<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the three month period ended October 3, 1998
Commission File Number: 333-04254
---------
BAR TECHNOLOGIES INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3753384
- - ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5700 LOMBARDO CENTER DRIVE, SUITE 100
SEVEN HILLS, OHIO 44131 (216) 750-2100
- - ---------------------------------------- -------------------------------
(Address of principal executive offices) (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
---- ----
Number of shares outstanding of common stock as of October 31, 1998:
CLASS A COMMON STOCK, $0.001 PAR VALUE 204,458 SHARES
CLASS B COMMON STOCK, $0.001 PAR VALUE 536,829 SHARES
CLASS C COMMON STOCK, $0.001 PAR VALUE 536,865 SHARES
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BAR TECHNOLOGIES INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
------------------------------
<TABLE>
<CAPTION>
Item 1. Financial Statements
<S> <C>
Consolidated Statements of Income (Unaudited) for the three and nine month
periods ended October 3, 1998 and September 27, 1997.....................................3
Consolidated Balance Sheets as of October 3, 1998 (Unaudited) and
January 3 1998.........................................................................4-5
Consolidated Statement of Stockholders' Equity (Deficit) (Unaudited) for
the nine month period ended October 3, 1998..............................................6
Consolidated Statements of Cash Flows (Unaudited) for the nine month
periods ended October 3, 1998 and September 27, 1997.....................................7
Notes to Consolidated Financial Statements............................................8-11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.....................................12-16
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.......................................................................17
Item 2. Changes in Securities...................................................................17
Item 3. Defaults Upon Senior Securities.........................................................17
Item 4. Submission of Matters to a Vote of Security Holders.....................................17
Item 5. Other Information.......................................................................17
Item 6. Exhibits and Reports on Form 8-K........................................................18
Signatures..............................................................................19
</TABLE>
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BAR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTH PERIODS ENDED
OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(In thousands of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
---------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Net sales $ 60,685 $ 64,945 $ 222,274 $ 180,432
Cost of sales 59,631 60,061 210,205 176,056
Depreciation and amortization 1,372 1,246 4,290 3,746
Selling, general and administrative
expenses 4,714 4,376 15,046 12,457
------- ------- ------- --------
Loss from operations (5,032) (738) (7,267) (11,827)
Interest expense, net 6,890 5,797 20,077 17,521
Other income (expense), net 781 (1) 1,049 768
------- ------- ------- --------
Loss before provision for income
taxes (11,141) (6,536) (26,295) (28,580)
Provision (benefit) for income taxes 4 (95) 63 152
------- ------- ------- --------
Net loss (11,145) (6,441) (26,358) (28,732)
Preferred stock dividends 97 96 289 288
------- ------- ------- --------
Net loss applicable to common shares $(11,242) $ (6,537) $ (26,647) $ (29,020)
======= ======= ======= ========
Net loss per share - basic $ (8.80) $ (7.74) $ (20.85) $ (37.34)
======= ======= ======= ========
Net loss per share - diluted $ (8.80) $ (7.74) $ (20.85) $ (37.34)
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
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BAR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
<TABLE>
<CAPTION>
October 3, January 3,
1998 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,816 $ 3,391
Accounts receivable, less allowances of
$955 and $817, respectively 38,597 34,287
Inventories 66,601 58,277
Prepaid expenses 2,218 1,935
Restricted interest escrow -- 42
-------- --------
TOTAL CURRENT ASSETS 110,232 97,932
PROPERTY, PLANT & EQUIPMENT
Land and improvements 7,169 7,169
Buildings and improvements 17,751 18,209
Machinery and equipment 57,594 57,594
Construction-in-progress 17,190 4,037
-------- --------
TOTAL PROPERTY, PLANT & EQUIPMENT 99,706 87,009
Accumulated depreciation (11,385) (7,432)
-------- --------
NET PROPERTY, PLANT & EQUIPMENT 88,321 79,577
Goodwill, net of accumulated amortization
of $810 and $567, respectively 12,050 12,293
Restricted debt service fund 1,551 1,551
Other assets 12,792 14,325
-------- --------
TOTAL ASSETS $ 224,946 $ 205,678
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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BAR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
October 3, January 3,
1998 1998
--------------- --------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 53,524 $ 33,339
Accrued interest 1,784 3,605
Other accrued liabilities 18,553 14,178
Current maturities of long-term debt 2,159 3,033
Senior notes to be refinanced 87,618 ---
Revolving credit facility 79,000 53,650
-------- --------
TOTAL CURRENT LIABILITIES 242,638 107,805
Long-term debt 42,635 130,741
Deferred income taxes 4,997 5,047
Other long-term liabilities 4,968 4,964
-------- --------
TOTAL LIABILITIES 295,238 248,557
Redeemable Stock
Series A Preferred Stock $0.001 par value;
Authorized, 5,000 shares
Issued and outstanding, 1,100 shares 5,500 5,500
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 (142,708) (116,061)
Accumulated other comprehensive loss - foreign
currency translation adjustment (1,260) (494)
-------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (75,792) (48,379)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 224,946 $ 205,678
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
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BAR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTH PERIOD ENDED OCTOBER 3, 1998
(In thousands of dollars, except share information)
(Unaudited)
<TABLE>
<CAPTION>
Series B Class A Class B Class C
Preferred Stock Common Stock Common Stock Common Stock
----------------- ----------------- ----------------- -----------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 3, 1998 1 $ - 204,458 $ - 536,829 $ 1 536,865 $ 1
Net loss
Preferred stock dividend
Other comprehensive
income - foreign currency
translation adjustments,
net of tax of $0
Comprehensive income
------ ------ ------- ------ ------- ------ ------- ------
Balance, October 3, 1998 1 $ - 204,458 $ - 536,829 $ 1 536,865 $ 1
====== ====== ======= ====== ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Additional Accumulated Other
Paid-in Warrants Accumulated Comprehensive Comprehensive
Capital Outstanding Deficit Income(1) Income
---------- ----------- ----------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 3, 1998 $ 63,055 $ 5,119 $ (116,061) $ (494)
Net loss (26,358) $ (26,358)
Preferred stock dividend (289) (289)
Other comprehensive
income - foreign currency
translation adjustments,
net of tax of $0 (766) (766)
--------
Comprehensive income $ (27,413)
========
---------- ----------- ----------- --------
Balance, October 3, 1998 $ 63,055 $ 5,119 $ (142,708) $ (1,260)
========== =========== =========== =========
(1) - Represents foreign currency translation adjustments, net of applicable income taxes.
The accompanying notes are an integral part of these statements.
</TABLE>
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BAR TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
October 3, September 27,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (26,358) $ (28,732)
Adjustments to reconcile net cash
used by operating activities:
Depreciation and amortization 4,290 3,746
Amortization of original issue discount 1,021 920
Amortization of deferred financing cost 1,672 1,603
Increase in accounts receivable (4,846) (18,990)
(Increase) decrease in inventory (8,683) 5,860
(Increase) decrease in prepaid expenses (270) 1,455
Increase in accounts payable 20,451 10,953
Increase (decrease) in other current liabilities 2,732 (2,206)
Other (53) (384)
--------- --------
NET CASH USED BY OPERATING ACTIVITIES (10,044) (25,775)
--------- --------
Cash flows from investing activities
Capital expenditures (12,990) (2,365)
--------- --------
NET CASH USED BY INVESTING ACTIVITIES (12,990) (2,365)
--------- --------
Cash flows from financing activities
Net receipts (payments) under revolving credit agreement 25,350 (10,000)
Repayments of debt (2,383) (2,173)
Proceeds from issuance of debt --- 322
Proceeds from issuance of common stock, net of fees --- 29,350
Payments from bond interest escrow --- 6,096
Preferred stock dividends (289) (289)
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 23,306
22,678
--------- --------
Effect of exchange rate changes on cash (219) (73)
NET DECREASE IN CASH AND CASH EQUIVALENTS (575) (4,907)
Cash and cash equivalents-beginning of period 3,391 7,034
--------- --------
Cash and cash equivalents-end of period $ 2,816 $ 2,127
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 18,208 $ 10,011
========= ========
Cash paid for income taxes, net $ 181 $ 260
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
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BAR TECHNOLOGIES INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands of dollars, except share information)
1. BASIS OF PRESENTATION
The consolidated financial statements and other financial information included
herein have been prepared by Bar Technologies Inc. ("BarTech") and are
unaudited. Certain information and footnote disclosures normally prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. Although management believes that all adjustments, including normal
recurring adjustments, necessary for a fair presentation have been made, interim
periods are not necessarily indicative of the results of operations for a full
year. As such, these financial statements should be read in conjunction with
audited financial statements and notes thereto for the fiscal year ended January
3, 1998, included in the Company's Form 10-K, filed with the Securities and
Exchange Commission.
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.
The consolidated financial statements presented include the accounts of BarTech
and its wholly owned subsidiary Bliss & Laughlin Industries, Inc. ("BLI") after
elimination of intercompany accounts and transactions.
Since its formation, the Company has incurred substantial losses as a result of
the start up and ongoing modernization of its facilities and its general and
administrative expenses. Based on its fiscal 1998 plan, the Company believes
that its available cash, combined with borrowings available under its current
financing arrangements will be sufficient to meet its working capital
requirements, capital expenditures and debt servicing needs, however, no
assurance to this effect can be given.
In the event of a substantial delay in the implementation of the plans to
refinance a substantial portion of the Company's debt in order to facilitate a
business combination with Republic Engineered Steels, Inc. ("Republic")(see Note
10 for further discussion), the Company may need to borrow funds under its
Amended Agreement and Sub-Facility or, to the extent funds are 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 adversely effect the operational and financial flexibility of the
Company.
2. COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," ("SFAS No. 130"), which requires
companies to report all changes in equity during a period, except those
resulting from investments by owners, in a financial statement for the period in
which they are recognized. The Company has chosen to disclose Comprehensive
Income, which encompasses net losses and foreign currency translation
adjustments, in the Consolidated Statement of Stockholders' Equity (Deficit).
3. 1997 EQUITY INVESTMENT AND REVOLVING CREDIT AGREEMENT
On September 11, 1997, the Company's principal owners, Blackstone Capital
Partners II Merchant Banking Fund and its affiliates ("Blackstone") and certain
affiliates of the successor to Veritas Capital Inc. ("Veritas"), purchased
536,865 shares of Class C non-voting common stock for $30,000.
Also in third quarter 1997, the Company and its commercial banks negotiated an
amendment to its existing $90,000 Revolving Credit Agreement (the "Amended
Agreement"). The Amended Agreement provides for the addition of a new revolving
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 $15,000 of additional borrowing capacity based on a higher
receivable and inventory advance rate than in the Revolving Credit Agreement.
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<PAGE> 9
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 $79,000 and $53,650 at
October 3 and January 3, 1998, respectively.
The Amended Agreement contains a number of covenants similar to those in the
Revolving Credit Agreement. Additionally, under the Amended Agreement, the
Company will be required to maintain a minimum Consolidated Interest Coverage
Ratio beginning with annualized results for the quarter ended October 3, 1998.
The Amended Agreement also contains provisions that will prohibit any
modifications of the Indenture Agreement dated April 2, 1996 to the Senior
Secured Notes in any manner adverse to the Lenders and that will limit the
Company's ability to refinance the Senior Notes without the consent of such
Lenders. The Company was in compliance with its covenants as of October 3, 1998.
4. SENIOR SECURED NOTES
The Company issued Senior Secured Notes ("Senior Notes") on April 2, 1996 in the
amount of $91,609. Interest on the Senior Notes is at 13-1/2% per annum and is
payable semi-annually. The Senior Notes are callable after three years, with the
exception noted below, at 106.75% in 1999 and 103.375% in 2000.
On or prior to April 1, 1999, the Company may, at its option, redeem up to an
aggregate of 35% of the principal amount of Senior Notes at a redemption price
equal to 113-1/2% of the principal amount plus accrued and unpaid interest, if
any, to the date of redemption; provided that not less than $55,000 aggregate
principal amount of Senior Notes would remain outstanding immediately after
giving effect to any such redemption.
The Senior Notes are fully and unconditionally guaranteed on a senior basis,
jointly and severally, by the Company's subsidiary, Bliss & Laughlin Industries
Inc. ("BLI") and its subsidiary, Canadian Drawn Steel Corporation ("CDSC"). Each
of the subsidiary guarantors is a wholly owned subsidiary of the Company. The
subsidiary guarantors comprise all of the direct and indirect subsidiaries of
the Company.
The Company's principal owners, Blackstone and Veritas intend to combine
Republic with the Company, both of which they control, subject to the
refinancing of a significant portion of the combined companies' debt.
Accordingly, the Company's Senior Notes have been classified as short-term in
the accompanying consolidated balance sheet at October 3, 1998.
5. CONDENSED FINANCIAL INFORMATION OF BLISS & LAUGHLIN INDUSTRIES INC.
The following is the unaudited condensed information of the subsidiary
guarantors on a combined basis. Separate financial statements and other
disclosures concerning the subsidiary guarantors are not presented because
management does not believe they are material to investors.
<TABLE>
<CAPTION>
October 3, January 3,
1998 1998
------------------- -------------------
<S> <C> <C>
Current assets $ 52,972 $ 56,948
Noncurrent assets 37,475 37,868
Current liabilities 36,747 43,180
Noncurrent liabilities 13,565 13,611
</TABLE>
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<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Net sales $ 36,739 $ 37,444 $ 125,535 $ 119,672
Gross profit 2,662 3,841 13,382 13,072
Operating income (loss) (74) (11) 4,327 2,684
Net income (loss) (349) (397) 2,876 1,083
</TABLE>
6. INVENTORIES
Inventory costs include material, labor and overhead. The components of
inventory were as follows:
<TABLE>
<CAPTION>
October 3, January 3,
1998 1998
----------------- -----------------
<S> <C> <C>
Raw materials $ 19,251 $ 14,569
Work-in-process 24,020 22,341
Finished goods 23,330 21,367
----------- --------
Total $ 66,601 $ 58,277
=========== ========
</TABLE>
7. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
October 3, January 3,
1998 1998
----------------- -----------------
<S> <C> <C>
Deferred financing costs, net of accumulated
amortization of $6,229 and $4,351 $ 7,310 $ 9,188
Deferred income taxes 1,214 1,214
Prepaid pension costs 2,948 2,930
Other 1,320 993
----------- --------
Total $ 12,792 $ 14,325
=========== ========
</TABLE>
8. NET LOSS PER SHARE
The weighted average number of common and common stock equivalent shares used in
the calculation of basic and diluted net loss per common share were 1,278,152
and 743,841 for both the three and nine month periods ended October 3, 1998 and
September 27, 1997, respectively. Securities totaling 137,416 shares at October
3, 1998 and September 27, 1997, were excluded from the diluted earnings per
share calculation due to their antidilutive effect.
9. ENVIRONMENTAL MATTERS
The domestic steel industry is subject to a broad range of Federal, state and
local environmental laws and regulations including those governing discharges
into the air and water, handling and disposal of solid and hazardous wastes, the
remediation of soil and ground water contaminated by petroleum products or
hazardous substances or wastes, and the health and safety of employees. The
Company has taken, and continues to take, into account the requirements of such
environmental laws and regulations in the conduct of its facilities and believes
that it is currently in substantial compliance with such material laws and
regulations. As is the case with most steel producers, the Company could incur
significant costs related to environmental compliance. To the extent the Company
might incur any substantial costs, these costs most likely would be incurred
over a number of years; however, no assurance can be given that future
regulatory actions regarding soil or ground water at the Company's facilities,
as well as continued compliance with environmental requirements, will not
require the Company to incur significant costs that may have a material adverse
effect on the Company's financial condition and results of operations.
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<PAGE> 11
The Company has sought to reduce the impact of costs arising from or related to
actual or potential environmental conditions at the Company's facilities caused
or created by Bethlehem Steel Corporation ("Bethlehem") or its predecessors in
title and attributable to the period in which the Bethlehem Bar, Rod & Wire
Division ("BRW Division") or its predecessors operated such facilities through
the Company's contractual agreements with Bethlehem. Pursuant to such
arrangements, Bethlehem has agreed to indemnify the Company for such costs by
limiting the Company's potential exposure to any such damages incurred (i)
through December 1996, to 50% of the first $2.0 million in damages, or $1.0
million, and (ii) thereafter, to 50% of the first $10.0 million of damages, or
$5.0 million in the aggregate. Although several investigations of past or
present environmental conditions at the Company's facilities have been conducted
by or on behalf of Bethlehem and certain regulatory agencies, the reports and
results of which have been made available to the Company, an in-depth,
environmental review of the Company'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 the Company. 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 the Company might be fully liable and
that may require the Company to incur significant costs that could have a
material adverse effect on the Company's financial condition and results of
operations.
Bethlehem is conducting remedial activities on a small portion of the Lackawanna
facility historically used for mill scale storage, which was identified by the
U. S. Environmental Protection Agency (the "EPA") pursuant to an Administrative
Order on Consent issued August 1990 as requiring certain corrective action.
Bethlehem currently awaits approval of the Remedial Work Plan for the former
mill scale storage area submitted to the EPA in September 1994. Bethlehem is
ultimately liable for compliance with the Administrative Order on Consent and
the Company believes that Bethlehem is likely to fulfill these obligations,
although there can be no assurance such will occur.
In August 1995, BLI received a request for information from the EPA pursuant to
section 104(e) of CERCLA with respect to a federal investigation and potential
remediation of two hazardous waste treatment sites in Kansas City, Kansas and
Kansas City, Missouri. In 1985, BLI shipped ten capacitors from its Harvey ,
Illinois facility to these sites for disposal. The capacitors held approximately
88 gallons of oil that may have contained polychlorinated biphenyls. At this
time, BLI has not received any further correspondence from the EPA and has not
been named as a potentially responsible party under CERCLA at either site;
however, there can be no assurance at this time that further action by the EPA
will not occur. The Company has not estimated the amount of liability it may
incur in connection with this disposal. The Company understands that the EPA has
identified approximately 1,300 customers of the treatment sites, which operated
over a period of several years. While no assurances can be given, the Company
does not believe that BLI's liability relating to these sites will have a
material adverse effect on the Company's financial condition and results of
operations.
Various Federal, state and local laws, regulations and ordinances govern the
removal, encapsulation or disturbance of asbestos containing materials ("ACMs").
Such laws and regulations may impose liability for the release of ACMs and may
provide for third parties to seek recovery from owners or operators of
facilities at which ACMs were or are located for personal injury associated with
exposure to ACMs. The Company is aware of the presence of ACMs at its
facilities, but it believes that such materials are in acceptable condition at
this time. The Company believes 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, although there can be no assurance with respect thereto.
The Company has the necessary environmental permits for the construction and
operation of its business.
Canadian Drawn Steel Company, Inc. ("CDSC"), BLI's Canadian subsidiary, is also
subject to Canadian federal, provincial, regional and municipal environmental
laws and regulations. BLI believes that it is currently in substantial
compliance with all applicable material environmental laws and regulations and
does not anticipate any substantial additional capital expenditures for
environmental control facilities in the near future. However, there can be no
assurance that the Company will not be required to incur significant costs that
could have a material adverse effect on the Company's financial condition and
results of operations.
Some of the steel processing operations presently conducted by Bliss & Laughlin
Steel Company ("BLSC"), a wholly owned subsidiary of BLI, commenced over 100
years ago by predecessors of BLSC and included properties which over the years
were sold by BLSC'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 BLI in the future based upon the
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<PAGE> 12
current property ownership of BLI and by historical operations by its
predecessors. However, BLI has received an indemnification from the former owner
and operator of such properties for certain environmental claims or liabilities
relating to activities at BLI's Harvey and Batavia, Illinois and Medina, Ohio
properties prior to October 23, 1984, when BLSC succeeded to ownership of such
properties, and for certain environmental claims or liabilities relating to
properties that were sold by BLSC'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 the Company might be fully liable and that may require the Company to
incur significant costs that could have a material adverse effect on the
Company's financial condition and results of operations.
While the Company believes that the foregoing environmental matters will not,
individually or in the aggregate have a material adverse impact on the Company's
financial condition or results of operations, or on the Company's competitive
position with respect to other steelmakers that are subject to the same
environmental requirements, there can be no assurance to that effect.
10. PROPOSED MERGER
The Company's principal owners, Blackstone and Veritas, serving as general
partners for limited partnerships, acquired Republic in a tender offer
completed September 8, 1998.
Blackstone and Veritas intend to combine Republic with Bar Technologies Inc.,
both of which they control, subject to the refinancing of a significant portion
of the combined companies' debt and accordingly, the Company's Senior Notes have
been classified as short-term in the accompanying consolidated balance sheet at
October 3, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- - --------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Following is management's discussion and analysis of financial condition, which
provides information with respect to the results of operations of the Company
for the three and nine month periods ended October 3, 1998 and September 27,
1997. The discussion should be read in connection with the information in the
Unaudited Consolidated Financial Statements and the notes pertaining thereto.
OVERVIEW
The Company acquired certain steelmaking and bar rolling assets from the former
Bar, Rod and Wire Division of Bethlehem Steel Corporation ("Bethlehem") in
September 1994. Pursuant to its modernization and expansion plan, the Company
restarted operations at its Lackawanna, New York hot bar rolling mill in
February 1996 and commissioned its continuous caster and restarted its melt shop
at its Franklin, Pennsylvania facility in August 1996.
In April 1996, the Company completed a recapitalization that resulted in the
issuance of $91.6 million in aggregate principal amount of 13 1/2% Senior Notes
due 2001 for proceeds of approximately $90.0 million. At the same time, the
Company's principal owners, Blackstone Capital Partners II Merchant Banking Fund
L. P. and its affiliates ("Blackstone") purchased 536,829 shares of Class B
common stock of the Company for $30.0 million. In addition, the Company also
entered into a senior revolving credit agreement ("Revolving Credit Agreement")
which was subsequently amended in September 1997, which provided for an initial
aggregate principal amount of $90.0 million. Subsequent amendments ("Amended
Agreement") to this facility provided the Company with an additional
sub-facility up to $15.0 million and amended certain portions of the agreement.
The Amended Agreement expires on September 1, 1999. The original maturity date
of the Revolving Credit Agreement remains April 2, 2000. Also in September 1997,
Blackstone and certain affiliates of the successor to Veritas Capital Inc.,
purchased 536,865 shares of Class C non-voting common stock for $30.0 million.
The Company's principal owners, Blackstone and Veritas, serving as general
partners for limited partnerships, acquired Republic Engineered Steels, Inc.
in a tender offer completed September 8, 1998. Blackstone and Veritas intend to
combine Republic with Bar Technologies Inc., both of which they control, subject
to the refinancing of a significant portion of the combined companies' debt.
12
<PAGE> 13
RESULTS OF OPERATIONS
During first quarter 1997, the Company began the transition from initial
operational and organizational start-up activities to a focused commercial
effort. Since first quarter 1997, the Company has begun to receive
qualifications from certain Tier I and II suppliers to the U.S. automotive
market. As a result of these qualifications, the Company has experienced a shift
of its product mix from lower to higher margins and product grades. This
qualification process will continue throughout the next one to three years,
depending on the length of the customer qualification process and the Company's
ability to meet the particular customer qualification standards.
On August 18, 1998, the Company's quality management system was certified as
QS-9000 compliant, ISO 9002 registered. The registration covers the Company's
Lackawanna, New York rolling operations and supporting corporate functions
located in Seven Hills, Ohio and Johnstown, Pennsylvania.
THREE MONTHS ENDED OCTOBER 3, 1998 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 27, 1997
The Company recorded net sales of $60.7 million for the three months ended
October 3, 1998, compared with $64.9 million for the comparable prior year
period. The $4.2 million, or 6.5%, decrease for third quarter 1998 was due to a
decrease in shipping volume reflecting a general weakening in demand within the
steel industry. Factors contributing to the change in market demands include
general economic conditions, domestic and foreign competition among producers,
the General Motors' strike and customer inventory corrections, among others.
Cost of sales was $59.6 million, or 98.2% of net sales, for the three months
ended October 3, 1998, as compared with $60.1 million, or 92.6% of net sales,
for the comparable prior year period. The increase in cost of sales as a
percentage of net sales reflects production outages experienced at the Company's
Lackawanna, New York facility during the third quarter 1998 due to the
installation of a new rolling mill electrical control system. The actual
installation period combined with a start-up phase resulted in 17 lost
production days. In addition, the Franklin, Pennsylvania facility experienced a
5 day production outage as the result of a caster fire during third quarter
1998.
As a result of the above factors, the Company recorded gross profit of $1.1
million, or 1.8% of sales, for the three months ended October 3, 1998, compared
with gross profit of $4.8 million, or 7.4% of sales, for the comparable prior
year period.
The Company incurred selling, general and administrative expenses of $4.7
million for the three months ended October 3, 1998, or 7.7% of net sales, as
compared with $4.4 million, or 6.8% of net sales, for the comparable prior year
period. The increase in selling, general and administrative expenses as a
percentage of net sales is due to the fixed nature of the majority of these
expenses and the decrease in net sales. In addition, the Company incurred
certain non-recurring charges during the third quarter 1998 related to costs
associated with the anticipated merger of the Company with Republic Engineered
Steels, Inc.
Interest expense, net, increased to $6.9 million for the three months ended
October 3, 1998, as compared with interest expense, net, of $5.8 million for the
comparable prior year period. The $1.1 million, or 19.0%, increase for the three
month period, is primarily attributable to higher average amounts borrowed under
the revolving credit facility.
The change in the provision for income taxes to a net expense of $4 thousand in
the third quarter 1998 from a net benefit for the comparable prior year period
was primarily the result of a provision for foreign taxes related to the
Company's Canadian subsidiary.
NINE MONTHS ENDED OCTOBER 3, 1998 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 27, 1997
The Company recorded net sales of $222.3 million for the nine months ended
October 3, 1998, as compared with net sales of $180.4 million for the comparable
prior year period. The $41.9 million, or 23.2%, increase for the first nine
months of fiscal 1998 is largely due to an increase in hot rolled bar shipments
to outside customers and to an increase in the sales mix toward higher price per
unit products. Offsetting this year-to-date increase was a downturn in net sales
during the third quarter 1998 as the Company experienced a weakening of demand
for both hot-rolled bar and cold-finished steel. The Company believes that the
factors that appear to be affecting demand include, but are not limited to,
general economic conditions, consumer confidence and competition and that these
factors will continue to negatively affect net sales through the end of its
fiscal year.
13
<PAGE> 14
Cost of sales was $210.2 million, or 94.6% of net sales, for the nine months
ended October 3, 1998, as compared with $176.1 million, or 97.6% of net sales,
for the comparable prior year period. This improvement in cost of sales as a
percentage of net sales principally reflects lower unit inventory costs
resulting from the efficiencies derived from increased production levels. As a
result, the Company experienced gross profit of $12.1 million for the nine
months ended October 3, 1998, compared with a gross profit of $4.3 million for
the comparable prior year period.
The Company incurred selling, general and administrative expenses of $15.0
million, or 6.7% of net sales, for the nine months ended October 3, 1998, as
compared with $12.5 million, or 6.9% of net sales, for the comparable prior year
period. As selling, general and administrative expenses are relatively fixed in
nature, the increase of $2.5 million is primarily due to higher wage and salary
costs in connection with the growth of the Company during the current year.
Interest expense, net, increased to $20.1 million for the nine months ended
October 3, 1998, as compared with interest expense, net, of $17.5 million for
the comparable prior year period. The $2.6 million, or 14.9%, increase for the
nine month period is primarily attributable to higher average amounts borrowed
under the revolving credit facility.
The provision for income taxes for the nine month period ended October 3, 1998
was largely offset by a tax benefit recorded. The provision for income taxes for
the comparable period in the prior year consisted primarily of a provision for
foreign taxes related to the Company's Canadian subsidiary.
IMPACT OF INFLATION AND CHANGING PRICES
The Company does not believe that inflation has or will have a significant
impact on its results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity consist of available cash and cash
equivalents and borrowings under its revolving credit facility. At October 3,
1998, the Company had liquidity available from cash and cash equivalents plus
availability under its revolving credit facility totaling approximately $5.2
million.
Borrowings outstanding under the $90 million amended revolving credit agreement
("Amended Agreement") including amounts outstanding under its Sub-Facility, were
$79.0 million at October 3, 1998, compared with $53.7 million at January 3,
1998. Weighted average interest rates on borrowings under the Amended Agreement
and the Sub-Facility at October 3, 1998 were 9.19% and 12.00%, respectively. At
January 3, 1998, weighted average interest rates under the Amended Agreement and
the Sub-Facility were 8.98% and 11.00%, respectively.
The Company has various financing arrangements in place in addition to its
Amended Agreement that are committed to funding its working capital and
corporate requirements. The Company had an aggregate amount of approximately
$132.4 million of borrowings outstanding under these committed agreements.
Cash used by operating activities decreased to $10.2 million for the nine month
period ended October 3, 1998, from the $25.8 million used in the comparable
period of the prior year. Amounts for the prior year comparable period evidenced
the beginning of the Company's transition from start-up activities to a focused
commercial effort. Accounts payable at October 3, 1998 increased $20.5 million
from their level at January 3, 1998, as the Company satisfied its debt service
costs and provided for working capital requirements and capital expenditures
during this period. The $8.7 million increase in inventory at October 3, 1998
from its level at January 3, 1998, was partially the result of lower than normal
inventory levels at year-end. Also contributing to the increase in inventory
levels was the decrease in the Company's net sales during the third quarter
1998.
There are no restrictions on the ability of the Company's wholly owned
subsidiary, Bliss & Laughlin Industries Inc. to transfer funds to the Company.
The Company's principal owners, Blackstone and Veritas, serving as general
partners for limited partnerships, acquired Republic in a tender offer completed
September 8, 1998. Blackstone and Veritas intend to combine Republic with Bar
Technologies Inc., both of which they control, subject to the refinancing of a
significant portion of the combined companies' debt.
14
<PAGE> 15
The Company believes that its available cash, combined with borrowings available
under its current financing arrangements will be sufficient to meet its working
capital requirements, capital expenditures and debt servicing needs, however, no
assurance to this effect can be given. In the event of a substantial delay in
the implementation of the plans to refinance a substantial portion of the
Company's debt in order to facilitate a business combination with Republic, the
Company may need to borrow funds under its Amended Agreement and Sub-Facility
or, to the extent funds are not available thereunder, to obtain additional
financing to meet its cash flow requirements. The Company is already highly
leveraged. Restrictive covenants included in its existing 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 adversely
effect the operational and financial flexibility of the Company.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Many computer systems will experience problems handling dates beyond the year
1999. Certain of the Company's computer systems will be affected by the Year
2000 issue. The Company is currently in the process of replacing its existing
computer systems in an effort to improve its processes related to financial and
operational information. These initiatives include technology which will be Year
2000 compliant when implemented. Although the plans to combine the Company with
Republic (see Note 10) have modified the Company's Year 2000 compliance
strategy, the Company is anticipating it will be compliant in mid 1999, but it
cautions that it might encounter unexpected delays which could delay full
compliance beyond that date. Year 2000 contingency plans are currently being
formulated by management.
Maintenance or modification costs will be expenses as incurred, while the cost
of new software will be capitalized and amortized over the software's useful
life. The cost of the system's upgrade is estimated at $1.6 million to $2.0
million and is being funded through operating cash flows. During the three
months ended October 3, 1998, the Company incurred costs associated with the
systems upgrade project. Certain of these costs were included in selling,
general and administrative expenses for this period, however, they were not
considered to be significant.
The Company is currently assessing the impact of the Year 2000 issue as it
relates to its suppliers and customers. There can be no assurance that the
systems of other companies on which the Company's business relies will be
converted timely, however, the Company does not believe at this time that the
Year 2000 issue related to its suppliers and customers will have a material
adverse effect on its future operating results.
Statements included in this filing with the Securities and Exchange Commission
(including those portions of Management's Discussion and Analysis that refer to
the future) may contain forward-looking statements that are not historical facts
but refer to management's intentions, beliefs, or expectations for the future.
It is important to note that the Company's actual results could differ
materially from those projected in such forward-looking statements. Certain
factors that could cause actual results to differ from those in such
forward-looking statements include, but are not limited to, the following: i.)
any substantial delay in the implementation of the Company's plans or
substantial unanticipated costs associated with its plans for a successful
merger of the Company with Republic Engineered Steels, Inc.; ii.) the ability of
the Company to sell its products in its targeted markets at gross margins
necessary to produce and maintain positive operating income. The Company's
success is dependent on its ability to increase its sales, maintain high product
quality and provide for customer service programs; iii.) the Company's ability
to obtain favorable financing within or outside the context of a merger; and
iv.) the Company is subject to a variety of competitive factors such as pricing,
the financial strength of its competitors and the Company's ability to establish
a favorable position in the steelmaking and bar rolling industry. The Company's
competitive position could also be adversely affected by any consolidation of
its competition in the steelmaking industry.
In the event of a substantial delay in the implementation of its plans or
substantial unanticipated costs associated with the implementation of its plans,
the Company may need to borrow funds under the Credit Agreement or, to the
extent funds are 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 adversely effect the
operational and financial flexibility of the Company.
15
<PAGE> 16
RECENT ACCOUNTING PRONOUNCEMENTS
During 1997 and early 1998, two accounting pronouncements were issued by the
Financial Accounting Standards Board that apply to the Company: Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of
an Enterprise and Related Information," and SFAS No. 132, "Employers' Disclosure
About Pensions and Other Postretirement Benefits." Both new standards are
effective for the Company's 1998 fiscal year. SFAS No. 131 introduces a new
model for segment reporting called the "management approach". The management
approach is based on the way the chief operating decision-maker organizes
segments within a company for making operating decisions and assessing
performance. SFAS No. 132 standardizes disclosures and requires additional
disclosures for pension and postretirement benefits. Implementation of the new
pronouncements is not expected to have a significant effect on the Company's
disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This Statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999. Currently, this pronouncement is not applicable to the
operations of the Company.
16
<PAGE> 17
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
- - --------------------------
The Company and its subsidiaries are occasionally involved in various legal
proceedings occurring in the ordinary course of business. It is the opinion of
management, after consultation with legal counsel, that these matters will not
materially affect the Company's consolidated financial position or results of
operations.
ITEM 2. CHANGES IN SECURITIES
- - ------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- - ----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - ------------------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
- - --------------------------
In anticipation of the completion of the combination (the "Combination") of the
Company and Republic Engineered Steels, Inc. ("Republic"), a consolidation plan
(the "Consolidation Plan") has been developed which will build on initiatives
already under way at Bar Tech and Republic. The Consolidation Plan is expected
to create a more efficient, higher quality base of production facilities
operated by a smaller and more flexible labor force under new labor agreements.
The Consolidation Plan will focus on reducing operating costs primarily through
headcount reductions and a multi-year capital investment program expected to
exceed $300 million with the objective of rationalizing and modernizing the
production facilities of the combined entity. To the extent that the Combination
is delayed, the timing for full implementation of the Consolidation Plan may be
extended and its cost may increase. There are several initiatives which the
Company expects to pursue regardless of the timing of the Combination and the
implementation of the Consolidation Plan. Depending on when the Combination is
completed, measures which the Company may take prior to the Combination may
include closure of certain of the Company's mills, which closures may be coupled
with capital investments in new facilities and/or equipment.
In addition, in order to reduce overhead and improve customer service, the
Company and Republic are combining their sales efforts and commencing marketing
their respective steel products jointly under the combined brand name "Republic
Technologies International" using a single sales force (however, each customer
purchase order for steel products continues to be entered into directly with
either the Company or Republic, as appropriate). The costs of such joint
marketing efforts are borne ratably by the Company and Republic based upon their
respective sales volumes achieved through such joint marketing.
The Company and Republic anticipate forming a joint venture (the "Marketing JV")
in the near future to further formalize the foregoing arrangements and continue
to jointly market, advertise, promote and sell both companies' steel products to
each company's existing and potential customers. It is anticipated that the
Marketing JV will be named "Republic Technologies International Marketing, LLC",
will be owned by the Company and Republic in proportions expected to be
determined based upon the companies' respective sales and will fill purchase
orders for steel products either by purchasing such steel products from the
Company and/or Republic, as appropriate for a particular order (at a price based
upon the price paid for such steel products by the underlying customer, less a
specified "markup" designed to cover the Marketing JV's operating expenses), or
by in certain cases allocating such purchase orders to the Company or Republic
and receiving a sales commission designed to cover the marketing JV's operating
expenses.
17
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- - -----------------------------------------
a.) Exhibits
(27) Financial Data Schedule
b.) Reports on Form 8-K
A report on Form 8-K was filed on July 24, 1998 which incorporated a
press release by Republic Engineered Steels, Inc. ("Republic")
announcing the proposed acquisition of Republic by the Company's
principal owners, Blackstone Capital Partners II Merchant Banking Fund
L. P. and Veritas Capital Partners L. P.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BAR TECHNOLOGIES INC.
Date: November 17, 1998 By: /s/ Thomas N. Tyrrell
-------------------------------------
Thomas N. Tyrrell
President and Chief Executive Officer
Date: November 17, 1998 By: /s/ Frederick L. Deichert
------------------------------
Frederick L. Deichert
Vice President of Finance and
Chief Financial Officer
19
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