement benefit obligation........................ $1,204 $1,115
NOTE 10--INCOME TAXES
The components of deferred income taxes at January 2, 1999 and January 3,
1998 were as follows:
JANUARY 2, JANUARY 3,
ASSET (LIABILITY) 1999 1998
- -------------------------------------------------------------------- ---------- ----------
(IN THOUSANDS)
Net operating loss carryforwards.................................... $ 59,310 $ 41,876
Inventory........................................................... 2,560 1,733
Post retirement benefits............................................ 2,019 2,002
Property basis differences.......................................... (8,319) (6,336)
Other--net.......................................................... 894 209
Valuation allowance................................................. (59,670) (42,736)
-------- --------
Net deferred income taxes........................................... $ (3,206) $ (3,252)
-------- --------
-------- --------
Net deferred income tax assets (liabilities) as of January 2, 1999 and
January 3, 1998 recorded in the balance sheet were as follows:
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
(IN THOUSANDS)
Prepaid expense..................................................... $ 581 $ 581
Other assets........................................................ 1,214 1,214
Other long-term liabilities......................................... (5,001) (5,047)
-------- --------
Net deferred income taxes........................................... $ (3,206) $ (3,252)
-------- --------
-------- --------
As of January 2, 1999, the Company had net operating loss carryforwards of
approximately $148 million available to offset future federal and state taxable
income during the carryforward periods which expire through 2019. These
carryforwards include amounts available from certain prior year operating loss
carryforwards which were limited as a result of the Recapitalization.
Utilization of these prior year loss carryforwards is limited to approximately
$1.1 million annually through 2010.
The realization of these tax benefits will depend upon the Company's
ability to generate future taxable income. Based upon its history of net
operating losses, the Company has recorded a valuation allowance to offset net
deferred tax assets that are not expected to be realized.
The provision for income taxes for fiscal 1998, fiscal 1997, the three
months ended December 28, 1996 and fiscal 1996 consisted of currently payable
income taxes, primarily foreign income taxes owed by CDSC. The difference
between the U.S. statutory income tax rate of 35% and the Company's effective
rate results principally from the recorded valuation allowances used to
F-88
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 10--INCOME TAXES--(CONTINUED)
offset the deferred tax benefits of tax loss carryforwards incurred by its U.S.
operations during each of these periods.
NOTE 11--COMMON AND PREFERRED STOCK
The Company's authorized capital stock consists of 1,000,000 shares of
Class A Common Stock, 600,000 shares of Special Class B Common Stock, 600,000
shares of Special Class C Common Stock and 5,000 shares of Series A Preferred
Stock and one share of Series B Preferred Stock, each with a par value of $0.001
per share. The Special Class B Common Stock allows the holders to designate
directors who will hold 50% of the voting power of the Board of Directors. The
Special Class B Common Stock will also have certain rights in the event of a
liquidation, dissolution or winding up of the Company. The Company's Class C
common stock is non-voting.
In connection with the Recapitalization, 66,600 shares of existing common
stock of the Company were converted into 196,410 shares of Class A Common Stock.
As a result, the number of shares outstanding prior to the Recapitalization and
earnings per share amounts were adjusted to reflect this reclassification of
shares.
On September 26, 1994, the Company issued 1,100 shares of Series A
Cumulative Preferred Stock with a $0.001 par value to Bethlehem in connection
with the formation of the Company. The shares were issued at $5,000 per share or
$5.5 million in total.
In each year, the Series A Preferred Stock is entitled to receive, whether
or not declared by the Board of Directors, cash dividends equal to $350 per
share, which dividends are cumulative. In the event that the Company is
liquidated, the holders of Series A Preferred Stock are entitled to a
liquidation preference, prior to any payment on the Common Stock, of $5,000 per
share plus any unpaid dividends. The Company is required to redeem all shares of
Series A Preferred Stock on the sixth anniversary of the date of original
issuance of such shares (September 26, 2000) for a total of $5,000 per share
plus all accrued or declared but unpaid dividends, and the Company may, at its
option, redeem shares of Series A Preferred Stock at an earlier date at the
mandatory redemption price, plus accrued but unpaid dividends. Holders of
Series A Preferred Stock do not generally vote on stockholders' matters.
However, the consent or vote of 66 2/3% in voting power of the Series A
Preferred Stock are only transferable by a holder of Series A Preferred Stock to
an affiliate of such holder or upon the prior written consent of the Company.
Upon redemption or repurchase by the Company, shares of Series A Preferred Stock
will not be reissued and will be canceled.
One share of Series B Preferred Stock was issued to the union representing
the Company's Johnstown, PA and Lackawanna, NY facilities. The Series B
Preferred Stock is not entitled to receive dividends and is non-redeemable. In
the event that the Company is liquidated, the holder of Series B Preferred Stock
is to be entitled to a liquidation preference, after payment to the holders of
the Series A Preferred Stock and prior to any payment on the Common Stock, of
$100 per share. The Series B Preferred Stock does not generally vote on
stockholders' matters; however, the holder of Series B Preferred Stock has the
right to nominate and elect two directors to the Board of Directors, and to
remove such directors as provided in the Company's Bylaws.
As part of the Recapitalization in April 1996, the Company issued 536,829
shares of Class B common stock in consideration of $30.0 million in cash
provided by Blackstone. In September 1997,
F-89
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 11--COMMON AND PREFERRED STOCK--(CONTINUED)
the Company issued 536,865 shares of Class C common stock to Blackstone and
Veritas for capital contributions of $30.0 million.
NOTE 12--STOCK PLANS
As part of the Company's previous collective bargaining agreement with the
United Steelworkers of America ("USWA"), the Company committed to grant
employees represented by the USWA a minimum of 20% equity interest in its common
stock through one or more stock ownership plans ("ESOP"), subject to dilution
for events occurring subsequent to February 1994. Following the Recapitalization
and Equity Investment, the commitment had been reduced to 3.7% of the Company's
common stock as of January 3, 1998, on a fully diluted basis. Under the previous
collective bargaining agreement, the allocation methodology and timing had not
been determined by the parties and the ESOP had not been established.
In 1998, the Company and an affiliate of Republic entered into a settlement
agreement with the USWA under which new master labor agreements were established
for all USWA employees of the Company and Republic. The new collective
bargaining agreements expire in 2003. As part of the new agreements, the Company
committed to establish a $1.6 million fund to be distributed to eligible USWA
employees in May 1999 in full and complete satisfaction of the Company's
obligation to establish an ESOP.
The agreement also provides that covered employees will be able to purchase
shares of the combined company following the Combination of the Company and
Republic. A maximum of $15 million of shares will be offered in the aggregate at
the same price per share attributable to the common stock of the combined
company acquired directly and indirectly by Blackstone in the Combination. Such
offering is to occur no later than six months after the closing of the
Combination. Holders of these shares will be granted piggyback registration
rights entitling them to registration of their shares in an underwritten initial
public offering of the combined company, subject to customary provisions.
Under Equity Award Agreements with certain executive employees in fiscal
1996 and prior periods the Company committed to award common stock grants. The
value of these awards on the date of commitment was recorded as deferred
compensation and was amortized over the terms of the employment agreements.
Common stock grants to these employees in fiscal 1996 represent 8,048 shares of
Class A common stock.
Severance agreements were negotiated with certain former Company executives
during fiscal 1998 and 1996. Included in Selling, General and Administrative
Expense for the years ended January 2, 1999 and September 30, 1996 relating to
these agreements were $0.3 million and $2.9 million, respectively.
Pursuant to the terms of certain executives' prior employment agreements,
the Company granted 4,810, 18,094, and 22,903 non-qualified stock options during
the year ended January 3, 1998, the three months ended December 28, 1996 and the
year ended September 30, 1996, respectively, at a price of $55.89 per share,
which approximated fair market value at the date of grant. No options were
granted during fiscal 1998. Expiration dates for the options were ten years from
the grant date and the options became exercisable according to certain criteria
regarding the Company's performance and length of service of the executive.
F-90
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 12--STOCK PLANS--(CONTINUED)
In the fourth quarter of fiscal year 1998, the executives of the Company
(the "Executives") entered into employment agreements with the Company and
Republic (the "Employment Agreements"). Each of the Employment Agreements
contains substantially similar terms and conditions other than compensation.
Subject to consummation of the proposed combination of the Company and Republic,
the Executives and two other members of management are eligible to receive in
the future options to acquire an aggregate 9.0% of the common stock of the
survivor entity of the Combination, subject to dilution. The exercise price per
share will equal the price per share paid by Blackstone.
As a result of signing the Employment Agreements, the Executives and other
members of management forfeited their rights, if any, to prior vested and
unvested options to purchase common stock of the Company. Two former executives
who terminated from the Company during 1998, have forfeited their rights to
prior vested or unvested options to purchase common stock of the Company under
the terms of their respective separation agreements.
Activity related to stock options is summarized below. The exercise price
for all shares was $55.89 per share.
THREE MONTHS
ENDED
DECEMBER 28,
(IN THOUSANDS) FISCAL 1998 FISCAL 1997 1996 FISCAL 1996
----------- ----------- ------------ -----------
Options outstanding at beginning period........ 45,807 40,997 22,903 --
Granted........................................ -- 4,810 18,094 22,903
Forfeited...................................... (45,807) -- -- --
------- ------- -------- -------
Outstanding at end of period................... -- 45,807 40,997 22,903
------- ------- -------- -------
------- ------- -------- -------
Exerciseable at end of period.................. -- 3,892 -- --
------- ------- -------- -------
------- ------- -------- -------
Weighted average fair value of option
granted...................................... N/A $ 20.21 $ 19.85 $ 20.52
------- ------- -------- -------
------- ------- -------- -------
The Company accounts for its equity award agreements and stock option
grants under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," under which the compensation costs, if applicable, have
been determined. Had the compensation costs been determined consistent with SFAS
No. 123, "Accounting for Stock Based Compensation," net income (loss) and
earnings per share would have been as follows: (in thousands except per share
amounts)
THREE MONTHS
ENDED
DECEMBER 28,
FISCAL 1998 FISCAL 1997 1996 FISCAL 1996
----------- ----------- ------------ -----------
Net (loss):
As reported.................................. $ (41,978) $ (44,823) $(13,525) $ (43,633)
Pro Forma.................................... (41,791) (44,976) (13,559) (43,633)
Diluted earnings per share:
As reported.................................. $ (33.14) $ (50.88) $ (18.37) $ (98.01)
Pro Forma.................................... (32.70) (50.62) (18.29) (98.01)
F-91
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 12--STOCK PLANS--(CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for the grants in fiscal 1997, the three months period ended
December 28, 1996 and fiscal 1996: (in thousands)
THREE MONTHS
ENDED
DECEMBER 28,
FISCAL 1997 1996 FISCAL 1996
----------- ------------ -----------
Average risk free interest rate.............................. 6.44% 6.27% 6.56%
Expected dividend yield...................................... 0% 0% 0%
Expected life of options..................................... 7 years 7 years 7 years
Expected volatility rate..................................... 0% 0% 0%
NOTE 13--RELATED PARTY TRANSACTIONS
In connection with the Recapitalization, an affiliate of Blackstone
received an origination fee and expense reimbursement totaling $2.0 million and
an affiliate of Veritas received a financial advisory fee and expense
reimbursement totaling $2.0 million in fiscal 1996.
In connection with the Recapitalization, the Company entered into a
management agreement with the Johnstown Advisors Corp. ("Advisors") and
Blackstone Management Partners L.P. ("Blackstone Advisors"), an affiliate of
Blackstone. Johnstown Advisors Corp. is owned by the principals of BRW Partners
Inc., the general partner of BRW Steel Holdings, LP, which owns approximately
26.6% of the common stock of the Company, on a fully diluted basis. Blackstone
owns approximately 72.8% of the common stock of the Company, on a fully diluted
basis. Pursuant to this agreement, Advisors and Blackstone Advisors are to
provide certain management and financial monitoring services to the Company for
which they will share equally an annual advisory fee of $0.9 million plus
reimbursement of certain out-of-pocket expenses. Under this agreement, the
Company expensed $0.9 million in fiscal 1998 and $1.5 million in fiscal 1997.
Subsequent to the acquisition of Republic, the Company and Republic share
common management and have begun to perform certain sales, marketing and
administrative functions on a combined basis. This includes marketing both
companies' steel products jointly under the combined brand name "Republic
Technologies International" using a single sales force. However, throughout
fiscal 1998 each customer purchase order for steel products continued to be
issued directly to the Company or Republic, as appropriate, to make the sale.
The costs of joint functions are borne ratably by the Company and Republic based
upon relative sales volume achieved.
The Company participates in an inventory purchasing arrangement with
Republic. Under the terms of this arrangement, Republic purchases inventory
products on behalf of both companies and bills the Company for its respective
purchases plus an administrative fee. During the period from September 8, 1998
to January 2, 1999, the Company purchased billet and bar products as well as
scrap material at market prices from Republic, totaling approximately $16.1
million. A similar arrangement is in place with regard to insurance. Republic
purchased insurance coverage for the combined company for which the costs are
borne ratably by the Company and Republic based on their respective share of
coverage. In December 1998, Republic completed negotiations for a two-year
insurance contract for the combined company for which the terms of payment
include a third-party financing arrangement.
F-92
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 13--RELATED PARTY TRANSACTIONS--(CONTINUED)
At January 1, 1999, certain salaried employees of the Company became
employees of Republic. Under the terms of an employee leasing and overhead
allocation agreement, the Company and Republic share the costs of common
expenses including, but not limited to sales and marketing services,
administrative services, plant overhead and costs for certain common facilities.
Costs are allocated according to each company's approximate share of combined
trade volumes. Among the salaried employees included in this overhead allocation
were Messrs. Tyrrell, Meyer and Asimou who hold the positions of Chief Executive
Officer, Executive Vice President and General Manager, Hot Rolled Bar Division
and Executive Vice President and General Manager, Cold Finished Bar Division,
respectively, for both the Company and Republic. Certain salaried employees
located at the Company's facilities in Lackawanna, New York and Johnstown,
Pennsylvania were also included in this arrangement. However, the Company leased
back the services of these employees, the salary and benefit costs of which are
borne entirely by the Company.
As of January 4, 1999, Republic Technologies International Marketing, LLC
("Marketing JV") was formed. The Company and Republic expect to finalize an
agreement in the second quarter 1999 under which this jointly owned
Marketing JV will market, advertise, promote and sell both companies' steel
products to each company's existing and potential customers. The Company and
Republic will be reimbursed for expenses they incur on behalf of the
Marketing JV, including compensation costs of employees of the Company and
Republic who perform sales and marketing functions for the Marketing JV. Except
for certain prior commitments to customers that will continue to be placed with
the Company or Republic as defined in the agreement, it is intended that
customer purchase orders will be placed with the Marketing JV. Pursuant to
allocation procedures to be approved by the boards of directors of both
companies, the production of steel products to fulfill these orders will be
allocated between the Company and Republic. To compensate the Marketing JV for
marketing services performed, it is intended that the Company and Republic will
pay commissions at specified percentages of sales.
As a result of the above, the Company had a current receivable due from
Republic of approximately $1.9 million, a current payable due to Republic of
$15.5 million and a non-current payable due to Republic of $0.5 million at
January 2, 1999. At January 2, 1999 and January 3, 1998, current amounts payable
to Blackstone were $0.9 million and $1.5 million, respectively.
NOTE 14--COMMITMENTS AND CONTINGENCIES
The Company, in the ordinary course of business, is the subject of or party
to various pending or threatened legal and environmental actions. The Company
provides for the costs related to these matters when a loss is probable and the
amount is reasonably estimable. Based on information presently known to the
Company, management believes that any ultimate liability resulting from these
actions will not have a material adverse affect on its consolidated financial
position, results of operations or cash flows.
The Company uses certain lease arrangements to supplement its financing
activities. Rental expense under operating leases was $0.9 million for the year
ended January 2, 1999, $0.8 million for the year ended January 3, 1998,
$0.06 million for the three month period ended December 28, 1996, and $0.2
million for the year ended September 30, 1996. At January 2, 1999, total minimum
lease payments under noncancellable operating leases are $0.7 million in 1999,
$0.6 million in 2000, $0.3 million in 2001, $0.2 million in 2002 and 2003 and
$0.9 million thereafter.
F-93
BAR TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION)
NOTE 14--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
On January 25, 1999, the Company entered into a technical exchange
agreement with Sanyo Special Steel Company, Ltd. ("Sanyo") for a total of
$6.0 million plus expenses. The four year agreement provides for technical
assistance to the Company in order to improve its operations and facilities at
its Lackawanna, New York facility. The Company's future obligation is divided
into 9 installments over the following years: $1.8 million in 1999,
$1.2 million in 2000, $1.2 million in 2001, $1.2 million in 2002 and
$0.6 million in 2003.
Republic also has a technical exchange agreement with Sanyo. The Company
subsequently entered into an agreement with Republic to share with each other
the information obtained from Sanyo for use at their respective steelmaking
facilities.
NOTE 15--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS AND SIGNIFICANT
GROUP CONCENTRATION OF CREDIT RISK
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents
The carrying amount approximates fair value because of the short maturity
of those investments.
Redeemable preferred stock
It is not practicable to estimate the fair value of this preferred stock,
which is not publicly traded.
Long-term debt
The fair value of the company's long-term debt obligations are estimated
based upon quoted market prices for the same or similar issues or on the current
rates offered to the company for debt of the same remaining maturities. The fair
value of the company's senior secured notes is determined using quoted market
prices. The fair value of the company's economic development financing
approximates carrying values as the development authorities continue to provide
such financing on substantially the same terms as provided to the Company.
The estimated fair value of the Company's financial instruments are as
follows: (in thousands)
JANUARY 2, 1999 JANUARY 3, 1998
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Cash and cash equivalents.................................. $ 2,188 $ 2,188 $ 3,391 $ 3,391
Long-term debt............................................. 132,767 142,601 133,774 133,575
Redeemable preferred stock................................. 5,500 -- 5,500 --
F-94
BAR TECHNOLOGIES INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JANUARY 2, 1999 AND JANUARY 3, 1998, THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND THE YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF DOLLARS)
ADDITIONS
-----------------------------------
CHARGED
TO DEDUCTIONS
BALANCE AT CHARGED TO OTHER FROM BALANCE
BEGINNING COSTS AND ACCOUNTS-- RESERVES AT END OF
DESCRIPTION OF YEAR EXPENSES RECOVERIES DESCRIBE (B) YEAR
- ------------------------------------------- ---------- ---------- ---------- --------- ---------- ---------
Allowance for doubtful accounts
Year ended January 2, 1999............... $ 817 448 (11) 55 (c)(d) (205) $ 1,104
Year ended January 3, 1998............... 567 1,160 (885) (3)(c) (22) 817
Three months ended
December 28, 1996...................... 549 18 567
Year ended September 30, 1996............ 117 432 (a) 549
- ------------------
* The Company changed its fiscal year from its previous calendar quarter basis
ended September 30, to a 4/4/5 week fiscal quarter basis ending the last
Saturday of the fifth week. As a result, the Company's fiscal year 1997 began
on December 29, 1996 and ended on January 3, 1998. Fiscal 1997 includes 53
weeks while fiscal 1998 and 1996 each include 52 weeks. This period represents
the three month transition period that bridges the Company's old and new year
ends.
(a) Represents the allowance recognized in connection with the acquisition of
Bliss & Laughlin Industries, Inc.
(b) Represents uncollected accounts charged-off against the allowance.
(c) Foreign currency translation.
(d) Addition to allowance due to reclassification of $60.
F-95
REPORT OF INDEPENDENT AUDITORS
Management Committee
USS/KOBE Steel Company
We have audited the accompanying balance sheets of the Bar Products Line of
USS/KOBE Steel Company, a partnership, as of December 31, 1998 and 1997, and the
related statements of operations, changes in partners' investment and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the USS/KOBE Steel Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted audited standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated July 7, 1999, which
report contained an explanatory paragraph regarding the Bar Products Line of
USS/KOBE Steel Company's ability to continue as a going concern, the Bar
Products Line of USS/KOBE Steel Company, as discussed in Note A, has completed
the combination transaction and refinancing of certain debt. Therefore, the
conditions that raised substantial doubt about whether the Bar Products Line of
USS/KOBE Steel Company will continue as a going concern no longer exist.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Bar Products Line of
USS/KOBE Steel Company at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Cleveland, Ohio Ernst & Young LLP
July 7, 1999, except for paragraph 1 of Note A,
as to which the date is August 13, 1999
F-96
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31
----------------------
1997 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 1,909 $ 3,195
Accounts receivable--net of allowances of $1,850 in 1997, $9,500 in 1998........... 43,338 44,274
Inventories:
Raw materials................................................................... 58,329 51,451
Work-in-process................................................................. 21,388 57,513
Finished goods.................................................................. 26,657 20,839
Supplies........................................................................ 1,274 1,391
-------- --------
107,648 131,194
Other current assets............................................................... 7,334 6,910
-------- --------
Total current assets................................................................. 160,229 185,573
Property, plant and equipment:
Land............................................................................... 2,607 2,633
Buildings and improvements......................................................... 41,539 41,700
Machinery and equipment............................................................ 613,483 636,723
Construction-in-progress........................................................... 12,804 7,718
-------- --------
670,433 688,774
Less accumulated depreciation...................................................... (223,567) (269,045)
-------- --------
446,866 419,729
Intangible pension asset............................................................. 7,321 12,793
-------- --------
Total assets....................................................................... $614,416 $618,095
-------- --------
-------- --------
LIABILITIES AND PARTNERS' INVESTMENT
Current liabilities:
Checks in transit.................................................................. $ 25,555 $ 16,261
Note payable....................................................................... 3,215
Accounts payable................................................................... 58,564 61,442
Accrued payroll and related expenses............................................... 17,781 17,371
Other accrued expenses............................................................. 16,883 14,544
Current portion of other postretirement benefits liabilities....................... 8,200 9,363
-------- --------
Total current liabilities............................................................ 126,983 122,196
Accrued pension liabilities.......................................................... 5,263 10,314
Other postretirement benefits liabilities............................................ 29,808 37,027
Non-current debt..................................................................... 180,238 180,238
Other long-term obligations.......................................................... 702 1,926
Partners' investment:
Accumulated other comprehensive loss............................................... (445)
Division control................................................................... 271,422 266,839
-------- --------
271,422 266,394
-------- --------
TOTAL LIABILITIES AND PARTNERS' INVESTMENT......................................... $614,416 $618,095
-------- --------
-------- --------
See notes to financial statements.
F-97
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
--------------------------------
1996 1997 1998
-------- -------- --------
REVENUES
Net sales:
Unrelated parties....................................................... $394,527 $416,593 $426,496
Related parties:
Tubular transfers.................................................... 165,901 197,810 145,185
Other................................................................ 151,606 107,182 42,710
-------- -------- --------
712,034 721,585 614,391
COST AND EXPENSES
Cost of sales............................................................. 674,550 697,241 593,048
Depreciation and amortization............................................. 40,204 41,515 45,853
Selling and administrative expenses....................................... 20,145 19,492 17,270
-------- -------- --------
734,899 758,248 656,171
-------- -------- --------
Loss from operations...................................................... (22,865) (36,663) (41,780)
OTHER (EXPENSES) INCOME
Interest expense, net..................................................... (8,867) (10,987) (11,189)
Other income.............................................................. 296 105 24
-------- -------- --------
(8,571) (10,882) (11,165)
-------- -------- --------
NET LOSS.................................................................. $(31,436) $(47,545) $(52,945)
-------- -------- --------
-------- -------- --------
See notes to financial statements.
F-98
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
STATEMENTS OF CHANGES IN PARTNERS' INVESTMENT
(IN THOUSANDS)
USS
LORAIN HOLDING KOBE/
COMPANY, INC. LORAIN INC. TOTAL
-------------- ----------- --------
Balance at January 1, 1996............................................ $169,055 $ 169,055 $338,110
Partners' non-cash contributions and transfers...................... 7,464 7,464 14,928
Net loss............................................................ (15,718) (15,718) (31,436)
-------- --------- --------
Balance at December 31, 1996.......................................... 160,801 160,801 321,602
Partners' non-cash contributions and transfers...................... (1,318) (1,317) (2,635)
Net loss............................................................ (23,772) (23,773) (47,545)
-------- --------- --------
Balance at December 31, 1997.......................................... 135,711 135,711 271,422
Partners' non-cash contributions and transfers...................... 19,741 19,741 39,482
Partners' cash contributions........................................ 4,440 4,440 8,880
Net loss............................................................ (26,472) (26,473) (52,945)
Other comprehensive loss............................................ (223) (222) (445)
-------- --------- --------
Total comprehensive loss....................................... (26,695) (26,695) (53,390)
-------- --------- --------
BALANCE AT DECEMBER 31, 1998.......................................... $133,197 $ 133,197 $266,394
-------- --------- --------
-------- --------- --------
See notes to financial statements.
F-99
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
-----------------------------------
1996 1997 1998
--------- --------- ---------
OPERATING ACTIVITIES
Net loss................................................................ $ (31,436) $ (47,545) $ (52,945)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization...................................... 40,204 41,515 45,853
Loss (gain) on disposal of property, plant and equipment........... (40) 58
Provision for receivable allowance................................. (250) (350) 7,650
Change in pension liability and asset--net......................... (9,665) 4,377 (866)
Increase in other postretirement benefits liability--net........... 6,326 7,141 8,382
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable....................... 17,464 (4,883) (8,586)
(Increase) decrease in inventories............................... (29,081) 17,183 (23,546)
Increase (decrease) in accounts payable and due to/from tubular
products line................................................. 11,313 (10,480) 42,360
(Decrease) increase in payroll related liabilities............... (11,964) 2,226 (410)
(Decrease) increase in other..................................... (4,107) 21,203 (9,985)
--------- --------- ---------
Net cash provided by (used in) operating activities..................... (11,236) 30,387 7,965
INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment..................... 40
Purchases of property, plant and equipment--net......................... (33,564) (42,326) (18,774)
--------- --------- ---------
Net cash used in investing activities................................... (33,524) (42,326) (18,774)
FINANCING ACTIVITIES
Contributions from Partners............................................. 8,880
Proceeds from debt facilities........................................... 333,364 811,903 767,017
Principal payments on notes and
other debt............................................................ (307,207) (799,387) (763,802)
--------- --------- ---------
Net cash provided by (used in) financing activities..................... 26,157 12,516 12,095
--------- --------- ---------
Increase (decrease) in cash and cash equivalents........................ (18,603) 577 1,286
Cash and cash equivalents, beginning
of period............................................................. 19,935 1,332 1,909
--------- --------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD......................................................... $ 1,332 $ 1,909 $ 3,195
--------- --------- ---------
--------- --------- ---------
See notes to financial statements.
F-100
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
A. DESCRIPTION OF BUSINESS AND PROPOSED TRANSACTION
On April 12, 1999, USX Corporation (USX) and Kobe Steel Ltd. (Kobe) entered
into a Letter of Intent with Blackstone Partners II L.L.C. (Blackstone) which
provides for the combination of USS/KOBE Steel Company's steelmaking and bar
producing assets with those of companies controlled by Blackstone and Veritas
Capital Management L.L.C. (Veritas), primarily Republic Engineered Steels, Inc.
and Bar Technologies, Inc., (Republic Technologies International, LLC ("RTI")).
Under the terms of the Letter of Intent, USX and Kobe will contribute the
steelmaking and bar producing assets and business, including the long-term debt,
(collectively, the Bar Products Line) of USS/KOBE to the new joint venture in
exchange for a 15% interest, each, in RTI. The transaction was completed on
August 13, 1999. Management refinanced the credit facility and the senior notes
upon the contribution of the Bar Product Line to RTI.
The accompanying financial statements represent carve-out financial
statements of the Bar Products Line which are being contributed to RTI, and are
not intended to be a complete presentation of the financial position or the
results of operations and cash flows of USS/KOBE on a stand-alone basis. The
financial statements include allocations and estimates of direct and indirect
USS/KOBE corporate administrative expenses as well as account balances
attributable to the contributed operations which are described in Note
B--Significant Accounting Policies and Allocations. The methods by which such
amounts are attributed or allocated are deemed reasonable by the management of
USS/KOBE.
USS/KOBE is an Ohio general partnership whose owners (each with a 50%
interest) are Kobe/Lorain Inc. (KLI), a wholly-owned subsidiary of Kobe Delaware
Inc., in which Kobe Steel USA Holdings Inc. (Kobe Holdings) has a 90.7% stake
and USS Lorain Holding Company, Inc. (ULHC) an Ohio Corporation wholly-owned by
USX. KLI and ULHC are collectively referred to as the Partners. USS/KOBE
operations commenced July 1, 1989 following the Partners' contribution of
certain assets and liabilities and the completion of certain other transactions,
resulting in USS/KOBE's ownership of the former Lorain Works fully integrated
steel mill facilities of USX.
The Bar Products Line of USS/KOBE Steel Company adopted Financial Statement
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information. The Bar Products Line operates in one business segment and
manufactures high quality steel bars, rod and seamless tubular products,
primarily for the automotive, automotive service and energy markets.
Domestic steel producers face significant competition from foreign
producers affecting both prices and volume. USS/KOBE also competes with other
domestic integrated bar and tubular steel producers, some of which have greater
financial resources than USS/KOBE, and with minimills, which are relatively
efficient, low-cost producers that generally produce steel from low cost raw
materials, have lower employment and environmental costs and generally target
regional markets.
B. SIGNIFICANT ACCOUNTING POLICIES AND ALLOCATIONS
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, on deposit and highly
liquid investments with maturities of three months or less when purchased. The
carrying amount of these assets approximates fair value. Checks in transit are
considered to be current liabilities, and classified with "other", for purposes
of cash flows. All cash accounts of USS/KOBE were allocated to the Bar Products
Line.
F-101
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
B. SIGNIFICANT ACCOUNTING POLICIES AND ALLOCATIONS--(CONTINUED)
Inventories
Inventories are valued at the lower of weighted average unit cost or market
value. All raw materials were allocated to the Bar Products Line.
Work-in-process and finished good inventory quantities were allocated to the Bar
Products Line based upon the point of production as of the balance sheet date.
All direct materials, labor and overhead including hourly pension and other
postretirement benefit (OPEB) costs are capitalized in inventory. Salaried wages
and benefits as well as the amortization of the OPEB transition obligation and
depreciation and amortization are not capitalized into inventory.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided
by the straight-line method over the estimated useful lives of the various
assets (35 years for buildings and ranging from 3 to 22 years for machinery and
equipment). When a major facility or facilities depreciated on an individual
basis are sold or otherwise disposed of, any gain or loss is reflected in
operations. Proceeds from the disposal of other facilities depreciated on a
group basis are credited to the depreciation reserve with no immediate effect on
income. Property, plant and equipment and the related accumulated depreciation
as well as construction-in-progress related to the Bar Products Line were
determined based on the production cost center to which the asset is assigned.
Depreciation expense was determined by the production cost center to which each
asset relates.
At December 31, 1998, the Bar Products Line has ingot teeming, soaking pit
and blast furnace assets which are idle, with a net carrying value of
approximately $6.8 million.
Construction-in-Progress
Costs (including capitalized interest) incurred in the construction of new
assets, and additions, improvements and betterments to existing assets which add
to the productive capacity or extend the useful lives of those assets are
capitalized as construction-in-progress. At the time an asset or improvement is
placed into service, the related costs are transferred to the appropriate
property, plant and equipment account.
Impairment of Property, Plant and Equipment
When indicators of impairment are present, the recoverability of property,
plant and equipment is assessed by determining whether the amortization of the
remaining balance over its remaining useful life can be recovered through
undiscounted future operating cash flows. If impairment exists, the carrying
amount of the related asset is reduced. Management has evaluated its long-lived
assets as held for use and has determined through a cash flow analysis that no
impairment in value exists as of December 31, 1998. Subsequent to the
transaction that is described in Note A is consummated and depending upon the
fair value assigned to the combined business, there could be an asset impairment
charge recorded on the Bar Products Line financial statements at the closing
date of the transaction.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses were allocated to the Bar Product
Line based upon related production cost centers. Payroll related liabilities
were allocated based upon the headcount of the various production cost centers.
F-102
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
B. SIGNIFICANT ACCOUNTING POLICIES AND ALLOCATIONS--(CONTINUED)
Postretirement Health Care and Life Insurance Benefits
USS/KOBE provides certain health care and life insurance benefits for
retirees. Substantially all employees may become eligible for these benefits
upon retirement. USS/KOBE accrues for such benefits over the period in which
active employees become eligible for such benefits. The transition obligation is
being amortized over a 20 year period. Under the USS/KOBE Partnership agreement,
USS/KOBE is responsible for all health care benefit payments after July 1, 1989,
relating to former employees of the former Lorain Works of USX retired as of
June 30, 1989, up to an aggregate of $7,400,000 annually. USX is responsible for
all such health care benefit payments exceeding that amount. To the extent that
such health care benefit payments are less than $7,400,000 in any one year,
USS/KOBE is responsible for reimbursing USX for payments of cumulative prior
year excess amounts such that the total amount paid is up to $7,400,000 for that
year, through the year 2020. At December 31, 1998 no cumulative excess amount
exists.
The portion of the postretirement health care and life insurance benefit
liability and related expense of the Bar Products Line was determined based upon
the production cost center to which each active employee was assigned. All
expenses and related liabilities associated with former employees who retired
between January 1, 1996 and December 31, 1998 were allocated to the respective
Tubular or Bar Products Line from which they retired. All expenses and related
liabilities associated with retirees prior to January 1, 1996 as well as all
former Lorain Works (of USX) employees were allocated to the Bar Products Line.
Division Control
The division control account includes the allocation of partners'
investment, accumulated deficit and intracompany balances due to/from the
Tubular Products Line of USS/KOBE.
Insurance
Insurance is obtained for catastrophic casualty and certain property
exposures, as well as those risks required to be insured by law or contract.
Costs resulting from noninsured losses are charged to operations when probable
and estimable. Insurance expense was allocated to the Bar Products Line based
upon the allocation of fixed assets.
Income Taxes
As a partnership, USS/KOBE is not subject to federal or state income taxes.
Federal and state income tax regulations provide that the items of income, gain,
loss, deduction, credit and tax preference of USS/KOBE are reportable by the
individual partners in their respective corporate income tax returns.
Accordingly, no provision for federal or state income taxes has been recorded by
USS/KOBE or the Bar Products Line.
Tubular Transfer Price
Related party revenues consist of the transfer of the Bar Products Line's
operating costs related to the production of seamless rounds by USS/KOBE's
tubular operations. Those costs include allocations of the materials,
maintenance and utilities, and labor and benefit costs incurred by the Bar
Products Line based upon the percentage of tubular product produced to total
production. Transfers of tubular products were made at actual inventoriable and
other costs incurred.
F-103
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
B. SIGNIFICANT ACCOUNTING POLICIES AND ALLOCATIONS--(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Sales are recognized when products are shipped or services are provided to
customers.
Environmental Remediation
USS/KOBE provides for remediation costs and penalties when the
responsibility to remediate is probable and the amount of associated costs is
reasonably determinable. Generally, the timing of remediation accruals coincides
with completion of a feasibility study or the commitment to a formal plan of
action. Remediation liabilities are accrued based on estimates of known
environmental exposure (see Note G).
C. RELATED PARTY TRANSACTIONS
Included in current assets and liabilities are amounts payable to
affiliates of the Partners, as follows:
DECEMBER 31, DECEMBER 31,
1997 1998
----------------------- -----------------------
RECEIVABLES PAYABLES RECEIVABLES PAYABLES
----------- -------- ----------- --------
(IN THOUSANDS)
USX Corporation........................................... $ 3,805 $ 33,982 $ -- $ 37,243
Kobe Steel, Ltd........................................... 710 211
------- -------- ------- --------
TOTAL..................................................... $ 3,805 $ 34,692 $ -- $ 37,454
------- -------- ------- --------
------- -------- ------- --------
USS/KOBE has an agreement with USX to provide blooms to the Fairfield Works
owned by USX. Bar Product Line sales recorded under this agreement were
$151,606,000 in 1996, $107,182,000 in 1997 and $42,710,000 in 1998.
In addition, USS/KOBE has an arrangement to store certain Fairfield Works
tubular products. Total income recorded under this arrangement was $50,000 in
1996, $45,000 in 1997 and $52,000 in 1998.
USS/KOBE has an agreement with USX, under which USX provides data
processing and other administrative services to USS/KOBE. Amounts paid by the
Bar Products Line under this agreement totaled, $4,846,000 in 1996, $4,786,000
in 1997 and $4,168,000 in 1998. In addition, under separate agreements, USX
provides coke and iron ore pellets to the Bar Products Line at negotiated
prices. Costs incurred by the Bar Products Line under these agreements totaled,
$227,523,000 in 1996 $193,827,000 in 1997 and $173,072,000 in 1998.
USS/KOBE has an agreement with Kobe, under which Kobe provides technical
assistance in 1) the improvement of daily operations and product quality, and 2)
preparation of a modernization plan. Under the agreement, USS/KOBE is to pay
Kobe an annual basic fee of $2,000,000 through August 31, 2001. Management has
allocated 100% of this contract to the Bar Products Line.
F-104
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
C. RELATED PARTY TRANSACTIONS--(CONTINUED)
USS/KOBE also incurs certain salary and absence fees for use of Kobe
employees, training fees related to training programs attended by USS/KOBE
employees, and patent license fees for any Kobe patents used by USS/KOBE.
Management has allocated 100% of this contract to the Bar Products Line which
totaled $126,000 in 1996, $99,000 in 1997 and $240,000 in 1998.
D. CREDIT FACILITIES
DECEMBER 31,
----------------------
1997 1998
-------- --------
(IN THOUSANDS)
Credit facilities:
Five year, $75 million revolving credit facility, at variable
rates (6.7% and 5.78% at December 31, 1997 and 1998,
respectively) due December 29, 2000......................... $ 66,607 $ 66,607
Senior notes:
Fixed rate private placement notes:
Tranche A: 6.85%; due November 21, 2002................... 44,404 44,404
Tranche B: 7.20%; due November 21, 2005................... 44,404 44,404
Tranche C: 7.47%; due November 21, 2010................... 13,321 13,321
Environmental bonds:
1984 Series, interest due monthly at a variable rate based on
the average of thirty-day yield evaluations at par of not
less than twenty issuers of tax-exempt securities, principal
due
December 2001............................................... 6,757 6,757
1995 Series, variable rate tax-exempt securities, principal due
November 2015............................................... 4,745 4,745
-------- --------
$180,238 $180,238
-------- --------
-------- --------
USS/KOBE has a five year $75 million revolving credit facility ("credit
facility"), established with a group of nine banks which is subject to
immaterial commitment fees. The credit facility, including the financial
covenants, was amended February 26, 1999. USS/KOBE was in violation of the net
worth and interest coverage financial covenants related to the credit facility
at December 31, 1998 and for the period through February 26, 1999, the date of
the amendment. USS/KOBE has obtained waivers of the events of default from the
banks as of December 31, 1998 and for such period through the date of the
amended agreement. As a result of the amendment, the interest rates on the
credit facility are set at a base rate based on the prime rate or LIBOR in
effect at the time of the loan plus a base rate adjustment, ranging from 0.38 to
0.88%.
At December 31, 1998, USS/KOBE was in breach of certain financial covenants
under its senior notes agreement dated as of November 1, 1995 ("Note Agreement")
relating to its $115 million senior notes. As of February 19, 1999, USS/KOBE
entered into an amendment to the Note Agreement to revise the financial
covenants. That amendment, and the February 26 amendment to the credit facility,
required USS/KOBE to deliver a first perfected security interest in certain
current assets ("Tier 1 Collateral") such as accounts receivable, inventory and
cash by March 31, 1999. These amendments also require USS/KOBE to deliver a
first perfected security interest in its
F-105
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
D. CREDIT FACILITIES--(CONTINUED)
remaining assets ("Tier 2 Collateral") no later than 90 days after its
consolidated net worth is less than $300 million. On May 14, 1999, USS/KOBE
advised its lenders that its consolidated net worth was less than $300 million.
On June 30, 1999 USS/KOBE executed documents providing for a collateral
trust arrangement with Chase Manhattan Trust Company, N.A. ("Collateral
Trustee") and its banks and noteholders and granting the Collateral Trustee a
first perfected security interest in all the Tier 1 Collateral and a portion of
the Tier 2 Collateral for the benefit of the banks and noteholders.
USS/KOBE expects to grant the Collateral Trustee a security interest in the
remaining Tier 2 Collateral in a timely manner and for all practical purposes
cure all outstanding events of default under the credit facility and the Note
Agreement.
In addition, if the adjusted consolidated net worth, as defined, of
USS/KOBE falls below $275 million, USX and Kobe are required to contribute up to
$15 million each, to restore adjusted consolidated net worth to a minimum of
$275 million.
The VEBA is entitled to a pari passu lien on most of the remaining assets
until the VEBA trust's fund level reaches 75% of USS/KOBE's total retiree health
care and life insurance obligation, but the proposed settlement agreement with
the United Steelworkers union does not contain this requirement. USS/KOBE will
pay an amendment fee equal to an additional 1.75% interest on the outstanding
principal of the senior notes, commencing on February 1, 1999 and payable semi-
annually on the scheduled interest payment dates of the senior notes.
Under the most restrictive debt covenant, USS/KOBE is not permitted to make
distributions to its Partners until net worth, as defined, exceeds
$350 million.
The amounts outstanding under the credit facility, senior notes and
environmental bonds represent those amounts allocated to the Bar Products Line
based upon fixed asset allocations and do not represent the total amounts
outstanding under those facilities (except for the 1995 Series, variable rate
tax-exempt securities).
Management expects to refinance the credit facility and the senior notes
upon the contribution of the Bar Product Line to RTI (See Note A).
Based on consideration of current market rates and the amended senior note
agreement, the fair value of the senior notes Tranche A, Tranche B and Tranche C
at December 31, 1998 allocated to the Bar Products Line was $47.4 million,
$48.8 million and $15 million, respectively.
In June 1996, USS/KOBE entered into an agreement with two banks for a
discretionary credit line at a variable rate (approximately 5.75% at December
31, 1998). The aggregate borrowings under this agreement cannot exceed $10
million. $3.2 million of outstanding borrowings under this credit line were
allocated to the Bar Products Line at December 31, 1998. There were no
borrowings outstanding under this credit line at December 31, 1997. This credit
line expired at the end of May 1999.
Interest incurred of $9,622,000 in 1996, $11,900,000 in 1997 and
$12,007,000 in 1998 has been allocated to the Bar Products Line based on the
related allocation of debt balances. Interest expense capitalized in
construction-in-progress has been determined based upon the allocation of
specific construction-in-progress projects and totaled $624,000 in 1996,
$906,000 in 1997 and $696,000 in 1998. Interest paid and allocated to the Bar
Products Line based on the related allocation of debt balances was $9,412,000 in
1996, $11,600,000 in 1997 and $11,720,000 in 1998.
F-106
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
E. PENSION AND OTHER POSTRETIREMENT BENEFITS
USS/KOBE sponsors two noncontributory defined benefit plans covering
substantially all employees. Benefits under these plans are based upon years of
service and final average pensionable earnings, or a minimum benefit based upon
years of service, whichever is greater. The funding policy for these defined
benefit plans provides that payment to the pension trusts shall be equal to the
minimum funding requirements of the Employee Retirement Income Security Act of
1974 plus such additional amounts as may be approved from time to time. Assets
held by the plans are invested primarily in corporate equity and debt securities
and interest bearing cash accounts. In addition, pension benefits from
USS/KOBE's two defined contribution plans, which cover participating employees,
are based upon years of service and career earnings.
The portion of the defined benefit plans' liabilities and related expenses
of the Bar Products Line has been determined based upon the production cost
center to which each active employee is assigned and from which non-active
employees retired. Expenses of the defined contribution plans have been
allocated based upon the headcount of the various production cost centers.
In addition to USS/KOBE's defined benefit pension plans and defined
contribution plans, USS/KOBE has two defined benefit postretirement plans
covering substantially all employees. Health care and life insurance benefits
are generally provided on a noncontributory basis. Coverage is also provided for
surviving spouses of retirees. The plans' postretirement benefit claims and
premiums are paid as incurred. As required by the United Steelworkers of America
(USWA) labor agreement, USS/KOBE has contributed funds to a Voluntary Employee
Benefit Association (VEBA) to partially fund its obligation. Under the terms of
the agreement, the VEBA may not be used to fund health care claims until certain
minimum funding levels are attained. The assets are invested in various mutual
funds.
F-107
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
E. PENSION AND OTHER POSTRETIREMENT BENEFITS--(CONTINUED)
The components of pension and other postretirement benefit (OPEB)
obligations and assets related to the benefit plans sponsored by USS/KOBE as
allocated to the Bar Products Line are as follows (in thousands):
PENSION BENEFITS OPEB
-------------------- --------------------
1997 1998 1997 1998
-------- -------- -------- --------
Change in benefit obligation:
Benefit obligation at beginning of year.................... $ 92,098 $108,965 $118,988 $130,415
Service cost............................................... 5,113 6,507 1,624 1,778
Interest cost.............................................. 7,613 8,183 8,854 9,276
Actuarial losses (gains)................................... 10,898 15,014 8,754 (21,335)
Benefits paid.............................................. (6,757) (9,578) (7,805) (6,872)
-------- -------- -------- --------
Benefit obligation at end of year............................ 108,965 129,091 130,415 113,262
Change in plan assets:
Fair value of plan assets at beginning of year............. 89,300 100,572 2,369 4,043
Actual return on plan assets............................... 15,672 14,946 780 734
Contributions.............................................. 2,357 7,937 8,699 8,200
Benefits paid.............................................. (6,757) (9,578) (7,805) (6,872)
-------- -------- -------- --------
Fair value of plan assets at end of year..................... 100,572 113,877 4,043 6,105
-------- -------- -------- --------
Funded status of the plans (underfunded)..................... (8,393) (15,214) (126,372) (107,157)
Unrecognized net actuarial losses (gains).................... (5,673) 3,894 (114) (21,787)
Unrecognized prior service cost.............................. 16,124 14,244 95 63
Unrecognized transition obligation........................... 88,383 82,491
-------- -------- -------- --------
PREPAID (ACCRUED) BENEFIT COST............................... $ 2,058 $ 2,924 $(38,008) $(46,390)
-------- -------- -------- --------
-------- -------- -------- --------
Amounts recognized in the balance sheet consist of:
Accrued benefit liability.................................. $ (5,263) $(10,314) $(38,008) $(46,390)
Intangible asset........................................... 7,321 12,793
Accumulated other comprehensive loss....................... 445
-------- -------- -------- --------
NET AMOUNT RECOGNIZED........................................ $ 2,058 $ 2,924 $(38,008) $(46,390)
-------- -------- -------- --------
-------- -------- -------- --------
F-108
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
E. PENSION AND OTHER POSTRETIREMENT BENEFITS--(CONTINUED)
Amounts applicable to the USS/KOBE pension plan with accumulated benefit
obligations in excess of plan assets have been allocated to the Bar Products
Line as follows (in thousands):
1997 1998
------------- -------------
Projected benefit obligation.................................. $91,977 $ 112,711
Accumulated benefit obligation................................ 89,058 110,056
Fair value of plan assets..................................... 84,147 100,008
PENSION BENEFITS OPEB
-------------------------- -----------------------------
1996 1997 1998 1996 1997 1998
------ ------ ------ ------- ------- -------
Weighted-average assumptions as of
December 31:
Discount rate..................... 7.60% 7.25% 6.75% 7.60% 7.25% 6.75%
Assumed compensation increase..... 2.50% 2.50% 2.50%
Expected return on plan assets.... 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
Projected health care cost trend
rate........................... 8.00% 8.00% 8.00%
Ultimate trend rate............... 5.00% 5.00% 5.00%
Year ultimate trend rate is
achieved....................... 2003 2004 2005
Components of net periodic benefit
cost (income) (in thousands):
Service cost...................... $5,237 $5,113 $6,507 $ 1,698 $ 1,624 $ 1,778
Interest cost..................... 6,708 7,613 8,183 8,626 8,854 9,276
Expected return on plan assets.... (6,556) (7,873) (9,498) (147) (255) (396)
Amortization of unrecognized
transition obligation.......... 5,892 5,892 5,892
Recognized net actuarial gain..... (182) (39)
Amortization of prior service
cost........................... 1,879 1,879 1,878 32 32 32
------ ------ ------ ------- ------- -------
Benefit cost...................... 7,268 6,732 7,070 15,919 16,108 16,582
Defined contribution plans........ 546 528 533
------ ------ ------ ------- ------- -------
TOTAL COST.......................... $7,814 $7,260 $7,603 $15,919 $16,108 $16,582
------ ------ ------ ------- ------- -------
------ ------ ------ ------- ------- -------
The following shows the 1998 effect of a 1% increase or decrease in the
weighted average health care cost trend rate (in thousands):
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
--------------- --------------
Effect on total of service and interest cost components..... $ 1,481 $ (1,220)
Effect on postretirement benefit obligation................. 13,768 (11,433)
F-109
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
F. COMMITMENTS AND CREDIT RISKS
At December 31, 1998, minimum annual rental commitments under
non-cancelable operating leases allocated to the Bar Products Line are as
follows (in thousands):
1999............................................................ $ 3,263
2000............................................................ 2,452
2001............................................................ 1,472
2002............................................................ 376
2003............................................................ 154
Thereafter...................................................... 82
-------
TOTAL MINIMUM LEASE PAYMENTS.................................... $ 7,799
-------
-------
Rent expense allocated to the Bar Products Line based on production cost
center was $1,953,000 in 1996, $2,290,000 in 1997 and $2,350,000 in 1998.
At December 31, 1998, the Partners had approved modernization plans for
USS/KOBE approximating $19 million and USS/KOBE had contracts or other purchase
commitments of approximately $540,000 for acquisition of machinery and
equipment.
The Bar Products Line has a labor agreement that expires July 31, 1999 with
the United Steelworkers union covering approximately 1,800 hourly workers.
Tentative agreements, subject to ratification of local United Steelworkers union
members, were reached in July 1999.
The Bar Products Line customers are primarily in the auto and related
industries. Credit is extended based on an evaluation of the customer's
financial condition and generally, collateral is not required. In 1996, one
customer accounted for approximately 11% of the Bar Products Line's revenues.
G. CONTINGENCIES
USS/KOBE is the subject of, or party to, pending or threatened legal
actions, as well as federal, state and local laws and regulations relating to
the environment. These laws generally provide for control of pollutants released
into the environment and require responsible parties to undertake remediation of
hazardous waste disposal sites. Penalties may be imposed for noncompliance.
USS/KOBE has accrued approximately $2,459,000 and $2,540,000 at December 31,
1997 and 1998, respectively, for litigation and environmental remediation, of
which $1,037,000 and $ 940,000 has been allocated to the Bar Products Line. It
is not presently possible to estimate the ultimate amount of all remediation
costs that might be incurred or the penalties that may be imposed. If, in the
future, Management were required to record such remediation costs which can not
be estimated at this time, the effect on the Bar Products Line of USS/KOBE Steel
Company's statements of financial position, results of operations and cash flows
could be significant.
F-110
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
BALANCE SHEETS
JUNE 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998 (AUDITED)
(IN THOUSANDS)
JUNE 30 DECEMBER 31
1999 1998
-------- -----------
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 8,222 $ 3,195
Accounts receivable--net of allowance of $7,400 in 1999 and $9,500 in 1998......... 59,355 44,274
Inventories:
Raw materials................................................................... 13,130 51,451
Work-in-process................................................................. 46,564 57,513
Finished goods.................................................................. 18,621 20,839
Supplies........................................................................ 1,183 1,391
-------- ---------
Total inventories.................................................................. 79,498 131,194
Partners' contribution receivable.................................................. 778 --
Other current assets............................................................... 3,707 6,910
-------- ---------
Total current assets................................................................. 151,560 185,573
Property, plant and equipment:
Land............................................................................... 2,633 2,633
Buildings and improvements......................................................... 41,733 41,700
Machinery and equipment............................................................ 643,478 636,723
Construction-in-progress........................................................... 1,135 7,718
-------- ---------
688,979 688,774
Less accumulated depreciation...................................................... (290,789) (269,045)
-------- ---------
398,190 419,729
Intangible pension asset............................................................. 12,793 12,793
-------- ---------
TOTAL ASSETS......................................................................... $562,543 $ 618,095
-------- ---------
-------- ---------
LIABILITIES AND PARTNERS' INVESTMENT
Current liabilities:
Checks in transit.................................................................. $ 8,487 $ 16,261
Note payable....................................................................... -- 3,215
Accounts payable................................................................... 64,246 61,442
Accrued payroll and related expenses............................................... 16,792 17,371
Other accrued expenses............................................................. 14,625 14,544
Current portion of other postretirement benefits liabilities....................... 9,363 9,363
-------- ---------
Total current liabilities............................................................ 113,513 122,196
Accrued pension liabilities.......................................................... 8,768 10,314
Other postretirement benefits liabilities............................................ 40,497 37,027
Non-current debt..................................................................... 180,238 180,238
Other long-term obligations.......................................................... 1,401 1,926
Partners' investment:
Accumulated other comprehensive loss............................................... (445) (445)
Division control................................................................... 218,571 266,839
-------- ---------
Total partners' investment........................................................... 218,126 266,394
-------- ---------
TOTAL LIABILITIES AND PARTNERS' INVESTMENT........................................... $562,543 $ 618,095
-------- ---------
-------- ---------
See notes to financial statements.
F-111
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
UNAUDITED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
SIX MONTHS
ENDED JUNE 30
--------------------
1998 1999
-------- --------
REVENUES
Net sales:
Unrelated parties..................................................................... $242,135 $217,529
Related parties:
Tubular transfers.................................................................. 91,346 45,264
Other.............................................................................. 42,385 4,936
-------- --------
375,866 267,729
COST AND EXPENSES
Cost of sales........................................................................... 347,977 269,926
Depreciation and amortization........................................................... 22,774 23,500
Selling and administrative expenses..................................................... 9,366 9,010
-------- --------
380,117 302,436
-------- --------
Loss from operations.................................................................... (4,251) (34,707)
OTHER (EXPENSES) INCOME
Interest expense, net................................................................... (5,575) (7,179)
Other income (expense).................................................................. 74 (417)
-------- --------
(5,501) (7,596)
-------- --------
NET LOSS................................................................................ $ (9,752) $(42,303)
-------- --------
-------- --------
See notes to financial statements.
F-112
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
UNAUDITED STATEMENT OF CHANGES IN PARTNERS' INVESTMENT
(IN THOUSANDS)
USS
LORAIN
HOLDING
COMPANY, KOBE/
INC. LORAIN INC. TOTAL
-------- ----------- --------
Balance at January 1, 1999................................................ $133,197 $ 133,197 $266,394
Partners' non-cash contributions and transfers............................ (2,983) (2,982) (5,965)
Net loss.................................................................. (21,151) (21,152) (42,303)
-------- --------- --------
BALANCE AT JUNE 30, 1999.................................................. $109,063 $ 109,063 $218,126
-------- --------- --------
-------- --------- --------
See notes to financial statements.
F-113
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
UNAUDITED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS
ENDED JUNE 30
----------------------
1998 1999
--------- ---------
OPERATING ACTIVITIES
Net loss.............................................................................. $ (9,752) $ (42,303)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization....................................................... 22,774 23,500
Change in provision for receivable allowance........................................ -- (2,100)
Change in pension liability and asset--net.......................................... (4,190) (1,546)
Increase in other postretirement benefits liability--net............................ 5,172 3,470
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable....................................... 23 (12,981)
(Increase) decrease in inventories............................................... 21,606 51,696
Increase (decrease) in accounts payable and due to/from tubular products line.... 19,997 (3,939)
(Decrease) increase in payroll related liabilities............................... 2,120 (579)
(Decrease) increase in other..................................................... (25,940) (5,015)
--------- ---------
Net cash provided by operating activities............................................. 31,810 10,203
INVESTING ACTIVITIES
Purchases of property, plant and equipment--net....................................... (10,348) (1,961)
--------- ---------
Net cash used in investing activities................................................. (10,348) (1,961)
FINANCING ACTIVITIES
Proceeds from debt facilities......................................................... 466,650 541,261
Principal payments on notes and other debt............................................ (488,629) (544,476)
--------- ---------
Net cash used by financing activities................................................. (21,979) (3,215)
--------- ---------
Increase in cash and cash equivalents................................................. (517) 5,027
Cash and cash equivalents, beginning of period........................................ 1,909 3,195
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............................................. $ 1,392 $ 8,222
--------- ---------
--------- ---------
Interest paid......................................................................... $ 5,650 $ 6,309
Interest capitalized.................................................................. 372 100
See notes to financial statements.
F-114
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999
A. DESCRIPTION OF BUSINESS AND PROPOSED TRANSACTION
On April 12, 1999, USX Corporation (USX) and Kobe Steel Ltd. (Kobe) entered
into a Letter of Intent with Blackstone Partners II, L.L.C. (Blackstone) which
provides for the combination of USS/KOBE Steel Company's steelmaking and bar
producing assets with those of companies controlled by Blackstone and Veritas
Capital Management L.L.C. (Veritas), primarily Republic Engineered Steels, Inc.
and Bar Technologies, Inc., (Republic Technologies International, L.L.C.
("RTI")). Under the terms of the Letter of Intent, a subsidiary of USX and a
subsidiary of Kobe will contribute the steelmaking and bar producing assets and
business, including the long-term debt, (collectively, the Bar Products Line) of
USS/KOBE to the new joint venture in exchange for a 15% interest, each, in RTI.
The transaction was completed on August 13, 1999. Management refinanced the
credit facility and the senior notes upon the contribution of the Bar Product
Line to RTI.
The accompanying unaudited financial statements represent carve-out
financial statements of the Bar Products Line which are being contributed to
RTI, and are not intended to be a complete presentation of the financial
position or the results of operations and cash flows of USS/KOBE on a
stand-alone basis. The unaudited financial statements include allocations and
estimates of direct and indirect USS/KOBE corporate administrative expenses as
well as account balances attributable to the contributed operations. The methods
by which such amounts are attributed or allocated are deemed reasonable by the
management of USS/KOBE and the methodology is consistent with the allocation
methods used for the years ended December 31, 1998, 1997 and 1996.
B. BASIS OF PRESENTATION
The unaudited balance sheet as of June 30, 1999, and the related statements
of operations and cash flows for the six months ended June 30, 1998 and 1999 and
the statement of changes in partners' investment for the six months ended June
30, 1999, have been prepared in accordance with generally accepted accounting
principles for interim financial information and with Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of adjustments of a normal and recurring nature) considered necessary for a
fair presentation of the financial position and results of operations and cash
flows have been included. Operating results for the six months ended June 30,
1999 are not necessarily indicative of the results that might be expected for
the year ending December 31, 1999.
Domestic steel producers face significant competition from foreign
producers affecting both prices and volume. USS/KOBE also competes with other
domestic integrated bar and tubular steel producers, some of which have greater
financial resources than USS/KOBE, and with minimills, which are relatively
efficient, low-cost producers that generally produce steel from low cost raw
materials, have lower employment and environmental costs and generally target
regional markets.
C. SIGNIFICANT ACCOUNTING POLICIES
Impairment of Property, Plant and Equipment
When indicators of impairment are present, the recoverability of property,
plant and equipment is assessed by determining whether the amortization of the
remaining balance over its remaining useful life can be recovered through
undiscounted future operating cash flows. If impairment exists, the carrying
amount of the related asset is reduced. Management has evaluated its long-lived
assets as held for use and has determined through a cash flow analysis that no
impairment in value exists as of June 30, 1999. Due to the consummation of the
transaction that is described in Note A and
F-115
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO UNAUDITED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999
C. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
depending upon the fair value assigned to the combined business, there could be
an asset impairment charge recorded on the Bar Products Line financial
statements at the closing date of the transactions.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Environmental Remediation
USS/KOBE provides for remediation costs and penalties when the
responsibility to remediate is probable and the amount of associated costs is
reasonably determinable. Generally, the timing of remediation accruals coincides
with completion of a feasibility study or the commitment to a formal plan of
action. Remediation liabilities are accrued based on estimates of known
environmental exposure (see Note F).
D. RELATED PARTY TRANSACTIONS
Included in current assets and liabilities are amounts receivable
from/payable to affiliates of the Partners, as follows:
JUNE 30, 1999 DECEMBER 31, 1998
----------------------- -----------------------
RECEIVABLES PAYABLES RECEIVABLES PAYABLES
----------- -------- ----------- --------
(IN THOUSANDS)
USX Corporation.............................. $16,648 $ 40,639 $ -- $ 37,243
Kobe Steel, Ltd.............................. -- 731 -- 211
------- -------- ------- --------
TOTAL........................................ $16,648 $ 41,370 $ -- $ 37,454
------- -------- ------- --------
------- -------- ------- --------
USS/KOBE has an agreement with USX to provide blooms to the Fairfield Works
owned by USX. Bar Product Line sales recorded under this agreement were
$42,385,000 and $4,936,000 for the six months ended June 30, 1998 and 1999,
respectively.
In addition, USS/KOBE has an arrangement to store certain Fairfield Works
tubular products. Total income recorded under this arrangement was $28,000 and
$21,000 for the six months ended June 30, 1998 and 1999, respectively.
USS/KOBE has an agreement with USX, under which USX provides data
processing and other administrative services to USS/KOBE. Amounts paid by the
Bar Products Line under this agreement totaled $5,490,000 and $5,830,000 for the
six months ended June 30, 1998 and 1999, respectively. In addition, under
separate agreements, USX provides coke and iron ore pellets to the Bar Products
Line at negotiated prices. Costs incurred by the Bar Products Line under these
agreements totaled $78,630,000 and $28,187,000 for the six months ended June 30,
1998 and 1999, respectively.
USS/KOBE has an agreement with Kobe, under which Kobe provides technical
assistance in 1) the improvement of daily operations and product quality,
and 2) preparation of a modernization plan. Under the agreement, USS/KOBE is to
pay Kobe an annual basic fee of $2,000,000 through August 31, 2001. Management
has allocated 100% of this contract to the Bar Products Line.
F-116
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO UNAUDITED FINANCIAL STATEMENTS--(CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999
D. RELATED PARTY TRANSACTIONS--(CONTINUED)
USS/KOBE also incurs certain salary and absence fees for use of Kobe
employees, training fees related to training programs attended by USS/KOBE
employees, and patent license fees for any Kobe patents used by USS/KOBE.
Management has allocated 100% of this contract to the Bar Products Line which
totaled $67,000 and $24,000 for the six months ended June 30, 1998 and 1999,
respectively.
E. COMMITMENTS AND CREDIT RISKS
The Bar Products Line has a labor agreement with the USWA covering
approximately 1,800 hourly workers. In August 1999, members of the local United
Steelworkers union ratified a new four-year agreement with the Company.
F. CONTINGENCIES
USS/KOBE is the subject of, or party to, pending or threatened legal
actions, as well as federal, state and local laws and regulations relating to
the environment. These laws generally provide for control of pollutants released
into the environment and require responsible parties to undertake remediation of
hazardous waste disposal sites. Penalties may be imposed for noncompliance.
USS/KOBE has accrued approximately $490,000 at June 30, 1999, for litigation and
environmental remediation. Management has allocated 100% of this liability to
the Bar Products Line. It is not presently possible to estimate the ultimate
amount of all remediation costs that might be incurred or the penalties that may
be imposed. If, in the future, Management were required to record such
remediation costs which can not be estimated at this time, the effect on the Bar
Products Line of USS/KOBE Steel Company's statements of financial position,
results of operations and cash flows could be significant.
F-117
$425,000,000
REPUBLIC TECHNOLOGIES INTERNATIONAL, LLC
RTI CAPITAL CORP.
OFFER TO EXCHANGE ALL OUTSTANDING 13 3/4% SENIOR SECURED NOTES DUE 2009 FOR
13 3/4% SENIOR SECURED NOTES DUE 2009, WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933
UNCONDITIONALLY GUARANTEED ON A SENIOR SECURED BASIS BY REPUBLIC TECHNOLOGIES
INTERNATIONAL HOLDINGS, LLC AND SPECIFIED SUBSIDIARIES OF REPUBLIC TECHNOLOGIES
INTERNATIONAL, LLC
UNTIL , 2000, WHICH IS 90 DAYS AFTER THE DATE OF THIS
PROSPECTUS, ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) Republic Technologies International Holdings, LLC; Republic
Technologies International, LLC; Nimishillen & Tuscarawas, LLC; Bliss &
Laughlin, LLC (each a Delaware limited liability company and collectively, the
"LLCs")
The LLCs are each empowered by Section 18-108 of the Delaware Limited
Liability Company Act, subject to the procedures and limitations stated therein,
to indemnify any person against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with any threatened, pending or completed action, suit or proceeding
in which such person is made a party by reason of his being or having been a
director, officer, employee or agent of such LLC, respectively. The statute
provides that indemnification pursuant to its provisions is not exclusive of
other rights of indemnification to which a person may be entitled under any
agreement, vote of members or disinterested directors or otherwise.
(b) RTI Capital Corp. ("RTI CapCo")
Section 145 of the Delaware General Corporation Law (the "DGCL") permits
RTI CapCo's board of directors to indemnify any person against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with any
threatened, pending or completed action (except settlements or judgments in
derivative suits), suit or proceeding in which such person is made a party by
reason of his or her being or having been a director, officer, employee or agent
of RTI CapCo, in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement of expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act"). The statute provides that indemnification pursuant to its provisions is
not exclusive of other rights of indemnification to which a person may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors, or otherwise.
As permitted by sections 102 and 145 of the DGCL RTI CapCo's certificate of
incorporation eliminates a director's personal liability for monetary damages to
the company and its stockholders arising from a breach of a director's fiduciary
duty, except as otherwise provided under the DGCL.
RTI CapCo's by-laws provide for the mandatory indemnification of its
directors, officers, employees and other agents to the fullest extent permitted
by the DGCL.
(c) Canadian Drawn Steel Company, Inc. ("CDSC")
Under the Canada Business Corporations Act and CDSC's by-laws, CDSC may
indemnify a present or former director or officer or a person who acts or acted
at CDSC's request as a director or officer of another corporation of which CDSC
is or was a stockholder or creditor, and his heirs and legal representatives (an
"indemnifiable person"), against all costs, charges and expenses, including an
amount paid to settle an action or satisfy a judgment, reasonably incurred by
him in respect of any civil, criminal or administrative action or proceeding to
which he is made a party by reason of his position if:
(i) he acted honestly and in good faith with a view to the best
interests of CDSC; and
(ii) in the case of a criminal or administrative action or proceeding
that is enforced by a monetary penalty, he had reasonable grounds for
believing that his conduct was lawful.
An indemnifiable person is entitled to such indemnity from CDSC if he was
substantially successful on the merits in his defense of the action or
proceeding and fulfilled the conditions set out in (i) and (ii) above. CDSC may,
with the approval of a court, also indemnify an indemnifiable person in respect
of an action by or on behalf of CDSC or a corporation to procure a judgment in
its favor, to which such person is made party by reason of being or having been
a director or an officer of
II-1
CDSC or a corporation, if he fulfills the conditions set out in (i) and
(ii) above. CDSC's by-laws provide for indemnification of directors and officers
to the fullest extent authorized by the Canada Business Corporations Act.
ITEM 21. EXHIBITS
The following exhibits are filed with this registration statement or
incorporated into this registration statement by reference.
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
.1 1 -- Purchase Agreement, dated as of August 6, 1999, among Republic Technologies International, LLC
("Republic Technologies"), RTI Capital Corp. ("RTI CapCo"), Republic Technologies International,
Inc. ("RTI"), Nimishillen & Tuscarawas, LLC ("N&T"), Bliss & Laughlin, LLC ("B&L"), Canadian Drawn
Steel Company, Inc. ("CDSC"), Republic Technologies International Holdings, LLC ("Holdings"),
Chase Securities Inc. ("Chase"), Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and
BancBoston Robertson Stephens Inc. ("BBRS"). *
2.1 -- Master Restructuring Agreement, dated as of August 13, 1999, among RTI, RES Holding Corporation
("RES Holding"), Republic Engineered Steels, Inc., Blackstone Capital Partners II Merchant Banking
Fund L.P. ("BCP II"), Blackstone Offshore Capital Partners II L.P. ("BOCP II"), Blackstone Family
Investment Partnership II L.P. ("BFIP II"), The Veritas Capital Fund L.P. ("Veritas Fund"), HVR
Holdings, L.L.C. ("HRV"), USX Corporation ("USX"), Kobe Steel, Ltd. ("Kobe"), Kobe Delaware Inc.
("Kobe Delaware"), USS Lorain Holding Company, Inc. ("USS Lorain"), USX RTI Holdings, Inc. ("USX
Holdings"), Kobe/Lorain Inc. ("Kobe/Lorain"), Kobe RTI Holdings, Inc. ("Kobe Holdings"), Holdings,
Republic Technologies, Lorain Tubular Company, LLC ("Lorain") and USS/Kobe Steel Company
("USS/Kobe SteelCo"). *
3.1 -- Limited Liability Company Agreement of Republic Technologies *
3.2 -- Certificate of Incorporation of RTI CapCo *
3.3 -- By-laws of RTI CapCo *
3.4 -- Limited Liability Company Agreement of Holdings *
3.5 -- Limited Liability Company Agreement of B&L *
3.6 -- Limited Liability Company Agreement of N&T *
3.7 -- Certificate of Incorporation of CDSC *
3.8 -- By-laws of CDSC **
4.1 -- Indenture, dated as of August 13, 1999, among Republic Technologies, RTI CapCo, Holdings, N&T,
B&L, CDSC and United States Trust Company of New York, as Trustee. *
4.2 -- Form of 13 3/4% Senior Secured Note due 2009 (included in Exhibit 4.1)
4.3 -- Form of 13 3/4% Senior Secured Note due 2009, Series B (included in Exhibit 4.1)
4.4 -- Notes Exchange and Registration Rights Agreement, dated as of August 13, 1999, among Republic
Technologies, RTI CapCo, Holdings, N&T, B&L, CDSC, Chase, DLJ and BBRS. *
4.5 -- Security Agreement, dated as of August 13, 1999, among Republic Technologies, RTI CapCo, Holdings,
N&T, B&L, CDSC and United States Trust Company of New York, as Collateral Agent. *
4.6 -- Mortgage, Assignment of Leases, Security Agreement and Fixture Filing, dated as of August 13,
1999, by Republic Technologies to United States Trust Company of New York, as Mortgagee. *
4.7 -- Master Pledge Agreement, dated as of August 13, 1999, among Republic Technologies, RTI CapCo,
Holdings, N&T, B&L, CDSC and United States Trust Company of New York, as Collateral Agent. *
II-2
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
4.8 -- Amended and Restated Intercreditor and Subordination Agreement, dated as of August 13, 1999, among
United States Trust Company of New York, as Collateral Agent, United States Trust Company of New
York, as Trustee, the Pennsylvania Lenders (as defined therein), BankBoston, N.A., as Agent,
Holdings, Republic Technologies, RTI CapCo, N&T, B&L and CDSC. *
4.9 -- Pledge Intercreditor Agreement, dated as of August 13, 1999, among the Secured Parties (defined
therein) and United States Trust Company of New York, as Collateral Agent. *
5 -- Opinion of Simpson Thacher & Bartlett **
10.1 -- Revolving Credit Agreement, dated as of August 13, 1999, among Republic Technologies, BankBoston,
N.A, as Administrative Agent and Co-Book Manager, Bank of America, N.A., as Syndication Agent and
Co-Book Manager, The Chase Manhattan Bank, as Documentation Agent and Co-Book Manager, the Lending
Institutions Named Therein, and BancBoston Robertson Stephens Inc. and Bank of America, N.A., as
Co-Arrangers. *
10.2 -- Security Agreement, dated as of August 13, 1999, among Republic Technologies, Holdings, RTI CapCo,
N&T, B&L, CDSC and BankBoston, N.A. *
10.3 -- Trademark Collateral Security and Pledge Agreement, dated as of August 13, 1999, between Republic
Technologies and BankBoston, N.A. *
10.4 -- Patent Collateral Security and Pledge Agreement, dated as of August 13, 1999, between Republic
Technologies and BankBoston, N.A. *
10.5 -- Canadian Security Agreement, dated as of August 13, 1999, between CDSC and BankBoston, N.A. *
10.6 -- Assignment of Intellectual Property, dated as of August 13, 1999, by CDSC to BankBoston, N.A. *
10.7 -- Open-End Mortgage, Security Agreement, Assignment of Rents, Income and Proceeds, dated as of
August 13, 1999, from Republic Technologies to BankBoston, N.A. *
10.8 -- Amended and Restated Equityholders Agreement, dated as of August 13, 1999, among BCP II, BOCP II,
BFIP II, Veritas Fund, Veritas Capital, L.L.C., KDJ, L.L.C., BRW Steel Holdings, L.P., BRW Steel
Holdings II, L.P., BRW Steel Offshore Holdings, L.P., RTI, RES Holding, Republic Technologies,
USX, USX Holdings, Kobe Delaware, Kobe, Kobe Holdings, HVR, Sumitomo Corporation of America,
FirstEnergy Services Corp., Triumph Capital Investors II, L.P., TCI-II Investors, L.P., First
Dominion Capital L.L.C., TCW Leveraged Income Trust, L.P., TCW Leveraged Income Trust II, L.P.,
TCW Shared Opportunity Fund, L.P., Shared Opportunity Fund IIB, L.L.C., Shared Opportunity Fund
III, L.L.C. and the other equityholders named therein. *
10.9 -- Round Supply Agreement, dated as of August 13, 1999, between Republic Technologies and USX. ***
10.10 -- Master Energy Services and Supply Agreement, dated as of August 13, 1999, between Republic
Technologies and FirstEnergy Services Corp. *
10.11 -- Transition, Administrative and Utilities Services Agreement, dated as of August 13, 1999, between
Lorain Tubular Company, LLC and Republic Technologies. *
10.12 -- Letter Agreement, dated August 13, 1999, between Republic Technologies and USX. *
10.13 -- Letter Agreement, dated August 13, 1999, among Republic Technologies, Lorain Tubular Company, LLC,
Kobe and USX. *
II-3
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
10.14 -- Master Agreement dated July 18, 1994, by and among the Commonwealth of Pennsylvania, acting by and
through the Department of Commerce, the Pennsylvania Industrial Development Authority, the
Commonwealth of Pennsylvania, acting by and through the Department of Community Affairs, the
Johnstown Industrial Development Corporation, the County of Cambria, the City of Johnstown,
Republic Technologies and BRW Steel Corporation-Johnstown. (1)
10.15 -- Amendment No. 1 to the Master Agreement dated September 21, 1994 among Commonwealth of
Pennsylvania, acting by and through the Department of Commerce, the Pennsylvania Industrial
Development Authority, the Commonwealth of Pennsylvania, acting by and through the Department of
Community Affairs, the Johnstown Industrial Development Corporation, the County of Cambria, the
City of Johnstown and Republic Technologies. (1)
10.16 -- Amendment No. 2 to the Master Agreement dated August 1999 among the Johnstown Industrial
Development Corporation, the County of Cambria, the City of Johnstown and Republic Technologies. *
10.17 -- Economic Development Partnership Loan Agreement dated September 21, 1994 between the City of
Johnstown and Republic Technologies. (1)
10.18 -- Economic Development Set-Aside Loan Agreement dated July 6, 1995 between the City of Johnstown and
Republic Technologies. (1)
10.19 -- Economic Development Set-Aside Loan Agreement dated July 6, 1995 between the City of Johnstown and
Republic Technologies. (1)
10.20 -- Section 108 Loan Agreement dated July 20, 1994 among the City of Johnstown, the County of Cambria
and Republic Technologies. (1)
10.21 -- Amendment No. 1 dated August 1994 to Section 108 Loan Agreement among the City of Johnstown, the
County of Cambria and Republic Technologies. (1)
10.22 -- Community Development Block Grant Loan Agreement dated November 3, 1995 between Cambria County and
Republic Technologies. (1)
10.23 -- BID Loan Agreement dated March 12, 1996 between Johnstown Industrial Development Corporation and
Republic Technologies. (1)
10.24 -- Loan Agreement dated December 1, 1998 between Development Authority of Cartersville and B&L. (2)
10.25 -- Trust Indenture dated as of October 1, 1994 between BankOne, Columbus, N.A. ("BankOne") and the
Ohio Water Development Authority (the "Authority"). (3)
10.26 -- Trust Indenture dated as of June 1, 1996 between BankOne and the Authority. (4)
10.27 -- Loan Agreement dated as of October 1, 1994 between Republic Technologies and the Authority. (3)
10.28 -- Loan Agreement dated as of June 1, 1996 between Republic Technologies and the Authority. (4)
10.29 -- Project Note dated October 1, 1994 by Republic Technologies to the Trustee. (3)
10.30 -- Project Note dated June 1, 1996 by Republic Technologies to the Trustee. (4)
10.31 -- Project Bond dated October 1, 1994 issued by the Authority. (3)
10.32 -- Project Bond dated June 1, 1996 issued by the Authority. (4)
10.33 -- Participation Agreement dated as of August 13, 1999 between Republic Technologies and USX. *
10.34 -- Employment Agreement, dated October 1, 1998, between Republic Technologies and Thomas N. Tyrrell.
(5)
10.35 -- Employment Agreement, dated October 1, 1998, between Republic Technologies and Joseph Lapinsky.
(5)
II-4
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
10.36 -- Employment Agreement, dated October 1, 1998, between Republic Technologies and Robert L. Meyer.
(5)
10.37 -- Employment Agreement, dated October 1, 1998, between Republic Technologies and John Asimou. (5)
10.38 -- Employment Agreement, dated July 1, 1999, between Republic Technologies and George F. Babcoke. *
10.39 -- Master Collective Bargaining Agreement dated as of September 30, 1998 among Republic Technologies,
RTI and the United Steel Workers of America. *
10.40 -- 1999 Settlement Agreement, dated as of August 2, 1999 between BarTech, RESI, Republic Technologies
and the United Steelworkers of America.*
10.41 -- Agreement dated as of November 2, 1998 between Pension Benefit Guaranty Corporation and RES
Holding. *
10.42 -- Transaction and Monitoring Fee Agreement dated August 13, 1999 among Blackstone Management
Partners L.P., Veritas, USX, Kobe and Republic Technologies. *
12 -- Computation of Ratio of Earnings to Fixed Charges *
21 -- List of subsidiaries **
23.1 -- Consent of Simpson Thacher & Bartlett (to be included in the opinion filed as Exhibit 5)
23.2 -- Consents of Deloitte and Touche LLP **
23.3 -- Consent of KPMG LLP **
23.4 -- Consent of Ernst & Young LLP **
23.5 -- Consent of Arthur Andersen LLP **
24 -- Powers of Attorney *
25 -- Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of United States Trust
Company of New York, as Trustee *
99.1 -- Form of Letter of Transmittal *
99.2 -- Form of Notice of Guaranteed Delivery *
- ------------------
* Previously filed.
** Filed herewith.
*** Filed herewith (and confidential treatment request submitted under C.F.R.
Sections 200.80(b)(4), 200.83 and 230.406).
(1) Filed as exhibits to the Registration Statement on Form S-4 of Bar
Technologies Inc. (SEC Registration No. 333-4254) and incorporated by
reference and made a part hereof.
(2) Filed as exhibit to Annual Report on Form 10-K of Bliss & Laughlin
Industries Inc. for the fiscal year ended September 30, 1989 and
incorporated by reference and made a part hereof.
(3) Filed as exhibits to Quarterly Report on Form 10-Q of Republic Engineered
Steels, Inc. for the quarter ended September 30, 1994 and incorporated by
reference and made a part hereof.
(4) Filed as exhibits to Annual Report on Form 10-K of Republic Engineered
Steels, Inc. for the fiscal year ended June 30, 1996 and incorporated by
reference and made a part hereof.
(5) Filed as exhibits to Annual Report on Form 10-K of Bar Technologies Inc. for
the fiscal year ended January 2, 1999 and incorporated by reference and made
a part hereof.
II-5
ITEM 22. UNDERTAKINGS
The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrants hereby undertake as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuers undertake that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The registrants undertake that every prospectus: (i) that is filed pursuant
to paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrants pursuant to the foregoing provisions, or otherwise, the registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrants of expenses
incurred or paid by the director, officer or controlling person of the
registrants in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrants will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such
II-6
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
following registrants has duly caused this Amendment No. 2 to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 10th day of January, 2000.
REPUBLIC TECHNOLOGIES INTERNATIONAL,
LLC
By: /s/ JOHN B. GEORGE
-------------------------------
John B. George
Vice President of Finance
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the registration statement has been signed below by the following
persons in the capacities indicated on January 10, 2000.
SIGNATURE TITLE
- ---------------------------------------------------- -------------------------------------------------------
* Chief Executive Officer and Principal Executive
Thomas N. Tyrrell Officer; Director of Republic Technologies
International, Inc.**
/s/ John B. George Vice President of Finance, Treasurer and Secretary and
John B. George Principal Financial and Accounting Officer
* Director of Republic Technologies International, Inc.**
Richard C. Lappin
* Director of Republic Technologies International, Inc.**
Robert Friedman
* Director of Republic Technologies International, Inc.**
David A. Stockman
* Director of Republic Technologies International, Inc.**
David Blitzer
* Director of Republic Technologies International, Inc.**
Robert B. McKeon
* Director of Republic Technologies International, Inc.**
Thomas J. Campbell
* Director of Republic Technologies International, Inc.**
Lynn R. Williams
II-8
SIGNATURE TITLE
- ---------------------------------------------------- -------------------------------------------------------
* Director of Republic Technologies International, Inc.**
Paul J. Wilhelm
Director of Republic Technologies International, Inc.**
Albert E. Ferrara, Jr.
Director of Republic Technologies International, Inc.**
Susumu Okushima
* Director of Republic Technologies International, Inc.**
Tadashi Takeuchi
*By: /s/ John B. George
John B. George
Attorney-in-fact
- ------------------
** Republic Technologies International, Inc. is the managing member of Republic
Technologies International Holdings, LLC. Republic Technologies International
Holdings, LLC is the sole member of Republic Technologies International, LLC.
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
following registrants has duly caused this Amendment No. 2 to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 10th day of January, 2000.
RTI CAPITAL CORP.
By: /s/ John B. George
-----------------------------
John B. George
Vice President of Finance
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the registration statement has been signed below by the following
persons in the capacities indicated on January 10, 2000.
SIGNATURE TITLE
- ----------------------------------------------- -----------------------------------------------------------------
* Chief Executive Officer and Principal Executive
Thomas N. Tyrrell Officer
/s/John B. George Vice President of Finance, Treasurer and Secretary and Principal
John B. George Financial and Accounting Officer
* Director
Richard C. Lappin
* Director
David A. Stockman
* Director
David Blitzer
*By: /s/ John B. George
John B. George
Attorney-in-fact
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
following registrants has duly caused this Amendment No. 2 to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 10th day of January, 2000.
REPUBLIC TECHNOLOGIES INTERNATIONAL
HOLDINGS, LLC
By: /s/ John B. George
------------------------------
John B. George
Vice President of Finance
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the registration statement has been signed below by the following
persons in the capacities indicated on January 10, 2000.
SIGNATURE TITLE
- ----------------------------------------------- -----------------------------------------------------------------
* Chief Executive Officer and Principal Executive Officer; Director
Thomas N. Tyrrell of Republic Technologies International, Inc.**
/s/ John B. George Vice President of Finance, Treasurer and Secretary and Principal
John B. George Financial and Accounting Officer
* Director of Republic Technologies International, Inc.**
Richard C. Lappin
* Director of Republic Technologies International, Inc.**
Robert Friedman
* Director of Republic Technologies International, Inc.**
David A. Stockman
* Director of Republic Technologies International, Inc.**
David Blitzer
* Director of Republic Technologies International, Inc.**
Robert B. McKeon
* Director of Republic Technologies International, Inc.**
Thomas J. Campbell
* Director of Republic Technologies International, Inc.**
Lynn R. Williams
* Director of Republic Technologies International, Inc.**
Paul J. Wilhelm
Director of Republic Technologies International, Inc.**
Albert E. Ferrara, Jr.
II-11
SIGNATURE TITLE
- ----------------------------------------------- -----------------------------------------------------------------
Director of Republic Technologies International, Inc.**
Susumu Okushima
* Director of Republic Technologies International, Inc.**
Tadashi Takeuchi
*By: /s/ John B. George
John B. George
Attorney-in-fact
** Republic Technologies International, Inc. is the managing member of Republic
Technologies International Holdings, LLC.
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
following registrants has duly caused this Amendment No. 2 to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 10th day of January, 2000.
BLISS & LAUGHLIN, LLC
By: /s/ John B. George
-------------------------------
John B. George
Vice President of Finance
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the registration statement has been signed below by the following
persons in the capacities indicated on January 10, 2000.
SIGNATURE TITLE
- --------------------------------------------------- --------------------------------------------------------
* Chief Executive Officer and Principal Executive Officer;
Thomas N. Tyrrell Director of Republic Technologies International, Inc.**
/s/ John B. George Vice President of Finance, Treasurer and Secretary and
John B. George Principal Financial and Accounting Officer
* Director of Republic Technologies International, Inc.**
Richard C. Lappin
* Director of Republic Technologies International, Inc.**
Robert Friedman
* Director of Republic Technologies International, Inc.**
David A. Stockman
* Director of Republic Technologies International, Inc.**
David Blitzer
* Director of Republic Technologies International, Inc.**
Robert B. McKeon
* Director of Republic Technologies International, Inc.**
Thomas J. Campbell
* Director of Republic Technologies International, Inc.**
Lynn R. Williams
II-13
SIGNATURE TITLE
- --------------------------------------------------- --------------------------------------------------------
/s/ Paul J. Wilhelm Director of Republic Technologies International, Inc.**
Paul J. Wilhelm
Director of Republic Technologies International, Inc.**
Albert E. Ferrara, Jr.
Director of Republic Technologies International, Inc.**
Susumu Okushima
* Director of Republic Technologies International, Inc.**
Tadashi Takeuchi
*By:/s/ John B. George
John B. George
Attorney-in-fact
- ------------------
** Republic Technologies International, Inc. is the managing member of Republic
Technologies International Holdings, LLC, which is the sole member of
Republic Technologies International, LLC. Republic Technologies
International, LLC is the sole member of Bliss & Laughlin, LLC.
II-14
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
following registrants has duly caused this Amendment No. 2 to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 10th day of January, 2000.
NIMISHILLEN & TUSCARAWAS, LLC
By: /s/ John B. George
---------------------------------
John B. George
Vice President of Finance
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the registration statement has been signed below by the following
persons in the capacities indicated on January 10, 2000.
SIGNATURE TITLE
- ------------------------------------------ ---------------------------------------------------------
* Chief Executive Officer and Principal Executive Officer;
Thomas N. Tyrrell Director of Republic Technologies International, Inc.**
/s/ John B. George Vice President of Finance, Treasurer and Secretary and
John B. George Principal Financial and Accounting Officer
* Director of Republic Technologies International, Inc.**
Richard C. Lappin
* Director of Republic Technologies International, Inc.**
Robert Friedman
* Director of Republic Technologies International, Inc.**
David A. Stockman
* Director of Republic Technologies International, Inc.**
David Blitzer
* Director of Republic Technologies International, Inc.**
Robert B. McKeon
* Director of Republic Technologies International, Inc.**
Thomas J. Campbell
II-15
SIGNATURE TITLE
- ------------------------------------------ ---------------------------------------------------------
* Director of Republic Technologies International, Inc.**
Lynn R. Williams
* Director of Republic Technologies International, Inc.**
Paul J. Wilhelm
Director of Republic Technologies International, Inc.**
Albert E. Ferrara, Jr.
Director of Republic Technologies International, Inc.**
Susumu Okushima
* Director of Republic Technologies International, Inc.**
Tadashi Takeuchi
*By: /s/ John B. George
John B. George
Attorney-in-fact
- ------------------
** Republic Technologies International, Inc. is the managing member of Republic
Technologies International Holdings, LLC, which is the sole member of
Republic Technologies International, LLC. Republic Technologies
International, LLC is the sole member of Nimishillen & Tuscarawas, LLC.
II-16
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
following registrants has duly caused this Amendment No. 2 to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 10th day of January, 2000.
CANADIAN DRAWN STEEL COMPANY, INC.
By: /s/ John B. George
-------------------------------
John B. George
Vice President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the registration statement has been signed below by the following
persons in the capacities indicated on January 10, 2000.
SIGNATURE TITLE
- ------------------------------------------ --------------------------------------------------------
* President and Principal Executive Officer
John G. Asimou
/s/ John B. George Vice President and Principal Financial and Accounting
John B. George Officer
* Director of Republic Technologies International, Inc.**
Richard C. Lappin
* Director of Republic Technologies International, Inc.**
Robert Friedman
* Director of Republic Technologies International, Inc.**
David Stockman
* Director of Republic Technologies International, Inc.**
David Blitzer
* Director of Republic Technologies International, Inc.**
Robert B. McKeon
* Director of Republic Technologies International, Inc.**
Thomas J. Campbell
* Director of Republic Technologies International, Inc.**
Lynn R. Williams
II-17
SIGNATURE TITLE
- ------------------------------------------ --------------------------------------------------------
* Director of Republic Technologies International, Inc.**
Paul J. Wilhelm
Director of Republic Technologies International, Inc.**
Albert E. Ferrara, Jr.
Director of Republic Technologies International, Inc.**
Susumu Okushima
* Director of Republic Technologies International, Inc.**
Tadashi Takeuchi
*By: /s/ John B. George
John B. George
Attorney-in-fact
- ------------------
** Republic Technologies International, Inc. is the managing member of Republic
Technologies International Holdings, LLC, which is the sole member of
Republic Technologies International, LLC. Republic Technologies
International, LLC has signing authority for Canadian Drawn Steel Company,
Inc. pursuant to the Canadian Drawn Steel Company, Inc. Shareholder
Agreement.
II-18
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
1.1 -- Purchase Agreement, dated as of August 6, 1999, among Republic Technologies International, LLC
("Republic Technologies"), RTI Capital Corp. ("RTI CapCo"), Republic Technologies International,
Inc. ("RTI"), Nimishillen & Tuscarawas, LLC ("N&T"), Bliss & Laughlin, LLC ("B&L"), Canadian Drawn
Steel Company, Inc. ("CDSC"), Republic Technologies International Holdings, LLC ("Holdings"),
Chase Securities Inc. ("Chase"), Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and
BancBoston Robertson Stephens Inc. ("BBRS"). *
2.1 -- Master Restructuring Agreement, dated as of August 13, 1999, among RTI, RES Holding Corporation
("RES Holding"), Republic Engineered Steels, Inc., Blackstone Capital Partners II Merchant Banking
Fund L.P. ("BCP II"), Blackstone Offshore Capital Partners II L.P. ("BOCP II"), Blackstone Family
Investment Partnership II L.P. ("BFIP II"), The Veritas Capital Fund L.P. ("Veritas Fund"), HVR
Holdings, L.L.C. ("HRV"), USX Corporation ("USX"), Kobe Steel, Ltd. ("Kobe"), Kobe Delaware Inc.
("Kobe Delaware"), USS Lorain Holding Company, Inc. ("USS Lorain"), USX RTI Holdings, Inc. ("USX
Holdings"), Kobe/Lorain Inc. ("Kobe/Lorain"), Kobe RTI Holdings, Inc. ("Kobe Holdings"), Holdings,
Republic Technologies, Lorain Tubular Company, LLC ("Lorain") and USS/Kobe Steel Company
("USS/Kobe SteelCo"). *
3.1 -- Limited Liability Company Agreement of Republic Technologies *
3.2 -- Certificate of Incorporation of RTI CapCo *
3.3 -- By-laws of RTI CapCo *
3.4 -- Limited Liability Company Agreement of Holdings *
3.5 -- Limited Liability Company Agreement of B&L *
3.6 -- Limited Liability Company Agreement of N&T *
3.7 -- Certificate of Incorporation of CDSC *
3.8 -- By-laws of CDSC **
4.1 -- Indenture, dated as of August 13, 1999, among Republic Technologies, RTI CapCo, Holdings, N&T,
B&L, CDSC and United States Trust Company of New York, as Trustee. *
4.2 -- Form of 13 3/4% Senior Secured Note due 2009 (included in Exhibit 4.1)
4.3 -- Form of 13 3/4% Senior Secured Note due 2009, Series B (included in Exhibit 4.1)
4.4 -- Notes Exchange and Registration Rights Agreement, dated as of August 13, 1999, among Republic
Technologies, RTI CapCo, Holdings, N&T, B&L, CDSC, Chase, DLJ and BBRS. *
4.5 -- Security Agreement, dated as of August 13, 1999, among Republic Technologies, RTI CapCo, Holdings,
N&T, B&L, CDSC and United States Trust Company of New York, as Collateral Agent. *
4.6 -- Mortgage, Assignment of Leases, Security Agreement and Fixture Filing, dated as of August 13,
1999, by Republic Technologies to United States Trust Company of New York, as Mortgagee. *
4.7 -- Master Pledge Agreement, dated as of August 13, 1999, among Republic Technologies, RTI CapCo,
Holdings, N&T, B&L, CDSC and United States Trust Company of New York, as Collateral Agent. *
4.8 -- Amended and Restated Intercreditor and Subordination Agreement, dated as of August 13, 1999, among
United States Trust Company of New York, as Collateral Agent, United States Trust Company of New
York, as Trustee, the Pennsylvania Lenders (as defined therein), BankBoston, N.A., as Agent,
Holdings, Republic Technologies, RTI CapCo, N&T, B&L and CDSC. *
II-19
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
4.9 -- Pledge Intercreditor Agreement, dated as of August 13, 1999, among the Secured Parties (defined
therein) and United States Trust Company of New York, as Collateral Agent. *
5 -- Opinion of Simpson Thacher & Bartlett **
10.1 -- Revolving Credit Agreement, dated as of August 13, 1999, among Republic Technologies, BankBoston,
N.A, as Administrative Agent and Co-Book Manager, Bank of America, N.A., as Syndication Agent and
Co-Book Manager, The Chase Manhattan Bank, as Documentation Agent and Co-Book Manager, the Lending
Institutions Named Therein, and BancBoston Robertson Stephens Inc. and Bank of America, N.A., as
Co-Arrangers. *
10.2 -- Security Agreement, dated as of August 13, 1999, among Republic Technologies, Holdings, RTI CapCo,
N&T, B&L, CDSC and BankBoston, N.A. *
10.3 -- Trademark Collateral Security and Pledge Agreement, dated as of August 13, 1999, between Republic
Technologies and BankBoston, N.A. *
10.4 -- Patent Collateral Security and Pledge Agreement, dated as of August 13, 1999, between Republic
Technologies and BankBoston, N.A. *
10.5 -- Canadian Security Agreement, dated as of August 13, 1999, between CDSC and BankBoston, N.A. *
10.6 -- Assignment of Intellectual Property, dated as of August 13, 1999, by CDSC to BankBoston, N.A. *
10.7 -- Open-End Mortgage, Security Agreement, Assignment of Rents, Income and Proceeds, dated as of
August 13, 1999, from Republic Technologies to BankBoston, N.A. *
10.8 -- Amended and Restated Equityholders Agreement, dated as of August 13, 1999, among BCP II, BOCP II,
BFIP II, Veritas Fund, Veritas Capital, L.L.C., KDJ, L.L.C., BRW Steel Holdings, L.P., BRW Steel
Holdings II, L.P., BRW Steel Offshore Holdings, L.P., RTI, RES Holding, Republic Technologies,
USX, USX Holdings, Kobe Delaware, Kobe, Kobe Holdings, HVR, Sumitomo Corporation of America,
FirstEnergy Services Corp., Triumph Capital Investors II, L.P., TCI-II Investors, L.P., First
Dominion Capital L.L.C., TCW Leveraged Income Trust, L.P., TCW Leveraged Income Trust II, L.P.,
TCW Shared Opportunity Fund, L.P., Shared Opportunity Fund IIB, L.L.C., Shared Opportunity Fund
III, L.L.C. and the other equityholders named therein. *
10.9 -- Round Supply Agreement, dated as of August 13, 1999, between Republic Technologies and USX. ***
10.10 -- Master Energy Services and Supply Agreement, dated as of August 13, 1999, between Republic
Technologies and FirstEnergy Services Corp. *
10.11 -- Transition, Administrative and Utilities Services Agreement, dated as of August 13, 1999, between
Lorain Tubular Company, LLC and Republic Technologies. *
10.12 -- Letter Agreement, dated August 13, 1999, between Republic Technologies and
USX. *
10.13 -- Letter Agreement, dated August 13, 1999, among Republic Technologies, Lorain Tubular Company, LLC,
Kobe and USX. *
10.14 -- Master Agreement dated July 18, 1994, by and among the Commonwealth of Pennsylvania, acting by and
through the Department of Commerce, the Pennsylvania Industrial Development Authority, the
Commonwealth of Pennsylvania, acting by and through the Department of Community Affairs, the
Johnstown Industrial Development Corporation, the County of Cambria, the City of Johnstown,
Republic Technologies and BRW Steel Corporation-Johnstown. (1)
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EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
10.15 -- Amendment No. 1 to the Master Agreement dated September 21, 1994 among Commonwealth of
Pennsylvania, acting by and through the Department of Commerce, the Pennsylvania Industrial
Development Authority, the Commonwealth of Pennsylvania, acting by and through the Department of
Community Affairs, the Johnstown Industrial Development Corporation, the County of Cambria, the
City of Johnstown and Republic Technologies. (1)
10.16 -- Amendment No. 2 to the Master Agreement dated August 1999 among the Johnstown Industrial
Development Corporation, the County of Cambria, the City of Johnstown and Republic Technologies. *
10.17 -- Economic Development Partnership Loan Agreement dated September 21, 1994 between the City of
Johnstown and Republic Technologies. (1)
10.18 -- Economic Development Set-Aside Loan Agreement dated July 6, 1995 between the City of Johnstown and
Republic Technologies. (1)
10.19 -- Economic Development Set-Aside Loan Agreement dated July 6, 1995 between the City of Johnstown and
Republic Technologies. (1)
10.20 -- Section 108 Loan Agreement dated July 20, 1994 among the City of Johnstown, the County of Cambria
and Republic Technologies. (1)
10.21 -- Amendment No. 1 dated August 1994 to Section 108 Loan Agreement among the City of Johnstown, the
County of Cambria and Republic Technologies. (1)
10.22 -- Community Development Block Grant Loan Agreement dated November 3, 1995 between Cambria County and
Republic Technologies. (1)
10.23 -- BID Loan Agreement dated March 12, 1996 between Johnstown Industrial Development Corporation and
Republic Technologies. (1)
10.24 -- Loan Agreement dated December 1, 1998 between Development Authority of Cartersville and B&L. (2)
10.25 -- Trust Indenture dated as of October 1, 1994 between BankOne, Columbus, N.A. ("BankOne") and the
Ohio Water Development Authority (the "Authority"). (3)
10.26 -- Trust Indenture dated as of June 1, 1996 between BankOne and the Authority. (4)
10.27 -- Loan Agreement dated as of October 1, 1994 between Republic Technologies and the Authority. (3)
10.28 -- Loan Agreement dated as of June 1, 1996 between Republic Technologies and the Authority. (4)
10.29 -- Project Note dated October 1, 1994 by Republic Technologies to the Trustee. (3)
10.30 -- Project Note dated June 1, 1996 by Republic Technologies to the Trustee. (4)
10.31 -- Project Bond dated October 1, 1994 issued by the Authority. (3)
10.32 -- Project Bond dated June 1, 1996 issued by the Authority. (4)
10.33 -- Participation Agreement dated as of August 13, 1999 between Republic Technologies and USX. *
10.34 -- Employment Agreement, dated October 1, 1998, between Republic Technologies and Thomas N. Tyrrell.
(5)
10.35 -- Employment Agreement, dated October 1, 1998, between Republic Technologies and Joseph Lapinsky.
(5)
10.36 -- Employment Agreement, dated October 1, 1998, between Republic Technologies and Robert L. Meyer.
(5)
10.37 -- Employment Agreement, dated October 1, 1998, between Republic Technologies and John Asimou. (5)
10.38 -- Employment Agreement, dated July 1, 1999, between Republic Technologies and George F. Babcoke. *
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EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
10.39 -- Master Collective Bargaining Agreement dated as of September 30, 1998 among Republic Technologies,
RTI and the United Steel Workers of America. *
10.40 -- 1999 Settlement Agreement, dated as of August 2, 1999 between BarTech, RESI, Republic Technologies
and the United Steelworkers of America. *
10.41 -- Agreement dated as of November 2, 1998 between Pension Benefit Guaranty Corporation and RES
Holding. *
10.42 -- Transaction and Monitoring Fee Agreement dated August 13, 1999 among Blackstone Management
Partners L.P., Veritas, USX, Kobe and Republic Technologies. *
12 -- Computation of Ratio of Earnings to Fixed Charges *
21 -- List of subsidiaries **
23.1 -- Consent of Simpson Thacher & Bartlett (to be included in the opinion filed as Exhibit 5)
23.2 -- Consents of Deloitte and Touche LLP **
23.3 -- Consent of KPMG LLP **
23.4 -- Consent of Ernst & Young LLP **
23.5 -- Consent of Arthur Andersen LLP **
24 -- Powers of Attorney *
25 -- Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of United States Trust
Company of New York, as Trustee *
99.1 -- Form of Letter of Transmittal *
99.2 -- Form of Notice of Guaranteed Delivery *
- ------------------
* Previously filed.
** Filed herewith.
*** Filed herewith (and confidential treatment request submitted under C.F.R.
Sections 200.80(b)(4), 200.83 and 230.406).
(1) Filed as exhibits to the Registration Statement on Form S-4 of Bar
Technologies Inc. (SEC Registration No. 333-4254) and incorporated by
reference and made a part hereof.
(2) Filed as exhibit to Annual Report on Form 10-K of Bliss & Laughlin
Industries Inc. for the fiscal year ended September 30, 1989 and
incorporated by reference and made a part hereof.
(3) Filed as exhibits to Quarterly Report on Form 10-Q of Republic Engineered
Steels, Inc. for the quarter ended September 30, 1994 and incorporated by
reference and made a part hereof.
(4) Filed as exhibits to Annual Report on Form 10-K of Republic Engineered
Steels, Inc. for the fiscal year ended June 30, 1996 and incorporated by
reference and made a part hereof.
(5) Filed as exhibits to Annual Report on Form 10-K of Bar Technologies Inc. for
the fiscal year ended January 2, 1999 and incorporated by reference and made
a part hereof.
II-22