<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------------
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): AUGUST 13, 1999
REPUBLIC TECHNOLOGIES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 333-04254 13-3753384
(STATE OR OTHER JURISDICTION OF (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER
INCORPORATION) IDENTIFICATION NUMBER)
</TABLE>
------------------------
3770 EMBASSY PARKWAY, AKRON, OHIO 44333
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
------------------------
(330) 670-3000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
BAR TECHNOLOGIES INC.
(FORMER NAME OR ADDRESS, IF CHANGED SINCE LAST REPORT)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On August 13, 1999, Republic Technologies International, Inc., a Delaware
corporation named Bar Technologies Inc. prior to that date (the "Company"),
consummated the combination (the "Combination") of the operating assets and
liabilities of the Company with Republic Engineered Steels, Inc., a Delaware
corporation ("Republic"), and the steelmaking and bar producing assets of
USS/Kobe Steel Company, an Ohio general partnership ("USS/Kobe"), of which USX
Corporation ("USX") and Kobe Steel, Ltd. ("Kobe") each were indirectly 50%
partners. Pursuant to the Combination, the operating assets and liabilities of
the Company were contributed to a newly formed limited liability company,
Republic Technologies International, LLC, a Delaware limited liability company
("RTI, LLC"), and Republic and the direct partners of USS/Kobe were merged with
and into RTI, LLC, resulting in RTI, LLC holding the operating assets and
liabilities of each of the Company, Republic and USS/Kobe (other than certain
unrelated seamless tube producing assets of USS/Kobe that were spun off prior to
consummation of the Combination). As a result of the Combination, the Company
received an approximately 70% indirect managing membership interest in RTI, LLC,
as further described below. Prior to the Combination, the Company and Republic
were each controlled by affiliates of The Blackstone Group. Following the
consummation of the Combination, affiliates of The Blackstone Group continue to
control the Company and have the right to appoint a majority of its directors.
The Combination was consummated pursuant to a Master Restructuring
Agreement, dated as of August 13, 1999 and filed as Exhibit 2.1 hereto, which
provided for, among other things: (1) the merger of a newly formed wholly-owned
merger subsidiary of the Company with and into the parent of Republic ("Republic
Holdings"), in consideration for which each share of common stock of Republic
Holdings was converted into 1.78949 shares of Class D Common Stock, par value
$.001 (the "Common Stock"), of the Company; (2) the merger of Republic with and
into RTI, LLC in consideration for which all of the shares of Republic were
converted into an approximately 39% membership interest in Republic Technologies
International Holdings, LLC, a Delaware limited liability company that is the
sole member of RTI, LLC and a direct approximately 70% owned subsidiary of the
Company ("RTI Holdings"); (3) the assignment by the Company of substantially all
of its assets (including its subsidiaries) to, and the assumption of
substantially all of its liabilities by, RTI, LLC, in consideration for an
approximately 31% direct managing membership interest in RTI Holdings, resulting
in the Company holding, directly and indirectly through Republic Holdings, an
approximately 70% managing membership interest in RTI Holdings; and (4)
following the spinoff of USS/Kobe's seamless tube producing assets, the merger
of the general partners of USS/Kobe with and into RTI, LLC, the termination of
USS/Kobe and the contributions of USS/Kobe and approximately $35 million to RTI
Holdings by USX and Kobe in the aggregate, in consideration for which each of
USX and Kobe received, indirectly, an approximately 15% membership interest in
RTI Holdings. The USS/Kobe assets acquired in the Combination consisted
primarily of a blast furnace and bar steel manufacturing facility located near
Lorain, Ohio. The Company intends to continue the current use of the Lorain
facility. Each of USX and Kobe received the right to appoint two directors to
the board of directors of the Company and certain minority consent rights in
connection with the Combination, and RTI, LLC has entered into certain supply
agreements with affiliates of USX and technical assistance agreements with
affiliates of Kobe.
Certain indebtedness of the Company, Republic Holdings, Republic and
USS/Kobe was refinanced in connection with the Combination through (1) the sale
of units comprising in the aggregate $425 million principal amount of senior
secured notes co-issued by RTI, LLC and RTI Capital Corp., direct and indirect
subsidiaries of RTI Holdings, and warrants to purchase up to approximately 10%
of the fully diluted Common Stock of the Company, (2) borrowings by subsidiaries
of RTI Holdings under a new credit agreement with BankBoston, N.A. of
approximately $245 million (which facility provides for total borrowings of up
to $425 million), and (3) the sale of equity securities of the Company for
approximately $155 million in the aggregate.
ITEM 5. OTHER EVENTS.
Pursuant to contractual obligations arising in connection with the
completion of the Combination and binding upon the Company and certain of its
subsidiaries, the Company and certain of its subsidiaries are obligated to make
publicly available certain information prepared in connection with the
Combination. Such information is included in Exhibit 99.1.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(A) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
(1) Audited financial statements for Republic as of June 30, 1998 and
June 30, 1997 and for the years ended June 30, 1998, 1997 and 1996 are set forth
below. Unaudited financial statements for Republic as of March 31, 1999 and June
30, 1998 and for the period from September 8, 1998 to March 31, 1999, the period
from July 1, 1998 to September 7, 1998 and the nine month period ended March 31,
1998 are also set forth below.
The Company expects that any additional financial statements for Republic
required to be filed as part of a Current Report on Form 8-K and not included in
this filing will be filed not later than October 12, 1999.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Republic Engineered Steels, Inc.:
We have audited the accompanying consolidated balance sheets of Republic
Engineered Steels, Inc. and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of income (loss), shareholders' equity, and cash
flows for each of the years in the three-year period ended June 30, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements 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 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
July 31, 1998, except as to
Note 20 which is as of
November 12, 1998
1
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 22,675 $ 6,412
Receivables, less allowance for doubtful accounts of $1,575 in 1998 and $1,624 in 1997
(note 5)........................................................................... 61,038 61,075
Inventories (notes 2 and 5)........................................................... 125,343 114,543
Prepaid expenses...................................................................... 2,844 2,012
Deferred income taxes (note 9)........................................................ 7,902 8,791
Assets held for sale.................................................................. 42,052 51,686
Other current assets.................................................................. 404 621
-------- --------
Total current assets.................................................................... 262,258 245,140
Property, plant and equipment, net (notes 3 and 5)...................................... 290,721 299,917
Intangibles and other assets, net (notes 4 and 5)....................................... 24,471 27,711
Restricted cash (note 5)................................................................ 715 1,183
Deferred income taxes (note 9).......................................................... 46,927 45,665
Assets held for sale.................................................................... 11,903 13,318
-------- --------
$636,995 $632,934
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... 59,573 60,280
Accrued compensation and benefits..................................................... 29,892 29,128
Accrued liabilities................................................................... 13,656 18,791
Accrued ESOP contribution............................................................. -- 201
-------- --------
Total current liabilities............................................................... 103,121 108,400
Long-term debt (note 5)................................................................. 273,922 273,939
Other postretirement benefits (note 8).................................................. 131,256 128,073
Defined benefit pension obligations (note 7)............................................ 12,178 16,885
Environmental costs (note 16)........................................................... 13,746 16,862
Other liabilities....................................................................... 1,301 3,521
-------- --------
Total liabilities....................................................................... 535,524 547,680
-------- --------
Shareholders' equity:
Special preferred stock, $.01 par value; one share authorized, one share issued,
liquidation value of $1,500 (note 10).............................................. 2 2
Common stock, $.01 par value; authorized 27,000,000 shares; issued 19,707,923 shares;
outstanding 19,706,578 (note 11)................................................... 197 197
Additional paid in capital............................................................ 275,270 275,270
Accumulated deficit................................................................... (173,990) (173,086)
-------- --------
101,479 102,383
Less receivable from Employee Stock Ownership Trust..................................... -- 17,121
Less treasury stock, at cost, 1,345 shares.............................................. 8 8
-------- --------
Total shareholders' equity.............................................................. 101,471 85,254
Commitments and contingencies (notes 3, 5, 7, 8, 13, 14, 15, and 16)....................
-------- --------
$636,995 $632,934
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................................. $689,870 $627,929 $604,076
Cost of product sold (including depreciation of $24,609 in 1998, $24,393
in 1997, and $19,114 in 1996)........................................... 612,526 576,745 558,496
-------- -------- --------
Gross profit.............................................................. 77,344 51,184 45,580
Selling expenses.......................................................... 6,794 8,208 9,132
General and administrative expenses....................................... 33,687 30,488 32,070
Special charges (credits) (note 18)....................................... (1,097) 1,649 3,890
Other postretirement benefits charges (note 8)............................ 4,951 15,585 12,715
Noncash ESOP charges...................................................... 15,616 28,191 29,938
Other charges (credits), net:
Interest charges........................................................ 27,622 28,807 27,958
Capitalized interest (note 3)........................................... -- -- (8,491)
Interest income......................................................... (710) (512) (538)
Miscellaneous, net...................................................... (410) (739) (562)
-------- -------- --------
86,453 111,677 106,112
-------- -------- --------
Loss from continuing operations before income tax benefit................. (9,109) (60,493) (60,532)
Income tax benefit (note 9)............................................... 2,661 23,999 24,114
-------- -------- --------
Net loss from continuing operations....................................... $ (6,448) $(36,494) $(36,418)
Income from discontinued operations, net of income tax expense of $2,288,
$1,430, and $1,978 respectively......................................... 5,544 2,175 2,988
-------- -------- --------
Net loss.................................................................. (904) (34,319) (33,430)
-------- -------- --------
-------- -------- --------
Earnings per Share:
Basic average shares outstanding.......................................... 19,707 19,707 19,707
-------- -------- --------
-------- -------- --------
Net loss per common share--continuing operations........................ $ (0.33) $ (1.85) $ (1.85)
Net income per common share--discontinued operations.................... 0.28 0.11 0.15
-------- -------- --------
Net loss per common share............................................... $ (0.05) $ (1.74) $ (1.70)
-------- -------- --------
-------- -------- --------
Diluted average shares outstanding........................................ 19,707 19,707 19,756
-------- -------- --------
-------- -------- --------
Net loss per common share--continuing operations........................ $ (0.33) $ (1.85) $ (1.84)
Net income per common share--discontinued operations.................... 0.28 0.11 0.15
-------- -------- --------
Net loss per common share............................................... $ (0.05) $ (1.74) $ (1.69)
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT AS INDICATED OTHERWISE)
<TABLE>
<CAPTION>
MINIMUM
SPECIAL ADDITIONAL PENSION
PREFERRED COMMON PREFERRED COMMON PAID-IN ACCUMULATED LIABILITY
STOCK STOCK STOCK STOCK CAPITAL DEFICIT ADJUSTMENT
--------- ------- --------- ------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of June 30, 1995................. 1* 19,707 $ 2 $197 $275,270 $(105,337) $ (1,604)
Net loss.................................... -- -- -- -- -- (33,430) --
Minimum pension liability adjustment net of
tax (note 7).............................. -- -- -- -- -- -- 1,604
ESOP loan repayment......................... -- -- -- -- -- -- --
--- ------- --- ---- -------- --------- --------
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) $ --
--- ------- --- ---- -------- --------- --------
--- ------- --- ---- -------- --------- --------
<CAPTION>
RECEIVABLE
FROM
EMPLOYEE
STOCK TOTAL
OWNERSHIP TREASURY SHAREHOLDERS'
TRUST STOCK EQUITY
---------- -------- -------------
<S> <C> <C> <C>
Balance as of June 30, 1995................. $(80,386) $(8) $ 88,134
Net loss.................................... -- -- (33,430)
Minimum pension liability adjustment net of
tax (note 7).............................. -- -- 1,604
ESOP loan repayment......................... 32,665 -- 32,665
-------- -- ---------
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
-------- -- ---------
-------- -- ---------
</TABLE>
- ------------------
* Not in thousands
See accompanying notes to consolidated financial statements.
4
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................................. $ (904) $(34,319) $(33,430)
Adjustments to reconcile net loss to net cash provided by continuing
operations:
Income from discontinued operations.................................... (5,544) (2,175) (2,988)
Depreciation and amortization.......................................... 27,427 27,982 22,517
Provision for ESOP contribution........................................ 15,616 28,191 29,938
Deferred income tax benefit............................................ (373) (22,569) (21,984)
Change in assets and liabilities, net of discontinued operations:
Receivables, net..................................................... 37 (1,176) 2,097
Inventories.......................................................... (10,800) 911 14,748
Prepaid expenses..................................................... (832) (238) 40
Other current assets................................................. 217 (343) 126
Intangibles and other assets......................................... 1,027 (164) 1,516
Accounts payable..................................................... 745 (3,140) (6,866)
Accrued compensation and benefits.................................... 764 (2,066) (1,002)
Accrued liabilities.................................................. (6,236) 1,270 1,098
Accrued ESOP contribution............................................ (201) 42 (144)
Accrued income taxes................................................. -- -- (177)
Other postretirement benefits........................................ 2,752 13,549 10,784
Defined benefit pension obligations.................................. (4,707) (3,549) (3,095)
Environmental costs.................................................. (3,417) (2,168) (3,288)
Other liabilities.................................................... (2,220) (29) (1,846)
-------- -------- --------
Total adjustments........................................................... 14,255 34,328 41,474
-------- -------- --------
Net cash provided by operating activities of continuing operations.......... 13,351 9 8,044
-------- -------- --------
Net cash provided by (used in) discontinued operations...................... 18,640 20,380 (1,732)
Net cash provided by operating activities................................... 31,991 20,389 6,312
-------- -------- --------
Cash flows from investing activities:
Additions to property, plant and equipment from continuing operations,
including capitalized interest of $8,491 in 1996....................... (15,807) (7,835) (44,590)
Additions to property, plant and equipment from discontinued operations... (520) (1,864) (551)
-------- -------- --------
Net cash used in investing activities....................................... (16,327) (9,699) (45,141)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.................................. -- -- 53,700
Repayment of long-term debt............................................... (17) (17) (16)
Revolver activity, net.................................................... -- (7,000) (16,000)
Deferred financing costs associated with long-term debt................... -- (923) (1,807)
Other financing activities, net........................................... 616 1,588 417
-------- -------- --------
Net cash provided by (used in) financing activities......................... 599 (6,352) 36,294
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........................ 16,263 4,338 (2,535)
Cash and cash equivalents at beginning of year.............................. 6,412 2,074 4,609
-------- -------- --------
Cash and cash equivalents at end of year.................................... $ 22,675 $ 6,412 $ 2,074
-------- -------- --------
Supplemental disclosure of cash flow information:
Interest paid, net of amounts capitalized................................. $ 26,353 $ 27,072 $ 19,801
-------- -------- --------
Income taxes paid......................................................... $ -- $ -- $ 25
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Nature of Operations
On April 28, 1995, Republic Engineered Steels, Inc. (Republic or the
Company) issued 8,050,000 shares of its common stock in an Initial Public
Offering (IPO) resulting in net proceeds of $48,782. Prior to the IPO, the
Company was owned by substantially all of its employees through an Employee
Stock Ownership Plan (ESOP). The ESOP acquired all of the originally issued
common shares of the Company on November 28, 1989 with the proceeds of two loans
from the Company in the amounts of $190,000 (Loan A) and $30,000 (Loan B),
respectively, each bearing interest at 10 percent per annum. The ESOP obtained
the funds to repay the loans primarily through tax deductible contributions made
by the Company to the ESOP based on annual stipulated percentages of employee
compensation or dividends. The ESOP repaid Loan A and Loan B (plus interest)
over their respective maturity periods. As of June 30, 1998 and 1997, the ESOP
owned approximately 54 percent and 56 percent, respectively, of the common stock
of the Company.
The Company produces a wide range of special bar quality (SBQ) hot-rolled
and cold-finished steels and specialty steel bars for the automotive, heavy
equipment manufacturing, aerospace, and power generation industries.
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
70 percent and 65 percent of its shipments for fiscal years 1998 and 1997,
respectively, were to customers in the states of Indiana, Illinois, Michigan,
New York, Ohio, and Pennsylvania. See also note 12.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Republic
Engineered Steels, Inc. and its wholly owned subsidiaries: The Nimishillen &
Tuscarawas Railway Company and The Oberlin Insurance Company. All significant
intercompany balances have been eliminated in consolidation.
(c) Cash Equivalents
The Company considers all short-term investments with maturities at date of
purchase of three months or less to be cash equivalents.
(d) Inventories
Inventories are carried at the lower of cost or market, with cost
determined using the last-in, first-out (LIFO) method.
(e) Long-Lived Assets
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.
6
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The Company adopted the provisions of Financial Accounting Standards Board
(FASB) No. 121, Accounting for the Impairment of Long-Lived Assets to be
Disposed Of, during fiscal year 1997. This statement requires that long-lived
assets and certain identifiable intangibles be 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 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. Adoption of the FASB No. 121 did not
have a material impact on the Company's consolidated financial position, results
of operations, or liquidity.
(f) Intangibles
Intangible assets consist primarily of deferred loan and bond fees and
intangible pension assets. The deferred loan and bond fees are being amortized
on a straight-line basis over the lives of the related debt instruments.
(g) 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.
(h) 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 stated 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 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.
7
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(i) Basic and Diluted Net Loss Per Common Share
During fiscal year 1998, the Company adopted FASB No. 128, Earnings per
Share. For the years presented, the Company presents basic and diluted earnings
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 earning per share reflects the potential dilution that
could occur if common stock equivalents were exercised and then shared in the
earnings of the Company. The weighted average common shares outstanding for both
the basic and diluted per share calculation was 19,707 for fiscal 1998 and 1997,
respectively. For fiscal 1996 the weighted average common shares outstanding for
the basic and diluted per share calculation were 19,707 and 19,756,
respectively. For fiscal 1996, the increase in the weighted average common
shares outstanding was due to the dilutive effect of stock options (see also
note 6).
(j) 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.
(k) Stock Based Compensation
During fiscal year 1997, the Company adopted FASB No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the grant date.
Alternatively, FASB No. 123 allows entities to continue to measure the
compensation cost for stock-based awards using the intrinsic value based method
of accounting prescribed by the Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and to provide pro forma net
income and pro forma earnings per share disclosures as if the fair value based
method defined in FASB No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosures of FASB No. 123.
8
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(l) Reclassification
Certain previously reported amounts have been reclassified to conform with
the current presentation.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Raw materials....................................................... $ 12,157 $ 10,923
Finished and semifinished product................................... 111,481 101,785
Supplies, molds, and stools......................................... 1,705 1,835
-------- --------
$125,343 $114,543
-------- --------
-------- --------
</TABLE>
The above inventory amounts are net of LIFO reserves which decreased the
value of the inventory by $2,435 and $7,101 as of June 30, 1998 and 1997,
respectively, and reserves to value inventory at the lower of cost or market
which decreased the value of inventory by $2,165 and $1,169 as of June 30, 1998
and 1997, respectively.
During fiscal 1998 and fiscal 1997, inventory quantities were reduced,
which resulted in a liquidation of LIFO inventory layers. The effects of these
liquidations were to increase cost of products sold by $109 in fiscal 1998 and
decrease cost of products sold by $63 in fiscal 1997.
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. These factors resulted in
a reduction in the LIFO reserve in fiscal 1998 and 1997 of $4,666 and $8,266,
respectively.
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Land................................................................ $ 9,898 $ 9,898
Buildings........................................................... 36,628 36,756
Machinery and equipment............................................. 356,036 353,677
-------- --------
402,562 400,331
Less accumulated depreciation....................................... 127,664 106,276
-------- --------
274,898 294,055
Construction in progress............................................ 15,823 5,862
-------- --------
$290,721 $299,917
-------- --------
-------- --------
</TABLE>
The Company's Cast-RollTM facility was officially placed in service
January 1, 1996. Interest was capitalized on this facility during the
construction period through December 31, 1995.
9
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(3) PROPERTY, PLANT AND EQUIPMENT--(CONTINUED)
As of June 30, 1998, the Company was formally committed to spend $9,843 on
capital expenditures.
(4) INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------
1998 1997
------- -------
<S> <C> <C>
Intangible pension asset (note 7)..................................... $15,779 $17,596
Deferred loan and bond fees........................................... 10,534 10,529
Deposits.............................................................. 2,472 2,626
Other................................................................. 218 218
------- -------
29,003 30,969
Less accumulated amortization......................................... 4,532 3,258
------- -------
$24,471 $27,711
------- -------
------- -------
</TABLE>
(5) LONG-TERM DEBT
Long-term debt of the Company consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
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................... 200,000 200,000
Revolving credit agreement.......................................... -- --
Other............................................................... 22 39
-------- --------
273,922 273,939
Less current maturities of long-term debt........................... -- --
-------- --------
$273,922 $273,939
-------- --------
-------- --------
</TABLE>
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
Cast-RollTM facility. These bonds were issued in addition to the Solid Waste
Revenue Bonds, Series 1994, noted below, to assist in financing the facilities.
As of June 30, 1998 and 1997, the Company had available $715 and $1,183,
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 1994, due
October 1, 2014 in connection with the solid waste disposal facilities installed
at the Cast-RollTM 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 (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,
10
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) LONG-TERM DEBT--(CONTINUED)
1998 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. Capital expenditures subsequent to
that date aggregating approximately $269,000 are not part of the security for
the Notes. 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, 1998. 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).
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, subsidiaries' stock,
short-term investments, and certain intangible assets. Advances under the
facility are limited to specified percentages of the Company's eligible
receivables and inventories.
The Revolving Credit Agreement provides up to $20,000 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 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. As of June 30, 1998 and 1997, there were
no outstanding letters of credit. A commitment fee of 3/8 percent per annum on
the average unused portion of the facility is payable quarterly. 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, 1998.
The Company's $200,000 First Mortgage Notes represent the only long-term
debt which matures during the next five years (December 15, 2001).
(6) 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 $7,667, $8,031, and $8,139, for the fiscal years
ended June 30, 1998, 1997, and 1996, respectively.
The Company's ESOP covers substantially all United Steelworkers of America
(USWA) and nonbargained-for employees of Republic Engineered Steels, Inc. The
plan is designed to enable eligible employees to acquire a beneficial interest
in the Company through the Employee Stock Ownership Trust (ESOP Trust). The
Company expenses ESOP contributions as made or incurred.
11
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) BENEFIT PLANS--(CONTINUED)
With the establishment of a public market for the Company's common stock in
May 1995, distributions from the ESOP Trust will be made to participants upon
request following termination of employment or after attaining age 70 1/2 if
still in active employment. Participants who are 55 years of age and have
10 years of participation under the plan may also elect to receive distributions
annually for a portion of their account balance. All distributions are in the
form of one lump sum payment of whole shares (and cash for fractional shares)
allocated to their account in the plan. See also note 20.
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 5).
From its inception, the Company had an executive incentive plan (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 (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, are exercisable after
May 5, 1998 with the majority of such options granted having an exercise price
of $6.67 per share and expire on November 28, 2001. There was no compensation
expense relating to these plans for fiscal 1998, 1997 or 1996.
Since the options outstanding as of June 30, 1997 were granted prior to the
effective date of FASB No. 123 and no additional options have been granted
since, the pro forma net income and pro forma net income per share disclosures
required by FASB No. 123 are not applicable.
(7) DEFINED BENEFIT PENSION OBLIGATIONS
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 is to fund this plan based on legal requirements
and tax considerations. Assets of the plan are currently invested in money
market funds, U.S. government
12
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) DEFINED BENEFIT PENSION OBLIGATIONS--(CONTINUED)
securities, and common stocks. The following table sets forth the funded status
of the plan as of June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits..................................................... $18,400 $17,182
------- -------
Accumulated benefit obligation........................................ 23,764 24,166
------- -------
Projected benefit obligation.......................................... 23,764 24,166
Plan assets at fair value............................................. 11,586 7,281
------- -------
Projected benefit obligation in excess of plan assets................. 12,178 16,885
Items not yet recognized in earnings:
Prior service cost.................................................. (16,780) (18,394)
Net gain............................................................ 1,001 798
Adjustment required to recognize minimum liability.................... 15,779 17,596
------- -------
Accrued pension cost as reflected on the consolidated balance
sheets.............................................................. $12,178 $16,885
------- -------
------- -------
</TABLE>
Net pension expense included in operating income for the years ended
June 30, 1998, 1997, and 1996 consist of the following components:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Service cost (benefit)................................................ $(1,471) $(1,498) $(1,721)
Interest cost......................................................... 1,899 1,865 2,113
Actual return on plan assets.......................................... (1,213) (993) (144)
Net amortization and deferred items................................... 2,095 2,192 1,567
------- ------- -------
Net periodic pension cost............................................. $ 1,310 $ 1,566 $ 1,815
------- ------- -------
------- ------- -------
Net periodic pension cost--continuing operations...................... $ 1,221 $ 1,459 $ 1,701
Net periodic pension cost--discontinued operations.................... 89 107 114
------- ------- -------
Net periodic pension cost............................................. $ 1,310 $ 1,566 $ 1,815
------- ------- -------
------- ------- -------
</TABLE>
Actuarial assumptions used in accounting for the pension plan for the
fiscal years ended June 30, 1998, 1997, and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate..................................................................... 7.0% 8.0% 8.0%
Rate of increase in future compensation levels.................................... 5.0% 5.0% 5.0%
Expected long-term rate of return on assets....................................... 8.0% 8.0% 8.0%
</TABLE>
During fiscal 1995, the minimum pension liability of $24,089 exceeded
unrecognized prior service costs by $2,468 and was recorded as a $1,604 charge
to shareholders' equity, net of applicable income tax benefits of $864.
As of June 30, 1998 and 1997, the minimum pension liability of $15,779 and
$17,596, respectively, is less than the unrecognized prior service cost;
accordingly, the charge to shareholders' equity made in fiscal 1995 of $1,604,
net of applicable income taxes of $864, was reversed in 1996.
13
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) OTHER POSTRETIREMENT BENEFITS
Prior to 1997, the Company provided postretirement health care and life
insurance benefits to substantially all employees who retired from the Company
subsequent to November 28, 1989, upon attaining the following age and years of
service:
<TABLE>
<CAPTION>
AGE AT RETIREMENT YEARS OF SERVICE
- -------------------------------------------------------- ----------------
<S> <C>
55...................................................... 30
60...................................................... 15
65...................................................... 10
</TABLE>
In fiscal 1997 the Company adopted a plan amendment to modify the minimum
retirement age to 65 for future salaried retirees. This change resulted in a
decrease in the accumulated postretirement benefit obligation (APBO) of $17,175.
This reduction is being amortized over the estimated remaining life of the
salaried work force, which at the time of the change was 13 years.
The following table presents the plan's APBO reconciled with amounts
recognized in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.......................................................... $ 28,785 $ 27,758
Fully eligible active plan participants........................... 29,704 28,183
Other active plan participants.................................... 71,401 71,944
-------- --------
129,890 127,885
Unrecognized prior service cost:
Original amount at adoption of FASB No. 106....................... (13,938) (16,437)
Deferral of benefits for future salaried retirees................. 15,304 16,625
-------- --------
1,366 188
-------- --------
Accrued postretirement benefits as reflected on the
consolidated balance sheets....................................... $131,256 $128,073
-------- --------
-------- --------
</TABLE>
14
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) OTHER POSTRETIREMENT BENEFITS--(CONTINUED)
Net periodic postretirement benefit charges (credits) recorded for the
years ended June 30, included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Service cost--benefit attributed to service during the period....... $ 3,593 $ 3,759 $ 3,761
Interest cost on accumulated postretirement benefit obligation...... 10,114 10,249 10,058
Immediate recognition of change in accumulated postretirement
benefit obligation due to actuarial (gains) losses, including
change in assumptions............................................. (9,503) 983 (2,498)
Net amortization of unrecognized amounts for net gain and prior
service cost...................................................... 1,178 1,949 2,500
------- ------- -------
Net periodic postretirement benefit charges......................... $ 5,382 $16,940 $13,821
------- ------- -------
------- ------- -------
Net periodic postretirement benefit charges--continuing
operations........................................................ $ 4,951 $15,585 $12,715
Net periodic postretirement benefit charges--discontinued
operations........................................................ 431 1,355 1,106
------- ------- -------
Net periodic postretirement benefit charges......................... $ 5,382 $16,940 $13,821
------- ------- -------
------- ------- -------
</TABLE>
The Company recorded a fourth quarter 1998 experience gain of $9,503
related to lower than anticipated per capita costs of indemnity and managed
health care plans coupled with the increased enrollment in Risk Sharing HMO
plans for Medicare eligible retirees.
The health care cost trend rates used in determining the APBO as of
June 30, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
1998......................................................................... 7.5% 7.5%
1999......................................................................... 7.0% 7.0%
2000......................................................................... 6.5% 6.5%
2001......................................................................... 6.0% 6.0%
2002......................................................................... 5.5% 5.5%
2003......................................................................... 5.0% 5.5%
Thereafter................................................................... 4.5% 5.5%
</TABLE>
The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the health care cost trend by 1
percent would increase the APBO as of June 30, 1998 from $129,890 to $155,275
and the aggregate of the service and interest cost components of net periodic
postretirement benefit charges for 1998 from $13,719 to $16,682.
The discount rate used in determining the APBO was 7.0 and 8.0 percent as
of June 30, 1998 and 1997 respectively. The discount rate used in determining
the net periodic postretirement benefit charge was 7.0 percent for fiscal 1998
and 8.0 percent for fiscal 1997 and 1996. The reduction in discount rates
combined with the reduction in health care cost trend rates in fiscal 1998 had
an offsetting impact to the fiscal 1998 net periodic postretirement benefit
charge. The withdrawal assumptions were revised in 1996 to meet Internal Revenue
Service requirements, and health care cost trend rates were changed resulting in
the loss of $129 and gain of $2,498 which were fully recognized in the net
periodic postretirement benefit charges for fiscal 1997, and 1996, respectively.
15
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) OTHER POSTRETIREMENT BENEFITS--(CONTINUED)
The Company's policy is to fund claims as incurred. Claims paid were
$2,211, $2,037, and $1,931, during the fiscal years ended June 30, 1998, 1997,
and 1996, respectively. The Company also recognizes actuarial gains and losses,
including the impact of actuarial assumption changes, immediately rather than
amortizing them over future years.
The Company also provides postemployment benefits to its employees in the
form of supplemental unemployment benefits, severance benefits, and disability
income benefits which are subject to the provisions of FASB No. 112, Accounting
for Postemployment Benefits. However, in connection with the Company's
collective bargaining agreement with the USWA, the Company has agreed to perform
annual actuarial valuations; cash fund all deficiencies through a voluntary
employee benefit association as described in Section 501(c)(9) of the Internal
Revenue Code of 1986, as amended; and record the change in liability as an
expense in the current period. Therefore, the adoption of the provisions of FASB
No. 112 effective July 1, 1994 had no effect on the consolidated financial
statements of the Company.
(9) INCOME TAXES
The net income tax benefit for fiscal years 1998, 1997, and 1996, includes
a current tax (benefit) charge of $-0- for fiscal years 1998 and 1997 and ($152)
for fiscal 1996, due to the federal alternative minimum tax, which was increased
by a deferred benefit of $373, $22,569, and $21,984 in 1998, 1997 and 1996,
respectively.
At present, given available state net operating loss carryforwards (NOLs),
the Company is not assessed state income tax. The Company anticipates being
assessed state income tax when certain temporary differences reverse or when
such state NOLs expire beginning in year 2001. Other state taxes are included in
general and administrative expenses.
The difference between the statutory U.S. federal income tax rate of 35
percent and the Company's effective tax rate was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Statutory federal income tax benefit................................. $ 447 $19,911 $19,448
State and local income tax benefit................................... 64 2,844 2,778
Other................................................................ (138) (186) (90)
------- ------- -------
Income tax benefit................................................... $ 373 $22,569 $22,136
------- ------- -------
------- ------- -------
Effective book income tax benefit rate............................... 29.2% 39.7% 39.8%
Income tax benefit--continuing operations............................ $ 2,661 $23,999 $24,114
Income tax expense--discontinued operations.......................... (2,288) (1,430) (1,978)
------- ------- -------
Income tax benefit................................................... $ 373 $22,569 $22,136
------- ------- -------
------- ------- -------
</TABLE>
16
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(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:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due
to allowance for doubtful accounts............................. $ 630 $ 650
Postretirement benefits........................................... 22,901 21,628
Environmental costs............................................... 5,094 6,451
Other liabilities................................................. 9,431 11,620
Net operating loss carryforwards.................................. 111,385 99,474
Other............................................................. 1,180 938
-------- --------
Total gross deferred tax assets..................................... 150,621 140,761
Less valuation allowance............................................ 25,187 25,187
-------- --------
Net deferred tax assets............................................. 125,434 115,574
-------- --------
Deferred tax liabilities:
Inventory valuation............................................... 10,626 9,762
Plant and equipment, principally
due to differences in depreciation............................. 57,658 50,513
Other............................................................. 2,321 843
-------- --------
Total gross deferred tax liabilities................................ 70,605 61,118
-------- --------
Net deferred tax asset.............................................. $ 54,829 $ 54,456
-------- --------
-------- --------
</TABLE>
The Company had available as of June 30, 1998, net operating loss (NOL)
carryforwards, for regular federal income tax purposes, totaling approximately
$278 million ($145 million for federal alternative minimum tax purposes) with
expirations of: $45 million in year 2006; $24 million in year 2007; $12 million
in year 2008; $16 million in year 2009; $8 million in year 2010; $71 million in
year 2011; and $73 million in year 2012; and $29 million in year 2013. The
Company believes that it is more likely than not that a significant portion of
the aforementioned NOL carryforwards will be used prior to their expiration.
While the Company has incurred pretax losses of nearly $195 million during its
nine-year existence, deductible noncash ESOP contributions have totaled
$216 million during that same period. Further, six of the eight years reflect
substantial income on a pretax/pre-ESOP contribution basis and the ESOP loans
have been fully repaid as of June 30, 1998 (eight years prior to the first year
NOL expiration date). Management also believes that future operating results
will be improved as a result of major capital improvements coupled with the
ongoing cost reduction program which is linked to the labor agreement. Based on
the aforementioned factors, but also recognizing the inherent uncertainties
associated with forward looking statements, management believes that the
valuation allowance which has been established is adequate to provide for
deferred tax assets that more likely than not will not be realized during the
NOL carryforward period.
(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 has the right to vote as a
separate class on any proposed merger or consolidation of the Company
17
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(10) SPECIAL PREFERRED STOCK--(CONTINUED)
(see note 19) 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 6 and 7). The agreement
with respect to the trust for the special preferred stock will provide that the
trustee of such trust will 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 has no voting power. The special
preferred stock is redeemable by the Company for $1.5 at such time as the ESOP
(and/or other benefit arrangement[s]) holds less than 25 percent of the issued
and outstanding shares of common stock.
The special preferred stock is not entitled to receive any dividends but is
entitled to a liquidation preference of $.01 per share. The special preferred
stock may not be transferred without the consent of the Company.
(11) COMMON STOCK
As of June 30, 1998 and 1997, there are 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 and 1997, of which
10,546,010 and 11,004,663 shares, respectively, were held by the ESOP Trust.
Holders of Common Stock are 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, will be one person, one vote.
Shares of Common Stock held by the ESOP Trust may be voted only by the ESOP
trustee. The ESOP provides that the administrative committee is 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 four
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 (note 5). 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.
The holders of Common Stock are not entitled to any preemptive right to
subscribe for, purchase, or receive any new or additional shares of capital
stock of the Company. Upon the liquidation, dissolution, or winding up of the
Company, the holders of shares of the Common Stock are entitled to receive
ratably the net assets of the Company available after the payment of all debts
and other liabilities and subject to the rights of the holder of the special
preferred stock.
(12) CONCENTRATIONS OF CREDIT RISK
The Company has one customer which accounted for approximately 12 percent
of total sales in each of the fiscal years ended June 30, 1998, 1997, and 1996.
A majority of the Company's business is directly or indirectly related to the
automobile industry.
18
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(13) LEASE COMMITMENTS
Minimum rental payments due under noncancelable operating leases are
estimated to be as follows: Year Ending June 30, 1998.
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, 1998 1998
- ---------------------------------------------------------------- ------
<S> <C>
1999............................................................ $1,179
2000............................................................ 662
2001............................................................ 195
2002............................................................ 62
2003............................................................ 8
Thereafter...................................................... --
------
$2,106
------
------
</TABLE>
Rent expense was approximately $4,006, $3,983, and, $4,118, for the fiscal
years ended June 30, 1998, 1997, and 1996, respectively.
(14) LONG-TERM COMMITMENT
On December 3, 1997, the Company entered into a technical exchange
agreement with Sanyo Special Steel Company of Japan for a total of $6 million.
The forty-eight (48) month agreement involves technical assistance in melting,
refining, and casting technologies. Obligations under this agreement as of
June 30, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................................ $1,200
2000............................................................ 1,200
2001............................................................ 1,200
2002............................................................ 600
------
$4,200
------
------
</TABLE>
(15) LITIGATION
In September 1992, a lawsuit was filed against the Company in the U.S.
District Court for the Northern District of Ohio (Eastern Division) on behalf of
19 former Company salaried employees whose employment was terminated on
February 19, 1991. The claims asserted on behalf of each former employee were
age discrimination under both federal and state laws, breach of employment
contract, promissory estoppel, and violation of Ohio public policy (by reason of
age discrimination). The relief sought for each former employee was lost pay and
fringe benefits, liquidated damages (doubling the claimed lost pay and
benefits), compensatory damages of $500 on each count, punitive damages of $500
under the public policy count, prejudgment interest, and attorneys' fees. The
Company denied all of the claims with the intent of contesting them vigorously.
The Company's motion for summary judgment with respect to these cases was
partially granted on May 15, 1996, dismissing all claims of the former employees
other than the age discrimination claims. In fiscal 1998, the age discrimination
lawsuit was settled and payment was made in an amount which is not material to
the Company.
The Company is involved in other 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
19
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(15) LITIGATION--(CONTINUED)
the aggregate, will have a material adverse effect on the consolidated financial
condition or results of operations 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 does not anticipate the
need to make material expenditures for environmental control measures during the
next 24 months. 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 $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 probable current and noncurrent
environmental liabilities was approximately $14,377 and $17,800 as of June 30,
1998 and 1997, 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, law, 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 (see note 5), based on quoted market
values, was approximately $199,000 as of June 30, 1998. 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 1996, classified under long-term debt (see note 5) was
approximately $22,220 and $64,440, respectively, as of June 30,
1998.
(18) ORGANIZATIONAL RESTRUCTURING
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
20
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(18) ORGANIZATIONAL RESTRUCTURING--(CONTINUED)
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. The
Company's plan to restructure the hourly workforce has not yet been approved as
negotiations with the USWA continue. Generally, the restructuring of the hourly
workforce will be covered by a supplemental unemployment benefit plan and other
plans covered by union contracts. Therefore, reasonable estimates resulting from
a hourly workforce restructuring cannot be made until negotiations with the USWA
are finalized.
(19) SUBSEQUENT EVENT
The Company, along with an affiliate of Blackstone Capital Partners II
Merchant Banking Fund L.P. and Veritas Capital Partners L.P., announced on
July 24, 1998, that they had agreed to the acquisition of Republic by the
Blackstone-Veritas affiliate for a cash price of $7.25 per share of Republic
common stock.
The acquisition of Republic is subject to various approvals and will occur
by means of a cash tender offer for all issued and outstanding shares, followed
by a merger in which all remaining shares will be converted into the same cash
consideration. Including acquired debt, the total purchase price is
approximately $420,000.
Upon consummation of the tender offer, the Employee Stock Ownership Plan
will be amended to allow in-service distributions upon request regardless of age
or service.
(20) DISCONTINUED OPERATIONS
The acquisition of the Company by Blackstone was completed on September 8,
1998 (see footnote 19). In connection with the acquisition, the Company is
committed to a formal plan of disposition for its specialty steels division, and
accordingly, the accompanying consolidated financial statements have been
restated to reflect that division as discontinued operations in accordance with
Accounting Principles Board Opinion No. 30.
Summarized results of discontinued operations for the specialty steels
division are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales............................................. $107,467 $120,694 $137,284
Gross profit.......................................... 12,622 11,033 12,149
Income before income taxes............................ 7,832 3,605 4,966
Provision for income taxes............................ (2,288) (1,430) (1,978)
Net income............................................ 5,544 2,175 2,988
</TABLE>
21
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(20) DISCONTINUED OPERATIONS--(CONTINUED)
The components of net assets of discontinued operations included in the
Company's balance sheet as assets held for sale are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JUNE 30,
------------------
1998 1997
------- -------
<S> <C> <C>
Receivables........................................................... $11,595 $14,521
Inventory............................................................. 30,457 37,165
------- -------
Assets held for sale--current....................................... $42,052 $51,686
------- -------
------- -------
Property, plant and equipment, net.................................... $11,903 $13,318
------- -------
Assets held for sale--noncurrent.................................... $11,903 $13,318
------- -------
------- -------
</TABLE>
22
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
MARCH 31, -------------
1999 JUNE 30, 1998
----------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 2,835 $ 22,675
Receivables, less allowance for doubtful accounts of $1,614 and $1,575,
respectively................................................................... 64,942 61,038
Receivables due from affiliate (Note 5)........................................... 41,689 --
Inventories (Note 2).............................................................. 154,726 125,343
Prepaid expenses.................................................................. 8,123 2,844
Deferred income taxes............................................................. -- 7,902
Assets held for sale (Note 4)..................................................... 31,830 42,052
Other current assets.............................................................. 3,622 404
--------- ---------
Total current assets........................................................... 307,767 262,258
--------- ---------
Property, plant and equipment, net.................................................. 262,560 290,721
Intangibles and other assets, net................................................... 8,152 24,471
Restricted cash..................................................................... 341 715
Deferred income taxes............................................................... -- 46,927
Receivables due from affiliate, non-current (Note 5)................................ 531 --
Assets held for sale (Note 4)....................................................... 11,687 11,903
Excess purchase price over net assets acquired (Note 1(b)).......................... 144,896 --
--------- ---------
TOTAL ASSETS...................................................................... $ 735,934 $ 636,995
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings............................................................. $ 67,206 $ --
Defined benefit pension obligation (Note 9)....................................... 36,893 --
Amounts due to affiliates......................................................... 6,645 --
Other current liabilities......................................................... 125,031 103,121
--------- ---------
Total current liabilities...................................................... 235,775 103,121
Long-term debt (Note 3)........................................................... 357,339 273,922
Other postretirement benefits..................................................... 103,056 131,256
Defined benefit pension obligation (Note 9)....................................... 36,976 12,178
Accrued environmental costs (Note 7) 14,434 13,746
Other liabilities................................................................. 1,035 1,301
--------- ---------
Total liabilities.............................................................. 748,615 535,524
Commitments and contingencies (Notes 3,7,8 and 9)................................... -- --
Stockholders' equity (deficit):
Special preferred stock, $.01 par value; one share authorized, no share issued and
outstanding at March 31, 1999, one share issued and outstanding at
June 30,1998, liquidation value of $1,500...................................... -- 2
Common stock, $0.01 par value; authorized 27,000,000 shares: 19,706,578 shares
issued and outstanding at March 31, 1999 and 19,707,923 shares issued at
June 30, 1998.................................................................. 197 197
Additional paid-in-capital.......................................................... 95,257 275,270
Accumulated other comprehensive loss................................................ (17,257) --
Accumulated deficit................................................................. (90,878) (173,990)
--------- ---------
(12,681) 101,479
Less treasury stock, at cost, no shares at March 31, 1999 and 1,345 shares at
June 30, 1998..................................................................... -- 8
--------- ---------
Total stockholders' equity (deficit)........................................... (12,681) 101,471
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT).............................. $ 735,934 $ 636,995
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO MARCH 31, 1999,
THE PERIOD FROM JULY 1, 1998 TO SEPTEMBER 7, 1998 AND
THE NINE MONTH PERIOD ENDED MARCH 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY (NOTE 1(C))
PERIOD FROM -----------------------------------
SEPTEMBER 8, PERIOD FROM JULY
1998 TO 1, 1998 TO NINE MONTH
MARCH 31, SEPTEMBER 7, PERIOD ENDED
1999 1998 MARCH 31, 1998
------------ ---------------- ---------------
<S> <C> <C> <C>
Net sales...................................................... $361,350 $102,955 $ 511,381
Cost of products sold (including depreciation of $12,870,
$4,178 and $18,470, respectively)............................ 346,178 97,883 455,706
-------- -------- ---------
Gross profit................................................. 15,172 5,072 55,675
Selling expenses............................................... 5,214 1,216 5,102
General and administrative expenses............................ 27,326 17,023 24,210
Postretirement benefits charges................................ 4,300 2,082 10,279
Non-cash ESOP charges.......................................... -- -- 15,596
Workforce reduction charges (Note 1(b))........................ 40,162 -- --
Other charges (credits), net:
Interest expense............................................. 29,877 4,588 20,732
Interest income.............................................. (414) (236) (364)
Miscellaneous, net........................................... (415) (153) (306)
-------- -------- ---------
Loss from continuing operations before
income taxes................................................. (90,878) (19,448) (19,574)
Income tax benefit............................................. -- -- 3,920
-------- -------- ---------
Loss from continuing operations................................ (90,878) (19,448) (15,654)
Income (loss) from discontinued operations, net of income tax
expense of $0 and $803, respectively (Note 4)................ -- (298) 3,188
-------- -------- ---------
Net loss....................................................... $(90,878) $(19,746) $ (12,466)
-------- -------- ---------
-------- -------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO MARCH 31, 1999, THE PERIOD FROM
JULY 1, 1998 TO
SEPTEMBER 7, 1998 AND THE NINE MONTH PERIOD ENDED MARCH 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------
PERIOD FROM
PERIOD FROM JULY 1, 1998 TO NINE MONTH
SEPTEMBER 8, 1998 TO SEPTEMBER 7, PERIOD ENDED
MARCH 31, 1999 1998 MARCH 31, 1998
-------------------- --------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $(90,878) $ (19,746) $(12,466)
Adjustments to reconcile net cash provided by
continuing operations:
Loss (income) from discontinued operation.......... -- 298 (3,188)
Depreciation and amortization...................... 21,022 4,645 20,336
Accretion of call premium.......................... 4,038 -- --
Non-cash ESOP charges.............................. -- -- 15,616
Deferred income tax benefit........................ -- -- (3,117)
Change in operating assets and liabilities:
(Increase) decrease in working capital........... (44,189) 486 (22,914)
(Increase) decrease in other operating assets and
liabilities................................... 30,144 550 805
-------- --------- --------
Total adjustments............................. 11,015 5,979 7,538
-------- --------- --------
Net cash provided by discontinued operations............ 10,377 1,584 15,549
Net cash used in continuing operations.................. (79,863) (13,767) (4,928)
-------- --------- --------
Net cash provided by (used in) operating activities..... (69,486) (12,183) 10,621
-------- --------- --------
Cash flows from investing activities:
Additions to property, plant and equipment from
continuing operations.............................. (10,839) (6,115) (9,192)
Additions to property, plant and equipment from
discontinued operations............................ (903) (24) (565)
Acquisition, net of cash acquired..................... (156,458) -- --
-------- --------- --------
Net cash used in investing activities.............. (168,200) (6,139) (9,757)
-------- --------- --------
Cash flows from financing activities:
Net borrowings under revolving credit facility........ 75,100 -- --
Proceeds from environmental financing................. -- -- 477
Proceeds from bridge loan............................. 65,045 -- --
Capital contribution.................................. 95,455 -- --
Other financing activities, net....................... 4,921 (312) 683
-------- --------- --------
Net cash provided by (used in) financing activities..... 240,521 (312) 1,160
-------- --------- --------
Net increase (decrease) in cash and cash equivalents.... 2,835 (18,634) 2,024
Cash and cash equivalents-beginning of period........... -- 22,675 6,412
-------- --------- --------
Cash and cash equivalents-end of period................. $ 2,835 $ 4,041 $ 8,436
-------- --------- --------
-------- --------- --------
Supplemental Cash Flow Information:
Cash paid for interest................................ $ 20,409 $ 4 $ 13,218
-------- --------- --------
-------- --------- --------
Cash paid for income taxes.............................. $ -- $ -- $ --
-------- --------- --------
-------- --------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER RELATED INFORMATION
(a) General
The condensed consolidated financial statements included herein have been
prepared by Republic Engineered Steels, Inc. ("Republic" or the "Company") 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, the condensed consolidated financial statements of the
Predecessor Company (see further discussion below) should be read in conjunction
with the audited financial statements and notes thereto for the fiscal year
ended June 30, 1998, included in the Predecessor Company's Form 10-K, filed with
the Securities and Exchange Commission.
Republic 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
condensed 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.
(b) Organization
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. The cash price paid totaled approximately $160.5 million, including
transaction related expenses. The sources of funds contributed to RES
Acquisition consisted of i.) $95.5 million 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
$65.0 million 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.
Blackstone and Veritas intend to combine ("Combination") 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.
26
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER RELATED
INFORMATION--(CONTINUED)
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 Acquisition gave rise to a new basis of accounting.
Given the timing of the Acquisition, fair value analysis of the net assets
acquired, including appraisals of property and equipment, are not yet completed.
Based upon preliminary assessments through March 31, 1999, the purchase price
and related acquisition expenses exceeded net assets acquired by approximately
$150 million. Fair value adjustments, once finalized, may materially increase or
decrease this amount. Pending completion of the fair value analysis, the
preliminary excess purchase price over the estimated value of the net assets
acquired is being amortized over 20 years. Upon completion of the fair value
analysis, adjustments will be made to depreciate the fair value of acquired
property, plant and equipment over their estimated useful lives and to amortize
goodwill over 40 years.
In connection with the Acquisition, the Company has developed preliminary
plans to rationalize and discontinue operations at certain manufacturing
locations. Management is conducting a detailed evaluation to finalize the timing
and extent of the further rationalization of the operations. As discussed in
Note 9, the Company plans to reduce the hourly workforce through retirement and
severance programs. These programs and the anticipated workforce reductions are
substantially voluntary in nature. Accordingly, the costs associated with these
workforce reductions are being recognized as charges to operations as the offers
for early retirement benefits and voluntary severance programs 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
March 31, 1999, the Company has incurred $40.2 million of workforce reduction
charges for early retirement benefits, including increased pension and other
postretirement benefit obligations and special termination payments.
(c) Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements for the period
from September 8, 1998 to March 31, 1999 and as of March 31, 1999, reflect the
new basis of accounting of the Acquisition. Periods prior to September 8, 1998
(Predecessor Company) have been presented under the historical cost basis of
Republic.
The condensed consolidated financial statement includes the accounts of
Republic Engineered Steels, Inc. and its wholly owned subsidiaries, Nimishillen
& Tuscarawas Railway Company and The Oberlin Insurance Company. All significant
intercompany balances have been eliminated.
(d) Cash Equivalents
The Company considers all short-term investments with maturities at date of
purchase of three months or less to be cash equivalents.
(e) Inventories
Inventories are carried at the lower of cost or market with cost determined
using the last-in, first-out (LIFO) method. Inventories are stated net of assets
held for sale.
(f) Long-Lived Assets
Property, plant and equipment are 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.
27
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER RELATED
INFORMATION--(CONTINUED)
(g) Intangibles and Other Assets
Intangible assets consist primarily of deferred loan and bond fees, and in
the case of the Predecessor Company, an intangible asset related to the
Company's pension plan. The deferred loan and bond fees are being amortized on a
straight-line basis over the lives of the related debt instruments.
(h) 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 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. Income
taxes for the period subsequent to the Acquisition reflect the pushdown impact
on the consolidated tax position resulting from a change of control. No cash
payments of income taxes were made during any of the periods presented.
(i) Environmental Costs
The Company and other steel companies have in recent years become subject
to increasingly demanding environmental laws and regulations. It is the policy
of the Company to endeavor to comply with applicable environmental laws and
regulations. The Company established a liability for an amount which the Company
believes is adequate, based on information currently available, to cover costs
of remedial actions it will likely be required to take to comply with existing
environmental laws and regulations.
(j) 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 financial statements included
herein, the Company uses estimates for, among others, deferred income tax
benefits, 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
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.
28
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER RELATED
INFORMATION--(CONTINUED)
(k) Reclassifications
Certain previously reported amounts have been reclassified to conform to
the current presentation.
(l) Comprehensive Income
During fiscal 1999, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." Total
comprehensive loss for the period from September 8, 1998 to March 31, 1999, the
period from July 1, 1998 to September 7, 1998 and the nine month period ended
March 31, 1998 is as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY (NOTE 1(C))
-------------------------------
PERIOD FROM PERIOD FROM NINE MONTH
SEPTEMBER 8, JULY 1, 1998 TO PERIOD ENDED
1998 TO MARCH 31, SEPTEMBER 7, MARCH 31,
1999 1998 1998
----------------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss..................................................... $ (90,878) $ (19,746) $(12,466)
Other comprehensive loss..................................... (17,257) -- --
--------- --------- --------
Total comprehensive loss..................................... $(108,135) $ (19,746) $(12,466)
--------- --------- --------
--------- --------- --------
</TABLE>
Other comprehensive loss in each of the periods above is comprised solely
of an additional minimum pension liability, net of $0 income tax effects.
2. INVENTORIES
In connection with the Acquisition, inventories at March 31, 1999 reflect a
new LIFO base cost as of September 8, 1998. Inventory amounts at June 30, 1998
are net of a $2.4 million LIFO reserve and a $2.2 million reserve to value
inventories at the lower of cost or market. As a result of the new LIFO base,
these reserves were $0 million at March 31, 1999. Inventories at March 31, 1999
and June 30, 1998 were as follows:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
------------
MARCH 31, JUNE 30,
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials..................................................... $ 12,530 $ 12,157
Finished and semi-finished product................................ 140,383 111,481
Supplies, molds and stools........................................ 1,813 1,705
--------- --------
$ 154,726 $125,343
--------- --------
--------- --------
</TABLE>
29
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
3. DEBT
Long-term debt of the Company consisted of the following:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
------------
MARCH 31, JUNE 30,
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
9% Solid Waste Revenue Bonds, Series 1996, due June 1, 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................. 206,038 200,000
Revolving Credit Agreement........................................ 75,100 --
Other............................................................. 2,301 22
--------- --------
357,339 273,922
Less current maturities of long-term debt......................... -- --
--------- --------
Total long-term debt.............................................. $ 357,339 $273,922
--------- --------
--------- --------
</TABLE>
The amended and restated Revolving Credit Agreement ("Revolving Credit
Agreement"), which expires April 25, 2000, permits borrowings up to $115.0
million and is secured by the Company's receivables, inventories, stock of a
subsidiary, short-term investments and certain intangible assets. As of March
31, 1999 and June 30, 1998, amounts outstanding under the Revolving Credit
Agreement were $75.1 million and $0, respectively.
On May 6, 1999, the Revolving Credit Agreement was 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 5 for further discussion.)
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 $115.0 million to $135.0 million until December 31, 1999.
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 loans to LIBOR rate
plus 2 3/4 percent. Fees for standby or documentary letters of credit were
increased to 2 3/4 percent.
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 or 1/2 percent above the Federal funds effective rate, plus
1/2 percent; or (ii) LIBOR plus 2 1/2 percent. The borrowing base under the
Revolving Credit Agreement is the sum of 55 percent of "Eligible Inventory" up
to a maximum of $75 million and 85 percent of "Eligible Accounts Receivable"
less approximately $25.0 million of reserves. Amounts available at March 31,
1999 under the Revolving Credit Agreement were $15.4 million. 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. A commitment fee of 3/8 percent per annum on the average unused
portion of the facility is payable quarterly. 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.
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
30
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
3. DEBT--(CONTINUED)
connection with the solid waste disposal facilities installed at the
CAST-ROLL(Trademark) facility. Additionally, on June 1, 1996, the 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 the Revolving Credit Facility. As of March
31, 1999 the Company had available approximately $0.3 million from the 1996
Bonds which is classified as restricted cash in the accompanying condensed
consolidated balance sheet, and zero from the 1994 Bonds.
The Company's $200 million 9 7/8% First Mortgage Notes ("Notes") mature on
December 15, 2001. 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.
On September 8, 1998, the Acquisition by RES Acquisition of Republic was
partially funded with 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 is currently June 8, 1999, however, the
Company is negotiating with its lenders to extend the maturity.
On October 5, 1998, the Company commenced the Change of Control Offer which
expired on November 5, 1998. Approximately $28.1 million principal amount of
Notes was tendered in accordance with the Change of Control Offer. The purchase
of the tendered 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 $1,042.30 per $1,000
principal amount plus accrued and unpaid interest (the "Offer"). The Offer is
scheduled to expire on June 30, 1999. The Company is accruing 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 $208.5 million of borrowings. In November
1999, any outstanding loans under the Bridge Facility convert into long-term
loans and accordingly, the Notes remain classified as long-term in the
accompanying condensed consolidated balance sheet as of March 31, 1999.
The interest rate on borrowings under the Bridge Facility will be LIBOR
(adjusted to include statutory reserves) plus a margin, increased by 0.5% every
three months, subject to a maximum rate of 15.5% per annum. In the event of any
borrowings under the Bridge Facility, the Company will pay certain fees and RES
Holding will make available warrants to purchase a portion of the common equity
of RES Holding. Such fees are subject to partial refund if the Company
refinances the Bridge Facility. Any warrants will be initially held under
certain circumstances in escrow and all or a portion of such warrants may be
subsequently released to the Lenders or to the holders of the loans, or if the
loans are refinanced, returned to RES Holding. Through March 31, 1999, no
amounts have been borrowed under the Bridge Facility.
4. DISCONTINUED OPERATIONS
In connection with the Acquisition, 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. All revenues and
31
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
4. DISCONTINUED OPERATIONS--(CONTINUED)
expenses related to the specialty steels division since the Acquisition date
have been reported as adjustments to the purchase price of the Acquisition.
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 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.
Summarized results of discontinued operations for the specialty steels
division were as follows:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
------------------------------
PERIOD FROM NINE MONTH
JULY 1, 1998 TO PERIOD ENDED
QUARTER ENDED JULY 1, 1998 TO PERIOD ENDED
MARCH 31, PERIOD FROM SEPTEMBER 7, MARCH 31,
------------------ SEPTEMBER 8, 1998 TO
1999 1998 MARCH 31, 1999 1998 1998
-------- ------- -------------------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales.................... $ 13,059 $28,011 $ 34,228 $14,533 $ 82,479
Gross profit................. (1,304) 2,784 (2,212) 410 8,655
Income (loss) before income
taxes...................... (2,072) 1,456 (4,353) (298) 3,991
Provision for income taxes... -- 291 -- -- 803
-------- ------- -------- ------- --------
Net income (loss)............ $ (2,072) $ 1,165 $ (4,353) $ (298) $ 3,188
-------- ------- -------- ------- --------
-------- ------- -------- ------- --------
</TABLE>
The components of net assets of discontinued operations included in the
Company's balance sheet as assets held for sale were as follows:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-------------
MARCH 31, 1999 JUNE 30, 1998
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Receivables.................................................. $ 9,195 $11,595
Inventory.................................................... 22,635 30,457
-------- -------
Assets held for sale--current.............................. $ 31,830 $42,052
-------- -------
-------- -------
Property, plant and equipment, net........................... $ 11,687 $11,903
-------- -------
Assets held for sale--non-current.......................... $ 11,687 $11,903
-------- -------
-------- -------
</TABLE>
5. RELATED PARTY TRANSACTIONS
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.
32
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
5. RELATED PARTY TRANSACTIONS--(CONTINUED)
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 quarter ended March 31, 1999 and the
period September 8, 1998 through March 31, 1999, the Company purchased materials
for Bar Tech and its subsidiary, Bliss & Laughlin Steel Company, totaling
approximately $24.4 million and $33.4 million, respectively. 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 on their respective share of coverage.
The Company also purchased $8.7 million and $11.7 million of billet and bar
products, at market prices, from Bar Tech during the quarter ended March 31,
1999 and the period September 8, 1998 through March 31, 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 will fill 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.
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:
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1999 JUNE 30, 1998
----------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable due from affiliates:
Bar Technologies Inc................................. $41,689 $ --
------- ----
------- ----
Accounts receivable due from affiliates, long-term:
Bar Technologies Inc................................. $ 531 $ --
------- ----
------- ----
Amounts due to affiliates:
Bar Technologies Inc................................. $ 1,524 $ --
Blackstone Capital Partners II....................... 1,125 --
Republic Technologies International Marketing, LLC... 3,996 --
------- ----
$ 6,645 $ --
------- ----
------- ----
</TABLE>
33
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
5. RELATED PARTY TRANSACTIONS--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED: MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Net sales to affiliates:
Bar Technologies Inc..................................... $1,794 $ --
Republic Technologies International Marketing, LLC....... 4,712 --
------ ----
$6,506 $ --
------ ----
------ ----
FOR THE NINE MONTH PERIOD ENDED:
Net sales to affiliates:
Bar Technologies Inc..................................... $2,570 $ --
Republic Technologies International Marketing, LLC....... 4,712 --
------ ----
$7,282 $ --
------ ----
------ ----
</TABLE>
6. SUBSEQUENT EVENTS
In April 1999, the Company's principal owners, Blackstone and Veritas
entered into a letter of intent with 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. USX and Kobe would jointly own 30% of the combined operations. The
combination is subject to numerous conditions including approval by the board of
directors of USX and Kobe, negotiation and execution of definitive agreements,
receipt of necessary government approvals, including antitrust, 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.
On July 1, 1999, the Company borrowed $208.5 million under the Bridge
Facility to fund the Offer to repurchase the Notes (see Note 3). A portion of
the Notes was purchased pursuant to a tender offer, which was completed
June 30, 1999 and the remaining proceeds from the Bridge Facility were placed in
escrow to fund the redemption of the remaining outstanding Notes. The Notes have
been called for redemption and the redemption is expected to be completed on
August 2, 1999.
7. 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. 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
anticipates making expenditures of approximately $0.1 million, which are covered
by the Company's current reserve for environmental investigatory and control
measures during the next 12 months. The reserve to cover potential current and
non-current environmental liabilities was approximately $14.4 million at
March 31, 1999 and June 30, 1998, substantially all of which is classified as a
long-term obligation in the accompanying consolidated balance sheets (except for
anticipated expenditures during the next twelve months).
34
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
7. ENVIRONMENTAL COMPLIANCE--(CONTINUED)
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.
8. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings, including
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.
9. EMPLOYMENT AND RETIREMENT AGREEMENTS
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 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 ("ERBs") 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. Subsequent to September 7, 1998, 259
ERBs were accepted. Under the terms of the Settlement Agreement, if the ERBs and
VSP 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 ERBs and VSPs. 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") 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 million 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: $7.5 million per quarter for the
first four payments, $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. Of the Company's aggregate pension obligation,
$36.9 million was classified as a current liability and $4.8 million was
classified as a long-term liability in the accompanying condensed consolidated
balance sheet as of March 31, 1999.
35
<PAGE>
(2) Financial statements for the Bar Products Line of USS/Kobe Steel
Company as of December 31, 1997 and 1998 (audited) and as of March 31, 1999
(unaudited) and for the years ended December 31, 1996, 1997 and 1998 (audited)
and for the three months ended March 31, 1997 and 1998 (unaudited) are set
forth below.
The Company expects that any additional financial statements for the Bar
Products Line of USS/Kobe Steel Company required to be filed as part of a
Current Report on Form 8-K and not included in this filing will be filed not
later than October 12, 1999.
36
<PAGE>
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.
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.
The accompanying financial statements have been prepared assuming that the Bar
Products Line of USS/KOBE Steel Company will continue as a going concern which
contemplates the realization of assets and the payment of liabilities in the
ordinary course of business. As described in Note E to the financial statements,
USS/KOBE Steel Company from time to time has breached the financial covenants of
its debt agreements. If the minimum adjusted net worth requirement of $275
million is not maintained throughout 1999, a specified number of lenders may
cause the debt repayment to be accelerated. If this occurs, there is no
assurance, absent a refinancing of the debt such as contemplated under the
proposed transaction described in Note B to the financial statements, that
USS/KOBE Steel Company would have sufficient cash to meet its current debt and
other obligations. This condition raises substantial doubt about the ability of
the Bar Products Line of USS/KOBE Steel Company to continue as a going concern.
Management's plans in regard to this matter are described in Note A. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amount
and classifications of liabilities that may result from the outcome of this
uncertainty.
The financial statements as of March 31, 1999 and for the three months ended
March 31, 1999 and 1998 were reviewed by us and our report thereon, dated
July 7, 1999, stated we were not aware of any material modifications that should
be made to those statements for them to be in conformity with generally accepted
accounting principles. However, a review is substantially less in scope than an
audit and does not provide a basis for the expression of an opinion on the
financial statements taken as a whole.
Cleveland, Ohio Ernst & Young LLP
July 7, 1999
37
<PAGE>
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
---------------------- -----------
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 1,909 $ 3,195 $ 177
Accounts receivable--net of allowances of $1,850 in 1997, $9,500 in
1998 and 1999..................................................... 43,338 44,274 51,347
Inventories:
Raw materials..................................................... 58,329 51,451 28,880
Work-in-process................................................... 21,388 57,513 54,045
Finished goods.................................................... 26,657 20,839 18,596
Supplies.......................................................... 1,274 1,391 1,170
-------- -------- ---------
107,648 131,194 102,691
Other current assets................................................. 7,334 6,910 6,057
-------- -------- ---------
Total current assets................................................... 160,229 185,573 160,272
Property, plant and equipment:
Land................................................................. 2,607 2,633 2,633
Buildings and improvements........................................... 41,539 41,700 41,706
Machinery and equipment.............................................. 613,483 636,723 643,369
Construction-in-progress............................................. 12,804 7,718 3,501
-------- -------- ---------
670,433 688,774 691,209
Less accumulated depreciation........................................ (223,567) (269,045) (280,713)
-------- -------- ---------
446,866 419,729 410,496
Intangible pension asset............................................... 7,321 12,793 12,793
-------- -------- ---------
Total assets......................................................... $614,416 $618,095 $ 583,561
-------- -------- ---------
-------- -------- ---------
LIABILITIES AND PARTNERS' INVESTMENT
Current liabilities:
Checks in transit.................................................... $ 25,555 $ 16,261 $ 10,064
Note payable......................................................... 3,215 2,224
Accounts payable..................................................... 58,564 61,442 55,511
Accrued payroll and related expenses................................. 17,781 17,371 15,513
Other accrued expenses............................................... 16,883 14,544 18,578
Current portion of other postretirement benefits liabilities......... 8,200 9,363 9,363
-------- -------- ---------
Total current liabilities.............................................. 126,983 122,196 111,253
Accrued pension liabilities............................................ 5,263 10,314 12,174
Other postretirement benefits liabilities.............................. 29,808 37,027 38,767
Non-current debt....................................................... 180,238 180,238 180,238
Other long-term obligations............................................ 702 1,926 1,914
Partners' investment:
Accumulated other comprehensive loss................................. (445) (445)
Division control..................................................... 271,422 266,839 239,660
-------- -------- ---------
271,422 266,394 239,215
-------- -------- ---------
TOTAL LIABILITIES AND PARTNERS' INVESTMENT........................... $614,416 $618,095 $ 583,561
-------- -------- ---------
-------- -------- ---------
</TABLE>
See notes to financial statements.
38
<PAGE>
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
-------------------------------- --------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales:
Unrelated parties............................ $394,527 $416,593 $426,496 $123,332 $102,128
Related parties:
Tubular transfers......................... 165,901 197,810 145,185 52,461 21,863
Other..................................... 151,606 107,182 42,710 24,355 4,892
-------- -------- -------- -------- --------
712,034 721,585 614,391 200,148 128,883
COST AND EXPENSES
Cost of sales.................................. 674,550 697,241 593,048 184,209 134,046
Depreciation and amortization.................. 40,204 41,515 45,853 11,475 11,783
Selling and administrative expenses............ 20,145 19,492 17,270 4,691 4,585
-------- -------- -------- -------- --------
734,899 758,248 656,171 200,375 150,414
-------- -------- -------- -------- --------
Loss from operations........................... (22,865) (36,663) (41,780) (227) (21,531)
OTHER (EXPENSES) INCOME
Interest expense, net.......................... (8,867) (10,987) (11,189) (2,922) (3,594)
Other income................................... 296 105 24 74 111
-------- -------- -------- -------- --------
(8,571) (10,882) (11,165) (2,848) (3,483)
-------- -------- -------- -------- --------
NET LOSS....................................... $(31,436) $(47,545) $(52,945) $ (3,075) $(25,014)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
See notes to financial statements.
39
<PAGE>
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
STATEMENTS OF CHANGES IN PARTNERS' INVESTMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
USS
LORAIN HOLDING KOBE/
COMPANY, INC. LORAIN INC. TOTAL
-------------- ----------- --------
<S> <C> <C> <C>
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
Partners' non-cash contributions and transfers (unaudited).......... (1,083) (1,082) (2,165)
Net loss (unaudited)................................................ (12,507) (12,507) (25,014)
-------- --------- --------
BALANCE AT MARCH 31, 1999 (UNAUDITED)................................. $119,607 $ 119,608 $239,215
-------- --------- --------
-------- --------- --------
</TABLE>
See notes to financial statements.
40
<PAGE>
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
----------------------------------- ----------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................................... $ (31,436) $ (47,545) $ (52,945) $ (3,075) $ (25,014)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization............. 40,204 41,515 45,853 11,475 11,783
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) 1,683 1,860
Increase in other postretirement benefits
liability--net......................... 6,326 7,141 8,382 1,807 1,740
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable........................... 17,464 (4,883) (8,586) (1,195) (7,073)
(Increase) decrease in inventories..... (29,081) 17,183 (23,546) 18,296 28,503
Increase (decrease) in accounts payable
and due to/from tubular products
line................................. 11,313 (10,480) 42,360 16,345 (8,096)
(Decrease) increase in payroll related
liabilities.......................... (11,964) 2,226 (410) 1,982 (1,858)
(Decrease) increase in other........... (4,107) 21,203 (9,985) (23,910) (1,322)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities.................................. (11,236) 30,387 7,965 23,408 523
INVESTING ACTIVITIES
Proceeds from sale of property, plant and
equipment................................... 40
Purchases of property, plant and
equipment--net.............................. (33,564) (42,326) (18,774) (5,245) (2,550)
--------- --------- --------- --------- ---------
Net cash used in investing activities......... (33,524) (42,326) (18,774) (5,245) (2,550)
FINANCING ACTIVITIES
Contributions from Partners................... 8,880
Proceeds from debt facilities................. 333,364 811,903 767,017 209,355 260,059
Principal payments on notes and
other debt.................................. (307,207) (799,387) (763,802) (228,150) (261,050)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities.................................. 26,157 12,516 12,095 (18,795) (991)
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents................................. (18,603) 577 1,286 (632) (3,018)
Cash and cash equivalents, beginning
of period................................... 19,935 1,332 1,909 1,909 3,195
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD............................... $ 1,332 $ 1,909 $ 3,195 $ 1,277 $ 177
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See notes to financial statements.
41
<PAGE>
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (AUDITED) AND MARCH 31, 1999
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Bar Products Line (the Bar Products Line) of USS/KOBE Steel Company will
continue as a going concern which contemplates the realization of assets and the
payment of liabilities in the ordinary course of business. As described in Note
E, USS/KOBE Steel Company (USS/KOBE) from time to time has breached the
financial covenants of its debt agreements. If the minimum adjusted net worth
requirement of $275 million is not maintained throughout 1999, a specified
number of lenders may cause the debt repayment to be accelerated. If this
occurs, there is no assurance, absent a refinancing of the debt as contemplated
under the proposed transaction described in Note B, that USS/KOBE Steel Company
would have sufficient cash to meet its current debt and other obligations.
Management believes that the contractual commitment of each partner to make
capital contributions of up to $15 million will be sufficient to ensure that
adjusted net worth remains in excess of the minimum $275 million requirement
throughout 1999. Additionally, if the transaction described in Note B were
completed, the debt to which this covenant is related would be repaid. However,
if the proposed transaction described in Note B does not close, there is no
assurance that actual losses incurred by USS/KOBE will not exceed those
anticipated by management and, further, that USS/KOBE and the Bar Products Line
will be able to otherwise refinance the debt, could obtain waivers from its
lenders or could obtain additional capital contributions in excess of the
contractual commitments from each partner in sufficient amounts to meet the
adjusted net worth requirement.
The Bar Products Line's independent auditors have included a "going
concern" explanatory paragraph in their audit report accompanying the carve-out
financial statements of the Bar Products Line. This paragraph states that the
aforementioned condition raises substantial doubt about the ability of the Bar
Products Line of USS/KOBE Steel Company to continue as a going concern. The
financial statements do not include any adjustments to reflect the possible
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
B. 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 is expected to be
completed in the third quarter of 1999.
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
C--Significant Accounting Policies and Allocations. The methods by which such
amounts are attributed or allocated are deemed reasonable by the management of
USS/KOBE.
42
<PAGE>
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (AUDITED) AND MARCH 31, 1999
(UNAUDITED)
B. DESCRIPTION OF BUSINESS AND PROPOSED TRANSACTION--(CONTINUED)
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. USS/KOBE manufactures high quality steel bars, rod
and seamless tubular products, primarily for the automotive, automotive service
and energy markets.
The unaudited balance sheet as of March 31, 1999, and the related
statements of operations and cash flows for the three months ended March 31,
1998 and 1999 and the statement of changes in partners' investment for the three
months ended March 31, 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 three
months ended March 31, 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 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.
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.
43
<PAGE>
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (AUDITED) AND MARCH 31, 1999
(UNAUDITED)
C. SIGNIFICANT ACCOUNTING POLICIES AND ALLOCATIONS--(CONTINUED)
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 March 31, 1999. If the proposed transaction
that is described in Note B 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.
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
44
<PAGE>
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (AUDITED) AND MARCH 31, 1999
(UNAUDITED)
C. SIGNIFICANT ACCOUNTING POLICIES AND ALLOCATIONS--(CONTINUED)
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.
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.
45
<PAGE>
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (AUDITED) AND MARCH 31, 1999
(UNAUDITED)
C. SIGNIFICANT ACCOUNTING POLICIES AND ALLOCATIONS--(CONTINUED)
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 H).
D. RELATED PARTY TRANSACTIONS
Included in current assets and liabilities are amounts payable to
affiliates of the Partners, as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999
----------------------- ----------------------- -----------------------
RECEIVABLES PAYABLES RECEIVABLES PAYABLES RECEIVABLES PAYABLES
----------- -------- ----------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
USX Corporation.............. $ 3,805 $ 33,982 $ -- $ 37,243 $ 2,071 $ 37,129
Kobe Steel, Ltd.............. 710 211 -- 793
------- -------- ------- -------- ------- --------
TOTAL........................ $ 3,805 $ 34,692 $ -- $ 37,454 $ 2,071 $ 37,922
------- -------- ------- -------- ------- --------
------- -------- ------- -------- ------- --------
</TABLE>
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, $42,710,000 in 1998, $24,355,000 in
the first three months of 1998 and $4,892,000 in the first three months of 1999.
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, $52,000 in 1998, $18,000 in the first three months of
1998 and $10,000 in the first three months of 1999.
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, $4,168,000 in 1998, $1,882,000 in the first three months of 1998 and
$1,426,000 in the first three months of 1999. 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, $173,072,000 in
1998, $28,770,000 in the first three months of 1998 and $12,258,000 in the first
three months of 1999.
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.
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
46
<PAGE>
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (AUDITED) AND MARCH 31, 1999
(UNAUDITED)
D. RELATED PARTY TRANSACTIONS--(CONTINUED)
Products Line which totaled $126,000 in 1996, $99,000 in 1997, $240,000 in 1998,
$32,000 in the three months ended March 31, 1998 and $10,000 in the three months
ended March 31, 1999.
E. CREDIT FACILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1997 1998 1999
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Credit facilities:
Five year, $75 million revolving credit facility,
at variable rates (6.7% and 5.78% at
December 31, 1997 and 1998, respectively, and
5.78% at March 31, 1999) due December 29,
2000.......................................... $ 66,607 $ 66,607 $ 66,607
Senior notes:
Fixed rate private placement notes:
Tranche A: 6.85%; due November 21, 2002..... 44,404 44,404 44,404
Tranche B: 7.20%; due November 21, 2005..... 44,404 44,404 44,404
Tranche C: 7.47%; due November 21, 2010..... 13,321 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 6,757
1995 Series, variable rate tax-exempt securities,
principal due November 2015................... 4,745 4,745 4,745
-------- -------- ---------
$180,238 $180,238 $ 180,238
-------- -------- ---------
-------- -------- ---------
</TABLE>
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
47
<PAGE>
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (AUDITED) AND MARCH 31, 1999
(UNAUDITED)
E. CREDIT FACILITIES--(CONTINUED)
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 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 B).
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 and $2.2 million at
March 31, 1999. 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, $12,007,000
in 1998, $3,136,000 in the first three months of 1998 and $3,648,000 in the
first three months of 1999 has been allocated to the Bar Products Line based on
the related allocation of debt balances. Interest expense
48
<PAGE>
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (AUDITED) AND MARCH 31, 1999
(UNAUDITED)
E. CREDIT FACILITIES--(CONTINUED)
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, $696,000 in 1998, $169,000 in the first three months of
1998 and $54,000 in the first three months of 1999. 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, $11,720,000 in 1998, $1,106,000 in the
first three months of 1998 and $1,226,000 in the first three months of 1999.
F. 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.
49
<PAGE>
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (AUDITED) AND MARCH 31, 1999
(UNAUDITED)
F. 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):
<TABLE>
<CAPTION>
PENSION BENEFITS OPEB
-------------------- --------------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
50
<PAGE>
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (AUDITED) AND MARCH 31, 1999
(UNAUDITED)
F. 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):
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Projected benefit obligation.................................. $91,977 $ 112,711
Accumulated benefit obligation................................ 89,058 110,056
Fair value of plan assets..................................... 84,147 100,008
</TABLE>
<TABLE>
<CAPTION>
PENSION BENEFITS OPEB
-------------------------- -----------------------------
1996 1997 1998 1996 1997 1998
------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
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
------ ------ ------ ------- ------- -------
------ ------ ------ ------- ------- -------
</TABLE>
The following shows the 1998 effect of a 1% increase or decrease in the
weighted average health care cost trend rate (in thousands):
<TABLE>
<CAPTION>
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
--------------- --------------
<S> <C> <C>
Effect on total of service and interest cost components..... $ 1,481 $ (1,220)
Effect on postretirement benefit obligation................. 13,768 (11,433)
</TABLE>
51
<PAGE>
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (AUDITED) AND MARCH 31, 1999
(UNAUDITED)
G. 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):
<TABLE>
<S> <C>
1999............................................................ $ 3,263
2000............................................................ 2,452
2001............................................................ 1,472
2002............................................................ 376
2003............................................................ 154
Thereafter...................................................... 82
-------
TOTAL MINIMUM LEASE PAYMENTS.................................... $ 7,799
-------
-------
</TABLE>
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.
H. 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.
I. YEAR 2000 ISSUE--(UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Bar
Products Line or USS/KOBE's computer programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Failure by the Bar Products Line, USS/KOBE and/or significant third parties such
as power utility providers and other critical suppliers
52
<PAGE>
BAR PRODUCTS LINE OF USS/KOBE STEEL COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (AUDITED) AND MARCH 31, 1999
(UNAUDITED)
I. YEAR 2000 ISSUE--(UNAUDITED)--(CONTINUED)
and major customers, to complete Year 2000 readiness activities in a timely
manner could have an adverse effect on the Bar Products Line or USS/KOBE's
business.
USS/KOBE has formed a multi-functional Year 2000 task force to execute a
preparedness plan which addresses the readiness of USS/KOBE and their affiliates
for business computer systems, technical infrastructure, end-user computing,
third parties, manufacturing, environmental operations, systems products
produced and sold and dedicated research and development facilities. Management
has engaged qualified information technology consultants to assist in the Year
2000 impact assessment and readiness effort. USS/KOBE's progress on achieving
Year 2000 readiness is currently on pace with management's objectives and
management believes that adapting systems to reflect the year 2000 will not have
a material adverse effect on the results of operations of USS/KOBE. Costs
associated with this issue approximated $0.3 million for 1998. Estimated costs
to complete the project in 1999 approximate $2.1 million.
USS/KOBE has completed an assessment and has modified or replaced portions
of its software so that its computer financial and operating systems will
function properly. The modification and the replacement costs of this project
were fully funded from the operations of USS/KOBE.
In addition, Management is in the process of developing a strategy to
address the additional potential consequences that may result from unresolved
Year 2000 issues such as system failure or miscalculations caused by disruption
of operations. Management is also developing one or more contingency plans to
respond to such potential consequences. Management has begun a program of
querying significant third parties, including suppliers, utility and other
resource providers and customers to assess their Year 2000 readiness. Management
is not presently aware of any significant third parties, which are not expected
to be year 2000 compliant.
53
<PAGE>
(B) PRO FORMA FINANCIAL INFORMATION.
The pro forma financial information required with respect to the businesses
acquired as described in Item 2 is not included in this filing. The Company
intends to file such information not later than October 12, 1999. Certain pro
forma financial information for RTI, LLC and its subsidiaries after giving
effect to the acquisition described in Item 2 for certain periods ended or
ending prior to June 30, 1999 is included in the information filed as
Exhibit 99.1 pursuant to (c) below.
(C) EXHIBITS.
2.1-- Master Restructuring Agreement, dated as of August 13, 1999, among
Bar Technologies Inc., RES Holding Corporation, Republic Engineered
Steels, Inc., Blackstone Capital Partners II Merchant Banking Fund
L.P., Blackstone Offshore Capital Partners II L.P., Blackstone Family
Investment Partnership II L.P., The Veritas Capital Fund, L.P., HVR
Holdings, L.L.C., USX Corporation, Kobe Steel, Ltd., Kobe Delaware
Inc., USS Lorain Holding Company, Inc., USX RTI Holdings, Inc.,
Kobe/Lorain Inc., Kobe RTI Holdings, Inc., Republic Technologies
International Holdings, LLC, Republic Technologies International,
LLC, Lorain Tubular Company, L.L.C., and USS/Kobe Steel Company.*
99.1-- Disclosures required to be made pursuant to an agreement with
certain financial institutions, including Recent Developments, Risk
Factors, Unaudited Pro Forma Combined Financial Information for
Republic Technologies International, LCC and its Subsidiaries, The
Combined Business, The Consolidation Plan, Projections for Republic
Technologies International, LCC and its subsidiaries and Annex
A--Report of Beddows & Company, Hatch Management and Technology
Consulting.
- ------------------
*The Company agrees to furnish supplementally to the Securities and Exchange
Commission upon request a copy of any omitted schedule or exhibit to Exhibit
2.1.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on their behalf by the
undersigned hereunto duly authorized.
REPUBLIC TECHNOLOGIES
INTERNATIONAL, INC. (formerly Bar
Technologies Inc.)
By: /s/ Thomas N. Tyrrell
-----------------------------
Name: Thomas N. Tyrrell
Title: Chief Executive Officer
Dated: September 10, 1999
55
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
2.1 -- Master Restructuring Agreement, dated as of August 13, 1999, among Bar Technologies Inc., RES
Holding Corporation, Republic Engineered Steels, Inc., Blackstone Capital Partners II Merchant
Banking Fund L.P., Blackstone Offshore Capital Partners II L.P., Blackstone Family Investment
Partnership II L.P., The Veritas Capital Fund, L.P., HVR Holdings, L.L.C., USX Corporation, Kobe
Steel, Ltd., Kobe Delaware Inc., USS Lorain Holding Company, Inc., USX RTI Holdings, Inc.,
Kobe/Lorain Inc., Kobe RTI Holdings, Inc., Republic Technologies International Holdings, LLC,
Republic Technologies International, LLC, Lorain Tubular Company, L.L.C., and USS/Kobe Steel
Company.
99.1 -- Disclosures required to be made pursuant to an agreement with certain financial institutions,
including Recent Developments, Risk Factors, Unaudited Pro Forma Combined Financial Information for
Republic Technologies International, LCC and its Subsidiaries, The Combined Business, The
Consolidation Plan, Projections for Republic Technologies International, LCC and its Subsidiaries
and Annex A--Report of Beddows & Company, Hatch Management and Technology Consulting.
</TABLE>
<PAGE>
MASTER RESTRUCTURING AGREEMENT
AMONG
BAR TECHNOLOGIES INC.,
RES HOLDING CORPORATION,
REPUBLIC ENGINEERED STEELS, INC.,
BLACKSTONE CAPITAL PARTNERS II MERCHANT BANKING FUND L.P.,
BLACKSTONE OFFSHORE CAPITAL PARTNERS II L.P.,
BLACKSTONE FAMILY INVESTMENT PARTNERSHIP II L.P.,
THE VERITAS CAPITAL FUND, L.P. ,
HVR HOLDINGS, L.L.C.,
USX CORPORATION,
KOBE STEEL, LTD.,
KOBE DELAWARE INC.,
USS LORAIN HOLDING COMPANY, INC.,
USX RTI HOLDINGS, INC.,
KOBE/LORAIN INC.,
KOBE RTI HOLDINGS, INC.,
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC,
REPUBLIC TECHNOLOGIES INTERNATIONAL, LLC,
LORAIN TUBULAR COMPANY, LLC,
AND
USS/KOBE STEEL COMPANY
DATED AS OF
AUGUST 13, 1999
<PAGE>
MASTER RESTRUCTURING AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1 DEFINITIONS............................................2
1.1 Certain Definitions.............................................................................2
SECTION 2 ACTIONS PRIOR TO CLOSING....................................18
2.1 State Lender Consents..........................................................................18
2.2 Labor Agreements...............................................................................19
2.3 [intentionally omitted]........................................................................19
2.4 RTI PBGC Agreement.............................................................................19
2.5 RTI Credit Facility............................................................................19
2.6 RTI High Yield Offering........................................................................19
2.7 Termination of Marketing Joint Venture.........................................................20
2.8 Termination of Certain Agreements; Certain Payables............................................20
SECTION 3 CORPORATE RESTRUCTURING AT CLOSING...............................21
3.1 Spinoff of USS/Kobe Tubular Assets and Liabilities.............................................21
3.2 Formation of RTI Opco, RTI Holdings and N&T, LLC...............................................24
3.3 Merger of BarTech Merger Subsidiary With and Into RES Holding..................................24
3.4 Merger of Nimishillen & Tuscarawas Railway Company.............................................24
3.5 Merger of RESI.................................................................................25
3.6 Conveyance of RTI Opco Interests to RTI Holdings...............................................25
3.7 Liquidation and Merger of Certain BarTech Subsidiaries.........................................25
3.8 Transfer of BarTech Assets and Liabilities to RTI Opco.........................................25
3.9 Contributions to Capital of USS/Kobe; Merger of USS/Kobe Bar Business into RTI Opco............26
SECTION 4 REFINANCING TRANSACTIONS AT CLOSING...............................27
4.1 Closing of RTI High Yield Offering; Borrowing Under RTI Credit Facility; Equity Contributions..27
4.2 Repayment of RES Holding Credit Facility.......................................................28
4.3 Repayment of BarTech Senior Secured Notes, BarTech Credit Facility
and Refinanced BarTech State and Bethlehem Debt................................................28
4.4 Repayment of RESI Credit Facility and RESI Bridge Facility.....................................29
4.5 Repayment of USS/Kobe Senior Notes and USS/Kobe Credit Facility................................29
4.6 Issuance of BarTech RTI High Yield Warrants in Connection with RTI High Yield Offering.........29
4.7 No Priority in Debt Payment....................................................................29
SECTION 5 THE CLOSING...........................................29
5.1 Closing........................................................................................29
5.2 Closing Obligations............................................................................30
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 6 REPRESENTATIONS AND WARRANTIES REGARDING USS/KOBE........................31
6.1 Organization and Good Standing.................................................................31
6.2 Authority; No Conflict; Consents...............................................................33
6.3 Capitalization.................................................................................34
6.4 Financial Statements...........................................................................34
6.5 [intentionally omitted]........................................................................35
6.6 Title to Properties; Encumbrances..............................................................35
6.7 [intentionally omitted]........................................................................36
6.8 Taxes..........................................................................................36
6.9 No Material Adverse Change.....................................................................37
6.10 Employee Benefits..............................................................................37
6.11 Compliance with Legal Requirements; Governmental Authorizations................................39
6.12 Legal Proceedings; Orders......................................................................39
6.13 Contracts; No Defaults.........................................................................39
6.14 Environmental Matters..........................................................................40
6.15 Labor Relations; Compliance....................................................................41
6.16 Intellectual Property..........................................................................42
6.17 Brokers or Finders.............................................................................43
SECTION 7 REPRESENTATIONS AND WARRANTIES OF
BARTECH AND REGARDING THE BV PARTIES..............................43
7.1 Organization and Good Standing.................................................................43
7.2 Authority; No Conflict; Consents...............................................................44
7.3 Capitalization.................................................................................45
7.4 Financial Statements...........................................................................46
7.5 [intentionally omitted]........................................................................46
7.6 Title to Properties; Encumbrances..............................................................46
7.7 [intentionally omitted]........................................................................47
7.8 Taxes..........................................................................................47
7.9 No Material Adverse Change.....................................................................48
7.10 Employee Benefits..............................................................................48
7.11 Compliance with Legal Requirements; Governmental Authorizations................................49
7.12 Legal Proceedings; Orders......................................................................49
7.13 Contracts; No Defaults.........................................................................50
7.14 Environmental Matters..........................................................................50
7.15 Labor Relations; Compliance....................................................................51
7.16 Intellectual Property..........................................................................52
7.17 Brokers or Finders.............................................................................53
7.18 BarTech Public Filings.........................................................................53
7.19 Other Matters..................................................................................53
SECTION 8 REPRESENTATIONS AND WARRANTIES OF RES HOLDING..........................53
8.1 Organization and Good Standing.................................................................53
8.2 Authority; No Conflict; Consents...............................................................54
8.3 Capitalization.................................................................................55
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C> <C>
8.4 Financial Statements...........................................................................56
8.5 [intentionally omitted]........................................................................56
8.6 Title to Properties; Encumbrances..............................................................56
8.7 [intentionally omitted]........................................................................57
8.8 Taxes..........................................................................................57
8.9 No Material Adverse Change.....................................................................58
8.10 Employee Benefits..............................................................................58
8.11 Compliance with Legal Requirements; Governmental Authorizations................................59
8.12 Legal Proceedings; Orders......................................................................60
8.13 Contracts; No Defaults.........................................................................60
8.14 Environmental Matters. ........................................................................61
8.15 Labor Relations; Compliance....................................................................62
8.16 Intellectual Property..........................................................................62
8.17 Brokers or Finders.............................................................................63
8.18 RESI Public Filings............................................................................63
SECTION 9 [intentionally omitted]......................................63
SECTION 10 COVENANTS.............................................64
10.1 Access and Investigation.......................................................................64
10.2 Operation of the Business of BarTech, RES Holding and USS/Kobe.................................65
10.3 Notification...................................................................................67
10.4 No Negotiation.................................................................................67
10.5 Commercially Reasonable Best Efforts...........................................................68
10.6 Confidentiality................................................................................68
10.7 Tubular Business Excluded......................................................................69
10.8 Use of Names...................................................................................69
10.9 Non-Competition and Non-Solicitation...........................................................70
10.10 Assignment of Rights to RTI Opco...............................................................71
SECTION 11 EMPLOYMENT COVENANTS......................................72
11.1 USS/Kobe Employee Benefits and Pension Plans...................................................72
11.2 Transfer of BarTech Employees..................................................................79
11.3 Transfer Rights of Certain Employees...........................................................79
SECTION 12 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF EACH PARTY TO CLOSE.................80
12.1 No Prohibition; No Opposition..................................................................80
12.2 Consents.......................................................................................81
12.3 Contemplated Transactions......................................................................81
12.4 RTI Financing..................................................................................81
12.5 Labor Agreements and Consents..................................................................81
12.6 RTI PBGC Agreement.............................................................................81
SECTION 13 CONDITIONS PRECEDENT TO THE OBLIGATIONS OFTHE USX/KOBE PARTIES TO CLOSE.............81
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C> <C>
13.1 Accuracy of Representations....................................................................81
13.2 Performance of Covenants.......................................................................82
13.3 Equity Contributions...........................................................................82
SECTION 14 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BARTECH TO CLOSE...................82
14.1 Accuracy of Representations....................................................................82
14.2 Performance of Covenants.......................................................................83
14.3 Tubular Spinoff................................................................................83
14.4 Equity Contributions...........................................................................83
SECTION 15 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE REPUBLIC PARTIES AND THE BV PARTIES TO CLOSE...83
15.1 Accuracy of Representations....................................................................83
15.2 Performance of Covenants.......................................................................83
15.3 Tubular Spinoff................................................................................84
15.4 Equity Contributions...........................................................................84
SECTION 16 [intentionally omitted]......................................84
SECTION 17 TERMINATION............................................84
17.1 Termination Events.............................................................................84
17.2 Termination Events.............................................................................85
SECTION 18 INDEMNIFICATION; REMEDIES.....................................85
18.1 Representations; Survival......................................................................85
18.2 Indemnification With Respect to Breaches by the USX/Kobe Parties...............................86
18.3 Indemnification With Respect to Breaches by the BV Parties, BarTech and the Republic Parties...86
18.4 [intentionally omitted]........................................................................87
18.5 Indemnification With Respect to USS/Kobe Tubular Liabilities,
USS/Kobe Bar Liabilities and BarTech and Republic Liabilities..................................87
18.6 Indemnification with respect to Taxes and Unrelated Liabilities of
USX Holdings, USX RTI Holdings, Kobe Holdings and Kobe RTI Holdings............................88
18.7 Minimum Damage Requirement.....................................................................88
18.8 Procedure for Indemnification - Third Party Claims.............................................89
18.9 Procedure for Indemnification - Other Claims...................................................90
18.10 Exclusive Remedy; Specific Performance.........................................................90
18.11 Payment in RTI Holdings Common Units or RTI Common Stock.......................................90
SECTION 19 GENERAL PROVISIONS.........................................96
19.1 Expenses.......................................................................................96
19.2 Public Announcements...........................................................................97
19.3 Notices........................................................................................97
19.4 Further Assurances.............................................................................99
19.5 Stockholder Consent............................................................................99
</TABLE>
-iv-
<PAGE>
<TABLE>
<S> <C> <C>
19.6 Waiver........................................................................................100
19.7 Entire Agreement and Modification.............................................................100
19.8 Assignments, Successors and No Third Party Rights.............................................100
19.9 Severability..................................................................................101
19.10 Section Headings, Construction................................................................101
19.11 Governing Law.................................................................................101
19.12 Counterparts..................................................................................101
</TABLE>
-v-
<PAGE>
EXHIBITS
Exhibit A BarTech Assignment and Assumption Agreement
Exhibit B Bloom Caster Consent and Assumption Agreement
Exhibit C B&L Merger Agreement
Exhibit D Coke Supply Agreement
Exhibit E Continuing USS/Kobe State Debt Participation Agreement
Exhibit F Equityholders Agreement
Exhibit G N&T Merger Agreement
Exhibit H New Kobe-RTI Opco Agreements
Exhibit I Pellet Supply Agreement
Exhibit J RES Holding Assignment and Assumption Agreement
Exhibit K RES Holding Merger Agreement
Exhibit L RESI Merger Agreement
Exhibit M Round Supply Agreement
Exhibit N RTI Holdings LLC Agreement
Exhibit O RTI Opco LLC Agreement
Exhibit P RTI-USX Payables Agreement
Exhibit Q Safe-Harbor Lease Matters Agreement
Exhibit R Transactional and Monitoring Fee Agreement
Exhibit S Transition, Administrative and Utilities Services Agreement
Exhibit T Tubular Assignment and Assumption Agreement
Exhibit U USS/Kobe Merger Agreement
Exhibit V USX Environmental Indemnity Agreement
Exhibit W Sources and Uses
SCHEDULES
Schedule 3.1(d) Preliminary/Final Closing Balance Sheets
Schedule 11.1(a) Tubular Employees and Other USS/Kobe Employees.
-vi-
<PAGE>
MASTER RESTRUCTURING AGREEMENT
This Master Restructuring Agreement is entered into as of August 13,
1999, by and among Bar Technologies Inc., a Delaware corporation being renamed
"Republic Technologies International, Inc." in connection with the transactions
contemplated hereby ("BarTech"), RES Holding Corporation, a Delaware corporation
("RES Holding"), Republic Engineered Steels, Inc., a Delaware corporation
("RESI" and, together with RES Holding, the "Republic Parties"), Blackstone
Capital Partners II Merchant Banking Fund L.P., a Delaware limited partnership
("BCPII"), Blackstone Offshore Capital Partners II L.P., a Cayman Islands
exempted limited partnership ("BOCPII"), Blackstone Family Investment
Partnership II L.P., a Delaware limited partnership ("BFIPII"), The Veritas
Capital Fund, L.P., a Delaware limited partnership ("VCP"), HVR Holdings,
L.L.C., a Delaware limited liability company ("HVR" and, together with BCP II,
BOCP II, BFIP II and Veritas, the "BV Parties"), USX Corporation, a Delaware
corporation ("USX"), Kobe Steel, Ltd., a Japanese corporation ("Kobe"), Kobe
Delaware Inc., a Delaware corporation ("Kobe Delaware"), USS Lorain Holding
Company, Inc., an Ohio corporation ("USX Holdings"), USX RTI Holdings, Inc., a
Delaware corporation ("USX RTI Holdings"), Kobe/Lorain Inc., an Ohio corporation
("Kobe Holdings"), Kobe RTI Holdings, Inc. ("Kobe RTI Holdings"), USS/Kobe Steel
Company, an Ohio general partnership ("USS/Kobe" and, together with USX, Kobe,
Kobe Delaware, USX Holdings, USX RTI Holdings, Kobe Holdings and Kobe RTI
Holdings, the "USX/Kobe Parties"), Republic Technologies International Holdings,
LLC, a Delaware limited liability company, Republic Technologies International,
LLC, a Delaware limited liability company, and Lorain Tubular Company, LLC, a
Delaware limited liability company.
BACKGROUND
BCPII, BOCPII and BFIPII (together, "Blackstone") and VCP, Veritas
Capital, L.L.C., KDJ, L.L.C. and BRW Steel Holdings II, L.P. (together,
"Veritas") collectively hold controlling interests in BarTech and RES Holding,
each of which is engaged in the manufacturing, finishing, processing and
distributing of special bar quality and other products classified as
high-quality steel or alloy bars (the "Bar Business"). USX Holdings and Kobe
Holdings equally hold all the partnership interests in USS/Kobe, which is also
engaged in the Bar Business, as well as in the manufacturing, finishing,
processing and distributing of products classified as high-quality steel or
alloy tubes (the "Tubular Business").
Blackstone, Veritas, USX and Kobe have each determined that it would be
beneficial to each of them respectively to combine all the operating assets of
BarTech and RES Holding and the operating assets of the USS/Kobe Bar Business
(as defined below) into RTI Opco (as defined below). Such combination will
include the refinancing of certain existing indebtedness of
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BarTech, the Republic Parties and USS/Kobe, the purchase of additional shares of
capital stock of BarTech by Blackstone, VCP, FirstEnergy Services Corp., an Ohio
corporation ("FirstEnergy"), Sumitomo Corporation of America, a New York
corporation ("Sumitomo"), Triumph Capital Investors II, L.P. and TCI-II
Investors, L.P., each a Delaware limited partnership (collectively, "Triumph"),
First Dominion Capital, L.L.C., a Delaware limited liability company ("First
Dominion"), TCW Leveraged Income Trust, L.P., TCW Leveraged Income Trust II,
L.P., TCW Shared Opportunity Fund II, L.P., Shared Opportunity Fund III, L.P.,
each a Delaware limited partnership, and Shared Opportunity Capital Fund IIB,
L.L.C. (collectively, "TCW"), the making of capital contributions to a
subsidiary of BarTech by Subsidiaries of USX and Kobe, and the purchase of
certain warrants from the Company by Chase Securities Inc., Donaldson Lufkin &
Jenrette Securities Corporation and BancBoston Robertson Stephens Inc., all as
described in this Agreement.
This Agreement sets forth the terms and conditions upon which the
parties hereto agree that such combinations, refinancings and investments will
occur.
SECTION 1
DEFINITIONS
For purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1:
1.1 Certain Definitions. As used in this Agreement:
"Affiliate" - with respect to a specified Person, any other Person who,
directly or indirectly controls, is controlled by, or is under common control
with such specified Person; provided, however, that neither USX nor Kobe will be
deemed to control BarTech, RTI Holdings or RTI Opco following the Closing for
purposes of this definition. As used in this definition, the term "control"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of a Person, whether through
ownership of voting securities, by contract or otherwise.
"Agreement" - this Agreement together with the Disclosure Letter.
"BarTech and Republic Liabilities" - collectively, all of the
liabilities and obligations of any nature (whether known or unknown and whether
absolute, accrued, contingent or otherwise) of BarTech and its Subsidiaries
(including without limitation RTI Holdings and RTI Opco) and of RES Holding and
its Subsidiaries, whether arising before or after the Closing.
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"BarTech Assignment and Assumption Agreement" - the assignment and
assumption agreement to be entered into between BarTech and RTI Opco at or prior
to the Closing in accordance with Section 3.8, substantially in the form
attached hereto as Exhibit A.
"BarTech Credit Facility" - the Credit Agreement, dated as of April 2,
1996, amended and restated as of April 25, 1996, and further amended and
restated as of September 5, 1997, among BarTech, Bliss & Laughlin, the financial
institutions from time to time party thereto, The Chase Manhattan Bank as
Administrative Agent and Collateral Agent, and The Chase Manhattan Bank Delaware
as Fronting Bank.
"BarTech Facilities" - any real property, leaseholds, or other
interests in real property owned, leased or operated by BarTech or any of its
Subsidiaries and any buildings, plants, structures, or fixtures owned, leased or
operated by BarTech or any of its Subsidiaries.
"BarTech Material Adverse Effect" - any material adverse effect on the
business, prospects, properties, assets, financial condition, liabilities or
results of operation of BarTech and its Subsidiaries, taken as a whole, other
than any effects arising out of or resulting from changes affecting the economy
generally or the steel industry generally.
"BarTech Public Filings" - BarTech's most recent Form 10-K filed under
the Exchange Act prior to the date hereof and any BarTech reports filed under
the Exchange Act subsequent thereto and prior to the date hereof.
"BarTech Senior Secured Notes" - BarTech's Senior Secured Notes due
2001, issued in an aggregate principal amount of $91,609,000.
"BarTech's Knowledge" - BarTech will be deemed to have "Knowledge" of a
particular fact or other matter only if any individual named in Section 1.1(a)
of the Disclosure Letter has actual knowledge of such fact or other matter.
"Bliss & Laughlin" - Bliss & Laughlin Steel Company, an Illinois
corporation.
"B&L Merger Agreement" - the merger agreement to be entered into among
BarTech, Bliss & Laughlin and B&L, LLC at or prior to the Closing in accordance
with Section 3.7, substantially in the form attached hereto as Exhibit B.
"Bloom Caster Consent and Assumption Agreement" - the consent and
assumption agreement to be entered into among Batus Retail Services, Inc., RTI
Opco and USS/Kobe at the Closing in accordance with Section 5.2, substantially
in the form attached hereto as Exhibit C.
"Closing Date" - the date and time as of which the Closing takes place.
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"Coke Supply Agreement" - the coke supply agreement to be entered into
between RTI Opco and USX (with respect to its U.S. Steel Group unit) at the
Closing in accordance with Section 5.2, substantially in the form attached
hereto as Exhibit D.
"Common Stock" - shares of Common Stock, par value $.001 per share, of
BarTech.
"Consent" - any approval, consent, ratification, waiver, or other
authorization (including any Governmental Authorization).
"Contemplated Transactions" - all of the transactions contemplated by
this Agreement, including without limitation the transactions occurring under
the other Transaction Documents.
"Continuing BarTech State Debt" - (i) $5,750,000 principal amount of
Section 108 Loans guaranteed by the Commonwealth of Pennsylvania (or
subdivisions thereof), (ii) $10,006,772 principal amount of Economic Development
Set-Aside Loans guaranteed by the Commonwealth of Pennsylvania (or subdivisions
thereof), (iii) $690,000 principal amount of Community Development Block Grant
Loans guaranteed by the Commonwealth of Pennsylvania (or subdivisions thereof),
(iv) $2,500,000 principal amount of Business Infrastructure Development Loans
guaranteed by the Commonwealth of Pennsylvania (or subdivisions thereof) and (v)
$3,600,000 principal amount of Georgia Industrial Revenue Bonds guaranteed by
the State of Georgia (or subdivisions thereof).
"Continuing RESI State Debt" - $73,900,000 principal amount of Solid
Waste Revenue Bonds, 1994 Series and 1996 Series guaranteed by the State of Ohio
(or subdivisions thereof).
"Continuing USS/Kobe State Debt" - (i) $9,000,000 aggregate principal
amount of State of Ohio Variable Rate Demand Environmental Improvement Revenue
Bonds, Series 1984 (United States Steel Corporation Project) issued by the Ohio
Water Development Authority, and (ii) $4,745,000 principal amount of the
$10,160,000 aggregate principal amount of Ohio Air Quality Development
Authority, Variable Rate Environmental Improvement Revenue Bonds (USX
Corporation Project) Refunding Series of 1995.
"Continuing USS/Kobe State Debt Participation Agreement" - the
participation agreement to be entered into among RTI Opco, USX and Kobe at the
Closing in accordance with Section 5.2, substantially in the form attached
hereto as Exhibit E.
"Contract" - any written agreement, contract, collective bargaining
agreement, obligation, promise, or undertaking that is legally binding,
including property leases, if applicable.
"Controlled Group" - a controlled group of organizations within the
meaning of IRC Sections 4.14(b), (c), (m) or (o).
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5
"Disclosure Letter" - the disclosure letter executed by BarTech, RES
Holding, USX RTI Holdings and Kobe RTI Holdings concurrently with the execution
and delivery of this Agreement.
"Employee Benefit Plan" - as defined in Section 3(3) of ERISA.
"Encumbrance" - any lien, mortgage, easement, servitude, right of way,
charge, pledge, security interest, covenant, condition, restriction, or other
encumbrance.
"Environment" - soil, land surface or subsurface strata, surface waters
(including navigable waters, ocean waters, streams, ponds, drainage basins, and
wetlands), groundwaters, drinking water supply, surface water sediments, ambient
air, natural resources, plant and animal life, and any other environmental
medium.
"Environmental Law" - the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Resource Conservation and Recovery
Act, the Hazardous Materials Transportation Act, Federal and State underground
storage tank laws and regulations, all as amended, and any other Legal
Requirements relating to the Environment or applicable to the storage, handling,
transportation, release, remediation, removal, or disposal of Hazardous
Materials in each case as they may relate to or affect the subject facilities,
properties or assets or any substances, materials or wastes generated from the
subject facilities, properties or assets.
"Equity Contributions" - collectively, the transactions described in
the first sentence of Section 3.9 and in Sections 4.1(b), 4.1(c) and 4.1(d).
"Equityholders Agreement" - the amended and restated agreement among
the equityholders of BarTech and RTI Holdings to be entered into at the Closing
in accordance with Section 5.2, substantially in the form attached hereto as
Exhibit F.
"ERISA" - the Employee Retirement Income Security Act of 1974, as
amended, or any successor law, and regulations and rules issued pursuant to that
Act or any successor law.
"Exchange Act" - the Securities Exchange Act of 1934, as amended, or
any successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"54 Code" - the Internal Revenue Code of 1954, as amended and as in
effect immediately after the enactment of the Tax Equity and Fiscal
Responsibility Act of 1982.
"Governmental Authorization" - any approval, consent, license, permit,
waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement.
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"Governmental Body" - any (a) nation, state, county, city, town,
village, district, or other jurisdiction of any nature, (b) federal, state,
local, provincial, municipal, foreign, or other government, (c) governmental or
quasi-governmental authority of any nature or (d) other body exercising any
statutory, administrative, executive, judicial, legislative, police, regulatory,
or taxing authority or power.
"Hazardous Materials" - material, substance or waste that is listed,
defined, designated, or classified as, or otherwise determined to be, hazardous,
radioactive, or toxic, or a pollutant or a contaminant, under or pursuant to any
Environmental Law or any other material that could result in liability under or
pursuant to any Environmental Law, including without limitation, petroleum and
petroleum products, polychlorinated biphenyls, and asbestos-containing
materials.
"HSR Act" - Title II of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and the rules and regulation promulgated thereunder.
"Indemnified Person" - each of BarTech, USX RTI Holdings and Kobe RTI
Holdings, as applicable, to the extent such Person is or may be entitled to
indemnification pursuant to Section 18.
"Intellectual Property" - all U.S. and foreign intellectual property,
including without limitation (i)(a) patents, inventions, discoveries, processes,
designs, techniques, developments, technology, and related improvements, whether
or not patented or patentable; (b) copyrights and works of authorship in any
media, including computer hardware, software, systems, databases, documentation
and Internet site content; (c) trademarks, service marks, trade names, brand
names, corporate names, domain names, logos and trade dress; (d) trade secrets,
know-how and show-how, drawings, blueprints and all confidential or proprietary
information; and (ii) all registrations, applications and recordings related
thereto.
"Interim BarTech Balance Sheet" - the most recent balance sheet for
BarTech included within the BarTech Financial Statements.
"Interim RESI Balance Sheet" - the most recent balance sheet for RESI
included within the RESI Financial Statements.
"Interim USS/Kobe Balance Sheet" - the most recent balance sheet for
the USS/Kobe Bar Business (giving effect to the Tubular Spinoff) included within
the USS/Kobe Financial Statements.
"IRC" - the Internal Revenue Code of 1986, as amended, or any successor
law, and regulations issued pursuant to the Internal Revenue Code or any
successor law.
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"IRS" - the United States Internal Revenue Service or any successor
agency, and, to the extent relevant, the United States Department of the
Treasury.
"Kobe Technology Transfer Agreement" - the Second Kobe Technology
Transfer Agreement, dated September 1, 1993 and amended as of September 1, 1997,
between Kobe and USS/Kobe.
"Legal Requirement" - any administrative or arbitrator's award or
order, constitution, law, ordinance, principle of common law, permit,
authorization, variance, regulation, rule, statute or requirement of any
Governmental Body, including without limitation all federal, foreign, state and
local laws related to Taxes, ERISA, Hazardous Materials and the Environment,
zoning and land use, occupational safety and health, product quality and safety,
employment and labor matters.
"Lorain Works" - the Lorain works located in Lorain, Ohio.
"Material Consents" - collectively, the consents disclosed in Section
6.2, Section 7.2 and Section 8.2 of the Disclosure Letter, the NewTube Labor
Agreement Ratification and the RTI Labor Agreement Ratification.
"Mergers" - the USX Holdings/Kobe Holdings-RTI Opco Merger, the RES
Holding-BarTech Merger and the RESI-RTI Opco Merger, collectively.
"N&T Merger Agreement" - the merger agreement to be entered into among
RESI, RTI Opco, Nimishillen & Tuscarawas Railway Company and N&T, LLC at or
prior to the Closing in accordance with Section 3.4, substantially in the form
attached hereto as Exhibit G.
"New Kobe-RTI Opco Agreements" - collectively, the New Technology
Transfer Agreement, the New Technology License Agreement and the New Technology
and Trademark License Agreement.
"New Technology License Agreement" - the tire cord license agreement to
be entered into between Kobe and RTI Opco at the Closing pursuant to Section
5.2, substantially in the form attached hereto as part of Exhibit H.
"New Technology Transfer Agreement" - the technology transfer agreement
to be entered into among Kobe Technologies Proprietary, Inc., Kobe and RTI Opco
at the Closing pursuant to Section 5.2, substantially in the form attached
hereto as part of Exhibit H.
"New Technology and Trademark License Agreement" - the UHS trademark
license agreement to be entered into among Kobe and RTI Opco at the Closing
pursuant to Section 5.2, substantially in the form attached hereto as part of
Exhibit H.
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"Order" - any award, decision, injunction, decree, stipulation,
determination, writ, judgment, order, ruling, subpoena, or verdict entered,
issued, made, or rendered by any court, administrative agency, or other
Governmental Body or by any arbitrator.
"Ordinary Course of Business" - an action taken by a Person will be
deemed to have been taken in the Ordinary Course of Business only if such action
is consistent with the past practices of such Person and is taken in the
ordinary course of the day-to-day operations of such Person.
"Organizational Documents" - the constituent and organizational
documents of a Person, as amended to date, and any organizational minutes or
resolutions, including (but not restricted to) (a) with respect to a limited
liability company, its certificate of formation and operating agreement, (b)
with respect to a corporation, its articles or certificate of incorporation and
its bylaws or documents of similar effects and (c) with respect to a general or
limited partnership, its partnership agreement.
"PBGC" - the Pension Benefit Guaranty Corporation.
"Pellet Supply Agreement" - the pellet supply agreement is to be
entered between RTI Opco and USX (with respect to its U.S. Steel Group unit) at
the Closing in accordance with Section 5.2, substantially in the form attached
hereto as Exhibit I.
"Permitted Encumbrances" - (a) liens for Taxes that are not yet due and
payable, or that are being contested in good faith by appropriate proceedings
and as to which adequate reserves have been established in accordance with
generally accepted accounting principles, consistently applied, (b) mechanics',
carriers', workers', repairmen's and similar Encumbrances imposed by Legal
Requirements that have been incurred in the Ordinary Course of Business, (c)
Encumbrances and other title defects, easements and encroachments including with
respect to real property that do not materially impair the value, occupancy, or
continued use of the asset to which they relate, (d) liens on bank deposits
created in the Ordinary Course of Business and (e) zoning, entitlement, building
and other land use Legal Requirements imposed by Governmental Bodies having
jurisdiction over real property that are not violated by the current use and
operation of such real property, except where such violation would not
reasonably be expected to have a USS/Kobe Material Adverse Effect, BarTech
Material Adverse Effect or RES Holding Material Adverse Effect, as applicable.
"Person" - any individual, firm, unincorporated organization,
corporation (including any not-for-profit corporation), general or limited
partnership, limited liability company, cooperative marketing association, joint
venture, estate, trust, association or other entity as well as any syndicate or
group that would be deemed to be a person under Section 13(a)(3) of the Exchange
Act.
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"Proceeding" - any action, arbitration, audit, hearing, investigation,
litigation, or suit (whether civil, criminal, administrative, investigative, or
informal) commenced, brought, conducted, or heard by or before, any Governmental
Body or arbitrator.
"Refinanced BarTech State and Bethlehem Debt" - (i) $3,442,959
principal amount of Pennsylvania Industrial Development Authority Loans
guaranteed by the Commonwealth of Pennsylvania (or subdivisions thereof), (ii)
$6,490,636 principal amount of Sunny Day Loans guaranteed by the Commonwealth of
Pennsylvania (or subdivisions thereof), (iii) $6,929,529 principal amount of
Marine Midland Loans guaranteed by the State of New York (or subdivisions
thereof), (iv) $428,571 principal amount of Erie County Loans guaranteed by the
State of New York (or subdivisions thereof) and (v) $5,500,000 principal amount
of subordinated loans from Bethlehem Steel Corporation, together with any
Continuing BarTech State Debt for which the requisite State Debt Consents have
not been obtained prior to the Closing.
"Release" - any spilling, leaking, emitting, discharging, depositing,
escaping, leaching, dumping, or other releasing into the Environment.
"Representative" - with respect to a particular Person, any director,
officer, employee, agent, consultant, advisor, or other representative of such
Person, including legal counsel, accountants, and financial advisors.
"Republic Parties' Knowledge" - the Republic Parties will be deemed to
have "Knowledge" of a particular fact or other matter only if any individual
named in Section 1.1(b) of the Disclosure Letter has actual knowledge of such
fact or other matter.
"RES Holding Assignment and Assumption Agreement" - the assignment and
assumption agreement to be entered into among RES Holding, RTI Holdings and RTI
Opco at or prior to the Closing in accordance with Section 3.6, substantially in
the form attached hereto as Exhibit J.
"RES Holding Credit Facility" - the Credit Agreement, dated as of
September 8, 1998, among RES Holding, the financial institutions listed therein,
The Chase Manhattan Bank as Administrative Agent and Collateral Agent, and DLJ
Capital Funding, Inc. as Documentation Agent.
"RES Holding Material Adverse Effect" - any material adverse effect on
the business, prospects, properties, assets, financial condition, liabilities or
results of operation of RES Holding and its Subsidiaries, taken as a whole,
other than any effects arising out of or resulting from changes affecting the
economy generally or the steel industry generally.
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"RES Holding Merger Agreement" - the merger agreement to be entered
into among BarTech, BarTech Merger Subsidiary and RES Holding at or prior to the
Closing in accordance with Section 3.3, substantially in the form attached
hereto as Exhibit K.
"RESI Bridge Facility" - the Credit Agreement, dated as of November 6,
1998, among RESI, the Guarantors named therein, the financial institutions
listed therein, The Chase Manhattan Bank as Administrative Agent, Collateral
Agent, Documentation Agent, Syndication Agent and as an Agent, and DLJ Bridge
Finance, Inc. and BankBoston, N.A. as Agents.
"RESI Credit Facility" - the Second Amended and Restated Revolving
Credit Agreement, dated as of April 25, 1997, among RESI, BankBoston, N.A., the
other lending institutions listed on Schedule I thereto and Congress Financial
Corporation (New England), and BankBoston, N.A. as agent for itself and such
other lending institutions.
"RESI Facilities" - any real property, leaseholds, or other interests
in real property owned, leased or operated by RES Holding or any of its
Subsidiaries and any buildings, plants, structures, or fixtures owned, leased or
operated by RES Holding or any of its Subsidiaries.
"RESI Merger Agreement" - the merger agreement to be entered into among
RES Holding, RESI and RTI Opco at or prior to the Closing in accordance with
Section 3.5, substantially in the form attached hereto as Exhibit L.
"RESI Public Filings" - RESI's most recent Form 10-K filed under the
Exchange Act prior to the date hereof and any RESI reports filed under the
Exchange Act subsequent thereto and prior to the date hereof.
"Round Supply Agreement" - the round supply agreement to be entered
into among RTI Opco, NewTube and USX (with respect to its U.S. Steel Group unit)
at the Closing in accordance with Section 5.2, substantially in the form
attached hereto as Exhibit M.
"RTI Holdings LLC Agreement" - the limited liability company agreement
of RTI Holdings to be entered into among RTI Holdings, BarTech, RES Holding, USX
RTI Holdings and Kobe RTI Holdings at the Closing in accordance with Section
5.2, substantially in the form attached hereto as Exhibit N.
"RTI Holdings Series A Preferred Units" - Class A Units of RTI Holdings
(as defined in the RTI Holdings LLC Agreement).
"RTI Holdings Series C Preferred Units" - Class C Units of RTI Holdings
(as defined in the RTI Holdings LLC Agreement).
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"RTI Holdings Common Units" - Class B Units of RTI Holdings (as defined
in the RTI Holdings LLC Agreement).
"RTI Holdings Units" - collectively, the RTI Holdings Common Units, RTI
Holdings Series A Preferred Units and RTI Holdings Series C Preferred Units.
"RTI Material Adverse Effect" - any material adverse effect on the
business, prospects, properties, assets, financial condition, liabilities or
results of operation of RTI Holdings and its Subsidiaries, taken as a whole
after giving effect to the Contemplated Transactions, other than any effects
arising out of or resulting from changes affecting the economy generally or the
steel industry generally.
"RTI Opco LLC Agreement" - the limited liability company agreement of
RTI Opco to be entered into between RTI Holdings and RTI Opco at the Closing in
accordance with Section 5.2, substantially in the form attached hereto as
Exhibit O.
"RTI-USX Payables Agreement" - the agreement regarding certain USS/Kobe
Bar Business Payables to be entered into between RTI Opco and USX at the Closing
in accordance with Section 5.2, substantially in the form attached hereto as
Exhibit P.
"Safe-Harbor Lease Agreements" - collectively, (i) the Safe-Harbor
Leases, (ii) the USS/Kobe Formation Agreement, (iii) the Consent and Assumption
Agreement among Batus Holdings, Inc., Batus Retail Services, Inc., Monessen,
Inc., Sharon Specialty Steel, Inc., Sharon Steel Corporation and USS/Kobe Steel
Company, dated as of June 24, 1993, and (iv) any other documents or agreements
relating to the Safe-Harbor Leases.
"Safe-Harbor Lease Matters Agreement" - the safe-harbor lease matters
agreement to be entered into among RTI Holdings, USX, Kobe Newco, USS/Kobe and
NewTube immediately prior to the Closing in accordance with Section 5.2,
substantially in the form attached hereto as Exhibit Q.
"Safe-Harbor Leases" - collectively, (i) the Safe Harbor Lease between
Anacomp, Inc. and United States Steel Corporation, dated as of May 26, 1983,
(ii) the Safe Harbor Lease between Anacomp, Inc. and United States Steel
Corporation, dated as of June 23, 1983, (iii) the Safe Harbor Lease between
Beatrice Financial Services, Inc. and United States Steel Corporation, dated as
of January 31, 1984, (iv) the Safe Harbor Lease between Stepan Chemical Company
and United States Steel Corporation, dated as of November 21, 1983, (v) the Safe
Harbor Lease between OMC Distributors, Inc. and United States Steel Corporation,
dated as of September 15, 1983, (vi) the Safe Harbor Lease between Flightsafety
International, Inc. and United States Steel Corporation, dated as of August 1,
1983, (vii) the Agreement between Marshall Field & Company and
Wheeling-Pittsburgh Steel Corporation, dated as of September 8, 1983, and (viii)
any other lease to which USS/Kobe was a party (whether by assumption or
otherwise) at any time
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at or prior to the Closing pursuant to which elections have been made under
Section 168(f)(8) of the 54 Code.
"Subscription Agreement" - the subscription agreement, dated as of
August 10, 1999, among BarTech, FirstEnergy, Sumitomo, Triumph, First Dominion
and TCW.
"Subsidiaries" - with respect to any Person, any other Person (i) of
which (or in which) such Person owns, directly or indirectly, 50% or more of the
outstanding capital stock having ordinary voting power or voting interest to
elect the Board of Directors or any equivalent body of such Person or (ii)
otherwise controlled by such Person (irrespective of whether or not at the time
capital stock of any other class or classes of such person will or might have
voting power upon the occurrence of any contingency); provided that none of RES
Holding or its Subsidiaries will be deemed to be Subsidiaries of BarTech for
purposes of representations and warranties made hereunder.
"Suspension Spring License Agreement" - the License and Technical
Assistance Agreement, dated September 21, 1998, between Kobe and USS/Kobe.
"Taxes" - all U.S. federal, state, local or foreign taxes, charges,
fees, duties, levies or other assessments, including without limitation, net or
gross income, gross receipts, net or gross proceeds, ad valorem, real and
personal property (tangible and intangible), sales, use, franchise, user,
transfer, value-added, fuel, excess profits, occupational, employees' income
withholding, unemployment and Social Security, alternative or add-on minimum,
environmental and franchise taxes, including interest, penalties or additions to
tax attributable to or imposed on or with respect to such taxes, which are
imposed by any Governmental Body whether disputed or not.
"Tax Return" - any return (including any information return), report,
statement, schedule, notice, form, or other document or information, including
any amendment thereof, filed with or submitted to, or required to be filed with
or submitted to, any Governmental Body in connection with the determination,
assessment, collection, or payment of any Tax.
"Tire Cord License Agreement" - the License and Technical Assistance
Agreement, dated as of November 10, 1994, between Kobe and USS/Kobe.
"Transactional and Monitoring Fee Agreement" - the transactional and
monitoring fee agreement to be entered into among RTI Opco, Blackstone
Management Partners II L.L.C., Veritas Capital Management, L.L.C., USX, Kobe
Delaware and Kobe Steel USA Holdings, Inc. at the Closing in accordance with
Section 5.2, substantially in the form attached hereto as Exhibit R.
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"Transaction Documents" - this Agreement and, unless otherwise
expressly provided herein, each of the other documents, agreements and
instruments to be entered into pursuant hereto.
"Transition, Administrative and Utilities Services Agreement" - the
transition, administrative and utilities services agreement to be entered into
between RTI Opco and NewTube at the Closing in accordance with Section 5.2,
substantially in the form attached hereto as Exhibit S.
"Tubular Assignment and Assumption Agreement" - the assignment and
assumption agreement to be entered into between USS/Kobe and NewTube at or prior
to the Closing in accordance with Section 3.1, substantially in the form
attached hereto as Exhibit T.
"UHS Trademark License Agreement" - the Trademark License Agreement,
dated October 2, 1998, between Kobe and USS/Kobe.
"USS/Kobe Bar Assets" - all of the facilities, properties and assets of
USS/Kobe (including without limitation the USS/Kobe Bar Business Current
Assets), other than the USS/Kobe Tubular Assets and the USS/Kobe Formation
Agreement.
"USS/Kobe Bar Business" - the Bar Business conducted by USS/Kobe as of
the date hereof, together with any changes to such business prior to the Closing
in compliance with the terms of this Agreement.
"USS/Kobe Bar Liabilities" - all of the liabilities and obligations of
any nature (whether known or unknown and whether absolute, accrued, contingent
or otherwise), whether arising before or after the Closing (including without
limitation the USS/Kobe Bar Business Payables), of USS/Kobe, USX Holdings or
Kobe Holdings, other than the USS/Kobe Tubular Liabilities and the liabilities
and obligations described in Section 18.6.
"USS/Kobe Credit Facility" - the Credit Agreement, dated as of December
29, 1995, amended and restated as of February 26, 1999, as amended, among
USS/Kobe, the financial institutions listed therein, and The Industrial Bank of
Japan, Limited, New York Branch, as agent.
"USS/Kobe Facilities" - any real property, leaseholds, or other
interests in real property owned, leased or operated by USS/Kobe and any
buildings, plants, structures, or fixtures owned, leased or operated by
USS/Kobe.
"USS/Kobe Formation Agreement" - the Composite Conformed Asset
Purchase and Contribution Agreement among Kobe, Kobe Holdings, USX, USX Holdings
and USS/Kobe, dated as of May 31, 1989, as the same has been amended through the
date of this Agreement.
<PAGE>
14
"USS/Kobe Material Adverse Effect" - any material adverse effect on the
business, prospects, properties, assets, financial condition, liabilities or
results of operation of USX Holdings, Kobe Holdings and USS/Kobe (giving effect
to the Tubular Spinoff), taken as a whole, other than any effects arising out of
or resulting from changes affecting the economy generally or the steel industry
generally.
"USS/Kobe Merger Agreement" - the merger agreement to be entered into
among USX, USX Holdings, USX RTI Holdings, Kobe Newco, Kobe Holdings, Kobe RTI
Holdings, RTI Holdings, RTI Opco and USS/Kobe at or prior to the Closing in
accordance with Section 3.9, substantially in the form attached hereto as
Exhibit U.
"USS/Kobe Senior Notes" - Senior Notes Series A due November 21, 2002,
Series B due November 21, 2005 and Series C due November 21, 2010, issued in an
aggregate principal amount of $115,000,000.
"USS/Kobe Tubular Assets" - collectively, (i) those facilities,
properties and assets of USS/Kobe identified as such in Section 6.6 or 6.13 of
the Disclosure Letter (including without limitation the water treatment plant
relating to the D-2 landfill); provided, however, that the parties agree that
any items of material tangible personal property identified in Section 6.6 of
the Disclosure Letter as being a USS/Kobe Tubular Asset that is in fact
primarily related to the USS/Kobe Bar Business (and was thus so identified as a
USS/Kobe Tubular Asset in error) will be reallocated to become a USS/Kobe Bar
Asset following the Closing if identified by RTI Opco in writing to NewTube
within thirty Business Days following the Closing, subject to NewTube's written
approval with respect to each such item (not to be unreasonably withheld), (ii)
the USS/Kobe Tubular Business Current Assets, (iii) all non-material tangible
personal property not identified in clauses (i) or (ii) of this sentence that is
located on parcel 1, parcel 2, parcel 3 or parcel 4 (as identified in Section
6.6 of the Disclosure Letter) in the Ordinary Course of Business, (iv) all
non-material tangible personal property not identified in clauses (i), (ii) or
(iii) of this sentence that is primarily related to the USS/Kobe Tubular
Business and is identified by NewTube in writing to RTI Opco within thirty
Business Days days following the Closing, subject to RTI Opco's written approval
with respect to each such item (not to be unreasonably withheld), and (v) the
shares of capital stock of USS/Kobe International Sales Company.
"USS/Kobe Tubular Business" - the Tubular Business conducted by
USS/Kobe as of the date hereof, together with any changes to such business after
the date hereof in compliance with the terms of this Agreement.
"USS/Kobe Tubular Liabilities" - all liabilities and obligations of any
nature (whether known or unknown and whether absolute, accrued, contingent or
otherwise) to the extent arising under or relating to the USS/Kobe Tubular
Business or the operation thereof, the USS/Kobe Tubular Assets or the Tubular
Employees (whether arising before or after the Closing, and including without
limitation all such liabilities of USS/Kobe, USX Holdings, Kobe Holdings and
<PAGE>
15
their Affiliates), including without limitation, all liabilities and obligations
relating to (i) termination of any Tubular Employees on or prior to the Closing
Date, (ii) any claim made by any Tubular Employee for severance pay arising
prior to, upon, or following the Closing Date, (iii) any suit or claim of
violation for failure of any USX/Kobe Party to satisfy any of its obligations
under any collective bargaining agreement or other labor agreement with any
labor organization (including without limitation the USWA) in connection with
the Tubular Spinoff, (iv) any suit or claim of violation under WARN or any State
law for any actions taken by the USX/Kobe Parties in connection with, on or
prior to the Closing Date with regard to the Tubular Spinoff or any site of
employment, facility, operating unit or employee of the USS/Kobe Tubular
Business, (v) any violations of Environmental Laws with respect to, or release
or existence of any Hazardous Materials at, any facility or property
constituting a USS/Kobe Tubular Asset, or otherwise relating to the USS/Kobe
Tubular Business (including without limitation those liabilities and obligations
of NewTube described in section 8.6(d) of the Transition, Administrative and
Utilities Services Agreement), (vi) those liabilities and obligations to be
assumed by NewTube or retained by USX in accordance with Section 11.1 hereof,
and (vii) the USS/Kobe Tubular Business Payables and all other obligations and
liabilities of the USS/Kobe Tubular Business set forth on the USS/Kobe Tubular
Business Closing Balance Sheet.
"USWA" - United Steelworkers of America, AFL-CIO.
"USX Environmental Indemnity Agreement" - the environmental indemnity
agreement to be entered into among RTI Opco, NewTube and USX at the Closing in
accordance with Section 5.2, substantially in the form attached hereto as
Exhibit V.
"USX/Kobe Parties' Knowledge" - the USX/Kobe Parties will be deemed to
have "Knowledge" of a particular fact or other matter only if any individual
named in Section 1.1(c) of the Disclosure Letter has actual knowledge of such
fact or other matter.
1.2 Other Definitions. The following terms are defined in the
Sections indicated
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
Accrued Liability 11.1(c)(iii)
Aggregate Account Balances 11.1(f)(iii)
APBO 11.1(e)
B&L, LLC 3.7
Bar Business Background
BarTech Introduction
BarTech Asset Contribution 3.8
BarTech Financial Statements 7.4
BarTech Financing Warrants 4.6
BarTech IP 7.16(a)
BarTech Merger Subsidiary 3.3
</TABLE>
<PAGE>
16
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
BarTech Plans 7.10(a)
BCPII Introduction
BFIPII Introduction
Blackstone Background
Blackstone Equity Contribution 4.1(b)
BOCPII Introduction
BV Parties Introduction
Class D Common Stock 3.3
Closing 5.1
Current Actuary 11.1(d)(i)
Current Record Keeper 11.1(f)(iii)
Damages 18.2
Final Closing Balance Sheets 3.1(d)
First Dominion Background
First Dominion Equity Contribution 4.1(c)
FirstEnergy Background
FirstEnergy Equity Contribution 4.1(c)
First Transfer Amount 11.1(f)(ii)
First Transfer Date 11.1(f)(ii)
HVR Introduction
Infringe 6.16(b)
Initial Transfer Amount 11.1(d)(ii)
Initial Transfer Date 11.1(d)(ii)
Kobe Introduction
Kobe Delaware Introduction
Kobe Equity Contribution 4.1(b)
Kobe Holdings Introduction
Kobe Newco 3.1(a)
Kobe RTI Holdings Introduction
Marked Inventory 10.8(b)
N&T, LLC 3.2
New Affiliate 10.9(a)
NewTube 3.1(a)
NewTube Labor Agreement Ratification 2.2(a)
NewTube Spinoff Plans 11.1(d)(i)
NewTube Spinoff Savings Plans 11.1(f)(i)
NewTube VEBA 11.1(e)
Preliminary Closing Balance Sheets 3.1(c)
</TABLE>
<PAGE>
17
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
Purchased Warrants 4.1(d)
Republic Parties Introduction
RES Holding Introduction
RES Holding Asset Contribution 3.6
RES Holding-BarTech Merger 3.3
RESI Introduction
RESI Financial Statements 8.4
RESI IP 8.16(a)
RESI Plans 8.10(a)
RESI-RTI Merger 3.5
Retained Names and Marks 10.8(a)
RTI Credit Facility 2.5
RTI Debt and Equity Proceeds 4.1(a)
RTI High Yield Bonds 2.6
RTI High Yield Offering 2.6
RTI Holdings 3.2
RTI Labor Agreement Ratification 2.2(b)
RTI Opco 3.2
RTI PBGC Agreement 2.4
Section 4044 Amount 11.1(d)(i)
Second Transfer Amount 11.1(h)(ii)
Second Transfer Date 11.1(h)(ii)
Sources and Uses 2.5
State Debt Consents 2.1
Sumitomo Background
Sumitomo Equity Contribution 4.1(c)
Terminated USS/Kobe Contracts 2.8(a)
Triumph Background
Triumph Equity Contribution 4.1(c)
True-Up Amount 11.1(d)(ii)
True-Up Date 11.1(d)(ii)
TCW Background
TCW Equity Contribution 4.1(c)
Tubular Business Background
Tubular Employees 11.1(a)
Tubular Non-Union Employees 11.1(a)
Tubular Spinoff 3.1(b)
Tubular Union Employees 11.1(a)
USS/Kobe Introduction
</TABLE>
<PAGE>
18
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
USS/Kobe Bar Business Closing Balance Sheet 3.1(d)
USS/Kobe Bar Business Current Assets 3.1(c)
USS/Kobe Bar Business Payables 2.8(c)
USS/Kobe Financial Statements 6.4
USS/Kobe IP 6.16(a)
USS/Kobe Pension Plans 11.1(d)(i)
USS/Kobe Plans 6.10(a)
USS/Kobe Tubular Business Closing Balance Sheet 3.1(d)
USS/Kobe Tubular Business Current Assets 3.1(c)
USS/Kobe Tubular Business Payables 2.8(c)
USX Holdings/Kobe Holdings-RTI Opco Merger 3.9
USS/Kobe Savings Plans 11.1(f)(i)
USS/Kobe VEBA 11.1(e)
USX Equity Contribution 4.1(b)
USX Holdings Introduction
USX/Kobe Parties Introduction
USX RTI Holdings Introduction
Valuation Date 11.1(d)(i)
VCP Introduction
Veritas Background
Veritas Equity Contribution 4.1(b)
Warrant Equity Contribution 4.1(d)
</TABLE>
SECTION 2
ACTIONS PRIOR TO CLOSING
2.1 State Lender Consents. Each of BarTech and the Republic Parties
will use commercially reasonable best efforts to obtain as promptly as
practicable all necessary consents so that the Continuing BarTech State Debt and
Continuing RESI State Debt, respectively, may remain outstanding following the
Closing without resulting in a material violation or breach of any provision of,
or give any Person the right to declare a default or exercise any remedy
<PAGE>
19
thereunder, or to accelerate the maturity or performance of, or to cancel,
terminate, or modify, any of the foregoing (collectively, the "State Debt
Consents").
2.2 Labor Agreements.
(a) The USX/Kobe Parties will use commercially reasonable best
efforts to obtain as promptly as practicable USWA member ratification
of the new labor agreement previously negotiated with the USWA covering
those union employees of USS/Kobe who will be employees of NewTube
following the Closing, such ratification to be in the manner determined
to be appropriate by the USWA (the "NewTube Labor Agreement
Ratification").
(b) BarTech and RES Holding will use commercially reasonable
best efforts to obtain as promptly as practicable USWA member
ratification of the new labor agreement previously negotiated with the
USWA covering those union employees of USS/Kobe who will be employees
of RTI Opco or its Subsidiaries following the Closing, such
ratification to be in the manner determined to be appropriate by the
USWA (the "RTI Labor Agreement Ratification").
2.3 [intentionally omitted]
2.4 RTI PBGC Agreement. BarTech and the Republic Parties, in
consultation with the USX/Kobe Parties, will use commercially reasonable best
efforts as promptly as practicable to reach agreement with the PBGC prior to the
Closing Date with respect to any material objections of the PBGC regarding the
Employee Benefit Plans of RTI Opco and its Subsidiaries and NewTube that will
exist following the Closing pursuant to the terms of this Agreement, with as
little financial detriment to RTI Opco, NewTube and their post-Closing
Affiliates as practicable and with such agreement to be reasonably satisfactory
to BarTech, the Republic Parties and the USX/Kobe Parties (the "RTI PBGC
Agreement").
2.5 RTI Credit Facility. BarTech and the Republic Parties, in
consultation with the USX/Kobe Parties, will use commercially reasonable best
efforts as promptly as practicable to enter into a new revolving bank credit
facility for RTI Opco that, upon the Closing, will be secured by the inventory
and receivables of RTI Opco and its Subsidiaries, provide borrowing capacity in
an amount at least consistent with the "sources and uses" listed on Exhibit W
hereto (the "Sources and Uses"), and otherwise be on terms reasonably
satisfactory in all material respects to BarTech, the Republic Parties and the
USX/Kobe Parties (the "RTI Credit Facility").
2.6 RTI High Yield Offering. BarTech and the Republic Parties, in
consultation with the USX/Kobe Parties, will use commercially reasonable best
efforts to prepare as promptly as practicable an offering memorandum for an
offering by RTI Opco of high yield debt securities (the "RTI High Yield Bonds")
to be issued on the Closing Date in an amount at least consistent with the
Sources and Uses, to be secured by RTI Opco's and its Subsidiaries' property,
plant and
<PAGE>
20
equipment and otherwise to be on terms reasonably satisfactory in all
material respects to BarTech, the Republic Parties and the USX/Kobe Parties (the
"RTI High Yield Offering") (provided that BarTech, the Republic Parties and the
USX/Kobe Parties acknowledge that BarTech Financing Warrants will be issued in
connection with the RTI High Yield Offering, as provided in Sections 4.1 and
4.6).
2.7 Termination of Marketing Joint Venture. BarTech and RESI hereby
terminate the limited liability company agreement of Republic Technologies
International Marketing, LLC effective as of the Closing.
2.8 Termination of Certain Agreements; Certain Payables.
(a) Effective as of the Closing, (i) USS/Kobe and USX hereby
terminate each Contract of USS/Kobe or any of its Subsidiaries that is
with or for the benefit of USX or any Affiliate of USX other than
USS/Kobe (and USX will cause each of its Affiliates to effect such
termination as of the Closing), and (ii) USS/Kobe, Kobe and Kobe
Delaware hereby terminate each Contract of USS/Kobe or any of its
Subsidiaries that is with or for the benefit of Kobe or any Affiliate
of Kobe other than USS/Kobe (and Kobe and Kobe Delaware will cause each
of their Affiliates to effect such termination as of the Closing), in
each case other than any such Contract that is (A) a Transaction
Document, (B) a USS/Kobe Tubular Asset or (C) set forth in Section
2.8(a) of the Disclosure Letter (collectively, the "Terminated USS/Kobe
Contracts").
(b) Effective as of the Closing, each of USX, Kobe and Kobe
Delaware hereby releases in full (and will cause each of its respective
Subsidiaries other than USS/Kobe to release in full) USS/Kobe, RTI Opco
and their post-closing Affiliates from any and all agreements,
obligations and liabilities of any nature or kind (including without
limitation those arising under the Terminated USS/Kobe Contracts and
any Contracts of USS/Kobe that are USS/Kobe Tubular Assets), other than
(i) accrued payables owed to USX, Kobe or any of their respective
Affiliates by the USS/Kobe Bar Business to the extent reflected as such
on the USS/Kobe Bar Business Closing Balance Sheet and (ii) agreements,
obligations and liabilities of RTI Opco, RTI Holdings and BarTech
arising under any of the Transaction Documents (including without
limitation liability for USS/Kobe Bar Liabilities).
(c) Effective as of the Closing, (i) RTI Opco hereby agrees to
pay to USX, Kobe and their respective post-closing Affiliates when due
(subject to the terms of the RTI-USX Payables Agreement) those
liabilities and other obligations of the USS/Kobe Bar Business
reflected as such on the USS/Kobe Bar Business Closing Balance Sheet
(collectively, the "USS/Kobe Bar Business Payables"), and (ii) NewTube
hereby agrees to pay when due (i) to RTI Opco, those accounts
receivable of the USS/Kobe Bar Business reflected on the USS/Kobe Bar
Business Closing Balance Sheet as obligations of NewTube to the
USS/Kobe Bar Business, and (ii) to whomever owed, all other
<PAGE>
21
liabilities and other obligations of the USS/Kobe Tubular Business
reflected as such on the USS/Kobe Tubular Business Closing Balance
Sheet (collectively, the "USS/Kobe Tubular Business Payables").
SECTION 3
CORPORATE RESTRUCTURING AT CLOSING
3.1 Spinoff of USS/Kobe Tubular Assets and Liabilities.
(a) Prior to the date hereof (i) USX has formed USX RTI
Holdings as a new direct wholly owned corporate Subsidiary of USX that
will hold the RTI Holdings Common Units to be acquired by USX pursuant
to the Contemplated Transactions, (ii) Kobe Delaware Inc., a Subsidiary
of Kobe, has formed a new direct wholly owned corporate Subsidiary
("Kobe Newco"), and Kobe Newco has formed Kobe RTI Holdings as a new
direct wholly owned corporate Subsidiary of Kobe Newco that will hold
the RTI Holdings Common Units to be acquired by Kobe pursuant to the
Contemplated Transactions, (iii) Kobe Delaware has contributed all of
the outstanding capital stock of Kobe Holdings to Kobe Newco, and (iv)
USX and Kobe Newco have formed a new joint venture limited liability
company (owned equally directly by USX and Kobe Newco) to hold the
USS/Kobe Tubular Business as of the Closing ("NewTube"). At or prior to
the Closing and prior to completion of the transactions described in
Section 3.9, USS/Kobe and NewTube will enter into the Tubular
Assignment and Assumption Agreement.
(b) Immediately prior to the Closing and in accordance with
the Tubular Assignment and Assumption Agreement, (i) USS/Kobe will
convey the USS/Kobe Tubular Assets to NewTube in exchange for a 99.99%
equity interest in NewTube and NewTube's assumption from USS/Kobe of
the USS/Kobe Tubular Liabilities and (ii) USS/Kobe immediately
thereafter will distribute such 99.99% equity interest in NewTube (A)
49.995% to Kobe Holdings, and Kobe Holdings immediately thereafter will
distribute such equity interests in NewTube to Kobe Newco (which,
together with the .005% equity interest in NewTube received by Kobe
Newco upon the formation of NewTube, will result in Kobe Newco owning
50% of the equity interests in NewTube), and (B) 49.995% percent to USX
Holdings, and USX Holdings immediately thereafter will distribute such
equity interests in NewTube to USX (which, together with the .005%
equity interest in NewTube received by USX upon the formation of
NewTube, will result in USX owning 50% of the equity interests in
NewTube) (collectively, the "Tubular Spinoff").
(c) Pursuant to the Tubular Spinoff, (i) USS/Kobe will retain
(A) all of the cash and cash-equivalents of USS/Kobe (including without
limitation the $878,916 of cash contributed by USX and Kobe to USS/Kobe
and described in Section 3.9(a)(ii)), which will be held as cash or
cash-equivalents by USS/Kobe through the Closing), and
<PAGE>
22
such cash and cash-equivalents will be reflected on the USS/Kobe Bar
Business Closing Balance Sheet, and (B) all of the inventory,
receivables and other current assets of USS/Kobe relating to the
USS/Kobe Bar Business, including without limitation those identified as
such on the USS/Kobe Bar Business Closing Balance Sheet (collectively,
the "USS/Kobe Bar Business Current Assets"), and (ii) NewTube will
receive all of the inventory, receivables and other current assets of
USS/Kobe relating to the USS/Kobe Tubular Business to the extent
reflected as such on the USS/Kobe Tubular Business Closing Balance
Sheet.
(d) At the Closing, USS/Kobe will deliver to RTI Opco (i) an
unaudited balance sheet of the USS/Kobe Bar Business as of August 1,
1999 (including the underlying workpapers that show the allocations of
individual accounts receivable, accounts payable and items of inventory
to the USS/Kobe Bar Business), and (ii) an unaudited balance sheet of
the USS/Kobe Tubular Business as of August 1, 1999 (including the
underlying workpapers that show the allocations of individual accounts
receivable, accounts payable and items of inventory to the USS/Kobe
Tubular Business), each giving effect to the Tubular Spinoff as though
it had occurred on such date and prepared in good faith by USS/Kobe in
consultation with RTI Opco in accordance with generally accepted
accounting principles consistently applied (subject to the same
exceptions stated in Section 6.4 with respect to the unaudited balance
sheets included in the USS/Kobe Financial Statements, and provided that
such balance sheets may be presented together as a single document that
shows the allocation of each line item between the USS/Kobe Bar
Business and USS/Kobe Tubular Business) (collectively, the "Preliminary
Closing Balance Sheets"). The Preliminary Closing Balance Sheets are
attached as Schedule 3.1(d) to this Agreement.
(d) Within thirty (30) Business Days following the Closing
Date, NewTube will deliver to RTI Opco (i) an unaudited balance sheet
of the USS/Kobe Bar Business as of immediately following the
consummation of the Tubular Spinoff (including the underlying
workpapers that show the allocations of individual accounts receivable,
accounts payable and items of inventory to the USS/Kobe Bar Business)
(subject to any adjustments as described below in this Section 3.1(d),
the "USS/Kobe Bar Business Closing Balance Sheet"), and (ii) an
unaudited balance sheet of the USS/Kobe Tubular Business as of
immediately following consummation of the Tubular Spinoff (including
the underlying workpapers that show the allocations of individual
accounts receivable, accounts payable and items of inventory to the
USS/Kobe Tubular Business) (subject to any adjustments as described
below in this Section 3.1(d), the "USS/Kobe Tubular Business Closing
Balance Sheet" and, collectively with the USS/Kobe Bar Business Closing
Balance Sheet, the "Final Closing Balance Sheets"), each prepared in
good faith by NewTube based solely upon (A) items appearing in the
respective Preliminary Closing Balance Sheet delivered at the Closing,
(B) any changes to the balances of
<PAGE>
23
particular current assets and current liabilities set forth in such
Preliminary Closing Balance Sheet occurring subsequent to the date of
such Preliminary Closing Balance Sheet in the Ordinary Course of
Business (but in no event will there be any reallocation between the
USS/Kobe Bar Business and the USS/Kobe Tubular Business of current
assets or current liabilities appearing in the Preliminary Closing
Balance Sheets without the written agreement of RTI Opco and NewTube;
provided, however, that the parties agree that (I) current liabilities
consisting of accounts payable appearing in the Preliminary Closing
Balance Sheet relating to the USS/Kobe Bar Business will be reallocated
to the USS/Kobe Tubular Business Closing Balance Sheet to the extent
that they relate to the USS/Kobe Tubular Business and were misallocated
to the Preliminary Closing Balance Sheet relating to the USS/Kobe Bar
Business in error and (II) current assets consisting of inventory
appearing in the Preliminary Closing Balance Sheet relating to the
USS/Kobe Tubular Business will be reallocated to the USS/Kobe Bar
Business Closing Balance Sheet to the extent that they relate to the
USS/Kobe Bar Business and were misallocated to the Preliminary Closing
Balance Sheet relating to the USS/Kobe Tubular Business in error), and
(C) the introduction of new current assets and/or current liabilities
to the extent arising subsequent to the date of a particular
Preliminary Balance Sheet in the Ordinary Course of Business (but in no
event will any new current assets be included in the USS/Kobe Tubular
Business Closing Balance Sheet that did not appear in the Preliminary
Closing Balance Sheet relating to the USS/Kobe Tubular Business, in
each case without the written agreement of RTI Opco; provided, however,
that the parties agree that current assets consisting of inventory
delivered by the USS/Kobe Bar Business to the USS/Kobe Tubular Business
in the Ordinary Course of Business after August 1, 1999 will be
included in the USS/Kobe Tubular Business Closing Balance Sheet to the
extent that an offsetting payable owed by the USS/Kobe Tubular Business
to the USS/Kobe Bar Business is reflected in both of the Final Closing
Balance Sheets in an amount equal to the fair market value of such
inventory), each prepared in accordance with generally accepted
accounting principles consistently applied (subject to the same
exceptions stated in Section 6.4 with respect to the unaudited balance
sheets included in the USS/Kobe Financial Statements). Within thirty
(30) Business Days following its receipt of the Final Closing Balance
Sheets, RTI Opco will notify NewTube in writing if it disagrees with
any component of such balance sheets (setting forth in reasonable
detail each such disagreement and the basis therefore), and if RTI Opco
does not deliver such a notice of disagreement, all parties hereto will
be deemed to have accepted such balance sheets as the Final Closing
Balance Sheets for all purposes hereunder, and such Final Closing
Balance Sheets will be attached as Schedule 3.1(d) to this Agreement.
If RTI Opco delivers to NewTube a notice of disagreement as described
in the preceding sentence, senior executives of RTI Opco and NewTube
promptly will meet in person and will negotiate in good faith to
resolve each item set forth in such notice of disagreement, and if they
are able to resolve such items to the reasonable satisfaction of both
RTI Opco and NewTube, all parties hereto will be deemed to have
accepted such balance sheets (with such written modifications as RTI
Opco and NewTube have agreed in reaching
<PAGE>
24
such resolution) as the Final Closing Balance Sheet for all purposes
hereunder, and such Final Closing Balance Sheets will be attached as
Schedule 3.1(d) to this Agreement. If RTI Opco and NewTube are unable
to resolve each item set forth in RTI Opco's notice of disagreement
within ten (10) Business Days following the delivery thereof, all
remaining items of disagreement promptly shall be resolved by KPMG Peat
Marwick in accordance with the principles set forth in this Section 3.1
(and RTI Opco and NewTube will bear 71.5% and 28.5% of the cost of such
accountant, respectively), and such accountant's resolution of each
such remaining item of disagreement will be final and all parties
hereto will be deemed to have accepted such balance sheets (with such
written resolutions to items of disagreement as such accountant shall
have reached) as the Final Closing Balance Sheet for all purposes
hereunder, and such Final Closing Balance Sheets will be attached as
Schedule 3.1(d) to this Agreement.
3.2 Formation of RTI Opco, RTI Holdings and N&T, LLC. Prior to the date
hereof, (i) RESI has formed a new wholly owned limited liability company
subsidiary that will hold all the assets and liabilities (directly and through
its Subsidiaries) of each of BarTech, RESI and the USS/Kobe Bar Business
following the Closing (except as otherwise expressly provided in Section 3.8)
("RTI Opco"), (ii) RES Holding has formed a new wholly owned limited liability
company subsidiary that will hold all of the outstanding membership interests in
RTI Opco following the Closing ("RTI Holdings") and (iii) RTI Opco has formed a
new wholly owned limited liability company subsidiary that will hold the assets
and liabilities of Nimishillen & Tuscarawas Railway Company ("N&T, LLC")
following the Closing.
3.3 Merger of BarTech Merger Subsidiary With and Into RES Holding. At
or prior to the Closing, BarTech will form a new special purpose wholly owned
corporate subsidiary that will be merged with and into RES Holding at the
Closing ("BarTech Merger Subsidiary"), and BarTech, BarTech Merger Subsidiary
and RES Holding will enter into the RES Holding Merger Agreement. At the Closing
and in accordance with the RES Holding Merger Agreement, BarTech Merger
Subsidiary will be merged with and into RES Holding, with RES Holding surviving
and the outstanding shares of RES Holding being converted into such number of
shares of Class D Common Stock, par value $.001 per share, of BarTech ("Class D
Common Stock") as is agreed between BarTech and RES Holding (the "RES
Holding-BarTech Merger").
3.4 Merger of Nimishillen & Tuscarawas Railway Company. At or prior to
the Closing, RESI, RTI Opco, Nimishillen & Tuscarawas Railway Company and N&T,
LLC will enter into the N&T Merger Agreement. At the Closing and in accordance
with the N&T Merger Agreement, following completion of the transaction described
in Section 3.3, RESI will cause Nimishillen & Tuscarawas Railway Company to be
merged with and into N&T, LLC, with N&T, LLC surviving and the outstanding
shares of Nimishillen & Tuscarawas Railway Company being converted into
membership interests in RTI Opco.
3.5 Merger of RESI. At or prior to the Closing, RES Holding, RESI and
RTI Opco will enter into the RESI
<PAGE>
25
Merger Agreement. At the Closing and in accordance with the RESI Merger
Agreement, following completion of the transaction described in Section 3.4,
RESI will merge with and into RTI Opco, with RTI Opco surviving and the
outstanding shares of RESI being converted into RTI Holdings Common Units (the
"RESI-RTI Merger").
3.6 Conveyance of RTI Opco Interests to RTI Holdings. At or prior to
the Closing, RES Holding, RTI Holdings and RTI Opco will enter into the RES
Holding Assignment and Assumption Agreement. At the Closing and in accordance
with the RES Holding Assignment and Assumption Agreement, following completion
of the transaction described in Section 3.5, (i) RES Holding will contribute to
RTI Holdings all of the outstanding membership interests in RTI Opco and (ii)
RTI Opco will assume all of RES Holding liabilities (including without
limitation any Taxes arising from the Contemplated Transactions) (together, the
"RES Holding Asset Contribution").
3.7 Liquidation and Merger of Certain BarTech Subsidiaries. At or prior
to the Closing, (i) BarTech will cause Bliss & Laughlin Industries Inc. to be
liquidated (which will result in Bliss & Laughlin and Canadian Drawn Steel
Company becoming directly held wholly owned Subsidiaries of BarTech), (ii)
BarTech will form a new wholly owned limited liability company subsidiary that
will hold the assets and liabilities of Bliss & Laughlin ("B&L, LLC") following
the Closing and (iii) BarTech, Bliss & Laughlin and B&L, LLC will enter into the
B&L Merger Agreement. At the Closing and in accordance with the B&L Merger
Agreement, following completion of the transaction described in Section 3.6,
BarTech will cause Bliss & Laughlin to be merged with and into B&L, LLC, with
B&L, LLC surviving and the outstanding shares of Bliss & Laughlin being
converted into membership interests in B&L, LLC.
3.8 Transfer of BarTech Assets and Liabilities to RTI Opco. At or prior
to the Closing, BarTech, RTI Holdings and RTI Opco will enter into the BarTech
Assignment and Assumption Agreement. At the Closing and in accordance with the
BarTech Assignment and Assumption Agreement, following completion of the
transactions described in Section 3.7, BarTech will convey all of its assets
(other than the shares of RES Holding, BarTech's rights arising under any of the
Transaction Documents to which it is a party, and any tax benefit accruing or
arising at or prior to the Closing Date of BarTech, including without limitation
any net operating loss, alternative minimum tax credit and general business
credit carryforward existing as of the Closing Date) to RTI Opco, in
consideration of which (i) BarTech will receive (A) RTI Holdings Common Units
representing, in the aggregate with those RTI Holdings Common Units held by RES
Holding, 70.233151% of the RTI Holdings Common Units to be outstanding upon
completion of the Closing, (B) 1,100 RTI Holdings Series A Preferred Units
(having an aggregate liquidation preference of $5,500,000) and (C) 30,000 RTI
Holdings Series C Preferred Units (having an aggregate liquidation preference of
$30,000,000), and (ii) RTI Opco will assume all of BarTech's liabilities
(including without limitation any Taxes arising from the Contemplated
Transactions) (together, the "BarTech Asset Contribution").
3.9 Contributions to Capital of USS/Kobe; Merger of USS/Kobe Bar
Business into RTI Opco.
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(a) Prior to the date hereof, (i) USX and Kobe have
contributed equally to the capital of USS/Kobe an aggregate of $10
million of cash, thereby causing the USS/Kobe Credit Facility not to
exceed $75 million principal amount outstanding (and resulting in RTI
Opco being required to expend $10 million less of RTI Debt and Equity
Proceeds pursuant to Section 4.5 below in connection with the repayment
in full of amounts outstanding under the USS/Kobe Credit Facility at
the Closing), and (ii) USX and Kobe have contributed to the capital of
USS/Kobe an additional aggregate of $878,916 of cash, thereby causing
the cash received by RTI Opco as a result of the USX Holdings/Kobe
Holdings-RTI Opco Merger to be increased by that amount (and resulting
in RTI Opco being required to obtain $878,916 less of Equity
Contributions pursuant to Section 4.1(b) below).
(b) At or prior to the Closing, USX, USX Holdings, USX RTI
Holdings, Kobe Newco, Kobe Holdings, Kobe RTI Holdings, RTI Holdings,
RTI Opco and USS/Kobe will enter into the USS/Kobe Merger Agreement. At
the Closing and in accordance with the USS/Kobe Merger Agreement,
following completion of the transactions described in Sections 3.1 and
3.8, (i) USX Holdings will merge with and into RTI Opco, with RTI Opco
surviving and the outstanding stock of USX Holdings being converted
into RTI Holdings Common Units representing 15.568073% of the RTI
Holdings Common Units to be outstanding upon completion of the Closing,
and (ii) Kobe Holdings will merge with and into RTI Opco, with RTI Opco
surviving and the outstanding stock of Kobe Holdings being converted
into RTI Holdings Common Units representing 14.198775% of the RTI
Holdings Common Units to be outstanding upon completion of the Closing
(which under Ohio law will result in (A) the automatic termination of
the USS/Kobe general partnership, and (B) RTI Opco becoming the
successor of Kobe Holdings and USX Holdings, with all of the assets and
liabilities of USS/Kobe, Kobe Holdings and USX Holdings thereby
becoming assets and liabilities of RTI Opco) (the foregoing steps
(i)-(ii), collectively, the "USX Holdings/Kobe Holdings-RTI Opco
Merger").
(c) Immediately following consummation of the USX
Holdings/Kobe Holdings-RTI Opco Merger, (i) USX will contribute to USX
RTI Holdings all of the RTI Holdings Common Units held directly or
indirectly by USX (and none of its other assets or liabilities) and
(ii) Kobe Newco will contribute to Kobe RTI Holdings all of the RTI
Holdings Common Units held directly or indirectly by Kobe Newco (and
none of its other assets or liabilities). Upon completion of the
transactions contemplated by this Section 3 and Section 4, the sole
holders of RTI Holdings Units will be (i) BarTech and RES Holding
(collectively owning 70.233151% of the outstanding RTI Holdings Common
Units, and with BarTech owning all of the outstanding RTI Holdings
Series A Preferred Units and RTI Holdings Series C Preferred Units),
(ii) USX RTI Holdings (owning 15.568073% of the outstanding RTI
Holdings Common Units) and (iii) Kobe RTI Holdings (owning 14.198775%
of the outstanding RTI Holdings Common Units).
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27
SECTION 4
REFINANCING TRANSACTIONS AT CLOSING
4.1 Closing of RTI High Yield Offering; Borrowing Under RTI Credit
Facility; Equity Contributions.
(a) Concurrently with the Closing, RTI Opco will (i) obtain
the net proceeds of the RTI High Yield Offering and (ii) close the RTI
Credit Facility and borrow an amount under the RTI Credit Facility such
that, when combined with the proceeds of the RTI High Yield Offering
and the Equity Contributions, such combined amount (the "RTI Debt and
Equity Proceeds") will be sufficient to effect the repayments of
existing indebtedness contemplated hereby and the payment or
reimbursement of all fees, transfer taxes or related fees and
out-of-pocket expenses incurred by each of the parties hereto and their
Affiliates in connection with the Contemplated Transactions.
(b) At the Closing and immediately prior to the BarTech Asset
Contribution, (i) BCPII, BOCPII and BFIPII will purchase from BarTech
an aggregate of 894,745 of Class D Common Stock, respectively, for an
aggregate cash purchase price of $50,000,000 (collectively, the
"Blackstone Equity Contribution") and (ii) VCP will purchase from
BarTech 322,108 shares of Class D Common Stock for an aggregate cash
purchase price of $18,000,000 (the "Veritas Equity Contribution"). At
the Closing and immediately following the USX Holdings/Kobe
Holdings-RTI Opco Merger, (i) USX RTI Holdings will make a cash capital
contribution to RTI Holdings in the amount of $14,560,542 (which
contribution will not increase the 15.568073% of the outstanding RTI
Holdings Common Units to be held by USX RTI Holdings upon completion of
the Closing) (the "USX Equity Contribution"), and RTI Holdings will in
turn immediately contribute such cash to the capital of RTI Opco, and
(ii) Kobe RTI Holdings will make a cash capital contribution to RTI
Holdings in the amount of $9,560,542 (which contribution will not
increase the 14.198775% of the outstanding RTI Holdings Common Units to
be held by Kobe RTI Holdings upon completion of the Closing) (the "Kobe
Equity Contribution"), and RTI Holdings will in turn immediately
contribute such cash to the capital of RTI Opco.
(c) At the Closing and immediately prior to the BarTech Asset
Contribution, pursuant to the Subscription Agreement (i) First Energy
will purchase from BarTech 30,000 shares of Class C Convertible
Preferred Stock for an aggregate cash purchase price of $30,000,000
(the "FirstEnergy Equity Contribution"), (ii) Sumitomo will purchase
from BarTech 53,684.7 shares of Class D Common Stock for an aggregate
cash purchase price of $3,000,000 (the "Sumitomo Equity Contribution"),
(iii) Triumph will purchase from BarTech an aggregate of 87,685 shares
of Class D Common Stock for an aggregate cash purchase price of
$4,900,000 (the "Triumph Equity Contribution"), (iv) First Dominion
will purchase from BarTech 35,789.8 shares of Class D Common
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28
Stock for an aggregate cash purchase price of $2,000,000 (the "First
Dominion Equity Contribution") and (v) TCW will purchase from BarTech
an aggregate of 89,474.5 shares of Class D Common Stock for an
aggregate cash purchase price of $5,000,000 (the "TCW Equity
Contribution").
(d) At the Closing and immediately prior to the BarTech Asset
Contribution, pursuant to a subscription agreement, dated as of August
13, 1999, among BarTech, Chase Securities Inc., Donaldson Lufkin &
Jenrette Securities Corporation and BancBoston Robertson Stephens Inc.,
Chase Securities Inc., Donaldson Lufkin & Jenrette Securities
Corporation and BancBoston Robertson Stephens Inc. will purchase from
BarTech an aggregate of 65,892 warrants (the "Purchased Warrants") to
purchase an aggregate of 127,501 shares of Class D Common Stock (with
each such warrant being exercisable for 1.935 shares of Class D Common
Stock at an exercise price of $.01 per warrant) for a purchase price of
$108.13137 per warrant and an aggregate purchase price of $7,125,000
(the "Warrant Equity Contribution").
4.2 Repayment of RES Holding Credit Facility. At the Closing,
concurrent with the consummation of the RES Holding Asset Contribution (and
prior to the BarTech Asset Contribution), BarTech will utilize sufficient
proceeds of the Equity Contributions to repay in full all amounts outstanding
under the RES Holding Credit Facility, and RTI Opco will keep available
sufficient liquidity to pay or reimburse all the fees and expenses of the
Republic Parties that are to be borne by RTI Opco in accordance with Section
19.1(a).
4.3 Repayment of BarTech Senior Secured Notes, BarTech Credit Facility
and Refinanced BarTech State and Bethlehem Debt. At the Closing, concurrent with
the consummation of the BarTech Asset Contribution, (i) RTI Opco will utilize
sufficient RTI Debt and Equity Proceeds to effect a covenant defeasance (or
otherwise cash-collateralize to the extent necessary to permit consummation of
the Contemplated Transactions) as of the Closing with respect to all outstanding
BarTech Senior Secured Notes, including without limitation any penalties,
interest and make-whole premiums, RTI Opco will keep available sufficient
liquidity to pay or reimburse all the fees and expenses of BarTech and the BV
Parties that are to be borne by RTI Opco in accordance with Section 19.1(a), and
BarTech will call for redemption all outstanding BarTech Senior Secured Notes
pursuant to the terms of the indenture and other documents relating thereto and
thereafter redeem such BarTech Senior Secured Notes at the earliest permissible
date following the Closing, (ii) RTI Opco will utilize sufficient RTI Debt and
Equity Proceeds to repay in full all amounts outstanding under the BarTech
Credit Facility, including without limitation any penalties, interest and
make-whole premiums, and (iii) RTI Opco will utilize sufficient RTI Debt and
Equity Proceeds to repay all outstanding Refinanced BarTech State and Bethlehem
Debt, including without limitation any penalties, interest and make-whole
premiums.
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29
4.4 Repayment of RESI Credit Facility and RESI Bridge Facility. At the
Closing, concurrent with the consummation of the RESI-RTI Merger, (i) RTI Opco
will utilize sufficient RTI Debt and Equity Proceeds to repay in full all
amounts outstanding under the RESI Credit Facility, including without limitation
any penalties, interest and make-whole premiums, and (ii) RTI Opco will utilize
sufficient RTI Debt and Equity Proceeds to repay in full all amounts outstanding
under the RESI Bridge Facility, including without limitation any penalties,
interest and make-whole premiums.
4.5 Repayment of USS/Kobe Senior Notes and USS/Kobe Credit Facility. At
the Closing, concurrent with the consummation of the USX Holdings/Kobe
Holdings-RTI Opco Merger, (i) RTI Opco will utilize sufficient RTI Debt and
Equity Proceeds to redeem in full all outstanding USS/Kobe Senior Notes,
including without limitation any penalties, interest and make-whole premiums,
and RTI Opco will keep available sufficient liquidity to pay or reimburse all
the fees and expenses of USX, Kobe and USS/Kobe that are to be borne by RTI Opco
in accordance with Section 19.1(a), and (ii) RTI Opco will utilize sufficient
RTI Debt and Equity Proceeds to repay in full all amounts outstanding under the
USS/Kobe Credit Facility, including without limitation any penalties, interest
and make-whole premiums.
4.6 Issuance of BarTech RTI High Yield Warrants in Connection with RTI
High Yield Offering. At the Closing, BarTech will contribute to RTI Holdings for
delivery to the purchasers of RTI High Yield Bonds 425,000 warrants to purchase
an aggregate of 822,386 shares of Class D Common Stock (with each such warrant
being exercisable for 1.935 shares of Class D Common Stock at an exercise price
of $.01 per warrant (collectively with the Purchased Warrants, the "BarTech
Financing Warrants").
4.7 No Priority in Debt Payment. The order of listing for the repayment
of outstanding debt set forth in Sections 4.2, 4.3, 4.4 and 4.5 is not a
statement of priority of payment, and the retirement of such outstanding debt is
a condition precedent as set forth in Section 12.4.
SECTION 5
THE CLOSING
5.1 Closing. Subject to the satisfaction or waiver of all conditions
precedent set forth in Sections 12, 13, 14, 15 and 16, the closing of the
Contemplated Transactions (the "Closing") will take place at the offices of
Simpson Thacher & Bartlett, New York, New York, at 10:00 a.m. (local time) on
the earliest practicable date on which the debt component of the RTI Debt and
Equity Proceeds become available, or at such other time and place as BarTech,
USX RTI Holdings and Kobe RTI Holdings may agree. Subject to the provisions of
Section 17, failure to consummate the Contemplated Transactions on the date and
time and at the place determined pursuant to this Section 5.1 will not result in
the termination of this Agreement nor relieve any
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30
party of any obligation under this Agreement. Prior to or concurrently with the
Closing, the parties hereto will cause the Contemplated Transactions to be
consummated, including without limitation by filing certificates of merger with
respect to the Mergers with the Secretary of State of each state of formation of
Persons party to the Mergers, as appropriate.
5.2 Closing Obligations. At the Closing:
(a) BarTech, RES Holding, USX RTI Holdings, Kobe RTI Holdings
and RTI Holdings will execute and deliver the RTI Holdings LLC
Agreement;
(b) RTI Holdings and RTI Opco will execute and deliver the RTI
Opco LLC Agreement;
(c) RTI Opco and USX (with respect to its U.S. Steel Group
unit) will execute and deliver the Coke Supply Agreement;
(d) RTI Opco and USX (with respect to its U.S. Steel Group
unit) will execute and deliver the Pellet Supply Agreement;
(e) RTI Opco, NewTube and USX (with respect to its U.S. Steel
Group unit) will execute and deliver the Round Supply Agreement;
(f) The parties named therein will execute and deliver the
Equityholders Agreement;
(g) RTI Opco, Blackstone Management Partners II L.L.C.,
Veritas Capital Management, L.L.C., USX, Kobe Delaware and Kobe Steel
USA, Inc. will execute and deliver the Transactional and Monitoring Fee
Agreement;
(h) RTI Opco and NewTube will execute and deliver the
Transition, Administrative and Utilities Services Agreement;
(k) USX, Kobe Newco, RTI Opco and NewTube will execute and
deliver the Safe-Harbor Lease Matters Agreement;
(l) RTI Opco, USX and Kobe will execute and deliver the
Continuing USS/Kobe State Debt Participation Agreement;
(m) RTI Opco, NewTube and USX will execute and deliver the USX
Environmental Indemnity Agreement;
(o) Each of the parties thereto will execute and deliver each
of the New Kobe-RTI Opco Agreements;
(p) RTI Opco, USS/Kobe and Batus Retail Services, Inc. will
enter into the Bloom Caster Consent and Assumption Agreement; and
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(q) RTI Opco and USX will enter into the RTI-USX Payables
Agreement.
SECTION 6
REPRESENTATIONS AND WARRANTIES REGARDING USS/KOBE
USX RTI Holdings and Kobe RTI Holdings (i) individually and severally
with respect to the representations and warranties in Section 6.2 regarding
USX/Kobe Parties which are themselves and their respective Affiliates (other
than USS/Kobe and its Subsidiaries), and (ii) severally with respect to all
other representations and warranties contained in this Agreement regarding
USS/Kobe and its Affiliates, represent and warrant to BarTech and RES Holding as
follows (provided, however, that the Disclosure Letter sets forth certain
exceptions to such representations and warranties or discloses certain matters
in response to such representations and warranties, in each case identified by
the applicable Section numbers below, and provided, further, that, for the
avoidance of doubt, the parties hereto acknowledge and agree that neither USX
nor Kobe is itself making any of the representations and warranties contained in
this Section 6):
6.1 Organization and Good Standing.
(a) USS/Kobe is a general partnership duly organized, validly
existing, and in good standing under the laws of Ohio, with full
partnership power and authority to conduct its business as it is now
being conducted. USX Holdings is a corporation duly organized, validly
existing, and in good standing under the laws of Ohio, with full
corporate power and authority to conduct its business as it is now
being conducted. Kobe Holdings is a corporation duly organized, validly
existing, and in good standing under the laws of Ohio, with full
corporate power and authority to conduct its business as it is now
being conducted. Each of USS/Kobe, USX Holdings and Kobe Holdings is
duly qualified to do business as a foreign partnership or corporation,
as applicable, and is in good standing under the laws of each state or
other jurisdiction in which the nature of the activities conducted by
it or the ownership or leasing of its properties requires such
qualification, except where such failure to so qualify or to be in good
standing does not have a USS/Kobe Material Adverse Effect.
(b) Each of USX RTI Holdings and Kobe RTI Holdings is a
corporation duly organized, validly existing, and in good standing
under the laws of Delaware, with full corporate power and authority to
conduct its business as it is now being conducted. Each of USX RTI
Holdings and Kobe RTI Holdings is duly qualified to do business as a
foreign corporation and is in good standing under the laws of each
state or other jurisdiction in which the nature of the activities
conducted by it or the ownership or leasing of its properties requires
such qualification, except where such failure to so qualify or to be in
good standing does not have a USS/Kobe Material Adverse Effect.
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32
(c) Each of USS/Kobe, USX Holdings, USX RTI Holdings, Kobe
Holdings and Kobe RTI Holdings has made available to BarTech and RES
Holding complete and correct copies of its Organizational Documents, as
currently in effect. Except for the incurrence of indebtedness set
forth in Section 6.1(d) of the Disclosure Letter, as of the Closing,
each of USX RTI Holdings and Kobe RTI Holdings will have engaged in no
activities and incurred no liabilities prior to the Closing except
those activities and liabilities incidental to its formation or
expressly contemplated by this Agreement.
(d) Except as set forth in Section 6.1(d) of the Disclosure
Letter, USS/Kobe does not own any direct or indirect equity or debt
interest in any other Person and USS/Kobe is not obligated or committed
to acquire any such interest. USS/Kobe International Sales Company is
primarily related to tubular sales. As of the Closing, each of USX RTI
Holdings and Kobe RTI Holdings will own no direct or indirect equity or
debt interest in any other Person, or be obligated or committed to
acquire any such interest (other than pursuant to this Agreement),
other than their respective membership interests in RTI Holdings
acquired in the Contemplated Transactions. As of the Closing, each of
USX Holdings and Kobe Holdings will own no direct or indirect equity or
debt interest in any other Person or other assets, or be obligated or
committed to acquire any such interest (other than pursuant to this
Agreement), other than their respective partnership interests in
USS/Kobe, and, except as set forth in Section 6.1(d) of the Disclosure
Letter, will have engaged in no activities, owned no assets and
incurred no liabilities prior to the Closing except for activities,
assets and liabilities incidental to acting as a general partner of
USS/Kobe which would not, individually or in the aggregate, reasonably
be expected to have a USS/Kobe Material Adverse Effect. As of the
Closing, all of the indebtedness of each of USX Holdings and Kobe
Holdings will have been repaid in full or otherwise eliminated, and
each of USX Holdings and Kobe Holdings will have no liabilities or
obligations with respect thereto.
6.2 Authority; No Conflict; Consents.
(a) This Agreement and each other Transaction Document to
which it is a party has been duly executed and delivered by, and
constitutes the legal, valid and binding obligation of, each USX/Kobe
Party, enforceable against such entity in accordance with its terms,
except to the extent that its enforceability may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance,
fraudulent transfer, moratorium or other laws relating to or affecting
creditors' rights generally and by general equity principles.
(b) Each of the USX/Kobe Parties has the requisite corporate,
partnership or other applicable right, power, authority and capacity to
execute and deliver this Agreement and each other Transaction Document
to which it is a party and to perform its obligations under this
Agreement and each other Transaction Document to which it is a party.
The execution, delivery and performance of this Agreement and each
other
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33
Transaction Document to which it is a party by each USX/Kobe Party have
been duly authorized by all necessary corporate, partnership or other
applicable action, as the case may be, on the part of such entity and
its owners.
(c) Except as disclosed in Section 6.2(c) of the Disclosure
Letter, neither the execution and delivery of this Agreement and each
other Transaction Document to which it is a party nor the consummation
of any of the Contemplated Transactions or other performance of its
obligations hereunder or thereunder will, directly or indirectly:
(i) violate any provision of the Organizational
Documents of any USX/Kobe Party or any of its Subsidiaries, as
applicable;
(ii) result in a violation of, or give any
Governmental Body or other Person the right to exercise any
remedy or obtain any relief under, any Legal Requirement or
any Order to which any USX/Kobe Party or any of its
Subsidiaries, as applicable, is subject;
(iii) result in a violation of any of the terms or
requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate, or modify, any
Governmental Authorization that is held by any USX/Kobe Party
or any of its Subsidiaries;
(iv) result in a violation or breach of any provision
of, or give any Person the right to declare a default,
exercise any remedy under or demand a mandatory prepayment of,
or to accelerate the maturity or performance of, or to cancel,
terminate, or modify, any material Contract of any USX/Kobe
Party or any of its Subsidiaries, as applicable; or
(v) result in the imposition or creation of any
Encumbrance upon any of the assets owned or used by any
USX/Kobe Party or any of its Subsidiaries.
(d) No USX/Kobe Party or any of its Affiliates is or will be
required to obtain any Consent from any Person or Governmental Body in
connection with the execution and delivery of this Agreement or any
other Transaction Document to which it is a party or the consummation
of any of the Contemplated Transactions or their performance hereunder
or thereunder, except (i) the Material Consents disclosed in Section
6.2(d) of the Disclosure Letter, which will be obtained by Closing and
(ii) such other Consents as to which the failure to obtain them by
Closing would not, individually or in the aggregate, reasonably be
expected to have a USS/Kobe Material Adverse Effect or a RTI Material
Adverse Effect.
6.3 Capitalization. The authorized and outstanding equity interests of
each of USS/Kobe, USX Holdings and Kobe Holdings (without giving effect to the
Contemplated Transactions) are listed in Section 6.3 of the Disclosure Letter.
All of the outstanding equity interests in USX Holdings are owned of record and
beneficially directly by USX, free and clear of all Encumbrances. As of the
Closing, all of the outstanding equity
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34
interests in Kobe Holdings are owned of record and beneficially directly by Kobe
Newco, free and clear of all Encumbrances. Except as set forth in Section 6.3 of
the Disclosure Letter, all of the outstanding equity interests in Kobe Delaware
Inc. are owned of record and beneficially directly by Kobe, free and clear of
all Encumbrances. Except as set forth in Section 6.3 of the Disclosure Letter
with respect to certain minority stockholder consent rights, no Person other
than Kobe has the right (contractual or otherwise) to designate any of the
directors of Kobe Delaware Inc. or to participate in the control or management
of Kobe Delaware Inc. Each of USX Holdings and Kobe Holdings is the direct
record and beneficial owner of fifty percent of the outstanding equity interests
in USS/Kobe, free and clear of all Encumbrances. USX is the direct record and
beneficial owner of all of the outstanding equity interests in USX RTI Holdings
and fifty percent of the outstanding equity interests in NewTube, in each case
free and clear of all Encumbrances. Kobe Delaware Inc. is the direct record and
beneficial owner of all of the outstanding equity interests in Kobe Newco, and
Kobe Newco is the direct record and beneficial owner of all of the outstanding
equity interests in Kobe RTI Holdings and fifty percent of the outstanding
equity interests in NewTube, in each case free and clear of all Encumbrances.
All of the foregoing equity interests have been duly authorized and validly
issued and are fully paid and nonassessable. Except as set forth in Section 6.3
of the Disclosure Letter, there are no outstanding options, warrants,
convertible securities or other rights of any kind relating to the issuance,
sale, or transfer of any equity interests in any of the foregoing entities
(other than this Agreement and the other Transaction Documents).
6.4 Financial Statements. Section 6.4(a) of the Disclosure Letter
includes financial statements of the USS/Kobe Bar Business, USX Holdings and
Kobe Holdings (collectively, the "USS/Kobe Financial Statements"). The USS/Kobe
Financial Statements fairly present (i) the assets and liabilities, financial
condition and the results of operations, changes in stockholders' equity or
partners' interest and cash flow of USS/Kobe, USX Holdings and Kobe Holdings, as
applicable, as at the respective dates of and for the periods referred to in
such USS/Kobe Financial Statements, and (ii) the assets and liabilities,
financial condition and the results of operations, changes in stockholders'
equity or partners' interest and cash flow of USS/Kobe, USX Holdings and Kobe
Holdings, as applicable, (A) as at March 31, 1999 and (B) as at December 31,
1998 and for the twelve month period then ended, in the case of USS/Kobe in each
case giving effect to the Tubular Spinoff as of January 1, 1998. The USS/Kobe
Financial Statements have been prepared in accordance with generally accepted
accounting principles, consistently applied, subject in the case of the
unaudited statements to the absence of footnote disclosure and other
presentation items, to changes resulting from normal period-end adjustments for
recurring accruals which are not in the aggregate material, and to the fact that
indebtedness of USS/Kobe has been allocated on a "straight allocation" basis
between the USS/Kobe Bar Business and the USS/Kobe Tubular Business without
regard as to whether such allocation is in accordance with generally accepted
accounting principles. Subject to the limitations provided in the immediately
preceding sentence, the USS/Kobe Financial Statements have been prepared
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35
from the books and records of USS/Kobe, USX Holdings and Kobe Holdings, as
applicable, which accurately and fairly reflect in all material respects the
transactions of, acquisitions and dispositions of assets by, and incurrence of
liabilities by USS/Kobe, USX Holdings and Kobe Holdings, as applicable. After
giving effect to the Tubular Spinoff, none of USS/Kobe, USX Holdings or Kobe
Holdings will have liabilities or obligations of any nature (whether known or
unknown and whether absolute, accrued, contingent or otherwise) which would be
required under generally accepted accounting principles to be reflected on a
balance sheet, except for (a) liabilities or obligations reflected or reserved
against in the December 31, 1998 balance sheet of the USS/Kobe Bar Business
(giving effect to the Tubular Spinoff) included in the USS/Kobe Financial
Statements, (b) liabilities incurred by USS/Kobe in the Ordinary Course of
Business since December 31, 1998 which in the aggregate do not have a USS/Kobe
Material Adverse Effect and (c) matters disclosed in Section 6.4 of the
Disclosure Letter.
6.5 [intentionally omitted]
6.6 Title to Properties; Encumbrances.
(a) Section 6.6(a) of the Disclosure Letter includes a
complete list (including the street address, where applicable) of each
USS/Kobe Facility (and in each case any such facility included in
"parcel 1", "parcel 2", "parcel 3" or "parcel 4" is a USS/Kobe Tubular
Asset, and all other such facilities are USS/Kobe Bar Assets). Except
as described in Section 6.6(a) of the Disclosure Letter, immediately
following consummation of the Tubular Spinoff, the assets, properties
and rights of USS/Kobe will include all of the material assets,
properties and rights used in connection with the USS/Kobe Bar Business
as of the date hereof (except for any such assets, properties or rights
sold after the date hereof in compliance with the terms of this
Agreement). Section 6.6(a) of the Disclosure Letter includes a complete
list of each item of material tangible personal property of USS/Kobe
(and in each case identifies any such item that is a USS/Kobe Tubular
Asset).
(b) Except as disclosed in Section 6.6(b) of the Disclosure
Letter, USS/Kobe has fee or other good title, as applicable, to all the
properties and assets (whether real, personal, or mixed and whether
tangible or intangible) that it purports to own or reflected as owned
in the books and records of USS/Kobe, including all of the properties
and assets reflected in the Interim USS/Kobe Balance Sheet (except for
personal property sold since the date of the Interim USS/Kobe Balance
Sheet in the Ordinary Course of Business of USS/Kobe), and all of the
properties and assets purchased or otherwise acquired by USS/Kobe since
the date of the Interim USS/Kobe Balance Sheet (except for personal
property acquired and sold since the date of the Interim USS/Kobe
Balance Sheet in the Ordinary Course of Business of USS/Kobe). Except
as described in Section 6.6(b) of the Disclosure Letter and subject to
the Safe-Harbor Leases, all material properties and assets constituting
USS/Kobe Facilities and reflected in the Interim USS/Kobe Balance Sheet
are free and clear of all Encumbrances, except for Permitted
Encumbrances.
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36
6.7 [intentionally omitted]
6.8 Taxes. Except as set forth in Section 6.8 of the Disclosure
Letter:
(a) Each of USS/Kobe, USX Holdings and Kobe Holdings has filed
or caused to be filed on a timely basis all Tax Returns that are or
were required to be filed by it pursuant to applicable Legal
Requirements. Each of USS/Kobe, USX Holdings and Kobe Holdings has
paid, or made provision for the payment of, all Taxes that have become
due and payable as Taxes imposed on USS/Kobe pursuant to those Tax
Returns or otherwise, or pursuant to any assessment received by
USS/Kobe, except such Taxes, if any, as are being contested in good
faith and as to which adequate reserves have been provided in the
applicable Interim USS/Kobe Balance Sheet.
(b) All Taxes that USS/Kobe, USX Holdings and Kobe Holdings
are or were required by Legal Requirements to withhold or collect have
been duly withheld or collected and, to the extent required, have been
paid to the proper Governmental Body.
(c) USS/Kobe has been a partnership for tax purposes since its
formation and all Tax Returns of USS/Kobe have been filed as
partnership Tax Returns.
(d) None of USS/Kobe, USX Holdings or Kobe Holdings is liable
for any Taxes of another Person by reason of Treasury Regulation
1.1502-6(a) (or any comparable provision under state, local or foreign
law), as a successor in interest, as a transferee, by contract or
otherwise.
(e) No Proceeding is pending or, to the USX/Kobe Parties'
Knowledge, threatened in regard to any Taxes due from or with respect
to USS/Kobe, USX Holdings or Kobe Holdings or any Tax Return filed by
or with respect to USS/Kobe, USX Holdings or Kobe Holdings.
(f) None of USS/Kobe, USX Holdings or Kobe Holdings is a party
to or bound by (nor will USS/Kobe, prior to the Closing Date, become a
party to or bound by) any tax indemnity, tax sharing or tax allocation
agreement or similar contractual arrangement.
(g) To the USX/Kobe Parties' Knowledge, there are no pending,
threatened or proposed audits in writing, assessments or claims from
any Tax Authority for material Taxes against USS/Kobe, USX Holdings or
Kobe Holdings or any of their assets, operations or activities as of
the date hereof or as of the Closing Date. Except as disclosed in
Section 6.8(g) of the Disclosure Letter, there are no pending claims
for refund of any Taxes for USS/Kobe, USX Holdings or Kobe Holdings
(including refunds of Taxes allocable to USS/Kobe, USX Holdings or Kobe
Holdings or with respect to consolidated, combined, unitary, fiscal
unitary or similar Tax Returns).
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37
(h) There are no outstanding rulings of, or requests for
rulings with, any Tax Authority expressly addressed to USS/Kobe, USX
Holdings or Kobe Holdings (or to an Affiliate of USS/Kobe, USX Holdings
or Kobe Holdings) that are, or if issued would be binding for any
post-Closing period.
(i) The assets listed in Section 6.8(i) of the Disclosure
Letter are subject to the Safe-Harbor Leases, and none of the other
USS/Kobe Bar Assets are subject to leases pursuant to which elections
have been made under Section 168(f)(8) of the 54 Code.
6.9 No Material Adverse Change. Except as set forth in Section 6.9 of
the Disclosure Letter, since December 31, 1998, (i) each of USS/Kobe, USX
Holdings and Kobe Holdings has operated its business only in the Ordinary Course
of Business (other than as expressly provided for in the Transaction Documents),
(ii) to the USX/Kobe Parties' Knowledge, no event or occurrence has occurred
which has had or would reasonably be expected to have, individually or in the
aggregate, a USS/Kobe Material Adverse Effect, and (iii) none of USS/Kobe, USX
Holdings or Kobe Holdings has taken any action nor suffered any event that if
taken or suffered after the date hereof would require BarTech's or RES Holding's
consent under Section 10.2 of this Agreement.
6.10 Employee Benefits.
(a) Except as set forth in Section 6.10(a) of the Disclosure
Letter (the plans disclosed in Section 6.10(a) of the Disclosure Letter
being the "USS/Kobe Plans"), none of USS/Kobe, USX Holdings or Kobe
Holdings sponsors or contributes to any Employee Benefit Plan,
severance, change-in-control or employment plan, program or agreement
or stock option, bonus, or incentive plan or program. Copies of the
written USS/Kobe Plans have been made available to BarTech and RES
Holding.
(b) Except as set forth in Section 6.10(b) of the Disclosure
Letter, each USS/Kobe Plan has been administered and is in compliance
with the terms of such USS/Kobe Plan and all applicable laws, rules and
regulations where the failure to so comply would result in liability
that would have a USS/Kobe Material Adverse Effect.
(c) Except as set forth in Section 6.10(c) of the Disclosure
Letter: (i) each USS/Kobe Plan intended to be qualified within the
meaning of IRC Section 401(a) has received a favorable determination as
to such qualification from the IRS and (ii) to the USX/Kobe Parties'
Knowledge, nothing has occurred since that would adversely affect such
qualification.
(d) Except as would not have a USS/Kobe Material Adverse
Effect or, in the case of the following clause (i), in connection with
the Contemplated Transactions: (i) no "reportable event" (as such term
is used in Section 4043 of ERISA) (other than those events for which
the 30-day notice has been waived pursuant to the regulations) is
pending with respect to any USS/Kobe Plan, and (ii) no "accumulated
funding
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38
deficiency" (as such term is used in Section 412 or 4971 of the
IRC) has occurred during the last five years with respect to any
USS/Kobe Plan.
(e) No litigation or administrative or other proceeding
involving any USS/Kobe Plan has occurred or, to the USX/Kobe Parties'
Knowledge, is threatened where an adverse determination would result in
liability that would have a USS/Kobe Material Adverse Effect, other
than any such litigation or administrative or other proceeding that may
be commenced by the PBGC in connection with the Contemplated
Transactions.
(f) Except as set forth in Section 6.10(f) of the Disclosure
Letter, none of USS/Kobe, USX Holdings or Kobe Holdings has contributed
to any "multiemployer plan" (within the meaning of Section 3(37) of
ERISA), and none of USS/Kobe, USX Holdings or Kobe Holdings, nor any
member of their respective Controlled Groups, has incurred any
withdrawal liability which remains unsatisfied in an amount which would
result in liability that would have a USS/Kobe Material Adverse Effect.
(g) No USS/Kobe Plan or multiemployer plan to which USS/Kobe,
USX Holdings or Kobe Holdings contributed has been terminated, where
such termination has resulted in liability under Title IV of ERISA that
would have a USS/Kobe Material Adverse Effect.
(h) Except as would not have a USS/Kobe Material Adverse
Effect, none of USS/Kobe, USX Holdings or Kobe Holdings has incurred
any liability, direct or indirect, as a result of any breach of
fiduciary duty or non-exempt prohibited transaction (within the meaning
of IRC Section 4975 or Section 406 of ERISA) involving any USS/Kobe
Plan or the assets thereof. None of USS/Kobe, USX Holdings or Kobe
Holdings has engaged in any transaction that has resulted or could
result in any material liability of USS/Kobe, USX Holdings or Kobe
Holdings pursuant to Section 4069 or 4212 or ERISA.
6.11 Compliance with Legal Requirements; Governmental Authorizations.
Except as set forth in Section 6.11 of the Disclosure Letter, to the USX/Kobe
Parties' Knowledge, each of USS/Kobe, USX Holdings and Kobe Holdings has
complied and is in compliance with each Legal Requirement that is applicable to
it or to the conduct or operation of its business, except for any failures to
comply which would not, individually or in the aggregate, have a USS/Kobe
Material Adverse Effect. To the USX/Kobe Parties' Knowledge, each of USS/Kobe,
USX Holdings and Kobe Holdings holds all Governmental Authorizations that are
required in connection with the business of USS/Kobe, USX Holdings or Kobe
Holdings, as applicable, and is in compliance with all of the terms and
requirements of each Governmental Authorization applicable to it, except where
the failure to be in compliance would not have a USS/Kobe Material Adverse
Effect.
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39
6.12 Legal Proceedings; Orders. Except as set forth in Section 6.12 of
the Disclosure Letter, to the USX/Kobe Parties' Knowledge there is no Proceeding
(i) pending or threatened against USS/Kobe, USX Holdings, Kobe Holdings or any
of their Affiliates that, individually or in the aggregate, has had or, would
reasonably be expected to have, a USS/Kobe Material Adverse Effect, or (ii) as
of the date of this Agreement, that challenges, or that may have the effect of
preventing or making illegal, any of the Contemplated Transactions. Except as
set forth in Section 6.12 of the Disclosure Letter, to the USX/Kobe Parties'
Knowledge (i) there is no material Order to which USS/Kobe, USX Holdings, Kobe
Holdings or any of their Affiliates is subject that materially prohibits or
restricts USS/Kobe, USX Holdings or Kobe Holdings, and (ii) no agent or employee
of the USS/Kobe Bar Business is subject to any Order that materially prohibits
or restricts such agent or employee, from engaging in or continuing any conduct,
activity, or practice relating to the USS/Kobe Bar Business.
6.13 Contracts; No Defaults.
(a) Except for Permitted Encumbrances, Section 6.13(a) of the
Disclosure Letter contains a complete and accurate list of (and in each
case identifies any such Contract that is a USS/Kobe Tubular Asset):
(i) each material Contract of USS/Kobe and each Contract of USX
Holdings or Kobe Holdings, (ii) any other Contracts of USS/Kobe
containing covenants not to compete, employee non-solicitation or
no-hire covenants, or otherwise materially limiting the freedom of
USS/Kobe to engage in any line of business or to compete with any
Person, (iii) any other Contract of USS/Kobe constituting a material
employment agreement or a collective bargaining or other agreement with
a labor organization or other representative of USS/Kobe's employees,
(iv) any other Contract of USS/Kobe with or for the benefit of any
Affiliate of USS/Kobe (including without limitation USX or Kobe) or, to
the USX/Kobe Parties' Knowledge, any immediate family member of any
officer, director, employee or equityholder of USS/Kobe or any of its
Affiliates or any Affiliate thereof, (v) any other Contract of USS/Kobe
relating to material indebtedness, financing arrangements or guarantees
of indebtedness and (vi) each lease which USS/Kobe has assumed or to
which USS/Kobe was a party at any time at or prior to the Closing
pursuant to which elections have been made under Section 168(f)(8) of
the 54 Code, together with each of the Safe-Harbor Lease Agreements.
(b) With respect to the Contracts identified in Section
6.13(a) of the Disclosure Letter and except as set forth in Section
6.13(b) of the Disclosure Letter, to the USX/Kobe Parties' Knowledge:
(i) each Contract is in full force and effect and is valid and
enforceable in accordance with its terms, except to the extent that its
enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent transfer, moratorium or other laws relating
to or affecting creditors' rights generally and by general equity
principles, (ii) USS/Kobe, USX Holdings or Kobe Holdings, as
applicable, has made available to BarTech and RES Holding a copy of
each such Contract, (iii) USS/Kobe, USX Holdings or Kobe Holdings, as
applicable, is in compliance with all
<PAGE>
40
material terms and requirements of such Contracts, and (iv) USS/Kobe,
USX Holdings or Kobe Holdings, as applicable, has not given to or
received from any other Person any written notice regarding any actual
or alleged material violation or default of any such Contract.
6.14 Environmental Matters. Except as set forth in Section 6.14 of the
Disclosure Letter and except as would not, individually or in the aggregate,
reasonably be expected to have a USS/Kobe Material Adverse Effect:
(a) None of USS/Kobe, USX Holdings or Kobe Holdings has
violated or is in violation of any Environmental Law.
(b) To the USX/Kobe Parties' Knowledge, none of the USS/Kobe
Facilities or any facility formerly owned, leased or operated by
USS/Kobe, USX Holdings or Kobe Holdings contains any Hazardous
Materials in amounts exceeding the levels permitted by applicable
Environmental Law or under circumstances that would reasonably be
expected to result in liability under or relating to Environmental Law.
(c) To the USX/Kobe Parties' Knowledge, none of USS/Kobe, USX
Holdings or Kobe Holdings has disposed of, arranged to be disposed of,
Released, threatened to Release or transported in violation of any
applicable Environmental Law or in a manner that would reasonably be
expected to result in liability under or relating to Environmental
Laws, any Hazardous Materials at, to or from any of the USS/Kobe
Facilities or any facility formerly owned, leased or operated by
USS/Kobe, USX Holdings or Kobe Holdings.
(d) There have been no material environmental investigations,
studies, audits, tests, reviews or other analyses regarding compliance
or noncompliance with, or potential liability under or relating to, any
Environmental Law conducted by or on behalf of USS/Kobe, USX Holdings
or Kobe Holdings, or which are in the custody or control of USS/Kobe,
USX Holdings or Kobe Holdings, relating to the facilities, business or
activities of USS/Kobe, USX Holdings or Kobe Holdings or any of the
USS/Kobe Facilities that have not been made available to BarTech and
RES Holding.
(e) None of USS/Kobe, USX Holdings or Kobe Holdings has been
subject to any Proceedings, is subject to any Order or has received any
written notice or other written communication from any Governmental
Body or the current or prior owner or operator of any USS/Kobe
Facilities or any other Person, in each case of or with respect to any
actual or potential violation or failure to comply with any
Environmental Law or of any actual or threatened obligation to
undertake or bear any cost, damage, expense, liability, or obligation
arising from or under any Environmental Law.
(f) None of USS/Kobe, USX Holdings or Kobe Holdings has
contractually assumed any liability or obligation under or relating to
Environmental Laws.
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41
(g) None of USS/Kobe, USX Holdings or Kobe Holdings has
entered into, and is not subject to, any Order or agreement relating to
compliance with Environmental Laws or the investigation or remediation
of Hazardous Materials.
6.15 Labor Relations; Compliance. Neither USX Holdings nor Kobe
Holdings has at any time had any employees. Except as set forth in Section 6.15
of the Disclosure Letter: (i) there is no labor strike, slowdown, work stoppage,
dispute, lockout or other labor controversy in effect or, to the USX/Kobe
Parties' Knowledge, threatened involving the employees of USS/Kobe, and USS/Kobe
has not experienced any such labor controversy within the past three years, (ii)
no grievance is pending or, to the USX/Kobe Parties' Knowledge, threatened
which, if adversely decided, would have a USS/Kobe Material Adverse Effect,
(iii) USS/Kobe has paid in full to all employees of USS/Kobe all currently
accrued and payable wages, salaries, commissions, bonuses and other material
compensation due to such employees in accordance with the payroll practices of
USS/Kobe currently in effect and applicable, (iv) USS/Kobe will not have any
material liability for severance benefits payable to a USS/Kobe employee whose
employment continues after the Closing with RTI Opco or any of its Subsidiaries
or NewTube immediately following the Closing under any USS/Kobe Plan as a result
of or in connection with the Contemplated Transactions and (v) USS/Kobe is not
presently negotiating a collective bargaining agreement or other Contract with
any labor organization or other representative of any of USS/Kobe's employees
(other than as expressly contemplated by this Agreement). Neither USS/Kobe nor
any of its Affiliates is subject to any bargaining obligations with any labor
organization (including without limitation the USWA) under any Legal
Requirement, collective bargaining agreement or otherwise in connection with the
Contemplated Transactions, or is required to obtain any agreements of any labor
organizations to the changes in corporate structure involved in the Contemplated
Transactions, in each case other than any such obligations or requirements which
will have been satisfied upon receipt of the NewTube Labor Agreement
Ratification and the RTI Labor Agreement Ratification.
6.16 Intellectual Property.
(a) To the USX/Kobe Parties' Knowledge, Section 6.16(a) of the
Disclosure Letter contains a complete and accurate list and summary
description of, with respect to all material Intellectual Property
owned, held or used by USS/Kobe ("USS/Kobe IP"), all patents,
registered copyrights, registered trademarks and service marks, and all
pending registrations or applications for the foregoing and all
material unregistered USS/Kobe IP.
(b) Except as disclosed in Section 6.16(b) of the Disclosure
Letter, to the USX/Kobe Parties' Knowledge: (i) USS/Kobe owns or has
the enforceable, legal right to use all the Intellectual Property
necessary to conduct its business in all material respects as currently
conducted and consistent with past practice, free of all Encumbrances,
and (ii) to the USX/Kobe Parties' Knowledge, all of the USS/Kobe IP is
valid, enforceable and unexpired, has not been abandoned, does not
infringe, impair or make unauthorized use of ("Infringe") the
Intellectual Property of any other party (including Affiliates of
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42
USS/Kobe) and is not being Infringed by any other party (including
Affiliates of USS/Kobe).
(c) Except as expressly set forth otherwise in Section 6.16(c)
of the Disclosure Letter or as would not, individually or in the
aggregate, reasonably be expected to have a USS/Kobe Material Adverse
Effect, (i) to the USX/Kobe Parties' Knowledge, there is no actual or
threatened adverse Proceeding of any Person pertaining to, or any
challenge to the scope, validity or enforceability of, any of the
USS/Kobe IP, and (ii) USS/Kobe (A) is not a party to any Proceeding
which involves a claim of infringement or misappropriation by USS/Kobe
of any Intellectual Property of any third party and (B) has not brought
any Proceeding against any third party for infringement or
misappropriation of, or breach of any license or agreement involving,
any of the USS/Kobe IP.
(d) Except as would not, individually or in the aggregate,
reasonably be expected to have a USS/Kobe Material Adverse Effect, to
the USX/Kobe Parties' Knowledge, USS/Kobe is not, nor will it be as a
result of the execution and delivery of this Agreement or the
performance of its obligations hereunder, in breach of any Intellectual
Property license to which it is a party, either as licensor or
licensee, or other agreement relating to any of the USS/Kobe IP.
6.17 Brokers or Finders. Except as provided in the Transactional and
Monitoring Fee Agreement, none of the USX/Kobe Parties, their Affiliates or
their respective agents have incurred any obligation or liability, contingent or
otherwise, for brokerage or finders' fees or agents' commissions or other
similar payment in connection with this Agreement or the Contemplated
Transactions.
SECTION 7
REPRESENTATIONS AND WARRANTIES OF
BARTECH AND REGARDING THE BV PARTIES
BarTech represents and warrants with respect to itself and its
Affiliates to each of the USX/Kobe Parties and RES Holding as follows (provided,
however, that the Disclosure Letter sets forth certain exceptions to such
representations and warranties or discloses certain matters in response to such
representations and warranties, in each case identified by the applicable
Section numbers below, and provided, further, that, for the avoidance of doubt,
the parties hereto acknowledge and agree that none of the BV Parties is itself
making any of the representations and warranties contained in this Section 7):
7.1 Organization and Good Standing.
(a) BarTech is a corporation duly organized, validly existing,
and in good standing under the laws of Delaware, with full corporate
power and authority to conduct
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43
its business as it is now being conducted. BarTech is duly qualified to
do business as a foreign corporation in each jurisdiction in which the
nature of the activities conducted by it or the ownership or leasing of
its properties requires such qualification, except where such failure
to so qualify or to be in good standing does not have a BarTech
Material Adverse Effect. Each of the BV Parties is a limited
partnership or limited liability company, as applicable, duly
organized, validly existing, and in good standing under the laws of its
jurisdiction of formation, with full partnership or company, as
applicable, power and authority to conduct its business as it is now
being conducted. BarTech is duly qualified to do business as a foreign
corporation in each jurisdiction in which the nature of the activities
conducted by it or the ownership or leasing of its properties requires
such qualification, except where such failure to so qualify or to be in
good standing does not have a BarTech Material Adverse Effect. Each of
the BV Parties is duly qualified to do business as a foreign limited
partnership or limited liability company in each jurisdiction in which
the nature of the activities conducted by it or the ownership or
leasing of its properties requires such qualification, except where
such failure to so qualify or to be in good standing does not have a
BarTech Material Adverse Effect.
(b) Each of BarTech's Subsidiaries is a United States or
foreign corporation or limited liability company duly organized,
validly existing, and in good standing under the laws of its
jurisdiction of organization, with full corporate or limited liability
company power and authority to conduct its business as it is being
conducted. Each of BarTech's Subsidiaries is duly qualified to do
business as a foreign corporation or limited liability company and is
in good standing under the laws of each state or other jurisdiction in
which the nature of the activities conducted by it or the ownership or
leasing of its properties requires such qualification, except where
such failure to so qualify or to be in good standing does not have a
BarTech Material Adverse Effect.
(c) BarTech has made available to USX, Kobe and RES Holding
complete and correct copies of its Organizational Documents and those
of each of its Subsidiaries, as currently in effect.
(d) Section 7.1(d) of the Disclosure Letter contains a
complete and accurate list of all the Subsidiaries of BarTech (without
giving effect to the Contemplated Transactions). Except as listed in
Section 7.1(d) of the Disclosure Letter, BarTech and its Subsidiaries
do not own any material direct or indirect equity or debt interest in
any other Person, and none of them is obligated or committed to acquire
any such interest (other than pursuant to this Agreement).
7.2 Authority; No Conflict; Consents.
(a) This Agreement and each other Transaction Document to
which it is a party has been duly executed and delivered by, and
constitutes the legal, valid and binding obligation of, BarTech and
each of the BV Parties, enforceable against it in
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44
accordance with its terms, except to the extent that its enforceability
may be limited by bankruptcy, insolvency, reorganization, fraudulent
conveyance, fraudulent transfer, moratorium or other laws relating to
or affecting creditors' rights generally and by general equity
principles.
(b) BarTech and each of the BV Parties has the requisite
corporate, partnership, company or other applicable right, power,
authority and capacity to execute and deliver this Agreement and each
other Transaction Document to which it is a party and to perform its
obligations under this Agreement and each other Transaction Document to
which it is a party. The execution, delivery and performance of this
Agreement and each other Transaction Document to which it is a party by
BarTech and each of the BV Parties have been duly authorized by all
necessary corporate, partnership, company or other applicable action,
as the case may be, on the part of such entity and its owners.
(c) Except as disclosed in Section 7.2(c) of the Disclosure
Letter, neither the execution and delivery of this Agreement and each
other Transaction Document to which it is a party nor the consummation
of any of the Contemplated Transactions or other performance of its
obligations hereunder or thereunder will, directly or indirectly:
(i) violate any provision of the Organizational
Documents of BarTech or any of its Subsidiaries or of any of
the BV Parties;
(ii) result in a violation of, or give any
Governmental Body or other Person the right to exercise any
remedy or obtain any relief under, any Legal Requirement or
any Order to which BarTech or any of its Subsidiaries or any
of the BV Parties is subject;
(iii) result in a violation of any of the terms or
requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate, or modify, any
Governmental Authorization that is held by BarTech or any of
its Subsidiaries or any of the BV Parties;
(iv) result in a violation or breach of any provision
of, or give any Person the right to declare a default or
exercise any remedy under, or to accelerate the maturity or
performance of, or to cancel, terminate, or modify, any
material Contract of BarTech or any of its Subsidiaries or any
of the BV Parties; or
(v) result in the imposition or creation of any
Encumbrance upon any of the assets owned or used by BarTech or
any of its Subsidiaries or any of the BV Parties (other than
pursuant to the Transaction Documents).
(d) None of BarTech or its Affiliates or the BV Parties is or
will be required to obtain any Consent from any Person or Governmental
Body in connection with the
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45
execution and delivery of this Agreement or any other Transaction
Document to which it is a party or the consummation of any of the
Contemplated Transactions or their performance hereunder or thereunder,
except (i) the Material Consents disclosed in Section 7.2(d) of the
Disclosure Letter, which will be obtained by Closing, and (ii) such
other Consents as to which the failure to obtain them by Closing would
not, individually or in the aggregate, reasonably be expected to have a
BarTech Material Adverse Effect or a RTI Material Adverse Effect.
7.3 Capitalization. The authorized and outstanding equity interests of
each of BarTech (without giving effect to the Contemplated Transactions) and
BarTech's Subsidiaries are listed in Section 7.3 of the Disclosure Letter. At
the time of consummation of the USX Holdings/Kobe Holdings-RTI Opco Merger,
BarTech will be the record and beneficial owner of all the outstanding equity
interest in RES Holding, free and clear of all Encumbrances. All of the
outstanding equity interests in each of BarTech's Subsidiaries are owned of
record and beneficially directly or indirectly by BarTech. All of the foregoing
equity interests have been duly authorized and validly issued and are fully paid
and nonassessable. Except as set forth in Section 7.3 of the Disclosure Letter,
there are no outstanding options, warrants, convertible securities or other
rights of any kind relating to the issuance, sale, or transfer of any equity
interests in any of the foregoing entities (other than this Agreement and the
other Transaction Documents).
7.4 Financial Statements. Included within the BarTech Public Filings
are certain financial statements of BarTech (collectively, the "BarTech
Financial Statements"). The BarTech Financial Statements fairly present the
assets and liabilities, financial condition and the results of operations,
changes in stockholders' equity and cash flow of BarTech as at the respective
dates of and for the periods referred to in such BarTech Financial Statements.
The BarTech Financial Statements have been prepared in accordance with generally
accepted accounting principles, consistently applied, subject in the case of the
unaudited statements to the absence of footnote disclosure and other
presentation items and to changes resulting from normal period-end adjustments
for recurring accruals which are not in the aggregate material. Subject to the
limitations provided in the immediately preceding sentence, the BarTech
Financial Statements have been prepared from the books and records of BarTech
which accurately and fairly reflect in all material respects the transactions
of, acquisitions and dispositions of assets by, and incurrence of liabilities by
BarTech. BarTech and its Subsidiaries have no liabilities or obligations of any
nature (whether known or unknown and whether absolute, accrued, contingent or
otherwise) which would be required under generally accepted accounting
principles to be reflected on a balance sheet, except for (a) liabilities or
obligations reflected or reserved against in the January 2, 1999 balance sheet
included in the BarTech Financial Statements, (b) liabilities incurred by
BarTech and its Subsidiaries in the Ordinary Course of Business since January 2,
1999 which in the aggregate do not have a BarTech Material Adverse Effect and
(c) matters disclosed in Section 7.4 of the Disclosure Letter or as identified
in the BarTech Public Filings.
7.5 [intentionally omitted]
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46
7.6 Title to Properties; Encumbrances.
(a) Section 7.6(a) of the Disclosure Letter includes a
complete list (including the street address, where applicable) of the
BarTech Facilities.
(b) Except as described in Section 7.6(b) of the Disclosure
Letter or as identified in the BarTech Public Filings, BarTech or one
of its Subsidiaries has fee or other good title, as applicable, to all
the properties and assets (whether real, personal, or mixed and whether
tangible or intangible) that it purports to own or reflected as owned
in the books and records of BarTech including all the properties and
assets reflected in the Interim BarTech Balance Sheet (except for
personal property acquired or sold since the date of the Interim
BarTech Balance Sheet in the Ordinary Course of Business of BarTech)
and all of the properties and assets purchased or otherwise acquired by
BarTech since the date of the Interim BarTech Balance Sheet (except for
personal property acquired and sold since the date of the Interim
BarTech Balance Sheet in the Ordinary Course of Business of BarTech).
Except as described in Section 7.6(b) of the Disclosure Letter, all
material properties and assets constituting BarTech Facilities and
reflected in the Interim BarTech Balance Sheet are free and clear of
all Encumbrances, except for Permitted Encumbrances.
7.7 [intentionally omitted]
7.8 Taxes. Except as set forth in Section 7.8 of the Disclosure
Letter or as identified in the BarTech Public Filings:
(a) BarTech and each of its Subsidiaries has filed or caused
to be filed on a timely basis all Tax Returns that are or were required
to be filed by it pursuant to applicable Legal Requirements. BarTech
and its Subsidiaries have paid, or made provision for the payment of,
all Taxes that have become due and payable as Taxes imposed on them
pursuant to those Tax Returns or otherwise, or pursuant to any
assessment received by BarTech or its Subsidiaries, except such Taxes,
if any, as are being contested in good faith and as to which adequate
reserves have been provided in the applicable Interim BarTech Balance
Sheet.
(b) All Taxes that BarTech and its Subsidiaries are or were
required by Legal Requirements to withhold or collect have been duly
withheld or collected and, to the extent required, have been paid to
the proper Governmental Body.
(c) Neither BarTech nor any of its Subsidiaries is liable for
any Taxes of another Person by reason of Treasury Regulation
1.1502-6(a) (or any comparable provision under state, local or foreign
law), as a successor in interest, as a transferee, by contract or
otherwise.
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47
(d) No Proceeding is pending or, to BarTech's Knowledge,
threatened in regard to any Taxes due from or with respect to BarTech
or any of its Subsidiaries or any Tax Return filed by or with respect
to BarTech or any of its Subsidiaries.
(e) BarTech and each of its Subsidiaries is not a party to or
bound by (nor will BarTech and each of its Subsidiaries, prior to the
Closing Date, become a party to or bound by) any tax indemnity, tax
sharing or tax allocation agreement or similar contractual arrangement.
(f) To BarTech's Knowledge, there are no pending, threatened
or proposed audits, assessments or claims from any Tax Authority for
material Taxes against BarTech or any of its Subsidiaries or any of
their assets, operations or activities as of the date hereof or as of
the Closing Date. There are no pending claims for refund of any Taxes
for BarTech or any of its Subsidiaries (including refunds of Taxes
allocable to BarTech or any of its Subsidiaries or with respect to
consolidated, combined, unitary, fiscal unitary or similar Tax
Returns).
(g) There are no outstanding rulings of, or requests for
rulings with, any Tax Authority expressly addressed to BarTech or any
of its Subsidiaries that are, or if issued would be binding for any
post-Closing period.
7.9 No Material Adverse Change. Except as set forth in Section 7.9 of
the Disclosure Letter or as identified in the BarTech Public Filings, since
January 2, 1999, (i) BarTech and each of its Subsidiaries has operated its
business only in the Ordinary Course of Business (other than as expressly
provided for in the Transaction Documents), (ii) to BarTech's Knowledge, no
event or occurrence has occurred which has had or would reasonably be expected
to have, individually or in the aggregate, a BarTech Material Adverse Effect,
and (iii) neither BarTech nor any of its Subsidiaries has taken any action nor
suffered any event that if taken or suffered after the date hereof would require
USX's, Kobe's or RES Holding's consent under Section 10.2 of this Agreement.
7.10 Employee Benefits.
(a) Except as set forth in Section 7.10(a) of the Disclosure
Letter (the plans disclosed in Section 7.10(a) of the Disclosure Letter
being the "BarTech Plans"), BarTech and its Subsidiaries do not sponsor
or contribute to any Employee Benefit Plan, severance,
change-in-control or employment plan, program or agreement or stock
option, bonus, or incentive plan or program. Copies of the written
BarTech Plans have been made available to USS/Kobe and RES Holding.
(b) Each BarTech Plan has been administered and is in
compliance with the terms of such BarTech Plan and all applicable laws,
rules and regulations where the failure to so comply would result in
liability that would have a BarTech Material Adverse Effect.
<PAGE>
48
(c) Except as set forth in Section 7.10(c) of the Disclosure
Letter: (i) each BarTech Plan intended to be qualified within the
meaning of IRC Section 401(a) has received a favorable determination as
to such qualification from the IRS and (ii) to BarTech's Knowledge,
nothing has occurred since that would adversely affect such
qualification.
(d) Except as would not have a BarTech Material Adverse Effect
or, in the case of the following clause (i), in connection with the
Contemplated Transactions: (i) no "reportable event" (as such term is
used in Section 4043 of ERISA) (other than those events for which the
30-day notice has been waived pursuant to the regulations) is pending
with respect to any BarTech Plan, and (ii) no "accumulated funding
deficiency" (as such term is used in Section 412 or 4971 of the IRC)
has occurred during the last five years with respect to any BarTech
Plan.
(e) No litigation or administrative or other proceeding
involving any BarTech Plan has occurred or, to BarTech's Knowledge, is
threatened where an adverse determination would result in liability
that would have a BarTech Material Adverse Effect, other than any such
litigation or administrative or other proceeding that may be commenced
by the PBGC in connection with the Contemplated Transactions.
(f) Except as set forth in Section 7.10(f) of the Disclosure
Letter, neither BarTech nor any of its Subsidiaries have contributed to
any "multiemployer plan" (within the meaning of Section 3(37) of
ERISA), and neither BarTech nor any member of its Controlled Group has
incurred any withdrawal liability which remains unsatisfied in an
amount which would result in liability that would have a BarTech
Material Adverse Effect.
(g) No BarTech Plan or multiemployer plan to which BarTech or
any of its Subsidiaries contributed has been terminated, where such
termination has resulted in liability under Title IV of ERISA that
would have a BarTech Material Adverse Effect.
(h) Except as would not have a BarTech Material Adverse
Effect, none of BarTech or any of its Subsidiaries has incurred any
liability, direct or indirect, as a result of any breach of fiduciary
duty or non-exempt prohibited transaction (within the meaning of IRC
Section 4975 or Section 406 of ERISA) involving any BarTech Plan or the
assets thereof. None of BarTech or any of its Subsidiaries has engaged
in any transaction that has resulted or could result in any material
liability of any of them pursuant to Section 4069 or 4212 of ERISA.
7.11 Compliance with Legal Requirements; Governmental Authorizations.
Except as set forth in Section 7.11 of the Disclosure Letter or as identified in
the BarTech Public Filings, to BarTech's Knowledge, BarTech and each of its
Subsidiaries has complied and is in compliance with each Legal Requirement that
is applicable to it or to the conduct or operation of its business, except for
any failures to comply which would not, individually or in the aggregate,
<PAGE>
49
have a BarTech Material Adverse Effect. To BarTech's Knowledge, BarTech and its
Subsidiaries hold all Governmental Authorizations that are required in
connection with their businesses, and are in compliance with all of the terms
and requirements of each Governmental Authorization applicable to them, except
where the failure to be in compliance would not have a BarTech Material Adverse
Effect.
7.12 Legal Proceedings; Orders. Except as set forth in Section 7.12 of
the Disclosure Letter or as identified in the BarTech Public Filings, to
BarTech's Knowledge there is no Proceeding (i) pending or threatened against
BarTech or any of its Affiliates or any of the BV Parties that, individually or
in the aggregate, has had, or would reasonably be expected to have, a BarTech
Material Adverse Effect, or (ii) as of the date of this Agreement, that
challenges, or that may have the effect of preventing or making illegal, any of
the Contemplated Transactions. Except as set forth in Section 7.12 of the
Disclosure Letter, to BarTech's Knowledge (i) there is no material Order to
which BarTech or any of its Affiliates or any of the BV Parties is subject that
materially prohibits or restricts BarTech or any of its Subsidiaries, and (ii)
no agent or employee of BarTech's and its Subsidiaries' business is subject to
any Order that materially prohibits or restricts such agent or employee, from
engaging in or continuing any conduct, activity, or practice relating to
BarTech's business.
7.13 Contracts; No Defaults.
(a) Except for Permitted Encumbrances, Section 7.13(a) of the
Disclosure Letter contains a complete and accurate list of, or the
BarTech Public Filings include as exhibits thereto: (i) each Contract
of BarTech and its Subsidiaries that is required to be filed as an
exhibit to any of the BarTech Public Filings, (ii) any other Contract
of BarTech or any of its Subsidiaries containing covenants not to
compete, employee non-solicitation or no-hire covenants, or otherwise
materially limiting the freedom of BarTech and its Subsidiaries to
engage in any line of business or to compete with any Person, (iii) any
other Contract of BarTech or any of its Subsidiaries constituting a
material employment agreement or a collective bargaining or other
agreement with a labor organization or other representative of
BarTech's and its Subsidiaries' employees, (iv) any other Contract of
BarTech or any of its Subsidiaries with or for the benefit of any
Affiliate of BarTech (other than with or among its Subsidiaries) or, to
BarTech's Knowledge, any immediate family member of any officer,
director, employee or equityholder of BarTech or any of its Affiliates
or any Affiliate thereof and (v) any other Contract of BarTech or any
of its Subsidiaries relating to material indebtedness, financing
arrangements or guarantees of indebtedness.
(b) With respect to the Contracts identified in Section
7.13(a) of the Disclosure Letter, to BarTech's Knowledge: (i) each
Contract is in full force and effect and is valid and enforceable in
accordance with its terms, except to the extent that its enforceability
may be limited by bankruptcy, insolvency, reorganization, fraudulent
transfer, moratorium or other laws relating to or affecting creditors'
rights generally and
<PAGE>
50
by general equity principles, (ii) BarTech has made available to
USS/Kobe and RES Holding a copy of each such Contract, (iii) BarTech
and its Subsidiaries are in compliance with all material terms and
requirements of such Contracts, and (iv) BarTech and its Subsidiaries
have not given to or received from any other Person any written notice
regarding any actual or alleged material violation or default of any
such Contract.
7.14 Environmental Matters. Except as set forth in Section 7.14 of the
Disclosure Letter or as identified in the BarTech Public Filings and except as
would not, individually or in the aggregate, reasonably be expected to have a
BarTech Material Adverse Effect:
(a) Neither BarTech nor any of its Subsidiaries has violated
or is in violation of any Environmental Law.
(b) To BarTech's Knowledge, none of the BarTech Facilities or
any facility formerly owned, leased or operated by BarTech or any of
its Subsidiaries contains any Hazardous Materials in amounts exceeding
the levels permitted by applicable Environmental Law or under
circumstances that would reasonably be expected to result in liability
under or relating to Environmental Law.
(c) To BarTech's Knowledge, BarTech and its Subsidiaries have
not disposed of, arranged to be disposed of, Released, threatened to
Release or transported in violation of any applicable Environmental Law
or in a manner that would reasonably be expected to result in liability
under or relating to Environmental Laws, any Hazardous Materials at, to
or from any of the BarTech Facilities or any facility formerly owned,
leased or operated by BarTech or any of its Subsidiaries.
(d) There have been no material environmental investigations,
studies, audits, tests, reviews or other analyses regarding compliance
or noncompliance with, or potential liability under or relating to, any
Environmental Law conducted by or on behalf of BarTech, or which are in
the custody or control of BarTech, relating to the facilities, business
or activities of BarTech or any of its Subsidiaries or any of the
BarTech Facilities that have not been made available to USS/Kobe and
RES Holding.
(e) Neither BarTech nor any of its Subsidiaries has been
subject to any Proceedings, is subject to any Order or has received any
written notice or other written communication from any Governmental
Body or the current or prior owner or operator of any BarTech
Facilities or any other Person, in each case of or with respect to any
actual or potential violation or failure to comply with any
Environmental Law or of any actual or threatened obligation to
undertake or bear any cost, damage, expense, liability, or obligation
arising from or under any Environmental Law.
(f) Neither BarTech nor any of its Subsidiaries has
contractually assumed any liability or obligation under or relating to
Environmental Laws.
<PAGE>
51
(g) Neither BarTech nor any of its Subsidiaries has entered
into, or is subject to, any Order or agreement relating to compliance
with Environmental Laws or the investigation or remediation of
Hazardous Materials.
7.15 Labor Relations; Compliance. Except as set forth in Section 7.15
of the Disclosure Letter or as identified in the BarTech Public Filings: (i)
there is no labor strike, slowdown, work stoppage, dispute, lockout or other
labor controversy in effect or, to BarTech's Knowledge, threatened involving the
employees of BarTech or any of its Subsidiaries, and BarTech and its
Subsidiaries have not experienced any such labor controversy within the past
three years, (ii) no grievance is pending or, to BarTech's Knowledge, threatened
which, if adversely decided, would have a BarTech Material Adverse Effect, (iii)
BarTech and each of its Subsidiaries have paid in full to all employees of
BarTech all currently accrued and payable wages, salaries, commissions, bonuses,
and other material compensation due to such employees in accordance with the
payroll practices of BarTech and its Subsidiaries currently in effect and
applicable, (iv) BarTech and its Subsidiaries will not have any material
liability for severance benefits payable immediately following the Closing under
any BarTech Plan as a result of or in connection with the Contemplated
Transactions and (v) BarTech and its Subsidiaries are not presently negotiating
a collective bargaining agreement or other Contract with any labor organization
or other representative of any of their employees (other than as expressly
contemplated by this Agreement). Neither BarTech nor any of its Affiliates is
subject to any bargaining obligations with any labor organization (including
without limitation the USWA) under any Legal Requirement, collective bargaining
agreement or otherwise in connection with the Contemplated Transactions, or is
required to obtain any agreements of any labor organizations to the changes in
corporate structure involved in the Contemplated Transactions, in each case
other than any such obligations or requirements which will have been satisfied
upon receipt of the NewTube Labor Agreement Ratification and the RTI Labor
Agreement Ratification.
7.16 Intellectual Property.
(a) To BarTech's Knowledge, Section 7.16(a) of the Disclosure
Letter contains a complete and accurate list and summary description
of, with respect to all material Intellectual Property owned, held or
used by BarTech and its Subsidiaries ("BarTech IP"), all patents,
registered copyrights, registered trademarks and service marks, and all
pending registrations or applications for the foregoing and all
material unregistered BarTech IP.
(b) Except as disclosed in Section 7.16(b) of the Disclosure
Letter or as identified in the BarTech Public Filings, to BarTech's
Knowledge (i) BarTech or one of its Subsidiaries owns or has the
enforceable, legal right to use all the Intellectual Property necessary
to conduct BarTech's business in all material respects as currently
conducted and consistent with past practice, free of all Encumbrances,
and (ii) to BarTech's Knowledge, all of the BarTech IP is valid,
enforceable and unexpired, has not been
<PAGE>
52
abandoned, does not Infringe the Intellectual Property of any
third party and is not being Infringed by any third party.
(c) Except as expressly set forth otherwise in Section 7.16(c)
of the Disclosure Letter, as identified in the BarTech Public Filings,
or as would not, individually or in the aggregate, reasonably be
expected to have a BarTech Material Adverse Effect, (i) to BarTech's
Knowledge, there is no actual or threatened adverse Proceeding of any
Person pertaining to, or any challenge to the scope, validity or
enforceability of, any of the BarTech IP; and (ii) neither BarTech nor
any of its Subsidiaries (A) is a party to any Proceeding which involves
a claim of infringement or misappropriation by BarTech or any of its
Subsidiaries of any Intellectual Property of any third party; or (B)
has brought any Proceeding against any third party for infringement or
misappropriation of, or breach of any license or agreement involving,
any of the BarTech IP.
(d) Except as would not, individually or in the aggregate,
reasonably be expected to have a BarTech Material Adverse Effect, to
BarTech's Knowledge, neither BarTech nor any of its Subsidiaries is, or
will be as a result of the execution and delivery of this Agreement or
the performance of its obligations hereunder, in breach of any
Intellectual Property license to which it or any of its Subsidiaries is
a party, either as licensor or licensee, or other agreement relating to
any of the BarTech IP.
7.17 Brokers or Finders. Except as provided in the Transactional and
Monitoring Fee Agreement and in the Sources and Uses, none of BarTech, its
Affiliates or their respective agents have incurred any obligation or liability,
contingent or otherwise, for brokerage or finders' fees or agents' commissions
or other similar payment in connection with this Agreement or the Contemplated
Transactions.
7.18 BarTech Public Filings. To BarTech's Knowledge, as of their
respective dates, BarTech's Public Filings complied in all material respects
with the requirements of the Exchange Act and the rules and regulations of the
Commission promulgated thereunder applicable to such Commission Documents,
except for any failures to so comply which would not, individually or in the
aggregate, reasonably be expected to have a BarTech Material Adverse Effect.
7.19 Other Matters. As of the Closing Date, neither Blackstone nor any
of its Affiliates (other than the Company and its Subsidiaries) has any
agreement or arrangement to acquire any Class A Preferred Stock or Class C
Convertible Preferred Stock of BarTech.
SECTION 8
REPRESENTATIONS AND WARRANTIES OF RES HOLDING
RES Holding represents and warrants to the USX/Kobe Parties and BarTech
as follows (provided, however, that the Disclosure Letter sets forth certain
exceptions to such
<PAGE>
53
representations and warranties or discloses certain matters in response to such
representations and warranties, in each case identified by the applicable
Section numbers below).
8.1 Organization and Good Standing.
(a) RES Holding is a corporation duly organized, validly
existing, and in good standing under the laws of Delaware, with full
corporate power and authority to conduct its business as it is now
being conducted. RES Holding is duly qualified to do business as a
foreign corporation in each jurisdiction in which the nature of the
activities conducted by it or the ownership or leasing of its
properties requires such qualification, except where such failure to so
qualify or to be in good standing does not have a RES Holding Material
Adverse Effect.
(b) Each of RES Holding Subsidiaries is a United States
corporation or limited liability company duly organized, validly
existing, and in good standing under the laws of its jurisdiction of
organization, with full corporate or limited liability company power
and authority to conduct its business as it is being conducted. Each of
RES Holding Subsidiaries is duly qualified to do business as a foreign
corporation or limited liability company and is in good standing under
the laws of each state or other jurisdiction in which the nature of the
activities conducted by it or the ownership or leasing of its
properties requires such qualification, except where such failure to so
qualify or to be in good standing does not have a RES Holding Material
Adverse Effect.
(c) RES Holding has made available to USS/Kobe and BarTech
complete and correct copies of its Organizational Documents and those
of each of its Subsidiaries, as currently in effect.
(d) Section 8.1(d) of the Disclosure Letter contains a
complete and accurate list of all the Subsidiaries of RES Holding
(without giving effect to the Contemplated Transactions). Except as
listed in Section 8.1(d) of the Disclosure Letter, RES Holding and its
Subsidiaries do not own any material direct or indirect equity or debt
interest in any other Person, and none of them is obligated or
committed to acquire any such interest (other than pursuant to this
Agreement).
8.2 Authority; No Conflict; Consents.
(a) This Agreement and each other Transaction Document to
which it is a party has been duly executed and delivered by, and
constitutes the legal, valid and binding obligation of each of the
Republic Parties, enforceable against each of them in accordance with
its terms, except to the extent that its enforceability may be limited
by bankruptcy, insolvency, reorganization, fraudulent conveyance,
fraudulent transfer, moratorium or other laws relating to or affecting
creditors' rights generally and by general equity principles.
<PAGE>
54
(b) Each of the Republic Parties has the requisite corporate,
partnership or other applicable right, power, authority and capacity to
execute and deliver this Agreement and each other Transaction Document
to which it is a party and to perform their respective obligations
under this Agreement and each other such Transaction Document. The
execution, delivery and performance of this Agreement and each other
Transaction Document to which it is a party by each of the Republic
Parties has been duly authorized by all necessary corporate,
partnership or other applicable action, as the case may be, on the part
of such entity and its owners.
(c) Except as disclosed in Section 8.2 of the Disclosure
Letter, neither the execution and delivery of this Agreement and each
other Transaction Document to which it is a party nor the consummation
of any of the Contemplated Transactions or other performance of its
obligations hereunder or thereunder will, directly or indirectly:
(i) violate any provision of the Organizational
Documents of the Republic Parties or any of their
Subsidiaries, as applicable;
(ii) result in a violation of, or give any
Governmental Body or other Person the right to exercise any
remedy or obtain any relief under, any Legal Requirement or
any Order to which any of the Republic Parties or any of their
Subsidiaries, as applicable, is subject;
(iii) result in a violation of any of the terms or
requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate, or modify, any
Governmental Authorization that is held by any of the Republic
Parties or any of their Subsidiaries;
(iv) result in a violation or breach of any provision
of, or give any Person the right to declare a default or
exercise any remedy under, or to accelerate the maturity or
performance of, or to cancel, terminate, or modify, any
material Contract of any of the Republic Parties or any of
their Subsidiaries, as applicable; or
(v) result in the imposition or creation of any
Encumbrance upon any of the assets owned or used by any of the
Republic Parties or any of their Subsidiaries (other than
pursuant to the Transaction Documents).
(d) None of the Republic Parties or their Affiliates is or
will be required to obtain any Consent from any Person or Governmental
Body in connection with the execution and delivery of this Agreement or
any other Transaction Document to which it is a party or the
consummation of any of the Contemplated Transactions or their
performance hereunder or thereunder, except (i) the Material Consents
disclosed in Section 8.2 of the Disclosure Letter, which will be
obtained by Closing, and (ii) such other Consents as to which the
failure to obtain them by Closing would not, individually
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55
or in the aggregate, reasonably be expected to have a RES Holding
Material Adverse Effect or a RTI Material Adverse Effect.
8.3 Capitalization. The authorized and outstanding equity interests of
each of the Republic Parties (without giving effect to the Contemplated
Transactions) and their Subsidiaries are listed in Section 8.3 of the Disclosure
Letter. At the time of consummation of the USX Holdings/Kobe Holdings-RTI Opco
Merger, BarTech will be the record and beneficial owner of all the outstanding
equity interests in RES Holding, free and clear of all Encumbrances. All of the
outstanding equity interests in each of RES Holding Subsidiaries are owned of
record and beneficially directly or indirectly by RES Holding. All of the
foregoing equity interests have been duly authorized and validly issued and are
fully paid and nonassessable. Except as set forth in Section 8.3 of the
Disclosure Letter, there are no outstanding options, warrants, convertible
securities or other rights of any kind relating to the issuance, sale, or
transfer of any equity interests in any of the foregoing entities (other than
this Agreement and the other Transaction Documents).
8.4 Financial Statements. Included within the RESI Public Filings are
certain financial statements of RESI (collectively, the "RESI Financial
Statements"). The RESI Financial Statements fairly present the assets and
liabilities, financial condition and the results of operations, changes in
stockholders' equity and cash flow of RESI as at the respective dates of and for
the periods referred to in such RESI Financial Statements. The RESI Financial
Statements have been prepared in accordance with generally accepted accounting
principles, consistently applied, subject in the case of the unaudited
statements to the absence of footnote disclosure and other presentation items
and to changes resulting from normal period-end adjustments for recurring
accruals which are not in the aggregate material. Subject to the limitations
provided in the immediately preceding sentence, the RESI Financial Statements
have been prepared from the books and records of RESI which accurately and
fairly reflect in all material respects the transactions of, acquisitions and
dispositions of assets by, and incurrence of liabilities by RESI. RES Holding
and its Subsidiaries have no liabilities or obligations of any nature (whether
known or unknown and whether absolute, accrued, contingent or otherwise) which
would be required under generally accepted accounting principles to be reflected
on a balance sheet, except for (a) liabilities or obligations reflected or
reserved against in the June 30, 1998 balance sheet included in the RESI
Financial Statements, (b) liabilities incurred by RES Holding and its
Subsidiaries in the Ordinary Course of Business since June 30, 1998 which in the
aggregate do not have a RES Holding Material Adverse Effect and (c) matters
disclosed in Section 8.4 of the Disclosure Letter or as identified in the RESI
Public Filings.
8.5 [intentionally omitted]
8.6 Title to Properties; Encumbrances.
(a) Section 8.6(a) of the Disclosure Letter includes a
complete list (including the street address, where applicable) of the
RESI Facilities.
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56
(b) Except as disclosed in Section 8.6(b) of the Disclosure
Letter or as identified in the RESI Public Filings, RESI or one of its
Subsidiaries has fee or other good title, as applicable, to all the
properties and assets (whether real, personal, or mixed and whether
tangible or intangible) that it purports to own or reflected as owned
in the books and records of RESI including all the properties and
assets reflected in the Interim RESI Balance Sheet (except for personal
property acquired or sold in the Ordinary Course of Business of RESI)
and all of the properties and assets purchased or otherwise acquired by
RESI since the date of the Interim RESI Balance Sheet (except for
personal property acquired and sold since the date of the Interim RESI
Balance Sheet in the Ordinary Course of Business of RESI). Except as
described in Section 8.6(b) of the Disclosure Letter, all material
properties and assets constituting RESI Facilities and reflected in the
Interim RESI Balance Sheet are free and clear of all Encumbrances,
except for Permitted Encumbrances.
8.7 [intentionally omitted]
8.8 Taxes. Except as set forth in Section 8.8 of the Disclosure
Letter or as identified in the RESI Public Filings:
(a) RES Holding and each of its Subsidiaries has filed or
caused to be filed on a timely basis all Tax Returns that are or were
required to be filed by it pursuant to applicable Legal Requirements.
RES Holding and its Subsidiaries have paid, or made provision for the
payment of, all Taxes that have become due and payable as Taxes imposed
on them pursuant to those Tax Returns or otherwise, or pursuant to any
assessment received by RES Holding or its Subsidiaries, except such
Taxes, if any, as are being contested in good faith and as to which
adequate reserves have been provided in the applicable Interim RESI
Balance Sheet.
(b) All Taxes that RES Holding and its Subsidiaries are or
were required by Legal Requirements to withhold or collect have been
duly withheld or collected and, to the extent required, have been paid
to the proper Governmental Body.
(c) Neither RES Holding nor any of its Subsidiaries is liable
for any Taxes of another Person by reason of Treasury Regulation
1.1502-6(a) (or any comparable provision under state, local or foreign
law), as a successor in interest, as a transferee, by contract or
otherwise.
(d) No Proceeding is pending or, to RES Holding Knowledge,
threatened in regard to any Taxes due from or with respect to RES
Holding or any of its Subsidiaries or any Tax Return filed by or with
respect to RES Holding or any of its Subsidiaries.
(e) RES Holding and each of its Subsidiaries is not a party to
or bound by (nor will RES Holding and each of its Subsidiaries, prior
to the Closing Date, become a party
<PAGE>
57
to or bound by) any tax indemnity, tax sharing or tax allocation
agreement or similar contractual arrangement.
(f) To the Republic Parties' Knowledge, there are no pending,
threatened or proposed audits, assessments or claims from any Tax
Authority for material Taxes against RES Holding or any of its
Subsidiaries or any of their assets, operations or activities as of the
date hereof or as of the Closing Date. There are no pending claims for
refund of any Taxes for RES Holding or any of its Subsidiaries
(including refunds of Taxes allocable to RES Holding or any of its
Subsidiaries or with respect to consolidated, combined, unitary, fiscal
unitary or similar Tax Returns).
(g) There are no outstanding rulings of, or requests for
rulings with, any Tax Authority expressly addressed to RES Holding or
any of its Subsidiaries that are, or if issued would be, binding for
any post-Closing period.
8.9 No Material Adverse Change. Except as set forth in Section 8.9 of
the Disclosure Letter or as set forth in the RESI Public Filings, since December
31, 1998, (i) RES Holding and each of its Subsidiaries has operated its business
only in the Ordinary Course of Business (other than as expressly provided for in
the Transaction Documents), (ii) to the Republic Parties' Knowledge, no event or
occurrence has occurred which has had or would reasonably be expected to have,
individually or in the aggregate, a RES Holding Material Adverse Effect, and
(iii) neither RES Holding nor any of its Subsidiaries has taken any action nor
suffered any event that if taken or suffered after the date hereof would require
USX's, Kobe's or BarTech's consent under Section 10.2 of this Agreement.
8.10 Employee Benefits.
(a) Except as set forth in Section 8.10(a) of the Disclosure
Letter (the plans disclosed in Section 8.10(a) of the Disclosure Letter
being the "RESI Plans"), RES Holding and its Subsidiaries do not
sponsor or contribute to any Employee Benefit Plan, severance,
change-in-control or employment plan, program or agreement or stock
option, bonus, or incentive plan or program. Copies of the written RESI
Plans have been made available to USS/Kobe and BarTech.
(b) Each RESI Plan has been administered and is in compliance
with the terms of such RESI Plan and all applicable laws, rules and
regulations where the failure to so comply would result in liability
that would have a RES Holding Material Adverse Effect.
(c) Except as set forth in Section 8.10(c) of the Disclosure
Letter: (i) each RESI Plan intended to be qualified within the meaning
of IRC Section 401(a) has received a favorable determination as to such
qualification from the IRS and (ii) to the Republic Parties' Knowledge,
nothing has occurred since that would adversely affect such
qualification.
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(d) Except as would not have a RES Holding Material Adverse
Effect or, in the case of the following clause (i), in connection with
the Contemplated Transactions: (i) no "reportable event" (as such term
is used in Section 4043 of ERISA) (other than those events for which
the 30-day notice has been waived pursuant to the regulations) is
pending with respect to any RESI Plan, and (ii) no "accumulated funding
deficiency" (as such term is used in Section 412 or 4971 of the IRC)
has occurred during the last five years with respect to any RESI Plan.
(e) No litigation or administrative or other proceeding
involving any RESI Plan has occurred or, to the Republic Parties'
Knowledge, is threatened where an adverse determination would result in
liability that would have a RES Holding Material Adverse Effect, other
than any such litigation or administrative or other proceeding that may
be commenced by the PBGC in connection with the Contemplated
Transactions.
(f) Except as set forth in Section 8.10(f) of the Disclosure
Letter, neither RES Holding nor any of its Subsidiaries have
contributed to any "multiemployer plan" (within the meaning of Section
3(37) of ERISA), and neither RES Holding nor any member of its
Controlled Group has incurred any withdrawal liability which remains
unsatisfied in an amount which would result in liability that would
have a RES Holding Material Adverse Effect.
(g) No RESI Plan or multiemployer plan to which RES Holding or
any of its Subsidiaries contributed has been terminated, where such
termination has resulted in liability under Title IV of ERISA that
would have a RES Holding Material Adverse Effect.
(h) Except as would not have a RES Holding Material Adverse
Effect, none of RES Holding or any of its Subsidiaries has incurred any
liability, direct or indirect, as a result of any breach of fiduciary
duty or non-exempt prohibited transaction (within the meaning of IRC
Section 4975 or Section 406 of ERISA) involving any RESI Plan or the
assets thereof. None of RES Holding or any of its Subsidiaries has
engaged in any transaction that has resulted or could result in any
material liability of any of them pursuant to Section 4069 or 4212 of
ERISA.
8.11 Compliance with Legal Requirements; Governmental Authorizations.
Except as set forth in Section 8.11 of the Disclosure Letter or as identified in
the RESI Public Filings, to the Republic Parties' Knowledge, RES Holding and
each of its Subsidiaries has complied and is in compliance with each Legal
Requirement that is applicable to it or to the conduct or operation of its
business, except for any failures to comply which would not, individually or in
the aggregate, have a RES Holding Material Adverse Effect. To the Republic
Parties' Knowledge, RES Holding and its Subsidiaries hold all Governmental
Authorizations that are required in connection with their businesses, and are in
compliance with all of the terms and
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59
requirements of each Governmental Authorization applicable to them, except where
the failure to be in compliance would not have a RES Holding Material Adverse
Effect.
8.12 Legal Proceedings; Orders. Except as set forth in Section 8.12 of
the Disclosure Letter or as identified in the RESI Public Filings, to the
Republic Parties' Knowledge there is no Proceeding (i) pending or threatened
against RES Holding or any of its Subsidiaries that, individually or in the
aggregate, has had, or would reasonably be expected to have, a RES Holding
Material Adverse Effect, or (ii) as of the date of this Agreement, that
challenges, or that may have the effect of preventing or making illegal, any of
the Contemplated Transactions. Except as set forth in Section 8.12 of the
Disclosure Letter, to the Republic Parties' Knowledge (i) there is no material
Order to which RES Holding or any of its Affiliates is subject that materially
prohibits or restricts RES Holding or any of its Subsidiaries, and (ii) no agent
or employee of RES Holding and its Subsidiaries' business is subject to any
Order that materially prohibits or restricts such agent or employee, from
engaging in or continuing any conduct, activity, or practice relating to RES
Holding business.
8.13 Contracts; No Defaults.
(a) Except for Permitted Encumbrances, Section 8.13(a) of the
Disclosure Letter contains a complete and accurate list of, or the RESI
Public Filings include as exhibits thereto: (i) each Contract of RES
Holding and its Subsidiaries that is required to be filed as an exhibit
to any of the RESI Public Filings, (ii) any other Contract of RES
Holding or any of its Subsidiaries containing covenants not to compete,
employee non-solicitation or no-hire covenants, or otherwise materially
limiting the freedom of RES Holding and its Subsidiaries to engage in
any line of business or to compete with any Person, (iii) any other
Contract of RES Holding or any of its Subsidiaries constituting a
material employment agreement or a collective bargaining or other
agreement with a labor organization or other representative of RES
Holding and its Subsidiaries employees, (iv) any other Contract of RES
Holding or any of its Subsidiaries with or for the benefit of any
Affiliate of RES Holding (other than with or among its Subsidiaries)
or, to the Republic Parties' Knowledge, any immediate family member of
any officer, director, employee or equityholder of RES Holding or any
of its Affiliates or any Affiliate thereof and (v) any other Contract
of RES Holding or any of its Subsidiaries relating to material
indebtedness, financing arrangements or guarantees of indebtedness;
(b) With respect to the Contracts identified in Section
8.13(a) of the Disclosure Letter, to the Republic Parties' Knowledge:
(i) each Contract is in full force and effect and is valid and
enforceable in accordance with its terms, except to the extent that its
enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent transfer, moratorium or other laws relating
to or affecting creditors' rights generally and by general equity
principles, (ii) RES Holding has made available to USS/Kobe and BarTech
a copy of each such Contract, (iii) RES Holding and its Subsidiaries
are in compliance with all material terms and requirements of such
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60
Contracts, and (iv) RES Holding and its Subsidiaries have not given to
or received from any other Person any written notice regarding any
actual or alleged material violation or default of any such Contract.
8.14 Environmental Matters. Except as set forth in Section 8.14 of the
Disclosure Letter or as identified in the RESI Public Filings and except as
would not, individually or in the aggregate, reasonably be expected to have a
RES Holding Material Adverse Effect:
(a) Neither RES Holding nor any of its Subsidiaries has
violated or is in violation of any Environmental Law.
(b) To the Republic Parties' Knowledge, none of the RESI
Facilities or any facility formerly owned, leased or operated by RES
Holding or any of its Subsidiaries contains any Hazardous Materials in
amounts exceeding the levels permitted by applicable Environmental Law
or under circumstances that would reasonably be expected to result in
liability under or relating to Environmental Law.
(c) To the Republic Parties' Knowledge, RES Holding and its
Subsidiaries have not disposed of, arranged to be disposed of,
Released, threatened to Release or transported in violation of any
applicable Environmental Law or in a manner that would reasonably be
expected to result in liability under or relating to Environmental
Laws, any Hazardous Materials at, to or from any of the RESI Facilities
or any facility formerly owned, leased or operated by RES Holding or
any of its Subsidiaries.
(d) There have been no material environmental investigations,
studies, audits, tests, reviews or other analyses regarding compliance
or noncompliance with, or potential liability under or relating to, any
Environmental Law conducted by or on behalf of RES Holding and its
Subsidiaries, or which are in the custody or control of RES Holding and
its Subsidiaries, relating to the facilities, business or activities of
RES Holding and its Subsidiaries or any of the RESI Facilities that
have not been made available to USS/Kobe and BarTech.
(e) Neither RES Holding nor any of its Subsidiaries has been
subject to any Proceedings, is subject to any Order or has received any
written notice or other written communication from any Governmental
Body or the current or prior owner or operator of any RESI Facilities
or any other Person, in each case of or with respect to any actual or
potential violation or failure to comply with any Environmental Law or
of any actual or threatened obligation to undertake or bear any cost,
damage, expense, liability, or obligation arising from or under any
Environmental Law.
(f) RES Holding and its Subsidiaries have not contractually
assumed any liability or obligation under or relating to Environmental
Laws.
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61
(g) Neither RES Holding nor any of its Subsidiaries has
entered into, or is subject to, any Order or agreement relating to
compliance with Environmental Laws or the investigation or remediation
of Hazardous Materials.
8.15 Labor Relations; Compliance. Except as set forth in Section 8.15
of the Disclosure Letter or as identified in the RESI Public Filings: (i) there
is no labor strike, slowdown, work stoppage, dispute, lockout or other labor
controversy in effect or, to the Republic Parties' Knowledge, threatened
involving the employees of RES Holding or any of its Subsidiaries, and RES
Holding and its Subsidiaries have not experienced any such labor controversy
within the past three years, (ii) no grievance is pending or, to the Republic
Parties' Knowledge, threatened which, if adversely decided, would have a RES
Holding Material Adverse Effect, (iii) RES Holding and its Subsidiaries have
paid in full to all of their employees all currently accrued and payable wages,
salaries, commissions, bonuses and other material compensation due to such
employees in accordance with the payroll practices of RES Holding and its
Subsidiaries currently in effect and applicable law, (iv) RES Holding and its
Subsidiaries will not have any material liability for severance benefits payable
under any RESI Plan as a result of or in connection with the Contemplated
Transactions and (v) RES Holding and its Subsidiaries are not presently
negotiating a collective bargaining agreement or other Contract with any labor
organization or other representative of any of their employees (other than as
expressly contemplated by this Agreement). Neither RES Holding nor any of its
Affiliates is subject to any bargaining obligations with any labor organization
(including without limitation the USWA) under any Legal Requirement, collective
bargaining agreement or otherwise in connection with the Contemplated
Transactions, or is required to obtain any agreements of any labor organizations
to the changes in corporate structure involved in the Contemplated Transactions,
in each case other than any such obligations or requirements which will have
been satisfied upon receipt of the NewTube Labor Agreement Ratification and the
RTI Labor Agreement Ratification.
8.16 Intellectual Property.
(a) To the Republic Parties' Knowledge, Section 8.16(a) of the
Disclosure Letter contains a complete and accurate list and summary
description of, with respect to all material Intellectual Property
owned, held or used by RES Holding and Subsidiaries and, to the extent
applicable to RES Holding, its Affiliates ("RESI IP"), all patents,
registered copyrights, registered trademarks and service marks, and all
pending registrations or applications for the foregoing and all
material unregistered RESI IP.
(b) Except as disclosed in Section 8.16(b) of the Disclosure
Letter or as identified in the RESI Public Filings, to the Republic
Parties' Knowledge (i) RES Holding or one of its Subsidiaries owns or
has the enforceable, legal right to use all the Intellectual Property
necessary to conduct RES Holding business in all material respects as
currently conducted and consistent with past practice, free of all
Encumbrances, and (ii) to the Republic Parties' Knowledge, all of the
RESI IP is valid, enforceable and
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62
unexpired, has not been abandoned, does not Infringe the Intellectual
Property of any third party and is not being Infringed by any third
party.
(c) Except as expressly set forth otherwise in Section 8.16(c)
of the Disclosure Letter, as identified in the RESI Public Filings, or
as would not, individually or in the aggregate, reasonably be expected
to have a RES Holding Material Adverse Effect, (i) to the Republic
Parties's Knowledge, there is no actual or threatened adverse
Proceeding of any Person pertaining to, or any challenge to the scope,
validity or enforceability of, any of the RESI IP, and (ii) neither RES
Holding nor any of its Subsidiaries (A) is a party to any Proceeding
which involves a claim of infringement or misappropriation by RES
Holding or any of its Subsidiaries of any Intellectual Property of any
third party or (B) has brought any Proceeding against any third party
for infringement or misappropriation of, or breach of any license or
agreement involving, any of the RESI IP.
(d) Except as would not, individually or in the aggregate,
reasonably be expected to have a RES Holding Material Adverse Effect,
to the Republic Parties' Knowledge, neither RES Holding nor any of its
Subsidiaries is, or will be as a result of the execution and delivery
of this Agreement or the performance of its obligations hereunder, in
breach of any Intellectual Property license to which it or any of its
Subsidiaries is a party either as licensor or licensee, or other
agreement relating to any of the RESI IP.
8.17 Brokers or Finders. Except as provided in the Transactional and
Monitoring Fee Agreement and in the Sources and Uses, none of the Republic
Parties, their Affiliates or their respective agents have incurred any
obligation or liability, contingent or otherwise, for brokerage or finders' fees
or agents' commissions or other similar payment in connection with this
Agreement or the Contemplated Transactions.
8.18 RESI Public Filings. To the Republic Parties' Knowledge, as of
their respective dates, RESI's Public Filing, complied in all material respects
with the requirements of the Exchange Act and the rules and regulations of the
Commission promulgated thereunder applicable to such Commission Documents,
except for failures to so comply which would not, individually or in the
aggregate, reasonably be expected to have a RES Holding Material Adverse Effect.
SECTION 9
[intentionally omitted]
SECTION 10
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COVENANTS
10.1 Access and Investigation. From the date of this Agreement until
the Closing, upon reasonable advance notice, each of BarTech, RES Holding and
USS/Kobe (only with respect to its Bar Business) will, and will cause each of
their Subsidiaries and relevant Affiliates to:
(a) Afford the other parties hereto and their Representatives
and their lenders and their Representatives reasonable access during
normal business hours to the personnel, properties, contracts, books
and records, and other documents and data of such Person and its
Subsidiaries and relevant Affiliates;
(b) Furnish the other parties hereto and their Representatives
with copies of all such contracts, books and records, and other
existing documents and data as they may reasonably request in
connection with the Transaction Documents and the transactions
contemplated hereby and thereby;
(c) Furnish the other parties hereto and their Representatives
with such additional financial, operating, and other data and
information with respect to such Person and its Subsidiaries and
relevant Affiliates as they may reasonably request; provided, however,
that such investigation shall not unreasonably interfere with any of
the businesses or operations of such Person or any of its Subsidiaries
or relevant Affiliates and will be at the cost of the Person making
such investigation;
(d) Notwithstanding the foregoing, neither BarTech, RES
Holding nor USS/Kobe will be required prior to the Closing Date to
disclose or cause the disclosure to the Representatives of any such
Person (or provide access to any of their or their Subsidiaries' or
relevant Affiliates' properties, contracts, books or records) of any
confidential information relating to pricing and marketing plans, to
the extent that such Person receives the written advice of outside
legal counsel which counsel will be reasonably satisfactory to the
other Persons that disclosure of such information would be inconsistent
with any applicable antitrust or competition law, nor will such Person
be required to permit or cause others to permit the Representatives of
such Person to photocopy or remove from the offices or properties of
any such Person or any of its Subsidiaries or relevant Affiliates any
original or photocopied documents, drawings or other materials that
might reveal any such confidential information;
(e) From the date hereof and following the Closing, each of
the parties hereto agrees to, and will cause its Subsidiaries,
Affiliates and Representatives to treat and hold as confidential (and
not disclose or provide access to any Person) all information provided
to pursuant to this Agreement or other Transaction Documents as
provided in Section 10.6; and
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(f) Each of BarTech, the Republic Parties, the BV Parties and
the USX/Kobe Parties acknowledges and agrees that it (i) has made its
own inquiry and investigation into, and based thereon, has formed an
independent judgment concerning the business, the assets and
liabilities of the other parties, (ii) has been furnished with or given
adequate access to such information about the business, the assets and
liabilities of the other parties as it has requested, (iii) has had
independent legal, financial and technical advice relating to the
business and the assets of the other parties and the terms of this
Agreement and the Transaction Documents and (iv) will not assert any
claim against any of the other parties or their Affiliates or any of
their or their Affiliates' respective directors, officers, employees,
agents, stockholders, consultants, investment bankers, accountants or
representatives, or hold any such persons liable, for any inaccuracies,
misstatements or omissions with respect to information (other than the
representations and warranties of the other parties contained in this
Agreement) furnished by the other parties or such persons concerning
the other parties, provided, however, that nothing contained in this
Agreement will preclude the assertion by any party or its Affiliates of
any causes of action that may exist, not based upon breach of contract,
for fraud. Any implied warranty or other rights applicable to any of
the transactions contemplated hereby under the law of any jurisdiction
is hereby expressly and irrevocably waived by each party to the fullest
extent permitted by such legal requirements, and each party agrees that
it will not seek to enforce any such implied warranties or other
rights.
10.2 Operation of the Business of BarTech, RES Holding and
USS/Kobe. Between the date of this Agreement and the Closing Date, each of
BarTech, RES Holding, USS/Kobe, USX Holdings and Kobe Holdings will (except (i)
for the USS/Kobe Tubular Business, USS/Kobe Tubular Assets and the Tubular
Spinoff, in respect of which USS/Kobe, USX Holdings and Kobe Holdings will not
be subject to any of the provisions of this Section 10.2, (ii) to the extent
that the others have otherwise consented in advance in writing, which consent
will not be unreasonably withheld or delayed, or (iii) as expressly provided for
elsewhere in the Transaction Documents or in the Disclosure Letter), and will
cause its Subsidiaries to:
(a) Conduct its business only in the Ordinary Course of
Business and use its commercially reasonable efforts to: preserve
intact its current business, keep available the services of its current
officers, employees, and agents, and maintain good relations and good
will with suppliers, customers, landlords, creditors, employees,
agents, and others having business relationships with it;
(b) Not (i) amend any of its Organizational Documents, (ii)
otherwise alter or modify its authorized or outstanding capital stock,
partnership or other equity interests, or grant of any option or right
to purchase equity interests, (iii) issue any debt or equity security,
or incur any indebtedness other than (A) gross debt for borrowed money
to the extent it replaces existing outstanding indebtedness or
indebtedness incurred pursuant to clause (B) below, is incurred in the
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65
Ordinary Course of Business and is prepayable at the Closing without
premium or penalty or (B) net debt for borrowed money incurred in the
Ordinary Course of Business pursuant to bank credit facilities existing
on the date hereof, (iv) grant any registration rights, (v) declare,
set aside, make or pay any dividends of cash or other property or make
any cash or other distributions on debt or equity securities, or
redeem, repurchase, retire or otherwise acquire any of its debt or
equity securities, except to the extent otherwise required to do so by
the terms of any debt securities or preferred stock currently
outstanding, (vi) liquidate, dissolve, merge, consolidate, recapitalize
or otherwise reorganize its business, other than liquidations of
non-operating Subsidiaries and mergers with other wholly owned
Subsidiaries of such Person, (vii) create any new Subsidiaries or joint
ventures, (viii) incur or accrue any obligations to any of its direct
or indirect equityholders, partners or Affiliates, other than
obligations arising under Contracts existing on the date hereof, or
(ix) repay any advances from, or make any other payments to, any of its
direct or indirect equityholders, partners or Affiliates, except for
(A) payments which reduce dollar-for-dollar amounts owed to such
stockholder, partner or Affiliate that are reflected on its respective
Interim Balance Sheet or have been incurred in the Ordinary Course of
Business pursuant to obligations arising under Contracts existing on
the date hereof and (B) payments set forth in the Disclosure Letter;
(c) Except to the extent required by an agreement in effect on
the date hereof and disclosed in the applicable section of the
Disclosure Letter or any of the RTI PBGC Agreement, labor agreement
subject to the NewTube Labor Agreement Ratification or labor agreement
subject to the RTI Labor Agreement Ratification, not (i) materially
increase any bonuses, salaries or other compensation of any of its
employees, officers or directors, (ii) enter into any employment,
severance or similar Contract with any of its employees, officers or
directors; adopt, modify or terminate any Employee Benefit Plan or
other benefit or severance policy, plan, agreement, arrangement or
program; or hire any employees other than in the Ordinary Course of
Business or, in the case of USS/Kobe, transfer any employees between
the USS/Kobe Bar Business and USS/Kobe Tubular Business other than in
the Ordinary Course of Business, or (iii) effect a "plant closing" or
"mass layoff", as those terms are defined in the Worker Adjustment and
Retraining Notification Act, affecting in whole or in part any USS/Kobe
Facilities or other site of employment of USS/Kobe, BarTech Facilities
or other site of employment of BarTech or any of its Subsidiaries or
RESI Facilities or other site of employment of RES Holding or any of
its Subsidiaries;
(d) Not (i) enter into, terminate or materially amend any
Contract identified (in the case of existing Contracts), or of the type
identified (in the case of new Contracts), in Section 6.13(a), 7.13(a)
or 8.13(a), as applicable, other than Contracts entered into with
customers and suppliers in the Ordinary Course of Business and, in the
case of USS/Kobe, Contracts which are USS/Kobe Tubular Assets, (ii)
sell (other than sales of inventory in the Ordinary Course of
Business), lease, mortgage, pledge, license or otherwise dispose of any
of its material assets or properties, or create or suffer to exist any
new Encumbrance on any of its material assets or properties, other
than, in the case of USS/Kobe, (A) assets or properties which are
USS/Kobe Tubular Assets and (B)
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mortgages, security interests and liens granted to secure USS/Kobe's
obligations under the USS/Kobe Credit Facility and/or USS/Kobe Senior
Notes (provided that such mortgages, security interests and liens will
be released upon consummation of the refinancing transactions described
in Section 4), (iii) make any loans, advances or capital contributions
to any Person, other than to its Subsidiaries and other than loans or
advances to employees in the Ordinary Course of Business, or (iv)
assume, guarantee, endorse or otherwise become liable for any material
obligations of any Person other than its Subsidiaries;
(e) Not make any material capital expenditures (in the case of
USS/Kobe, solely with respect to the USS/Kobe Bar Assets) other than as
provided in the capital expenditures budgets previously provided to the
other parties hereto, or fail to make any material capital expenditures
so budgeted; and
(f) Not enter into any agreement, arrangement or understanding
to do any of the foregoing.
10.3 Notification. Between the date of this Agreement and the Closing
Date, each of BarTech, the Republic Parties and USS/Kobe (only in respect of the
USS/Kobe Bar Business) promptly will notify the others in writing if it becomes
aware of any fact or condition that would reasonably be expected to cause or
constitute a breach of any of its representations, warranties or covenants so as
to cause the failure of any of the conditions contained herein (or that would
reasonably be expected to cause such a breach if any such representation or
warranty had been made as of the time of discovery of such fact or condition).
10.4 No Negotiation. Until such time, if any, as this Agreement is
terminated pursuant to Section 17, each of BarTech, the Republic Parties (other
than as to any discontinued operations of the Republic Parties), the BV Parties
and the USX/Kobe Parties (other than as to the USS/Kobe Tubular Assets, USS/Kobe
Tubular Business and USS/Kobe Tubular Liabilities) will not, and will cause its
Subsidiaries, Affiliates and Representatives not to, directly or indirectly (a)
solicit, initiate, encourage (including by way of furnishing information) or
take any action knowingly to facilitate the submission of any inquiries,
proposals or offers (whether or not in writing) from any Person relating to,
other than the Contemplated Transactions, (i) any acquisition or purchase of 5%
or more of the assets of BarTech and its Subsidiaries, RES Holding and its
Subsidiaries or USS/Kobe, as applicable, (ii) any direct or indirect acquisition
or purchase of any equity securities of BarTech or any of its Subsidiaries, RES
Holding or any of its Subsidiaries or USS/Kobe, as applicable, (iii) any merger,
consolidation, business combination, recapitalization, liquidation, dissolution
or similar transaction involving BarTech or any of its Subsidiaries, RES Holding
or any of its Subsidiaries or USS/Kobe, as applicable, or (iv) any other
transaction the consummation of which would or would reasonably be expected to
impede, interfere with, prevent or materially delay the Contemplated
Transactions or that would or would reasonably be expected to dilute the
benefits to the other parties hereto of the Contemplated Transactions, or agree
to or endorse any such proposal, or (b) enter into or participate in any
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discussions or negotiations regarding any of the foregoing, or furnish to any
other Person any information with respect to its business, properties or assets
in connection with the foregoing, or otherwise cooperate in any way with, or
knowingly assist or participate in, facilitate or encourage, any effort or
attempt by any other Person to do or seek any of the foregoing.
10.5 Commercially Reasonable Best Efforts. Between the date of this
Agreement and the Closing Date, each of BarTech, the Republic Parties and
USS/Kobe will use commercially reasonable best efforts to cause the conditions
hereunder to the others' obligations to be satisfied. Each of BarTech, the
Republic Parties and USS/Kobe will furnish the others, at the cost and expense
of the party being furnished with such information, with all information that is
required for inclusion in any application or filing to be made by any such
Person or its Subsidiaries or Affiliates to any Governmental Body in connection
with the Contemplated Transactions, and each party hereto will use commercially
reasonable best efforts to assist the others in obtaining any Governmental
Authorizations, or any Consents related thereto, required in connection with the
Contemplated Transactions. USS/Kobe will provide reasonable assistance to
BarTech and the Republic Parties in connection with their efforts to obtain the
RTI Credit Facility and to consummate the RTI High Yield Offering, including
facilitating customary due diligence and arranging for senior officers of
USS/Kobe, as reasonably selected by BarTech and the Republic Parties, to meet
with prospective lenders and investors in customary "road show" presentations or
otherwise, and use commercially reasonable best efforts to cause USS/Kobe's
accountants and attorneys to provide reasonable assistance in such financing,
including providing financial statements, reasonable access to work papers and
other information regarding USS/Kobe and its relevant Affiliates suitable for
inclusion in a registration statement on Form S-1 or Rule 144A offering
memorandum, customary "comfort letters" and legal opinions. Notwithstanding the
foregoing or anything else contained in this Agreement, none of the parties
hereto will have any obligation to comply with any request or requirement
imposed by any Governmental Body in connection with the Contemplated
Transactions if such party, in the exercise of its reasonable discretion,
determines that to do so would be materially adverse to its business or the
business of its Affiliates (including without limitation any request by, or any
requirement of, any Governmental Body to dispose of any assets or operations or
to comply with any restriction on the manner in which it conducts its
operations).
10.6 Confidentiality. Each party hereto will maintain in confidence,
and will cause its Subsidiaries, Affiliates and Representatives to maintain in
confidence, any information furnished to them by or on behalf of any other party
hereto or its Representatives in connection with this Agreement or the
Contemplated Transactions to the extent contemplated by the terms of the
confidentiality agreement, dated as of March 8, 1999, between Blackstone
Management Partners III, L.L.C. and USS/Kobe as if such party hereto were a
party thereto.
10.7 Tubular Business Excluded. For the avoidance of doubt, none of the
covenants of USS/Kobe in subsections 10.1 to 10.6 will be applicable to the
Tubular Business or the Tubular Assets.
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10.8 Use of Names.
(a) Notwithstanding any other provision of this Agreement to
the contrary, no right, title or interest in, nor any right to use, the
names "Kobe," "USS," "USS/Kobe" and "USX," any corporate name of Kobe,
USX or their respective Affiliates, or any logo, trademark, service
mark, trade dress or trade name or any derivation thereof of Kobe, USX
or their respective Affiliates with respect to, or associated with, the
foregoing (collectively, the "Retained Names and Marks") is being
transferred to RTI Opco pursuant to the transactions contemplated
hereunder, and the use of any Retained Names and Marks (except to the
extent any rights thereto were owned by RTI Opco or any of its
Affiliates prior to the date of this Agreement), whether in connection
with the Bar Business or otherwise, by RTI Opco and its Affiliates will
cease as soon as practicable following the Closing Date, but in no
event later than 180 days after the Closing Date. RTI Opco, as soon as
practicable following the Closing Date, will, and will cause its
Affiliates to: (i) remove or obliterate all of the Retained Names and
Marks from all of its signs, purchase orders, invoices, sales orders,
labels, letterheads, shipping documents, and other items and materials,
whether relating to the Bar Business or otherwise, and not to put into
use after the Closing Date any such items and materials not in
existence on the Closing Date that bear any of the Retained Names and
Marks or any name, mark or logo confusingly similar thereto; and (ii)
change the corporate name of each Subsidiary whose corporate name
includes any of the Retained Names and Marks or any name, mark or logo
confusingly similar thereto, to another corporate name that does not
include any of the Retained Names and Marks or any name, mark or logo
confusingly similar thereto.
(b) Notwithstanding the foregoing, RTI Opco and its
Subsidiaries may, until the earlier of 180 days after the Closing Date
and the date on which all of the Marked Inventory is sold, use any
purchase orders, invoices, sales orders, labels, letterheads, or
shipping documents existing on the Closing Date that bear any of the
Retained Names and Marks or any name, mark or logo confusingly similar
thereto, where the removal of any of the Retained Names and Marks or
any such similar name, mark or logo would be impractical, and will not
in any event be prohibited from selling inventories existing as of the
Closing Date which are pre-labeled in a manner such that the removal of
any of the Retained Names and Marks or any name, mark or logo
confusingly similar thereto would be impractical (the "Marked
Inventory"), provided that RTI Opco and its Affiliates will use
commercially reasonable efforts to sell all such inventories as
promptly as practicable, and to cease using any of the Retained Names
and Marks as promptly as practicable. RTI Opco agrees that none of
Kobe, USX and their respective Affiliates will have any responsibility
or liability to RTI Opco or its Affiliates with respect to claims by
third parties to the extent arising out of, or relating to, any use by
RTI Opco or any of its Affiliates of any Retained Name or Mark after
the Closing Date.
(c) RTI Opco acknowledges Kobe's and USX's respective
ownership of the appropriate Retained Names and Marks and the goodwill
associated therewith and agrees
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that all goodwill associated with or arising from the use of the
Retained Names and Marks by RTI Opco and its Affiliates will inure
solely to the benefit of Kobe or USX, as applicable, RTI Opco will
knowingly do nothing inconsistent with Kobe's and USX's respective
ownership of the appropriate Retained Names and Marks nor knowingly
take any action that would reasonably be expected to be detrimental to
the goodwill associated with the Retained Names and Marks. RTI Opco
agrees that nothing in this Section 10.8 vests in it, or will be
construed to vest in it, any right, title, claim or interest in any of
the Retained Names and Marks or the goodwill associated therewith other
than the limited right to use granted herein. RTI Opco will not
directly or indirectly knowingly undertake any action anywhere that
would reasonably be expected to infringe or impair the validity of
Kobe's or USX's respective title in the appropriate Retained Names and
Marks. RTI Opco will notify Kobe and USX promptly if RTI Opco or any of
its Affiliates learns of any pending or threatened litigation involving
any of the Retained Names and Marks as used in connection with this
Agreement.
(d) RTI Opco agrees that it and its Affiliates will use the
Retained Names and Marks only as authorized in this Section 10.8 and
will not affix any of the Retained Names and Marks to any products
produced after the Closing Date or use any of the Retained Names and
Marks in connection with any service (other than services reasonably
related to the sale of the Marked Inventory as provided herein). In
using the Retained Names and Marks in connection with the sale of the
Marked Inventory, RTI Opco will use commercially reasonable efforts to
include and cause its Affiliates to include all notices and legends
with respect to the Retained Names and Marks as are required by
applicable federal, state or local trademark laws and as have been
reasonably requested by Kobe or USX.
10.9 Non-Competition and Non-Solicitation.
(a) Until the earlier of (i) the fifth anniversary of the
Closing Date and (ii) such time that USX and its Subsidiaries (in the
case of the covenants of USX in this Section 10.9) or Kobe and its
Subsidiaries (in the case of the covenants of Kobe in this Section
10.9), as applicable, owns less than 5% of the Common Stock on a fully
diluted basis (as calculated for purposes of the Equityholders
Agreement), (A) USX agrees that neither it nor any of its Affiliates
will engage in the United States in the manufacturing, finishing,
processing or distributing of special bar quality or other products
classified as high quality steel or alloy bars and (B) Kobe agrees that
neither it nor any of its Affiliates will engage in the United States
in the manufacturing, finishing or processing of special bar quality or
other products classified as high quality steel or alloy bars;
provided, however, that the restrictions contained in this Section
10.9(a) will not prevent any Person that becomes an Affiliate of USX or
Kobe after the Closing Date (a "New Affiliate") from engaging in such
activities, provided that such New Affiliate (i) had been actively
engaged in the conduct of such high quality bar activities prior to the
date on which it became a New Affiliate, (ii) was acquired as a going
concern, (iii) did not
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commence the conduct of such high quality bar activities in
contemplation of becoming a New Affiliate and (iv) on average derived
less than 40% of its annual revenues from the conduct of such high
quality steel or alloy bar activities during the five year period
preceding the date on which it became a New Affiliate (based upon an
average of such five years of operation (or such shorter period as it
had been in operation if less than five years)); and provided, further,
that neither any New Affiliate nor its Affiliates will solicit
customers of BarTech or its Subsidiaries, RESI or its Subsidiaries or
the USS/Kobe Bar Business existing as of the Closing Date in connection
with the conduct of such high quality bar activities (except to the
extent that such customers were also high quality bar customers of such
New Affiliate or its Affiliates as of the time it became a New
Affiliate).
(b) Until the second anniversary of the Closing Date, each of
USX, Kobe and BarTech agrees that neither it nor any of its respective
Affiliates will, without the prior written consent of the party that is
the employer or former employer of such employee, directly or
indirectly solicit to hire or employ (or seek to cause to leave the
employ of) any non-union employee (limited, however, to the plant
manager level and above) employed by BarTech or its Subsidiaries, USX
or its Subsidiaries or Kobe or its Subsidiaries at the time of such
solicitation or during the immediately preceding six-month period
(provided that this Section 10.9(b) will not be deemed to apply to (i)
any person who contacts any of the parties on his or her own initiative
and without any direct or indirect solicitation by any of the parties
or their Representatives or (ii) a general solicitation to the public).
10.10 Assignment of Rights to RTI Opco. Effective as of the Closing,
except to the extent otherwise provided in the Transaction Documents or the
Sources and Uses, (i) the BV Parties will be deemed to have assigned or
otherwise transferred to RTI Opco any rights to indemnification, reimbursement
of expenses or other similar rights owned by any of the BV Parties on the date
hereof relating to the acquisition of their respective interests in BarTech, RES
Holding and their Subsidiaries, and (ii) except with respect to the USS/Kobe
Tubular Business, USX and Kobe will be deemed to have assigned or otherwise
transferred to RTI Opco any rights to indemnification, reimbursement of expenses
or other similar rights owned by USX or Kobe on the date hereof relating to the
acquisition of their respective interests in USX Holdings, Kobe Holdings,
USS/Kobe and its Subsidiaries.
SECTION 11
EMPLOYMENT COVENANTS
11.1 USS/Kobe Employee Benefits and Pension Plans.
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(a) Offer of Employment. The parties hereto intend that there
will be continuity of employment for all employees of the USS/Kobe
Tubular Business following the Closing. In connection with the Tubular
Spinoff and with such employment commencing on the Closing Date, the
USX/Kobe Parties will cause to be transferred to NewTube the employment
of (i) all nonunion employees, including those on vacation, leave of
absence, disability or layoff, who were employed by the USS/Kobe
Tubular Business immediately prior to the Tubular Spinoff (the "Tubular
Non-Union Employees"), and (ii) all employees covered by collective
bargaining agreements, including those on vacation, leave of absence,
disability or layoff, who were employed by the USS/Kobe Tubular
Business immediately prior to the Tubular Spinoff (the "Tubular Union
Employees" and, together with the Tubular Non-Union Employees, the
"Tubular Employees"), and will cause NewTube to assume and be bound by
the terms of the labor agreement subject to the NewTube Labor Agreement
Ratification with respect to such Tubular Union Employees. Schedule
11.1(a) sets forth the name of (i) each Tubular Employee as of the
Closing (and identifies each such person as a Tubular Employee) and
(ii) each of the other employees of USS/Kobe as of the Closing (and
identifies each such person as a RTI employee or a "Kobe Tech"
employee). NewTube will be liable for any amounts to which any employee
of the USS/Kobe Tubular Business becomes entitled under any benefit or
severance policy, plan, agreement, arrangement or program which exists
or arises, or may be deemed to exist or arise, under any applicable law
or otherwise, as a result of, or in connection with, the Contemplated
Transactions. Except to the extent otherwise provided in this
Agreement, the parties hereto will use commercially reasonable efforts
to reduce or eliminate any payments or benefits with respect to
employees of USS/Kobe which may exist or arise as a result of, or in
connection with, the Contemplated Transactions.
(b) Tubular Assumed Employee Benefit Liabilities. USX and Kobe
will cause NewTube to assume all of USS/Kobe's medical, dental and life
insurance and other employee benefit liabilities for the Tubular
Employees, including without limitation any workers' compensation,
severance, incentive, employment, change in control or any other
payroll or employee benefit liability for which such employees are
eligible through USS/Kobe's plans or pursuant to a collective
bargaining agreement with USS/Kobe or its Affiliates, whether or not
such amounts are accrued as of the consummation of the Tubular Spinoff,
provided that the assumption of liabilities in respect of the USS/Kobe
Pension Plans is subject to the transfer of assets to the NewTube
Spinoff Plans in accordance with in Section 11.1(d) hereof. On or prior
to the consummation of the Tubular Spinoff, NewTube will establish
employee welfare benefit plans which provide substantially similar
benefits as the USS/Kobe welfare benefit plans covering insurance
programs for the benefit of the Tubular Employees participating in the
USS/Kobe insurance plans. NewTube will be responsible to the Tubular
Employees for (i) any required continuation of coverage notification
under the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended, and Sections 601 through 608 of ERISA
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("COBRA"), and (ii) issuing any required Certificates of Creditable
Coverage under the Health Insurance Portability and Accountability Act
of 1996, as amended.
(c) Retained Employee Benefit Liabilities. RTI Opco will, as a
matter of law in connection with the USX Holdings/Kobe Holdings-RTI
Opco Merger, become responsible for all of USS/Kobe's medical, dental
and life insurance and other employee benefit liabilities for all
active employees who are not Tubular Employees and for all former or
retired participants eligible under its current plans including without
limitation any workers' compensation, severance, incentive, employment
or any other payroll or employee benefit liability for which such
employees and participants are eligible through USS/Kobe plans or
pursuant to a collective bargaining agreement with USS/Kobe. RTI Opco
will also be responsible for the reimbursement of retiree medical
payments to USX for pre-1989 Lorain Works' retirees and their
dependents and, regardless of the provisions of any pension plans
maintained by RTI Opco or its Affiliates, RTI Opco shall assume the
liability for, and shall perform the obligations of, USS/Kobe described
under Section 10.10 of the USS/Kobe Formation Agreement (as if Section
10.10 of such USS/Kobe Formation Agreement was incorporated herein in
its entirety) with respect to, the pensions payable to any Affected
Employee (as defined below) prior to such employee's 62nd birthday;
provided, that the parties recognize and agree that the election by any
employee to retire under the 30-Year Sole Option at such employee's own
discretion and without any inducements offered by RTI Opco or any of
its Affiliates will not be subject to such Section 10.10; provided,
further, that NewTube will be solely responsible for such obligations
and liabilities with respect to, and in no event will RTI Opco or any
of its Affiliates have any such obligations or liabilities with respect
to, any Tubular Employee following the Tubular Spinoff. Any disputes
between the parties with regard to whether a person has received any
inducements to retire will be subject to arbitration on terms mutually
acceptable to the parties. For purposes of this 11.1(c), the term
"Affected Employee" shall mean an employee of RTI Opco or its
Affiliates who formerly was a USS/Kobe employee and who (i) retires
under Rule-of-65 or 70/80 Pensions, or (ii) agrees to accept an early
retirement buyout package, or (iii) otherwise receives enhanced
retirement benefits including, but not limited to, pensions, medical
benefits, life insurance or severance payments, as an inducement to
retire early. USX will continue to administer claims and make payments
under the USX program of insurance benefits for pre-1989 Lorain Works'
retirees and their beneficiaries, as required under the USS/Kobe
Formation Agreement and Section 11.1(h).
(d) Plan Asset Transfers. (i) Employees of the USS/Kobe
Tubular Business currently participate solely in the following defined
benefit pension plans: The USS/Kobe Steel Company Union Eligible
Pension Plan and The USS/Kobe Steel Company Salaried Employees Pension
Plan (together, the "USS/Kobe Pension Plans"). As of the Tubular
Spinoff, Tubular Employees will cease to accrue service credit or
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benefits under the USS/Kobe Pension Plans. As soon as practicable
following the date that the Tubular Spinoff occurs, NewTube will (A)
establish a defined benefit plan or plans, or (B) with USX's consent,
utilize an existing USX pension plan or plans (the "NewTube Spinoff
Plans") for the benefit of the Tubular Employees participating in the
USS/Kobe Pension Plans. As soon as practicable following the Closing,
RTI Opco will cause Watson Wyatt & Company (the "Current Actuary") to
calculate the Accrued Liability (as defined in clause (iii) below) as
of the Closing Date (the "Valuation Date") of all participants in each
of the USS/Kobe Pension Plans and then to compare, on a plan by plan
basis, the Accrued Liability of all the participants in each USS/Kobe
Pension Plan to the fair market value of the assets in the respective
USS/Kobe Pension Plans as of the Valuation Date. If the Accrued
Liability as of the Valuation Date of all participants in a USS/Kobe
Pension Plan is less than the fair market value of the assets as of the
Valuation Date in such USS/Kobe Pension Plan, then RTI Opco will cause
assets (determined as of the Valuation Date) to be transferred from
such USS/Kobe Pension Plan to a trust or trusts established by NewTube
or USX to hold assets of the corresponding NewTube Spinoff Plan equal
to the product of (x) such fair market value of the assets in such
USS/Kobe Pension Plan multiplied by (y) a fraction the numerator of
which is the Accrued Liability of Tubular Employees under such USS/Kobe
Pension Plan as of the Valuation Date and the denominator of which is
the Accrued Liability of all participants in such USS/Kobe Pension Plan
as of the Valuation Date (such product, the "Proportionate Accrued
Liability Amount"). If the Accrued Liability as of the Valuation Date
of all participants in a USS/Kobe Pension Plan is equal to or greater
than the fair market value as of the Valuation Date of the assets in
such USS/Kobe Pension Plan, then the Current Actuary will determine the
amount of assets allocable to the Accrued Liabilities attributable to
Tubular Employees participating in that plan based on Section 4044 of
ERISA (the "Section 4044 Amount"), and RTI Opco will cause assets equal
in value to the Section 4044 Amount applicable to Tubular Employees
under such USS/Kobe Pension Plan to be transferred from such USS/Kobe
Pension Plan to a trust or trusts established by NewTube or USX to hold
assets of the corresponding NewTube Spinoff Plan. Contingent upon the
transfer of the Transfer Amount (as defined below) to each NewTube
Spinoff Plan, (X) NewTube will assume all liabilities and obligations
of USS/Kobe, RTI Opco and their Affiliates and (Y) such NewTube Spinoff
Plan will assume all liabilities and obligations of the corresponding
USS/Kobe Pension Plan, solely with respect to Tubular Employees under
such USS/Kobe Pension Plan from which that transfer was made and will
become with respect to such Tubular Employees responsible for all acts,
omissions and transactions under or in connection with such USS/Kobe
Pension Plan, whether arising before or after the Closing, other than
to the extent resulting from acts or omissions of RTI Opco or its
Affiliates after the Closing. With respect to each New Tube Spinoff
Plan, RTI Opco will continue to administer benefit claims for such
Tubular Employees commencing on the Closing Date until the first of the
month following the Transfer Date.
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(ii) All transfers to the NewTube Spinoff Plans pursuant to
paragraph (d)(i) above will be made as soon as practicable after the
Closing Date and in accordance with the provisions of this paragraph
(d)(ii), and no such transfer will be made with respect to a USS/Kobe
Pension Plan until such date as (A) the amount to be transferred has
been finally determined in accordance with Section 11.1(d)(iii), (B)
RTI Opco has been provided evidence reasonably satisfactory to it that
NewTube or USX has established a trust (or trusts) to hold the assets
of the corresponding NewTube Spinoff Plan and (C) RTI Opco has been
provided with (X) an opinion of counsel, which opinion and counsel are
reasonably satisfactory to RTI Opco, to the effect that the terms of
the corresponding NewTube Spinoff Plan satisfy the requirements for
qualification under Sections 401(a) and 411(d)(6) of the IRC or (Y)
other evidence reasonably satisfactory to RTI Opco that the NewTube
Spinoff Plans are qualified under Section 401(a) of the IRC, and that
the trusts holding assets of the NewTube Spinoff Plans satisfy the
requirements of Section 501(a) of the IRC (the actual date of transfer,
the "Transfer Date"). All such transfers will be made in cash and kind,
to the extent practicable in the same proportion as exists under the
corresponding USS/Kobe Pension Plan. On the Transfer Date, RTI Opco
will cause each trust relating to a USS/Kobe Pension Plan to make a
transfer of assets (the "DB Transfer Amount"), equal to the following
amount with respect to the corresponding NewTube Spinoff Plan:
The Proportionate Accrued Liability Amount or the 4044 Amount,
whichever is applicable, minus benefit payments to Tubular Employees
during the period from the Valuation Date to the Transfer Date,
adjusted for Earnings. Earnings will be calculated from the Valuation
Date until the Transfer Date on the amount equal to the DB Transfer
Amount (minus benefit payments to Tubular Employees) using the rate
paid on a 90-day Treasury Bill on the auction date coincident with or
immediately preceding the Closing. Unless the parties agree otherwise,
all transfers will occur on the last business day of a month by 11 A.M.
Eastern Standard Time. Notwithstanding anything contained herein to the
contrary, the transfers contemplated by this paragraph (d)(ii) will be
determined in accordance with Section 414(1) of the IRC and Treasury
Regulation 1.414(1)-1. The amounts to be transferred pursuant to this
paragraph (d)(ii) will be reduced to the extent necessary to satisfy
Section 414(1) of the IRC, and any regulations promulgated thereunder,
ERISA Section 4044, and any regulations promulgated thereunder.
(iii) For purposes of this Section 11.1, the term "Accrued
Liability" will mean the present value of the accrued benefit of the
applicable plan participant, determined on a termination basis using
the interest factors specified by the PBGC for an immediate or deferred
annuity as appropriate for such plan participant and the other methods
and assumptions specified in the regulations of the PBGC for the
valuation of accrued benefits upon plan termination, including, but not
limited to, expected retirement ages and expense load assumptions
published by the PBGC, and the 1983 Group Annuity
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75
Mortality Table. The interest factors will be those in effect on the
Valuation Date. The Accrued Liability and Section 4044 Amount will be
initially determined by the Current Actuary, subject to review by the
actuary selected by RTI Opco. If the actuary selected by RTI Opco does
not agree with the determinations of the Current Actuary, the dispute
resolution provisions in this paragraph will govern. The Current
Actuary, NewTube and RTI Opco will each cause to be provided to any
actuary designated by NewTube or RTI Opco (with copies provided to
USX's actuary) all information in its possession or under its control
that is reasonably necessary to review the determination and
calculation of the Accrued Liability, the Section 4044 Amount and any
other determination or calculation, in all respects, and to verify that
such determinations and calculations have been performed in a manner
consistent with the terms of this Agreement. If there are one or more
good faith disputes between the Current Actuary and RTI Opco's actuary
as to any actuarial or other determination or calculation which gives
rise to a disputed amount or amounts not in excess of $50,000 in the
aggregate, such dispute(s) will be resolved by dividing the disputed
amount(s) equally. If such disputed amount or amounts in the aggregate
exceed $50,000 and the Current Actuary and RTI Opco's actuary are not
able to resolve a sufficient number of such dispute(s) to bring the
remaining disputed items to below $50,000 in the aggregate after using
their reasonable best efforts to do so within 30 days, they will select
and appoint a third actuary, who has no professional relationship with
either of the parties hereto or either the Current Actuary or RTI
Opco's actuary, to resolve such dispute(s). The decision of such third
party actuary will be rendered within 30 days and will be conclusive as
to any dispute for which it was appointed. The cost of such third party
actuary will be divided equally between RTI Opco and NewTube. Each
party will be responsible for the cost of its own actuary.
(iv) As soon as practicable after the Tubular Spinoff, NewTube
will take all action necessary to qualify each NewTube Spinoff Plan
under the applicable provisions of the IRC. As soon as practicable
after the Closing Date, to the extent not filed prior thereto, RTI Opco
and NewTube will file Form 5310-A with the IRS with respect to the
proposed transfer of assets described in this Section 11.1(d) and will
make all plan amendments necessary to effectuate such provision.
(e) VEBA. As soon as practicable following the Closing Date,
NewTube will establish a VEBA or, with USX's consent, utilize an
existing USX VEBA for the benefit of Tubular Employees (the "NewTube
VEBA"). As soon as practicable following formation of the NewTube VEBA,
RTI Opco will cause the trustee of USS/Kobe Steel Company Union Retiree
Trust (the "USS/Kobe VEBA") to transfer to the NewTube VEBA assets, in
cash and kind, to the extent practicable in the same proportion as
exists under the Plan, equal in value to the product of (i) the value
of the assets of the USS/Kobe VEBA on the Closing Date and (ii) a
fraction, calculated as of the Closing Date, the numerator of which is
the retiree medical and retiree life accumulated post retirement
benefit obligations ("APBO") for the Tubular Union Employees and the
denominator of which is the retiree medical and retiree life APBO for
all USS/Kobe
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employees and retirees identified as USWA members (including the
Tubular Union Employees).
(f) Defined Contribution Plan Asset Transfers. (i) Employees
of the USS/Kobe Tubular Business currently participate solely in the
following defined contribution pension plans: The USS/Kobe Steel
Company Savings Fund Plan For Salaried Employees and the USS/Kobe Steel
Company and USWA Savings Program 401(k) Plan (together, the "USS/Kobe
Savings Plans"). As of the Tubular Spinoff, Tubular Employees will
cease to be eligible to actively participate in the USS/Kobe Savings
Plans. As soon as practicable following the Tubular Spinoff, NewTube
will establish a defined contribution plan or plans (the "NewTube
Spinoff Savings Plans") covering the Tubular Employees. In accordance
with paragraph (ii) below, RTI Opco will cause to be transferred from
each USS/Kobe Savings Plan to the trust established by NewTube to hold
assets of the corresponding NewTube Spinoff Savings Plan assets equal
to the Aggregate Account Balances (as defined in paragraph (iii) below)
of the Tubular Employees under the applicable USS/Kobe Savings Plans.
Contingent upon the transfer of the DC Transfer Amount (as defined in
paragraph (ii) below) to each NewTube Spinoff Savings Plan, NewTube and
the NewTube Spinoff Savings Plans will assume all liabilities and
obligations of USS/Kobe, RTI Opco and their Affiliates and the USS/Kobe
Savings Plans, respectively, with respect to Tubular Employees under
the USS/Kobe Savings Plan from which that transfer was made and will
become with respect to such Tubular Employees responsible for all acts,
omissions and transactions under or in connection with such USS/Kobe
Savings Plan, whether arising before or after the Closing, other than
to the extent resulting from acts or omissions of RTI Opco or its
Affiliates after the Closing.
(ii) All transfers to the NewTube Spinoff Savings Plans
pursuant to paragraph (f)(i) above will be made in accordance with the
provisions of this paragraph (f)(ii), and no such transfer will be made
with respect to a USS/Kobe Savings Plan until such date as RTI Opco has
been provided evidence reasonably satisfactory to it (x) that NewTube
has established a trust (or trusts) to hold the assets of the
corresponding NewTube Spinoff Savings Plans and (y) RTI Opco has been
provided with either (A) an opinion of counsel, which opinion and
counsel are reasonably satisfactory to RTI Opco, to the effect that the
terms of the corresponding New Tube Spinoff Savings Plan satisfy the
requirements for qualification under Sections 401(a) and 411(d)(6) of
the IRC or (B) other evidence reasonably satisfactory to RTI Opco that
the New Tube Spinoff Savings Plans are qualified under Section 401(a)
of the IRC, and that the trusts holding assets of the NewTube Spinoff
Savings Plans satisfy the requirements of Section 501(a) of the IRC
(the actual date of transfer, the "Transfer Date"). All such transfers
will be made in cash and in kind, to the extent practicable in the same
proportion as exists under the corresponding USS/Kobe Savings Plan,
including the promissory note and related loan documentation for
participant loans outstanding on the Closing Date. On the Transfer
Date, RTI Opco will cause to be transferred from each USS/Kobe Savings
Plan to the
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trust established by NewTube to hold assets of the corresponding
NewTube Spinoff Savings Plan assets equal to the sum of (x) the excess
of (A) the Aggregate Account Balances determined as of the last day of
the calendar month ending immediately prior to the Transfer Date (the
"Preceding Month End") over (B) any benefit payments made to Tubular
Employees during the period from the Preceding Month End to the
Transfer Date and (y) interest on such excess amount from the Preceding
Month End to the Transfer Date using the rate paid on a 30-day Treasury
Bill on the auction date coincident with or immediately preceding the
Transfer Date (the "DC Transfer Amount").
(iii) For purposes of this Section 11.1, the term "Aggregate
Account Balances" will mean the sum of the individual account balances
of the Transferred Employees under the applicable USS/Kobe Savings
Plan. The Aggregate Account Balances will be determined by the current
record keeper for the USS/Kobe Savings Plans (the "Current Record
Keeper"). RTI Opco will provide any record keeper designated by NewTube
with all information reasonably necessary to review the determination
and calculation of the Aggregate Account Balances in all material
respects and to verify that such determinations and calculations have
been performed in a manner consistent with the terms of this Agreement.
(g) Nothing in this Section 11 will be construed as creating
an express or an implied contract of employment or a guarantee of
employment with BarTech, the Republic Parties, the USX/Kobe Parties,
RTI Opco, NewTube or any of their respective Affiliates for any period
of time after the Closing Date, nor will anything in this Section 11
confer upon any employee of any of the foregoing Persons any right to
continue in the employ or in the business of any of the foregoing
Persons after the Closing Date, nor (except as expressly provided in
this Section 11) interfere with or restrict in any way the rights of
any of the foregoing Parties, which are hereby expressly reserved, to
terminate the employment of any employee at any time for any reason
whatsoever, or in accordance with the terms of any applicable
collective bargaining agreement or other labor agreement, as the case
may be.
(h) With respect to current and former employees of USS/Kobe
who are not Tubular Employees and for whom RTI Opco is obligated to
provide employee benefits under this Agreement, USX will continue to
discharge its obligations and liabilities relating to employee
benefits, and RTI Opco will assume the employee benefit obligations of
USS/Kobe, under the USS/Kobe Formation Agreement as if such Agreement
were an agreement between USX and RTI Opco (and without regard to
whether the USS/Kobe Formation Agreement may have terminated as a
result of the consummation of the Contemplated Transactions).
11.2 Transfer of BarTech Employees. The parties hereto intend that
there will be continuity of employment for all employees of BarTech following
the Closing. In connection with the BarTech Asset Contribution and commencing on
the Closing Date, BarTech will cause
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to be transferred to RTI Opco the employment of all employees of BarTech,
including those on vacation, leave of absence, disability or layoff, who were
employed by BarTech immediately prior to the BarTech Asset Contribution and will
cause RTI Opco to assume and be bound by the terms of any collective bargaining
agreement that covers such employees.
11.3 Transfer Rights of Certain Employees.
(a) In General. The parties hereto recognize that in
accordance with the provisions of the labor agreement subject to the
NewTube Labor Agreement Ratification and the labor agreement subject to
the RTI Labor Agreement Ratification, certain employees of RTI Opco or
its Subsidiaries and NewTube or its Subsidiaries (the "Covered
Employees") have certain rights to transfer employment between
specified sites of NewTube or its Subsidiaries and RTI Opco or its
Subsidiaries (the "Transfer Sites"), and RTI Opco and NewTube are
required to cause all service of such Covered Employees completed at
any Transfer Site to be recognized for purposes of eligibility and
vesting under their respective Employee Benefit Plans.
(b) Retiree Welfare Benefits. A Covered Employee who, at the
time of his or her last termination of employment from RTI Opco,
NewTube and their respective Subsidiaries, is eligible for retiree
medical and life insurance benefits under the terms of an applicable
Employee Benefit Plan maintained by any such Person, shall be provided
retiree medical and life insurance benefits solely under the Employee
Benefit Plan maintained by the last such Person by whom such Covered
Employee was employed (the "Last Employer"). NewTube and RTI Opco shall
share the cost of providing such retiree medical and life insurance
benefits to such Covered Employees as follows. If the Last Employer is
NewTube or any of its Subsidiaries, RTI Opco shall reimburse NewTube
for RTI Opco's Applicable Portion (as defined below) of such costs and
if the Last Employer is RTI Opco or any of its Subsidiaries, NewTube
shall reimburse RTI Opco for NewTube's Applicable Portion of such
costs, in either such case, on a calendar quarterly basis, in arrears,
promptly upon receipt of reasonably acceptable evidence of such costs
for the applicable calendar quarter. The parties will, in good faith,
institute a mutually agreeable mechanism to determine how such retiree
medical and life insurance costs will be calculated for any such
Covered Employee.
The term "Applicable Portion" shall mean, with respect to a
Covered Employee, a percentage obtained by dividing (i) such Covered
Employee's years of service and fractions thereof required to be taken
into account by the applicable plan or collective bargaining agreement
for purposes of benefit accrual with NewTube and its Subsidiaries
(including service with USS/Kobe in the Tubular Business completed
prior to the date of the Tubular Spinoff), or RTI Opco and its
Subsidiaries (including service with USS/Kobe in the Bar business
completed prior to the date of the Tubular Spinoff), as the case may
be, by (ii) such Covered Employee's aggregate years of service and
fractions thereof required to be taken into account by the applicable
plan or collective bargaining
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agreement for purposes of benefit accrual with RTI Opco, NewTube and
their respective Affiliates and predecessors including without
limitation USS/Kobe.
(c) Defined Benefit Plans. RTI Opco and NewTube will each
cause to be recognized for purposes of eligibility and vesting under
their respective defined benefit plans in which a Covered Employee
participates all years of service and fractions thereof completed by
such Covered Employee at any Transfer Site. RTI Opco shall pay to such
Covered Employee the pension payable under any defined benefit plans
maintained by RTI Opco in accordance with the terms of such plans and
NewTube shall pay to such Covered Employee the pension payable under
any defined benefit plans maintained by NewTube and its Affiliates in
accordance with the terms of such plans.
SECTION 12
CONDITIONS PRECEDENT TO THE OBLIGATIONS OFEACH PARTY TO CLOSE
The obligation of each of BarTech, the Republic Parties, the
BV Parties and the USX/Kobe Parties to consummate the Contemplated Transactions
is subject to the satisfaction, at or prior to the Closing, of each of the
following conditions (any of which may be waived in whole or in part by BarTech,
RES Holding or USS/Kobe solely with respect to the obligation of BarTech, the
Republic Parties and the BV Parties or the USX/Kobe Parties, respectively, to
consummate the Contemplated Transactions):
12.1 No Prohibition; No Opposition. (i) No Legal Requirement or Order
enjoining or prohibiting consummation of the Contemplated Transactions will have
been promulgated or entered and remain in effect, and (ii) no Proceeding will be
pending or threatened before or by any Governmental Body seeking damages or
other relief in connection with the execution and delivery of this Agreement or
the consummation of the Contemplated Transactions which would, individually or
in the aggregate, have a BarTech, RES Holding, USS/Kobe or RTI Material Adverse
Effect.
12.2 Consents. Each material Consent required to be obtained to
consummate the Contemplated Transactions (including without limitation the
Material Consents) will have been obtained and will remain in full force and
effect. Without limiting the generality of the foregoing, all filings pursuant
to the HSR Act required to be made in connection with the Contemplated
Transactions will have been made and the required waiting periods under the HSR
Act will have expired or been terminated.
12.3 Contemplated Transactions. Each of the Contemplated Transactions
under Section 3 will have been consummated or will be consummated concurrently
with the Closing.
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12.4 RTI Financing. All conditions to the closing of the RTI Credit
Facility and RTI High Yield Offering will have been satisfied (other than any
such conditions which, by their nature, cannot be satisfied until or after the
Closing), and (i) the closing of the RTI Credit Facility will occur
simultaneously with the Closing and (ii) the closing of the RTI High Yield
Offering will occur simultaneously with the Closing or, in the event the RTI
High Yield Offering has previously closed on an escrow basis, the proceeds in
escrow will be released to RTI Opco simultaneously with the Closing (subject in
any event to the specific sequencing of events as set forth in Section 4
hereof).
12.5 Labor Agreements and Consents. Each of the NewTube Labor Agreement
Ratification and RTI Labor Agreement Ratification will have been obtained and
will remain in full force and effect.
12.6 RTI PBGC Agreement. The RTI PBGC Agreement will have been reached
with the PBGC and will remain in full force and effect.
SECTION 13
CONDITIONS PRECEDENT TO THE OBLIGATIONS OFTHE USX/KOBE PARTIES TO CLOSE
The obligation of each of the USX/Kobe Parties to consummate
the Contemplated Transactions is subject to the satisfaction, at or prior to the
Closing, of each of the following conditions (any of which may be waived in
whole or in part by USS/Kobe):
13.1 Accuracy of Representations. Each of the representations and
warranties of BarTech and the Republic Parties in this Agreement and the other
Transaction Documents will have been accurate in all respects as of the date of
this Agreement and will be accurate in all respects as of the Closing Date as if
made on the Closing Date, except to the extent that any such representation or
warranty is made as of a specified date, in which case such representation and
warranty will be accurate in all respects as of such date (in each case
disregarding for such purpose any qualifications set forth therein with respect
to "materiality" or "Material Adverse Effect"), except for such failures to be
accurate which, individually or in the aggregate, would not have an RTI Material
Adverse Effect.
13.2 Performance of Covenants.
(a) All of the covenants and obligations that each of BarTech,
the Republic Parties and the BV Parties is required to perform or to
comply with pursuant to this Agreement at or prior to the Closing will
have been duly performed and complied with in all material respects.
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(b) Each agreement required to be entered into by BarTech or
any of its Subsidiaries (including without limitation RTI Holdings and
RTI Opco), RES Holding or any of its Subsidiaries or the BV Parties
pursuant to this Agreement or any of the other Transaction Documents
will have been duly executed and delivered and will remain in full
force and effect.
13.3 Equity Contributions. The closing of each of the Blackstone Equity
Contribution, the Veritas Equity Contribution, the First Energy Equity
Contribution, the Sumitomo Equity Contribution, the Triumph Equity Contribution,
the First Dominion Equity Contribution and the TCW Equity Contribution will
occur simultaneously with the Closing.
SECTION 14
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BARTECH TO CLOSE
The obligation of BarTech to consummate the Contemplated
Transactions is subject to the satisfaction, at or prior to the Closing, of each
of the following conditions (any of which may be waived in whole or in part by
BarTech):
14.1 Accuracy of Representations. Each of the representations and
warranties of each of USX RTI Holdings and Kobe RTI Holdings in this Agreement
and the other Transaction Documents will have been accurate in all respects as
of the date of this Agreement and will be accurate in all respects as of the
Closing Date as if made on the Closing Date, except to the extent that any such
representation or warranty is made as of a specified date, in which case such
representation and warranty will be accurate in all respects as of such date (in
each case disregarding for such purpose any qualifications set forth therein
with respect to "materiality" or "Material Adverse Effect"), except for such
failures to be accurate which, individually or in the aggregate, would not have
a RTI Material Adverse Effect.
14.2 Performance of Covenants.
(a) All of the covenants and obligations that each of the
USX/Kobe Parties is required to perform or to comply with pursuant to
this Agreement at or prior to the Closing will have been duly performed
and complied with in all material respects.
(b) Each agreement required to be entered into by USX or any
of its Subsidiaries, Kobe or any of its Subsidiaries or USS/Kobe
pursuant to this Agreement or any of the other Transaction Documents
will have been duly executed and delivered and will remain in full
force and effect.
14.3 Tubular Spinoff. The Tubular Spinoff will have been
consummated.
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14.4 Equity Contributions. The closing of each of the USX Equity
Contribution, the Kobe Equity Contribution, the First Energy Equity
Contribution, the Sumitomo Equity Contribution, the Triumph Equity Contribution,
the First Dominion Equity Contribution and the TCW Equity Contribution will
occur simultaneously with the Closing.
SECTION 15
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE REPUBLIC PARTIES
AND THE BV PARTIES TO CLOSE
The obligation of the Republic Parties and the BV Parties to
consummate the Contemplated Transactions is subject to the satisfaction, at or
prior to the Closing, of each of the following conditions (any of which may be
waived in whole or in part by RES Holding):
15.1 Accuracy of Representations. Each of the representations and
warranties of each of USX RTI Holdings and Kobe RTI Holdings in this Agreement
and the other Transaction Documents will have been accurate in all respects as
of the date of this Agreement and will be accurate in all respects as of the
Closing Date as if made on the Closing Date, except to the extent that any such
representation or warranty is made as of a specified date, in which case such
representation and warranty will be accurate in all respects as of such date (in
each case disregarding for such purpose any qualifications set forth therein
with respect to "materiality" or "Material Adverse Effect"), except for such
failures to be accurate which, individually or in the aggregate, would not have
a RTI Material Adverse Effect.
15.2 Performance of Covenants.
(a) All of the covenants and obligations that each of the
USX/Kobe Parties is required to perform or to comply with pursuant to
this Agreement at or prior to the Closing will have been duly performed
and complied with in all material respects.
(b) Each agreement required to be entered into by USX or any
of its Subsidiaries, Kobe or any of its Subsidiaries or USS/Kobe
pursuant to this Agreement or any of the other Transaction Documents
will have been duly executed and delivered and will remain in full
force and effect.
15.3 Tubular Spinoff. The Tubular Spinoff will have been
consummated.
15.4 Equity Contributions. The closing of each of the USX Equity
Contribution, the Kobe Equity Contribution, the First Energy Equity
Contribution, the Sumitomo Equity Contribution, the Triumph Equity Contribution,
the First Dominion Equity Contribution and the TCW Equity Contribution will
occur simultaneously with the Closing.
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SECTION 16
[intentionally omitted]
SECTION 17
TERMINATION
17.1 Termination Events. This Agreement may, by notice given
prior to or at the Closing, be terminated:
(a)(i) by USX RTI Holdings or Kobe RTI Holdings if
satisfaction of any condition in Sections 12 or 13 is or becomes
impossible (other than through the failure of any USX/Kobe Party to
comply with its obligations under this Agreement) and USS/Kobe has not
waived such condition, (ii) by BarTech if satisfaction of any condition
in Sections 12 or 14 is or becomes impossible (other than through the
failure of BarTech or any Republic Party to comply with its obligations
under this Agreement) and BarTech has not waived such condition or
(iii) by RES Holding if satisfaction of any condition in Sections 12 or
15 is or becomes impossible (other than through the failure of BarTech
or any Republic Party to comply with its obligations under this
Agreement) and RES Holding has not waived such condition;
(b) by mutual consent of USS/Kobe, BarTech and RES
Holding; or
(c) by USS/Kobe if the Closing has not occurred on or before
January 31, 2000, or such later date to which USS/Kobe may agree (other
than through the failure of any USX/Kobe Party to comply with its
obligations under this Agreement), (ii) by BarTech if the Closing has
not occurred on or before January 31, 2000, or such later date to which
BarTech may agree (other than through the failure of BarTech or any
Republic Party to comply with its obligations under this Agreement) or
(iii) by RES Holding if the Closing has not occurred on or before
January 31, 2000, or such later date to which RES Holding may agree
(other than through the failure of BarTech or any Republic Party to
comply with its obligations under this Agreement).
17.2 Termination Events. This Each of USS/Kobe's, BarTech's and
Republic's right of termination under Section 17.1 is in addition to any other
rights it and its related parties may have under this Agreement or otherwise,
and the exercise of a right of termination will not be an election of remedies.
If this Agreement is terminated pursuant to Section 17.1, all further
obligations of the parties under this Agreement will terminate, except that this
Section 17 and Sections 10.6 (confidentiality) and 19.1 (expenses) will survive;
provided, however, that if this Agreement is terminated because of the willful
breach of this Agreement by a party hereto, the other parties' rights to pursue
all legal remedies will survive such termination unimpaired.
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SECTION 18
INDEMNIFICATION; REMEDIES
18.1 Representations; Survival. Except for the express representations
and warranties contained herein and in any certificate delivered pursuant
hereto, none of the parties to this Agreement are making any representation or
warranty whatsoever in connection with the Contemplated Transactions, express or
implied, including but not limited to any implied warranty or representation as
to condition, merchantability or suitability, as to any of their properties or
assets. It is understood that, except as otherwise specified in this Agreement
(including the schedules and exhibits hereto) and except to the extent included
within or incorporated into the Disclosure Letter, any cost estimates,
projections or other predictions, any data, any financial information or any
memoranda or offering materials or presentations provided or addressed to any
party to this Agreement or to any other Person are not and will not be deemed to
be or to include representations or warranties of any party to this Agreement.
All representations and warranties in this Agreement and any certificate
delivered pursuant hereto will terminate (i) twenty four months after the
Closing, in the case of those representations and warranties contained in
Sections 6.8, 6.14, 7.8, 7.14, 8.8 and 8.14 (and related statements in
certificates delivered pursuant hereto), and (ii) twelve months after the
Closing, in the case of all other representations and warranties contained in
this Agreement (and related statements in certificates delivered pursuant
hereto), provided in each case that such termination will not affect any written
claim as to which notification has been provided to the other parties prior to
the date of such termination describing in reasonable detail an alleged breach
of a representation and warranty on the basis of identified facts and
circumstances. All covenants and other obligations contained in this Agreement
and the other Transaction Documents not fully performed prior to the Closing
will survive the Closing indefinitely until fully performed (unless an earlier
termination date is expressly provided in such covenant).
18.2 Indemnification With Respect to Breaches by the USX/Kobe Parties.
Notwithstanding any investigation by BarTech, its Representatives, the Republic
Parties or their Representatives, from and after the Closing, USX RTI Holdings
and Kobe RTI Holdings hereby agree to indemnify, defend and hold harmless (as
provided herein) BarTech for any loss, liability, claim, damage, expense
(including costs of investigation and defense, reasonable attorneys' fees and
any expenses relating to the valuation, issuance or cancellation of equity in
connection with indemnification obligations) or diminution of value, whether or
not involving a third-party claim (collectively, "Damages") suffered by BarTech,
its Representatives, the Republic Parties' Representatives and their respective
equity owners, controlling persons and Affiliates (with USX RTI Holdings
responsible for all Damages relating to breaches of its individual covenants and
representations and warranties contained in Section 6.2 regarding itself and its
Affiliates (other than USS/Kobe and its Subsidiaries) and for one half of all
other Damages indemnifiable pursuant to this Section 18.2, and Kobe RTI
Holdings responsible for all Damages relating to
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breaches of its individual covenants and representations and warranties
contained in Section 6.2 regarding itself and its Affiliates (other than
USS/Kobe and its Subsidiaries) and for one half of all other Damages
indemnifiable pursuant to this Section 18.2) arising, directly or indirectly,
from or in connection with:
(a) any breach of any representation or warranty made by USX
RTI Holdings or Kobe RTI Holdings in this Agreement (or any allegation
by a third party that, if true, would constitute such a breach);
provided, however, that neither USX RTI Holdings nor Kobe RTI Holdings
will be obligated to indemnify BarTech under this Section 18.2(a) with
respect to any breach of a representation or warranty to the extent
there was BarTech Knowledge or Republic Parties' Knowledge of such
breach prior to the Closing; and provided, further, that no
indemnification will be made under this Section 18.2(a) to the extent
indemnification in respect of the same Damages is payable under Section
18.6 (and in such event, indemnification in respect of such Damages
will be made under Section 18.6); or
(b) any breach by any USX/Kobe Party of any covenant or
obligation of such Person in this Agreement.
18.3 Indemnification With Respect to Breaches by the BV Parties,
BarTech and the Republic Parties. Notwithstanding any investigation by the
USX/Kobe Parties or their Representatives, from and after the Closing, BarTech
hereby agrees to indemnify, defend and hold harmless (as provided herein) USX
RTI Holdings and Kobe RTI Holdings for any Damages suffered by USX RTI Holdings,
Kobe RTI Holdings and their respective Representatives, equity owners,
controlling persons and Affiliates arising, directly or indirectly, from or in
connection with:
(a) any breach of any representation or warranty made by
BarTech or any Republic Party in this Agreement (or any allegation by a
third party that, if true, would constitute such a breach); provided,
however, that BarTech will not be obligated to indemnify USX RTI
Holdings or Kobe RTI Holdings under this Section 18.3(a) with respect
to any breach of a representation or warranty to the extent there was
USX/Kobe Parties' Knowledge of such breach prior to the Closing; or
(b) any breach by BarTech, any of the BV Parties or any
Republic Party of any covenant or obligation of such Person in this
Agreement.
18.4 [intentionally omitted]
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18.5 Indemnification With Respect to USS/Kobe Tubular Liabilities,
USS/Kobe Bar Liabilities and BarTech and Republic Liabilities.
(a) Notwithstanding any investigation by BarTech, its
Representatives, the Republic Parties or their Representatives, from
and after the Closing, NewTube and, solely to the extent that NewTube
does not meet such obligations in cash, each of USX RTI Holdings (with
respect to one half of any such Damages) and Kobe RTI Holdings (with
respect to one half of any such Damages) (as provided in Section
18.11), hereby agrees to indemnify, defend and hold BarTech and its
Subsidiaries (including without limitation RTI Holdings and RTI Opco)
harmless from any Damages (including without limitation Taxes) to the
extent arising, directly or indirectly, from or in connection with
USS/Kobe Tubular Liabilities.
(b) Notwithstanding any investigation by the USX/Kobe Parties
or their Representatives, from and after the Closing, RTI Opco and,
solely to the extent that RTI Opco does not meet such obligations in
cash, BarTech (as provided in Section 18.11), hereby agrees to
indemnify, defend and hold USX, Kobe and their respective Subsidiaries
(including without limitation NewTube) harmless from any Damages
(including without limitation Taxes) to the extent arising, directly or
indirectly, from or in connection with USS/Kobe Bar Liabilities.
(c) Notwithstanding any investigation by the USX/Kobe Parties,
their Representatives, BarTech, its Representatives, the Republic
Parties or their Representatives, BarTech will cause RTI Opco, from and
after the Closing, to indemnify, defend and hold BarTech and its
Subsidiaries (other than RTI Opco and its Subsidiaries) harmless from,
and to pay to BarTech and its Subsidiaries (other than RTI Opco and its
Subsidiaries) the amount of, any Damages (including without limitation
Taxes) to the extent arising, directly or indirectly, from or in
connection with BarTech and Republic Liabilities.
18.6 Indemnification with respect to Taxes and Unrelated Liabilities of
USX Holdings, USX RTI Holdings, Kobe Holdings and Kobe RTI Holdings. From and
after the Closing, (a) USX will indemnify, defend and hold harmless BarTech and
its Subsidiaries from, and will pay to BarTech and its Subsidiaries the amount
of, any Damages arising directly or indirectly from or in connection with (i)
any and all Taxes of any Person (other than USX Holdings) by reason of the
liability of USX Holdings pursuant to Treasury Regulation Section 1.1502-6(a)
(or any analogous or similar state, local or foreign law or regulation), as a
transferee or successor, by contract or otherwise, (ii) any Taxes of USX
Holdings arising as a result of the Contemplated Transactions (other than
transfer Taxes, which will be borne by RTI Opco pursuant to Section 19.1) or
(iii) any activities engaged in, assets owned or liabilities incurred by USX
Holdings prior to the Closing other than activities, assets and liabilities
incidental to acting as a general partner of USS/Kobe, and any assets owned
(other than RTI Holdings Units and Common Stock) or liabilities incurred
(including without limitation the indebtedness set forth in
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Section 6.1(d) of the Disclosure Letter) by USX RTI Holdings prior to, on or
following the Closing Date, and (b) Kobe will cause Kobe Steel USA Holdings,
Inc. to indemnify, defend and hold harmless BarTech and its Subsidiaries from,
and to pay to BarTech and its Subsidiaries the amount of, any Damages arising
directly or indirectly from or in connection with (i) any and all Taxes of any
Person (other than Kobe Holdings) by reason of the liability of Kobe Holdings
pursuant to Treasury Regulation Section 1.1502-6(a) (or any analogous or similar
state, local or foreign law or regulation), as a transferee or successor, by
contract or otherwise, (ii) any Taxes of Kobe Holdings arising as a result of
the Contemplated Transactions (other than transfer Taxes, which will be borne by
RTI Opco pursuant to Section 19.1) or (iii) any activities engaged in, assets
owned or liabilities incurred by Kobe Holdings prior to the Closing other than
activities, assets and liabilities incidental to acting as a general partner of
USS/Kobe, and any assets owned (other than RTI Holdings Units and Common Stock)
or liabilities incurred (including without limitation the indebtedness set forth
in Section 6.1(d) of the Disclosure Letter) by Kobe RTI Holdings prior to, on or
following the Closing Date.
18.7 Minimum Damage Requirement. USX RTI Holdings will not have
liability under Section 18.2(a) with respect to breaches of the representations
and warranties contained in Section 6.2 unless the aggregate Damages subject to
its indemnification obligations under Section 18.2(a) exceed $5 million, in
which case USX RTI Holdings will only be liable thereunder for Damages in excess
of $5 million. Kobe RTI Holdings will not have liability under Section 18.2(a)
with respect to breaches of the representations and warranties contained in
Section 6.2 unless the aggregate Damages subject to its indemnification
obligations under Section 18.2(a) exceed $5 million , in which case Kobe RTI
Holdings will only be liable thereunder for Damages in excess of $5 million.
Neither USX RTI Holdings nor Kobe RTI Holdings will have liability under Section
18.2(a) with respect to breaches of any representations and warranties other
than those contained in Section 6.2 unless the aggregate Damages subject to
their collective indemnification obligations under Section 18.2(a) exceed $10
million, in which case they will only be liable thereunder for Damages in excess
of $10 million. BarTech will have no liability under Section 18.3(a) unless the
aggregate Damages subject to its indemnification obligations under Section
18.3(a) exceed $10 million, in which case BarTech will only be liable thereunder
for Damages in excess of $10 million .
18.8 Procedure for Indemnification - Third Party Claims.
(a) Promptly after receipt by an Indemnified Person of notice
of the commencement of any Proceeding, if such Indemnified Person would
reasonably be expected to be entitled to indemnification under this
Section 18 in connection with such Proceeding (or promptly following
any determination to such effect, if later than the commencement of the
related Proceeding), such Indemnified Person will, if a claim is to be
made against an indemnifying party under such section, give written
notice to the indemnifying party of the commencement of such claim, but
the failure to notify the indemnifying party will not relieve the
indemnifying party of any liability that it may have to any Indemnified
Person, except to the extent that the indemnifying party demonstrates
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that the defense of such action is prejudiced by the Indemnifying
Person's failure to give such notice.
(b) If notice is given to an indemnifying party pursuant to
Section 18.8(a), the indemnifying party may, if it so elects (unless
(i) the indemnifying party is also a party to such Proceeding and the
Indemnified Person determines in good faith that joint representation
would be inappropriate, or (ii) the indemnifying party fails to provide
reasonable assurance to the Indemnified Person of its financial
capacity to defend such Proceeding and provide indemnification with
respect to such Proceeding), assume the defense of such Proceeding with
counsel reasonably satisfactory to the Indemnified Person and to RTI
Opco, as applicable, and, after written notice from the indemnifying
party to the Indemnified Person and to RTI Opco, as applicable, of its
election to assume the defense of such Proceeding, the indemnifying
party will not, as long as it diligently conducts such defense, be
liable to the Indemnified Person or to RTI Opco, if applicable, under
this Section 18 for any fees of other counsel or any other expenses
with respect to the defense of such Proceeding, in each case
subsequently incurred by the Indemnified Person or RTI Opco, as the
case may be, in connection with the defense of such Proceeding, other
than reasonable costs of investigation. If the indemnifying party
assumes the defense of a Proceeding in accordance with the preceding
sentence, no compromise or settlement of such claims may be effected by
the indemnifying party without the Indemnified Person's and RTI Opco's
consent (which consent will not be unreasonably withheld or delayed)
unless (i) there is no finding or admission of any violation of Legal
Requirements or any violation of the rights of any Person and no effect
on any other claims that may be made against the Indemnified Person,
and (ii) the sole relief provided is monetary damages that are paid in
full by the indemnifying party. If written notice is given to an
indemnifying party of the commencement of any Proceeding and the
indemnifying party does not, within 20 days after the Indemnified
Person's notice is given, give notice to the Indemnified Person and to
RTI Opco, as applicable, of its election to assume the defense of such
Proceeding, the indemnifying party will be bound by any determination
made in such Proceeding or any compromise or settlement reasonably
effected by the Indemnified Person.
(c) Notwithstanding the foregoing, if an Indemnified Person or
RTI Opco determines in good faith that there is a reasonable
probability that a Proceeding may adversely affect it or its Affiliates
other than as a result of monetary damages for which (in the case of an
Indemnified Person) it would be entitled to indemnification under this
Agreement, the Indemnified Person or RTI Opco may, by written notice to
the indemnifying party, assume the exclusive right to defend,
compromise, or settle such Proceeding at such Indemnified Person's cost
and expense, but the indemnifying party will not be bound by any
compromise or settlement effected without its consent (which consent
will not be unreasonably withheld or delayed).
<PAGE>
89
18.9 Procedure for Indemnification - Other Claims. A claim for
indemnification for any matter not involving a third-party claim may be asserted
by written notice to the party from whom indemnification is sought.
18.10 Exclusive Remedy; Specific Performance.
(a) The parties acknowledge and agree that, from and after the
Closing, the indemnification and enforcement rights provided in this
Section 18 will be the sole and exclusive remedy available to the
parties for any claim or cause of action arising out of or in respect
of any breach of this Agreement (but not any of the other Transaction
Documents), other than any claim or cause of action based upon fraud.
(b) The parties acknowledge and agree that, from and after the
Closing, a violation of any of the covenants or agreements contained in
this Agreement which survive the Closing will cause the parties
irreparable injury for which adequate remedy at law is not available.
Accordingly, it is agreed that each party will be entitled to an
injunction, restraining order or other equitable relief to prevent
breaches of such covenants and agreements and to enforce specifically
the terms and provisions thereof in any court of competent
jurisdiction, in addition to any other remedy to which it may be
entitled at law or in equity.
18.11 Payment in RTI Holdings Common Units or RTI Common Stock.
(a) With respect to (i) any Damages subject to indemnification
by (A) USX RTI Holdings and/or Kobe RTI Holdings under Section 18.2, or
(B) NewTube under Section 18.5(a), solely to the extent that NewTube
does not meet such obligations in cash, each of USX and Kobe will
satisfy such indemnification obligations solely (subject to the proviso
contained in Section 18.11(e)) through a reduction in their respective
direct and indirect ownership percentages in RTI Holdings and/or
BarTech, as applicable, or (ii) any Damages subject to indemnification
by (A) BarTech under Section 18.3, or (B) RTI Opco under Section
18.5(b), solely to the extent that RTI Opco does not meet such
obligations in cash, BarTech will satisfy such indemnification
obligations solely (subject to the proviso contained in Section
18.11(e)) through an increase in the respective ownership percentages
of USX and Kobe in RTI Holdings and/or BarTech, as applicable, in each
case as described in Sections 18.11(b) and 18.11(c) below.
(b) In the event that any indemnification payment described in
Section 18.11(a) is to be made (i) prior to the occurrence of a USX
Exchange Event (as defined in the Equityholders Agreement) (A) by USX
RTI Holdings, USX will satisfy such indemnification obligation solely
through a cancellation of RTI Holdings Common Units held by it and its
Subsidiaries, or (B) to USX RTI Holdings, BarTech will satisfy such
indemnification obligation solely through an issuance to USX RTI
Holdings of additional RTI Holdings Common Units, and/or (ii) prior to
the occurrence of a Kobe Exchange Event (as defined in the
Equityholders Agreement) (A) by Kobe RTI Holdings, Kobe will
<PAGE>
90
satisfy such indemnification obligation solely through a cancellation
of RTI Holdings Common Units held by it and its Subsidiaries, or (B) to
Kobe RTI Holdings, BarTech will satisfy such indemnification obligation
solely through an issuance to Kobe RTI Holdings of additional RTI
Holdings Common Units, in each case in accordance with the following
formula; provided, however, that, in the event calculations are to be
made hereunder with respect to indemnification payments by both USX RTI
Holdings and Kobe RTI Holdings relating to the same indemnifiable
event, all such calculations will be deemed to be made simultaneously
hereunder and each such holder's Old Unit % will be determined as of
prior to any such calculations and New Unit % will be determined as of
following all such calculations:
Held Unit Value - Damages x Old Unit % = New Unit %
-------------------------
Held Unit Value
Where:
Held Unit Value = The fair market value of the RTI Holdings Units
(determined pursuant to Section 18.11(d) below)
held by (i) USX and its Subsidiaries if USX RTI
Holdings is making such indemnification
payment, (ii) Kobe and its Subsidiaries if Kobe
RTI Holdings is making such indemnification
payment or (iii) BarTech and its Subsidiaries
if BarTech is making such indemnification
payment, at the time of such indemnification
payment (i.e., taking into account any
diminution in the value of RTI Holdings Units
resulting from the matter giving rise to the
indemnification claim);
Damages = The Damages to be indemnified by USX RTI
Holdings, Kobe RTI Holdings or BarTech, as
applicable;
Old Unit % = The percentage interest in outstanding RTI
Holdings Units represented by the RTI Holdings
Units held by (i) USX and its Subsidiaries if
USX RTI Holdings is making such indemnification
payment, (ii) Kobe and its Subsidiaries if Kobe
RTI Holdings is making such indemnification
payment or (iii) BarTech and its Subsidiaries
if BarTech is making such indemnification
payment, immediately before giving effect to
such issuance or cancellation of RTI Holdings
Common Units, as applicable; and
New Unit % = The percentage interest in RTI Holdings Units
represented by the RTI Holdings Units held by
(i) USX and its
<PAGE>
91
Subsidiaries if USX RTI Holdings is making such
indemnification payment, (ii) Kobe and its
Subsidiaries if Kobe RTI Holdings is making
such indemnification payment or (iii) BarTech
and its Subsidiaries if BarTech is making such
indemnification payment, immediately after
giving effect to such issuance or cancellation
of RTI Holdings Common Units, as applicable.
(c) In the event that any indemnification payment described in
Section 18.11(a) is to be made (i) following the occurrence of a USX
Exchange Event (as defined in the Equityholders Agreement) (A) by USX
RTI Holdings, USX will satisfy such indemnification obligation solely
through a cancellation of shares of Common Stock held by it and its
Subsidiaries, or (B) to USX RTI Holdings, BarTech will satisfy such
indemnification obligation solely through an issuance to USX RTI
Holdings of additional shares of Common Stock, and/or (ii) prior to the
occurrence of a Kobe Exchange Event (as defined in the Equityholders
Agreement) (A) by Kobe RTI Holdings, Kobe will satisfy such
indemnification obligation solely through a cancellation of shares of
Common Stock held by it and its Subsidiaries, or (B) to Kobe RTI
Holdings, BarTech will satisfy such indemnification obligation solely
through an issuance to Kobe RTI Holdings of additional shares of Common
Stock, in each case in accordance with the following formula; provided,
however, that, in the event calculations are to be made hereunder with
respect to indemnification payments by both USX RTI Holdings and Kobe
RTI Holdings relating to the same indemnifiable event, all such
calculations will be deemed to be made simultaneously hereunder and
each such holder's Old Stock % will be determined as of prior to any
such calculations and New Stock % will be determined as of following
all such calculations:
Held Stock Value - Damages x Old Stock % = New Stock %
--------------------------
Held Stock Value
Where:
Held Stock Value = The fair market value (determined pursuant to
Section 18.11(d) below) of (i) the Common Stock
held by USX and its Subsidiaries if USX RTI
Holdings is making such indemnification
payment, (ii) the Common Stock held by Kobe and
its Subsidiaries if Kobe RTI Holdings is making
such indemnification payment or (iii) all of
the Common Stock then issued and outstanding
other than Common Stock held by the recipient
of such indemnification payment and its
Subsidiaries if BarTech is making such
indemnification payment, at the time of such
<PAGE>
92
indemnification payment (i.e., taking into
account any diminution in the value of Common
Stock resulting from the matter giving rise to
the indemnification claim);
Damages = The Damages to be indemnified by USX RTI
Holdings, Kobe RTI Holdings or BarTech, as
applicable;
Old Stock % = The percentage interest in BarTech on a fully
diluted basis (as calculated for purposes of
the Equityholders Agreement) represented by the
Common Stock held by (i) USX and its
Subsidiaries if USX RTI Holdings is making such
indemnification payment, (ii) Kobe and its
Subsidiaries if Kobe RTI Holdings is making
such indemnification payment or (iii) all
holders of Common Stock then issued and
outstanding other than the recipient of such
indemnification payment and its Subsidiaries if
BarTech is making such indemnification payment,
immediately before giving effect to such
issuance or cancellation of Common Stock, as
applicable; and
New Stock % = The percentage interest in BarTech on a fully
diluted basis (as calculated for purposes of
the Equityholders Agreement) represented by the
Common Stock held by (i) USX and its
Subsidiaries if USX RTI Holdings is making such
indemnification payment, (ii) Kobe and its
Subsidiaries if Kobe RTI Holdings is making
such indemnification payment or (iii) all
holders of Common Stock then issued and
outstanding other than the recipient of such
indemnification payment and its Subsidiaries if
BarTech is making such indemnification payment,
immediately after giving effect to such
issuance or cancellation of Common Stock, as
applicable.
(d) For purposes of determining Held Unit Value under Section
18.11(b) or Held Stock Value under Section 18.11(c), the fair market
value of RTI Holdings Units will be based upon the total equity value
of RTI Holdings (without attributing any control premium to RTI
Holdings Units held by BarTech) and the fair market value of Common
Stock will be based upon the total equity value of BarTech (without
contributing any control premium to Common Stock held by majority
stockholders), as applicable, and in each case will be determined by
the agreement of BarTech, USX RTI Holdings and Kobe RTI Holdings
(provided that any of them will have rights or obligations under this
Section 18.11 only if it is subject to any indemnification obligations
or entitlements under this Agreement with respect to such Damages), or
failing such agreement within 10 days
<PAGE>
93
following the commencement of negotiations with respect thereto, by
appraisal as follows:
(i) if BarTech, USX and Kobe can agree on a single
nationally recognized independent investment banking firm (a
"Valuer") to act as appraiser within five days after the end
of such 10-day period, such Valuer will determine the Held
Unit Value of the applicable RTI Holdings Units for purposes
of Section 18.11(b) and/or the Held Stock Value of the
applicable Common Stock for purposes of Section 18.11(c), as
applicable;
(ii) if BarTech, USX RTI Holdings and Kobe RTI
Holdings cannot agree on a single Valuer within five days
after the end of such 10-day period, then within an additional
five-day period, BarTech will select a Valuer and USX RTI
Holdings and Kobe RTI Holdings together will select a second
Valuer (together with the other Valuer, the "Valuers"), each
of which will determine the Held Unit Value of the applicable
RTI Holdings Units and/or the Held Stock Value of the
applicable Common Stock, as applicable. If the valuations of
such two Valuers differ by an amount which is twenty percent
(20%) or less of the higher valuation, the Held Unit Value of
the applicable RTI Holdings Units and/or the Held Stock Value
of the applicable Common Stock, as applicable, will be
calculated by averaging the independent valuations of such two
Valuers; provided, however, that if the difference between
such Valuers' valuations exceeds twenty percent (20%) of the
higher valuation, the two Valuers will select a third Valuer,
which Valuer will make its own independent valuation and will
choose the valuation performed by the first two Valuers which
most closely reflects its own independent valuation, and the
valuation so selected will be deemed to constitute Held Units
Value of the applicable RTI Holdings Units and/or the Held
Stock value of the applicable Common Stock, as applicable; and
further provided that if the two Valuers cannot agree on the
selection of the third Valuer, the selection of such Valuer
will be submitted to final and binding arbitration in New
York, New York pursuant to the commercial arbitration rules of
the American Arbitration Association;
(iii) if a single Valuer is used, BarTech will bear
one half of the costs of such appraisal and USX and Kobe
together will bear one half of such costs; if two appraisers
are used, BarTech will bear the costs of the appraiser it
selects and USX and Kobe will bear the costs of the appraiser
they jointly select; and if the third Valuer is used, BarTech
will bear half of the costs of such Valuer and USX and Kobe
will equally bear one half of such costs; and
(iv) the parties hereto will cooperate in good faith
with the Valuer(s) and provide the Valuer(s) with reasonable
access to information in connection with the determination of
Held Unit Value and/or Held Stock Value, as
<PAGE>
94
applicable, and the appraiser(s) will be instructed to render
written valuation(s) as promptly as practicable (but in any
event within 30 days of selection).
(e) The parties hereto agree to cause RTI Holdings and BarTech
to effect such issuances and cancellations of RTI Holdings Common Units
and/or Common Stock as are required pursuant to this Section 18.11.
Upon (i) the cancellation of all of the RTI Holdings Common Units and
shares of Common Stock owned by USX and its Subsidiaries (including any
shares of Common Stock obtainable upon exercise of options, warrants or
other rights), USX RTI Holdings will have no further indemnification
obligations under Section 18.2 or 18.5(a) (notwithstanding the fact
that Damages otherwise indemnifiable by USX RTI Holdings thereunder may
have exceeded the total fair market value of such canceled RTI Holdings
Units and Common Stock), (ii) the cancellation of all of the RTI
Holdings Common Units and shares of Common Stock owned by Kobe and its
Subsidiaries (including any shares of Common Stock obtainable upon
exercise of options, warrants or other rights), Kobe RTI Holdings will
have no further indemnification obligations under Section 18.2 or
18.5(a) (notwithstanding the fact that Damages otherwise indemnifiable
by Kobe RTI Holdings thereunder may have exceeded the total fair market
value of such canceled RTI Holdings Common Units and Common Stock), or
(iii) the issuance to USX RTI Holdings and/or Kobe RTI Holdings (A) by
RTI Holdings of that number of RTI Holdings Common Units such that the
remaining RTI Holdings Common Units owned by BarTech and its
Subsidiaries are of de minimis value, or (B) by BarTech of that number
of shares of Common Stock such that the remaining shares of Common
Stock owned by Persons other than USX, Kobe and their respective
Subsidiaries are of de minimis value, BarTech will have no further
indemnification obligations under Section 18.3 or 18.5(b)
(notwithstanding the fact that Damages otherwise indemnifiable by
BarTech thereunder may have exceeded the total fair market value of
such issued RTI Holdings Common Units and Common Stock); provided,
however, that, in the event that, prior to the time of satisfaction of
an indemnification obligation of USX RTI Holdings or Kobe RTI Holdings
under Section 18.2 or Section 18.5(a) or of BarTech under Section 18.3
or 18.5(b), USX and its Subsidiaries, Kobe and its Subsidiaries or
BarTech and its Subsidiaries, as applicable, have sold for value any
RTI Holdings Units in a transaction in which the other owners of RTI
Holdings Units did not all participate on a pro rata basis and in which
the transferee did not expressly assume in writing in a form reasonably
acceptable to RTI Opco all of the indemnification obligations of the
transferor relating to the RTI Holdings Units sold, USX, Kobe or
BarTech, as applicable, will indemnify RTI Opco in cash for the amount
of such indemnification obligation that exceeds the fair market value
of the remaining RTI Holdings Units owned by such party and its
Subsidiaries (up to a maximum of the value previously received by such
party and its Subsidiaries upon such sale of RTI Holdings Units for
value).
<PAGE>
95
SECTION 19
GENERAL PROVISIONS
------------------
19.1 Expenses.
(a) If this Agreement is not terminated pursuant to Section 17
and the Closing occurs, except to the extent otherwise expressly
provided in this Agreement, RTI Opco will bear all fees, transfer taxes
or related fees and out-of-pocket expenses incurred by the parties
hereto and their Affiliates in connection with the preparation,
execution, and performance of this Agreement and the other Transaction
Documents and the consummation of the Contemplated Transactions (other
than those Taxes described in Section 18.6, and other than any such
expenses relating to the formation of NewTube, which will be USS/Kobe
Tubular Liabilities). The parties will be entitled to reimbursement
from RTI Opco, dollar for dollar, for all fees, transfer taxes or
related fees, and out-of-pocket expenses incurred and paid by them
which are otherwise payable by RTI Opco pursuant to the preceding
sentence.
(b) If this Agreement is terminated pursuant to Section 17,
then:
(i) except as otherwise provided in Section
19.1(b)(ii), each party will bear all of its own fees and
expenses and those of its Affiliates incurred in connection
with the preparation, execution, and performance of this
Agreement and the other Transaction Documents and the
consummation of the Contemplated Transactions; and
(ii) USS/Kobe on the one hand, and BarTech and RES
Holding together on the other hand, each will bear one half of
the aggregate fees and out-of-pocket expenses incurred by the
parties and their Affiliates in connection with filings made
under the HSR Act in connection with the Contemplated
Transactions (including fees and out-of-pocket expenses
incurred in the preparation of such filings), and USS/Kobe or
BarTech and RES Holding, as applicable, promptly will
reimburse each other to the extent necessary to result in such
allocation of such fees and expenses.
19.2 Public Announcements. So long as this Agreement is in effect, no
press releases or other public disclosures or announcements, either written or
oral, regarding this Agreement or the Contemplated Transactions will be made by
a party to this Agreement or its Representatives without the prior written
consent of USS/Kobe, BarTech and RES Holding, except as is otherwise required by
Legal Requirements (and then only after providing the other parties hereto with
advance notice of such disclosure and an opportunity to comment thereon).
19.3 Notices. All notices, consents, waivers, and other communications
under this Agreement must be in writing and will be deemed to have been duly
given when (a) delivered by
<PAGE>
96
hand (with written confirmation of receipt), (b) sent by telecopier (with
written confirmation of receipt), or (c) when received by the addressee, if sent
by a nationally recognized overnight delivery service, in each case to the
appropriate addresses and telecopier numbers set forth below (or to such other
addresses and telecopier numbers as a party may designate by notice to the other
parties):
If to BarTech or Blackstone: with a copy to:
---------------------------
Bar Technologies Inc. Simpson Thacher & Bartlett
3770 Embassy Parkway 425 Lexington Avenue
Akron, Ohio 44333-8367 New York, New York 10017
Attention: Thomas N. Tyrrell Attention: Wilson S. Neely
Telecopy: (330) 670-3020 Telecopy: (212) 455-2502
E-mail: [email protected] E-mail: [email protected]
and
The Blackstone Group
345 Park Avenue
New York, New York 10154
Attention: Robert L. Friedman
Telecopy: (212) 583-5704
E-mail: [email protected]
<PAGE>
97
If to any Republic Party: with a copy to:
------------------------
Republic Engineered Steels, Inc. Simpson Thacher & Bartlett
3770 Embassy Parkway 425 Lexington Avenue
Akron, Ohio 44333-8367 New York, New York 10017
Attention: Thomas N. Tyrrell Attention: Wilson S. Neely
Telecopy: (330) 670-3020 Telecopy: (212) 455-2502
E-mail: [email protected] E-mail: [email protected]
and
The Blackstone Group
345 Park Avenue
New York, New York 10154
Attention: Robert L. Friedman
Telecopy: (212) 583-5704
E-mail: [email protected]
If to Kobe: with a copy to:
----------
Kobe Steel, Ltd. Cleary, Gottlieb, Steen &
10-26 Wakinohamacho 2-Chome Hamilton
Chuo-Ku, Kobe City, Hyugo 651-0072 One Liberty Plaza
New York, New York 10006
Attention: Shinsuke Asai Attention: Jeffrey Lewis
Telecopy: 011-81-78-261-5444 Telecopy: (212) 225-3999
E-mail: [email protected] E-mail: [email protected]
If to USX: with a copy to:
---------
USX Corporation USX Corporation
600 Grant Street 600 Grant Street
Pittsburgh, Pennsylvania 15219-4776 Pittsburgh, Pennsylvania
15219-4776
Attention: A.E. Ferrara, Jr. Attention: R.M. Stanton
Telecopy: (412) 433-1174 Telecopy: (412) 433-2811
E-mail: [email protected] E-mail: [email protected]
<PAGE>
98
If to USS/Kobe: with a copy to:
--------------
USS/Kobe Steel Company Cleary, Gottlieb, Steen & Hamilton
1807 East 28th Street One Liberty Plaza
Lorain, Ohio 44055 New York, New York 10006
Attention: Attention: Jeffrey Lewis
Telecopy: Telecopy: (212) 225-3999
E-mail: E-mail: [email protected]
and
USX Corporation
600 Grant Street
Pittsburgh, Pennsylvania 15219-4776
Attention: R.M. Stanton
Telecopy: (412) 433-2811
E-mail: [email protected]
If to Veritas: with a copy to:
-------------
The Veritas Capital Fund, L.P. Whitman, Breed, Abbott & Morgan
660 Madison Avenue 200 Park Avenue
New York, New York 10021 New York, New York 10166
Attention: Robert B. McKeon Attention: Benjamin Polk
Telecopy: (212) 688-9411 Telecopy: (212) 351-3131
E-mail: [email protected]
19.4 Further Assurances. The parties agree (a) to furnish upon request
to each other such further information, (b) to execute and deliver to each other
such other documents, and (c) to do such other acts and things, all as the other
party may reasonably request for the purpose of carrying out the intent of this
Agreement and the documents referred to in this Agreement.
19.5 Stockholder Consent. (a) The parties hereto that are or at the
Closing will become stockholders of BarTech, being the holders of a majority of
the outstanding stock of BarTech entitled to vote thereon, hereby consent to and
approve, without prior notice and without a vote, pursuant to Section 228(a) of
the Delaware General Corporation Law, each of the actions taken or to be taken
by BarTech or any of its Subsidiaries in connection with the consummation of the
Contemplated Transactions which are or may be subject to stockholder approval,
including without limitation each of the actions expressly contemplated by this
Agreement or the Equityholders Agreement to be taken by BarTech or any of its
Subsidiaries
<PAGE>
99
(including without limitation the amendment and restatement of BarTech's
certificate of incorporation in the form attached as an exhibit to the
Equityholders Agreement).
(b) The parties hereto that are stockholders of RES Holding,
being the holders of a majority of the outstanding stock of RES Holding
entitled to vote thereon, hereby consent to and approve, without prior
notice and without a vote, pursuant to Section 228(a) of the Delaware
General Corporation Law, each of the actions taken or to be taken by
RES Holding or any of its Subsidiaries in connection with the
consummation of the Contemplated Transactions which are or may be
subject to stockholder approval, including without limitation each of
the actions expressly contemplated by this Agreement or the
Equityholders Agreement.
19.6 Waiver. The rights and remedies of the parties to this Agreement
and the other Transaction Documents are cumulative and not alternative. Neither
the failure nor any delay by any party in exercising any right, power, or
privilege under this Agreement or the other Transaction Documents will operate
as a waiver of such right, power, or privilege, and no single or partial
exercise of any such right, power, or privilege will preclude any other or
further exercise of such right, power, or privilege or the exercise of any other
right, power, or privilege. To the maximum extent permitted by applicable law,
except as otherwise expressly provided in this Agreement or another Transaction
Document, as applicable, (a) no claim or right arising out of this Agreement or
the other Transaction Documents can be discharged by one party, in whole or in
part, by a waiver or renunciation of the claim or right unless in a writing
signed by the other parties; (b) no waiver that may be given by a party will be
applicable except in the specific instance for which it is given; and (c) no
notice to or demand on one party will be deemed to be a waiver of any obligation
of such party or of the right of the party giving such notice or demand to take
further action without notice or demand as provided in this Agreement or the
other Transaction Documents.
19.7 Entire Agreement and Modification. This Agreement and the other
Transaction Documents supersede all prior agreements between the parties with
respect to their subject matter (other than the confidentiality agreement, dated
as of March 8, 1999, between Blackstone Management Partners III, L.L.C. and
USS/Kobe) and constitute a complete and exclusive statement of the terms of the
agreement between the parties with respect to their subject matter. This
Agreement may not be amended except by a written agreement executed by the party
to be charged with the amendment.
19.8 Assignments, Successors and No Third Party Rights. No party may
assign any of its rights under this Agreement without the prior consent of
BarTech, RES Holding and USS/Kobe. Subject to the preceding sentence, this
Agreement will apply to, be binding in all respects upon, and inure to the
benefit of the successors and permitted assigns of the parties. Nothing
expressed or referred to in this Agreement will be construed to give any Person
other than the parties to this Agreement any legal or equitable right, remedy,
or claim under or with respect to this Agreement or any provision of this
Agreement. This Agreement and all of its
<PAGE>
100
provisions and conditions are for the sole and exclusive benefit of the parties
to this Agreement and their successors and assigns.
19.9 Severability. If any provision of this Agreement is held invalid
or unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
19.10 Section Headings, Construction. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement. All words used in this
Agreement will be construed to be of such gender or number as the circumstances
require. Unless otherwise expressly provided, the word "including" does not
limit the preceding words or terms. This Agreement and each of the other
Transaction Documents has been negotiated by the parties and their respective
legal counsel, and legal or other equitable principles that might require the
construction of this Agreement or any other Transaction Document or any
provision of this Agreement or any other Transaction Document against the party
drafting this Agreement or such other Transaction Document will not apply in any
construction or interpretation of this Agreement or such other Transaction
Document.
19.11 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF THE STATE
OF NEW YORK.
19.12 Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
<PAGE>
101
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first written above.
BAR TECHNOLOGIES INC.
By: /s/ John B. George
-------------------------------------
Name: John B. George
Title: Vice President of Finance,
Treasurer and Secretary
RES HOLDING CORPORATION
By: /s/ David S. Blitzer
--------------------------------------
Name: David S. Blitzer
Title: Secretary
REPUBLIC ENGINEERED STEELS, INC.
By: /s/ John B. George
--------------------------------------
Name: John B. George
Title: Vice President of Finance,
Treasurer and Secretary
BLACKSTONE CAPITAL PARTNERS II
MERCHANT BANKING FUND L.P.
By: Blackstone Management Associates II
L.L.C., as general partner
By: /s/ David A. Stockman
--------------------------------
Name: David A. Stockman
Title: Member
<PAGE>
BLACKSTONE OFFSHORE CAPITAL PARTNERS II L.P.
By: Blackstone Management Associates II
L.L.C., as general partner
By: /s/ David A. Stockman
----------------------------------
Name: David A. Stockman
Title: Member
BLACKSTONE FAMILY INVESTMENT PARTNERSHIP II L.P.
By: Blackstone Management Associates II L.L.C.,
as general partner
By: /s/ David A. Stockman
----------------------------------
Name: David A. Stockman
Title: Member
THE VERITAS CAPITAL FUND, L.P.
By: Veritas Capital Management, L.L.C., as
general partner
By: /s/ Robert B. McKeon
----------------------------------
Name: Robert B. McKeon
Title: Member
HVR HOLDINGS, L.L.C.
By: /s/ Andrew H. McQuarrie
----------------------------------
Name: Andrew H. McQuarrie
Title: Vice President
<PAGE>
USX CORPORATION
By: /s/ A.E. Ferrara, Jr.
----------------------------------
Name: A.E. Ferrara, Jr.
Title: Vice President - Strategic Planning
KOBE STEEL, LTD.
By: /s/ Susumu Okushima
----------------------------------
Name: Susumu Okushima
Title:
KOBE DELAWARE INC.
By: /s/ Nobuyuki Kurosu
----------------------------------
Name: Nobuyuki Kurosu
Title: Secretary
USS LORAIN HOLDING COMPANY, INC.
By: /s/ R.M. Stanton
----------------------------------
Name: R.M. Stanton
Title: Vice President
USX RTI HOLDINGS, INC.
By: /s/ R.M. Stanton
----------------------------------
Name: R.M. Stanton
Title: Vice President
KOBE/LORAIN INC.
By: /s/ Susumu Okushima
----------------------------------
Name: Susumu Okushima
Title: President
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KOBE RTI HOLDINGS, INC.
By: /s/ Susumu Okushima
----------------------------------
Name: Susumu Okushima
Title:
USS/KOBE STEEL COMPANY
By: /s/ George F. Babcoke
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Name: George F. Babcoke
Title: President
LORAIN TUBULAR COMPANY, L.L.C.
By: /s/ Gary F. Gajdzik
----------------------------------
Name: Gary F. Gajdzik
Title: President
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, L.L.C.
By: /s/ John B. George
----------------------------------
Name: John B. George
Title: Vice President of Finance,
Treasurer and Secretary
REPUBLIC TECHNOLOGIES INTERNATIONAL, L.L.C.
By: /s/ John B. George
----------------------------------
Name: John B. George
Title: Vice President of Finance,
Treasurer and Secretary
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EXHIBIT 99.1
CERTAIN DISCLOSURES RELATING TO THE COMBINATION
Unless otherwise indicated or the context otherwise requires, the
following names and expressions are used herein as set forth below:
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 is referred to herein 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. has been renamed after the Combination. RTI indirectly
owns 70% of our equity interests through Holdings.
Unless otherwise indicated, all information herein presented on a pro forma
basis gives effect to the Transactions. In the information which follows, high
quality engineered steel rod products have been included in the definition of
special bar quality, or "SBQ," steel products. 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 an offering of units (the "Units"), which consist of $425.0
million principal amount of 13 3/4% Senior Secured Notes due 2009 (the "Notes")
co-issued by Republic Technologies and its subsidiary RTI Capital Corp. and
425,000 warrants (the "Warrants") issued by RTI to purchase 822,386 shares of
Class D Common Stock, par value $.001 per share, of RTI, 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 herein as the "Refinancing." The Combination, the
Refinancing, the September 1998 acquisition of Republic by Blackstone Capital
Partners II Merchant Banking Fund L.P. and other investors and the payment of
related fees and expenses are collectively referred to herein as the
"Transactions."
---------------------------
All statements other than statements of historical facts included in the
information which follows including, without limitation, statements under "Risk
Factors," "Recent Developments," "Unaudited Pro Forma Combined Financial
Information for Republic Technologies International, LLC and its Subsidiaries,"
"The Combined Business," "The Consolidation Plan" and "Projections for Republic
Technologies International, LLC and its Subsidiaries" 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 that a variety of factors could cause business
conditions and results to differ materially from what is contained in the
forward-looking statements, including, among other things, the following:
o our ability to increase sales to existing and new customers, particularly
sales to automotive and industrial equipment manufacturers;
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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 report under the heading "Risk
Factors."
Readers should not place undue reliance on these forward-looking
statements, which speak only as of the filing date of the Current Report on Form
8-K containing this information. We undertake no obligation to release publicly
any revisions to any of the forward-looking statements contained herein to
reflect events or circumstances after such filing date or to reflect the
occurrence of unanticipated events.
The information contained herein under "Projections for Republic
Technologies International, LLC and its Subsidiaries" was obtained from our
management and other sources believed by our management to be reliable, but no
assurance can be given as to the accuracy or completeness of the information.
THE PROJECTIONS CONTAINED HEREIN ARE BASED UPON A NUMBER OF ASSUMPTIONS AND
ESTIMATES THAT, WHILE PRESENTED WITH NUMERICAL SPECIFICITY AND CONSIDERED
REASONABLE BY US WHEN TAKEN AS A WHOLE, ARE INHERENTLY SUBJECT TO SIGNIFICANT
BUSINESS, ECONOMIC AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF
WHICH ARE BEYOND OUR CONTROL. IN ADDITION, THE PROJECTIONS CONTAINED HEREIN ARE
BASED UPON SPECIFIC ASSUMPTIONS WITH RESPECT TO FUTURE BUSINESS CONDITIONS, SOME
OR ALL OF WHICH WILL CHANGE. PROJECTIONS ARE NECESSARILY SPECULATIVE IN NATURE
AND IT CAN BE EXPECTED THAT THE ASSUMPTIONS UPON WHICH THE PROJECTIONS ARE BASED
WILL NOT PROVE TO BE VALID OR WILL VARY FROM ACTUAL RESULTS. ACTUAL RESULTS WILL
VARY FROM THE PROJECTIONS AND THE VARIATIONS MAY BE MATERIAL. CONSEQUENTLY, THE
INCLUSION OF THE PROJECTIONS HEREIN SHOULD NOT BE REGARDED AS A REPRESENTATION
BY US OR ANY OTHER PERSON OF RESULTS THAT WILL ACTUALLY BE ACHIEVED. READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE PROJECTIONS.
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RECENT DEVELOPMENTS
Republic and USS/Kobe have not yet finalized their financial statements for
the period ended June 30, 1999. The discussion which follows is based on
preliminary information which is subject to change.
During the fourth quarter of 1998 and the first quarter of 1999, we
experienced a significant industry dislocation in two important end markets: (1)
steel service centers and (2) tubular goods sold to the oil and gas industry.
Combined shipment volumes of Republic, BarTech and USS/Kobe declined by 37% from
920,000 tons in the first quarter of 1998 to 578,000 tons in the fourth quarter
of 1998, reflecting decreases of 65%, 26%, and 26% in seamless rounds,
hot-rolled bar/rod and cold-finished bar shipments, respectively.
We believe the reduced shipments were principally attributable to
short-term inventory increases at steel service centers. While
automotive/contract shipments increased by 11% between the first and fourth
quarter of 1998, service center/spot market shipments dropped by 50% from
190,800 tons per month to 93,700 tons per month of 1998. In the third quarter of
1998, non-NAFTA imports approached 8% of shipments, as compared with an average
of 5% over the last five years. Service center shipment rates declined by 21%
resulting in abnormally high inventory days levels, which peaked at 95 days in
November 1998. Further impacting volumes was the General Motors strike in the
summer of 1998.
Since late 1998, we believe that imports have receded to levels approaching
the historical average. Service center shipments have rebounded and service
center inventories are returning to normalized levels. Our shipments have
recovered strongly in the second quarter and our order backlog has doubled since
a trough in October 1998. Automotive shipments remain strong and shipments to
the service center end markets have recovered substantially in the second
quarter. Cold-finishing shipments remain strong and have increased 20% from
fourth quarter levels. We believe that the decline in shipments to the oil and
gas industry can be attributed to substantial near-term volatility and price
pressure in the crude oil spot market. Many large energy companies curtailed
capital spending in light of the crude oil market environment. Tubular shipments
declined by 65% from the first to fourth quarter of 1998, but they have since
recovered slightly as crude oil markets have improved.
Aggregate shipments by Republic, BarTech and USS/Kobe increased by
approximately 11.6% in the three months ended June 30, 1999 as compared with
shipments during the three months ended March 31, 1999. This improvement is
principally attributable to increased shipments by the Lackawanna, New York
mill, including a 75% increase in quarterly shipments to independent cold
finishers, a 100% increase in fastener business and a 36% increase in quarterly
shipments to service centers from Lackawanna. During these same comparative
periods, aggregate revenues of the three companies increased by approximately
10% in the second quarter of 1999 as compared with the first quarter. This
increase resulted from the rise in shipments, offset in part by a reduction in
the sales price for semi-finished products. Aggregate costs of goods sold for
the second quarter increased from the first quarter as a result of the increase
in shipments but costs of goods sold as a percentage of net sales declined by
4.8% reflecting efficiencies gained through higher production levels and the
initial effects of cost reduction measures adopted by the companies.
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RISK FACTORS
This section discusses risks related to RTI and its subsidiaries and
investments in securities issued by them.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH
AND PREVENT US FROM FULFILLING OUR DEBT OBLIGATIONS.
We have substantial indebtedness after the Transactions. As of March 31,
1999, and after giving pro forma effect to the Transactions, we would have had
approximately $707.9 million of indebtedness, representing approximately 83% of
our total capitalization. In addition, we may have the ability to borrow
additional amounts under our new credit facility permitting borrowings of up to
$425 million, depending upon our accounts receivable and inventory and certain
other borrowing base components. In addition, we may incur additional
indebtedness in the future in accordance with the limitations contained in our
debt instruments.
After giving pro forma effect to the Transactions, our interest expense,
net, for the twelve months ended March 31, 1999, would have been $92.2 million.
As of March 31, 1999, and after giving pro forma effect to the Transactions, our
earnings without giving effect to any anticipated cost savings, would have been
insufficient to cover our fixed charges by approximately $205.0 million.
Accordingly, we will need to improve our operating results substantially in
order to meet our debt service obligations.
Our ability to pay interest and principal or to refinance our indebtedness
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 degree of leverage could have important consequences, 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 such bonds, and any such early
payment may adversely affect our liquidity;
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.
We believe that we will have adequate excess cash balances, available
liquidity under our new credit facility and other credit arrangements and
proceeds from planned asset sales, but 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 $425.0 million principal amount
of Notes and our other indebtedness, or to pay for capital expenditures,
including capital expenditures contemplated by the Consolidation Plan discussed
under the caption "The Consolidation Plan" below, 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. If we are unable to generate sufficient cash flow
from operations or to refinance our debts, we may need to sell assets or obtain
additional financing. You should consider that we may be unable to sell assets
or to obtain additional financing, if necessary. You should also consider that
our ability to sell assets may be constrained by provisions in our new labor
agreement with the United Steelworkers union
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including provisions which (1) may require purchasers to adopt the terms of that
agreement, (2) require notice to and consultation with union representatives and
(3) afford the union the right to bid in connection with asset sales.
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 will 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 additional 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.
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, 1998,
Republic reported net losses from continuing operations of $6.5 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 $205.0 million for the twelve months ended March 31, 1999. 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 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 was organized in September 1994 in connection with the acquisition
of the idle steelmaking and bar rolling assets of the BRW Division of Bethlehem
Steel Corporation. After BarTech bought these assets, it began to refurbish,
modernize and expand them. BarTech began operations at its facilities in 1996
and bought Bliss & Laughlin Industries, Inc., one of the largest processors of
cold-finished steel bar products in North America, 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.
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Because Republic's specialty steels business is reflected as a discontinued
operation in Republic's 1996, 1997 and 1998 historical financial statements and
not in its earlier 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 March 31,
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 necessarily conform to the treatment of these items in the
Master Restructuring Agreement pursuant to which the Combination has been
effected. In addition, the report of the independent auditors relating to the
historical audited and reviewed financial statements of USS/Kobe contains a
"going concern" qualification in the light of past and prospective covenant
breaches by USS/Kobe under its debt instruments.
OUR FUTURE OPERATIONAL AND FINANCIAL PERFORMANCE MAY VARY MATERIALLY FROM
THE PROJECTIONS
We are the sole preparer of the projected financial information contained
herein, which was prepared as of the filing date of the Current Report on Form
8-K containing such information. These projections are based on our estimated
results of operations under the hypothetical assumptions described under
"Projections for Republic Technologies International, LLC and its
Subsidiaries--Assumptions." We do not intend to update or otherwise revise the
projections to reflect events or circumstances existing or arising after such
filing date or to reflect the occurrence of unanticipated events. None of the
independent public accountants for Republic, BarTech or USS/Kobe has examined or
provided any other form of assurance on the projections. We have included a
report by Beddows & Company, Hatch Management and Technology Consulting
following "Projections for Republic Technologies International, LLC and its
Subsidiaries." Hatch was engaged in connection with the Transactions to evaluate
the technical and operational components of the Consolidation Plan. While the
Hatch report comments on the reasonableness of some of the assumptions
underlying the projections, Hatch was not engaged to evaluate the projections
for consistency or to verify the cash flows included in the projections.
Consequently, no person other than we assumes any responsibility for the
projections. The projections necessarily are based upon numerous estimates and
assumptions, including that we will timely and successfully implement the
Consolidation Plan and achieve the improvements in production costs, operating
efficiencies and selling, general and administrative expenses described under
"The Consolidation Plan." These estimates and assumptions are inherently subject
to significant business, economic and competitive uncertainties, contingencies
and risks, many of which are beyond our control. Actual results will vary from
the projections, and these variations may be material. Financial projections are
necessarily speculative in nature, and one or more of the assumptions underlying
these projections may prove not to be valid. The projections should not be
regarded as a representation by us or any other person that the projections
will be achieved. You are cautioned not to place undue reliance on the
projections or the Hatch report.
WE MAY NOT BE ABLE TO ACHIEVE THE OPERATING SYNERGIES AND COST SAVINGS THAT
WE EXPECT FROM THE COMBINATION.
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 could be affected by a number of factors. 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;
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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 have included estimates of these charges and
expenses in the projections included as part of this document, but you should
consider that the actual future charges and expenses could be greater than
expected or occur during different periods than expected and reduce the economic
benefits we expect from the Combination.
The steps to be taken to rationalize, reconfigure and/or replace our
facilities are a critical feature of the Consolidation Plan. We expect that
these integration measures will enable us to lower our per ton steel costs,
improve product quality and increase flexibility in production. We anticipate
that the restructuring of our facilities will be completed by the end of 2003.
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 not being completed on
schedule, which could adversely affect our business, results of operations and
financial condition. 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 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. We
intend to finance these expenditures principally with borrowings under the new
credit facility and cash flow from operations. Failure to complete, or a
substantial delay in completing, the facilities rationalization program,
significant cost overruns in implementing the program or our inability to
finance or to realize the anticipated benefits from the program could have a
material adverse effect on us.
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 have a material adverse
effect on us.
WE MAY BE UNABLE TO SIGNIFICANTLY REDUCE OUR NUMBER OF EMPLOYEES AS
CONTEMPLATED BY THE CONSOLIDATION PLAN.
In addition to a facilities rationalization program, the Consolidation Plan
contemplates that we will significantly reduce our workforce. Republic, BarTech
and USS/Kobe have adopted a new labor agreement with the United Steelworkers
union in contemplation of the combination transactions.
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 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.
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OUR NEW LABOR AGREEMENT MAY LIMIT THE FLEXIBILITY OF OUR MANAGEMENT.
While our new labor agreement provides us with substantially more
flexibility than was possible under our prior labor agreements, we remain less
flexible than some of our competitors, particularly our competitors without
unionized workforces. Partnership provisions in the 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 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. While the agreement provides that this plan would no
longer apply in extraordinary circumstances, such as bankruptcy or severe
financial difficulties representing a clear and present danger to our viability,
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
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.
The reduction in the number of job classifications applicable to our
workforce is an important element of our new labor agreement. The number of job
classifications at our facilities will be reduced from over 34 at specified
facilities to five, which will give our management considerably greater staffing
flexibility. However, the new wage scales applicable to each of the five classes
are generally higher under the new labor agreement than the former wage scales.
You should consider that the new wage scales could adversely affect us,
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 (the "PBGC")
to fund $178 million over the next four years into our defined benefit pension
plan in connection with the headcount reduction and related early retirement
benefits contemplated by the Consolidation Plan. Of this $178 million, $47
million has been funded to date with an additional $15 million to be funded by
January 1, 2000. After such time we will be required to make the additional
quarterly contributions in accordance with a specific schedule. In addition, we
expect to fund an additional $47 million over the next five years related to
headcount reductions to be made at our Lorain facility although it may be
necessary to fund a greater amount. These funding obligations may compound the
risks arising from our highly leveraged capital structure.
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 HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
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 35% of our total net sales in the twelve
months ended March 31, 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 50% of our pro forma total net sales for the twelve
months ended March 31, 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
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to these customers accounted for approximately 13% of our total net sales in the
twelve months ended March 31, 1999. In total, our ten largest customers
accounted for approximately 36% of pro forma total net sales in the twelve
months ended March 31, 1999. A disruption of sales to any of these customers
could adversely affect our business.
IF WE ARE UNABLE TO OBTAIN OR MAINTAIN QUALITY CERTIFICATIONS FOR OUR
FACILITIES, WE MAY BE UNABLE TO SERVICE OR TO PENETRATE MARKET SEGMENTS AS
PLANNED.
In order to continue to serve the higher quality end 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 except for our
Johnstown, Pennsylvania and Cartersville, Georgia facilities. We are currently
in the process of securing qualifications for these facilities. If we are
unsuccessful in obtaining these certifications or if certifications are
canceled, our ability to continue to serve our targeted market segment or to
retain our customers may be impaired and our business, results of operations and
financial condition may be adversely affected. 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.
WE MAY BE ADVERSELY AFFECTED BY 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 are currently in the process of replacing or upgrading
many of our existing computer systems in order to make them Year 2000 compliant.
Our plans call for the completion of the installation of these new systems by
September 1999, but you should consider that we may encounter unexpected delays
which could postpone the completion of the installation.
In order to minimize the impact of any Year 2000 compliance failures by us
or our suppliers and customers, we are developing contingency plans, including
the development of alternative manual systems and the use of alternative
suppliers. Despite any contingency plans that we develop, if we or any of our
significant suppliers or customers do not successfully and timely achieve Year
2000 compliance, we could be materially adversely affected.
WE ARE CONTROLLED BY BLACKSTONE, WHOSE INTERESTS IN OUR BUSINESS MAY BE
DIFFERENT THAN YOURS.
Blackstone affiliates are able to control our affairs in all cases, except
for certain actions specified in an Equityholders Agreement among Blackstone,
USX Corporation, Kobe Steel, Ltd., Veritas and their various affiliates,
FirstEnergy Services Corp. and certain 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.
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. for so long as they maintain
specified ownership levels but terminating on the third anniversary of an
initial public offering, including:
o the incurrence of indebtedness;
o material contracts between RTI and affiliates of Blackstone or Veritas;
9
<PAGE>
o capital expenditures in excess of those set forth in the capital spending
plan and a specified additional aggregate basket;
o the issuance of equity, subject to exceptions;
o mergers or sales of RTI and its subsidiaries; 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
results of operations and financial condition 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.
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 have a material adverse effect
on our business, results of operations and financial condition. 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 us.
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 late in 1998, which resulted in an
increase in imports of SBQ and other steel products. While imports of SBQ steel
products appear to have abated recently, 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, which may adversely affect our financial
performance.
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 March 31, 1999, we produced approximately 53% of
our steel from our electric arc furnaces. The principal raw material for steel
produced from our electric arc furnaces is ferrous scrap metal. On a pro forma
basis, scrap metal accounted for approximately 24% of our total cost of products
sold, excluding depreciation, of products originating from our electric arc
furnaces for the twelve months ended March 31, 1999. 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.
10
<PAGE>
For the twelve months ended March 31, 1999, we produced approximately 47%
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 30% of our total cost of
products sold, excluding depreciation, of products originating from our blast
furnaces for the twelve months ended March 31, 1999. 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 business, results
of operations and financial condition.
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 business, results of operations and financial condition 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 business, results of operations and financial condition if we are
unable to pass along such higher costs to our customers. In addition, a
disruption or curtailment in supply, including problems arising from Year 2000
computer failures, could have a material adverse effect on our business, results
of operations and financial condition.
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, we
will be adversely affected.
OUR OPERATIONS ARE SUBJECT TO ENVIRONMENTAL LAWS AND REGULATIONS THAT IN
THE EVENT OF ENVIRONMENTAL CONTAMINATION AT OUR FACILITIES MAY GENERATE
SIGNIFICANT LIABILITY.
Our domestic operations are subject to a broad range of U.S. federal, state
and local environmental laws and regulations. In addition, our Canadian
subsidiary is subject to Canadian
11
<PAGE>
federal, provincial, regional and municipal 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.
In connection with prior transactions in which we acquired real property,
including the consummation of the Combination, we obtained limited indemnities
from Bethlehem Steel Corporation, USX Corporation, affiliates of each of USX
Corporation and Kobe Steel, Ltd. and the new tubular joint venture of USX
Corporation and Kobe Steel, Ltd., which may reduce the impact of costs related
to actual or potential environmental conditions at various of our facilities.
However, these indemnifying parties may not meet their respective obligations
under those 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 pursuant to which the Combination has been completed
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 that
could have a material adverse effect on our business, results of operations and
financial condition. 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 certain permits, and not all approvals for
such transfers were obtained before the Combination was consummated. The failure
to obtain necessary permits or consents to transfer or the loss of any permits
could have a material adverse effect on our business.
12
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION FOR REPUBLIC
TECHNOLOGIES INTERNATIONAL, LLC AND ITS SUBSIDIARIES
The accompanying Unaudited Pro Forma Combined Financial Information of
Republic Technologies International, LLC and its Subsidiaries has been prepared
based on the historical financial statements of BarTech, Republic and USS/Kobe,
adjusted to give pro forma effect to the Transactions.
The Unaudited Pro Forma Combined Balance Sheet as of March 31, 1999 has
been prepared as if the Transactions occurred on that date. The Unaudited Pro
Forma Combined Statements of Operations for the twelve month period ended
December 31, 1998 gives 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 Unaudited Pro Forma Combined Statements of Operations for the twelve month
period ended March 31, 1999 gives pro forma effect to the Transactions as if
they occurred on April 5, 1998 for BarTech and on April 1, 1998 for Republic and
USS/Kobe. The Unaudited Pro Forma Combined Statements of Operations for the
three month period ended March 31, 1999 gives pro forma effect to the
Transactions as if they occurred on January 3, 1999 for BarTech and on
January 1, 1999 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. See "Projections for Republic Technologies
International, LLC and its Subsidiaries."
The Unaudited Pro Forma Combined Financial Information for Republic
Technologies International, LLC and its Subsidiaries is presented for
informational purposes only and does not purport to represent what our financial
position or results of operations would actually have been had the Transactions
in fact occurred on the assumed dates or to project our financial position or
results of operations for any future period or date.
The pro forma adjustments are based upon available information and various
assumptions that Republic Technologies believes are reasonable. The pro forma
adjustments and certain assumptions are described in the accompanying notes.
Other information included in the Unaudited Pro Forma Combined Financial
Information for Republic Technologies International, LLC and its Subsidiaries
has been presented to provide additional analysis. The acquisitions of Republic
and USS/Kobe have been accounted for using the purchase method of accounting.
Allocations of the purchase price have 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 allocations may differ significantly.
13
<PAGE>
REPUBLIC TECHNOLOGIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1999(A)
(IN MILLIONS)
<TABLE>
<CAPTION>
ACQUISITION
AND COMBINATION REFINANCING
BARTECH REPUBLIC(B) USS/KOBE(C) ADJUSTMENTS ADJUSTMENTS(D) PRO FORMA
------- ----------- ----------- --------------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............... $ 1.5 $ 2.8 $ 0.2 $ -- $ -- $ 4.5
Accounts receivable, net................ 33.7 106.6 51.3 (43.7)(e) -- 147.9
Inventories............................. 83.2 154.7 102.7 -- -- 340.6
Other current assets.................... 3.4 43.6 6.1 -- -- 53.1
------- ------- ------- ------- ------ ---------
Total current assets...................... 121.8 307.7 160.3 (43.7) -- 546.1
Property, plant & equipment, net.......... 91.3 262.6 410.5 (127.6)(f) -- 636.8
Goodwill/excess purchase price over net
assets acquired......................... 11.9 144.9 -- -- -- 156.8
Other intangible assets................... -- 8.2 12.8 -- -- 21.0
Restricted assets......................... 1.5 0.3 -- -- -- 1.8
Other non-current assets.................. 11.2 12.2 -- (0.5 ) (e) 17.8 (g) 40.7
------- ------- ------- ------- ------ ---------
Total..................................... $237.7 $ 735.9 $ 583.6 $(171.8) $ 17.8 $ 1,403.2
------- ------- ------- ------- ------ ---------
------- ------- ------- ------- ------ ---------
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
EQUITY/PARTNERS' INTERESTS/MEMBER'S
INTERESTS
Current liabilities
Accounts payable........................ $ 84.2 $ 75.8 $ 65.6 $ (43.7 ) (e) $ -- $ 181.9
Accrued expenses and other current
liabilities........................... 26.0 55.9 34.1 -- (12.3)(h) 103.7
Short-term borrowings................... 77.9 67.2 2.2 -- 74.6 (i) 221.9
Current portion of pension and other
postretirement benefits
liabilities........................... -- 36.9 9.4 -- -- 46.3
Current maturities of long-term debt.... 3.2 -- -- -- (3.2)(i) --
------- ------- ------- ------- ------ ---------
Total current liabilities................. 191.3 235.8 111.3 (43.7) 59.1 553.8
Long-term liabilities
Other long-term debt.................... 128.5 357.3 180.2 -- (180.0 ) (i) 486.0
Other postretirement benefits........... 5.3 103.0 38.8 -- -- 147.1
Defined benefit pension obligation...... -- 37.0 12.2 -- -- 49.2
Deferred income taxes................... 5.0 -- -- (5.0)(j) -- --
Other long-term liabilities............. 0.7 15.5 1.9 (0.5)(e) -- 17.6
------- ------- ------- ------- ------ ---------
Total long-term liabilities............... 139.5 512.8 233.1 (5.5) (180.0) 699.9
Redeemable preferred stock................ 5.5 -- -- -- (5.5)(k) --
Shareholders' (deficit) equity/Partners'
interests/Member's interests............ (98.6) (12.7) 239.2 (122.6)(l) 144.2 (l) 149.5
------- ------- ------- ------- ------ ---------
Total..................................... $237.7 $ 735.9 $ 583.6 $(171.8) $ 17.8 $ 1,403.2
------- ------- ------- ------- ------ ---------
------- ------- ------- ------- ------ ---------
</TABLE>
See Notes to Unaudited Pro Forma Combined Balance Sheet
14
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(a) The historical balance sheets of BarTech, Republic and USS/Kobe as of
March 31, 1999 were derived from the unaudited interim financial statements
of each such business.
(b) The following purchase accounting adjustments which resulted from the
Republic acquisition by Blackstone and other investors completed on
September 8, 1998 are included in the unaudited balance sheet of Republic as
of March 31, 1999. The Republic acquisition was accounted for using the
purchase method of accounting. The total purchase price was allocated to the
assets acquired and liabilities assumed, based on a preliminary estimate of
their respective fair values. The actual purchase accounting adjustment to
reflect the fair value of the assets acquired and liabilities assumed will
be based upon appraisals that are currently in process. Accordingly, the
final allocation of the purchase price and the resulting effect on income
may differ significantly from those reflected herein. The preliminary
allocation as of March 31, 1999 is as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Cash purchase price:
Republic acquisition...................................................... $ 143.9
Estimated acquisition fees and expenses................................... 16.6
-------
Total cash purchase price................................................... 160.5
Book value of net assets acquired........................................... (84.5)
-------
Excess of purchase price over book value of net assets acquired........... 76.0
Preliminary allocation of purchase price:
Decrease in property, plant and equipment................................. 29.4
Decrease in other non-current assets...................................... 15.7
Increase in defined benefit pension obligation............................ 38.6
Decrease in other postretirement benefits................................. (44.7)
Increase in accrued expenses.............................................. 7.4
Increase in inventory..................................................... (26.1)
Decrease in deferred tax asset............................................ 54.8
Other, net................................................................ (1.6)
-------
Adjusted excess purchase price over fair value of net assets acquired....... 149.5
Accumulated amortization through March 31, 1999............................. (4.6)
-------
Excess purchase price over net assets acquired, net as of March 31, 1999.... $ 144.9
-------
-------
</TABLE>
(c) 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 for
Republic Technologies International, LLC and its Subsidiaries 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 do not necessarily
conform to the treatment of these items in the Master Restructuring
Agreement pursuant to which the Combination was effected.
15
<PAGE>
(d) Sources and uses of cash for the Transactions were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Sources:
New credit facility borrowings................................................ $ 221.9
Units proceeds(1)............................................................. 419.5
New cash equity............................................................... 155.0
-------
Total................................................................. 796.4
-------
Uses:
Repayment of existing indebtedness, including accrued interest and
premiums(2)................................................................ 758.2
Estimated transaction fees and expenses....................................... 10.9
Capitalized financing costs................................................... 27.3
-------
Total................................................................. 796.4
-------
Net adjustment............................................................. $ --
-------
-------
</TABLE>
------------------------------------
(1) Units are reflected at their issue price.
(2) The repayment of debt includes (i) call and/or tender
offer premiums in the amount of $6.2 million,
$8.5 million and $3.3 million related to the BarTech
senior notes, Republic mortgage notes and USS/Kobe senior
notes, respectively, (ii) accrued interest through
March 31, 1999 and (iii) repayment of $21.7 million of
additional debt assumed, as specified in the Master
Restructuring Agreement.
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. Of the long-term debt assumed, all but $13.7 million,
representing two series of environmental bonds, was repaid concurrent with
the completion of the Combination.
(e) Represents the elimination of balances between BarTech, Republic and
USS/Kobe.
(f) Represents the preliminary allocation of the purchase price attributed to
the combination of USS/Kobe, Republic and BarTech to the assets acquired and
liabilities assumed based on their respective estimated fair values. The
actual purchase accounting adjustment to reflect the fair values of the
assets acquired and liabilities assumed, including property, plant and
equipment, employee benefit plans, as well as the fair value of the equity
consideration paid to acquire USS/Kobe, will be based upon actuarial and
appraisal studies that are currently in process and, accordingly, the
adjustments that have been included in the pro forma financial information
will change based upon the final allocation.
The net adjustment is calculated as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Purchase price:
Combination of USS/Kobe, Republic and BarTech (1)......................... $ 97.4
Estimated direct acquisition costs (2).................................... 14.2
-------
Total purchase price........................................................ 111.6
Less: historical net equity of USS/Kobe..................................... 239.2
-------
Net adjustment (3)................................................ $(127.6)
-------
-------
</TABLE>
------------------------------------
(1) Represents a preliminary estimate of the equity
consideration paid in connection with the Combination,
including $23.9 million of additional debt assumed,
including accrued interest.
(2) Includes $3.3 million in call premiums related to the
USS/Kobe senior notes.
(3) The entire net adjustment has been applied to reduce the
property, plant and equipment balance on a pro forma
basis. The adjustments to fair value of the individual
asset and liability balances of USS/Kobe will be made when
the actuarial and appraisal studies have been finalized.
16
<PAGE>
(g) The net increase is comprised of the following:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Capitalized financing fees (1).............................................. $ 27.3
Deferred loan and bond fees (2)............................................. (9.5)
-------
$ 17.8
-------
-------
</TABLE>
------------------------------------
(1) Represents the portion of estimated transaction fees and
expenses attributable to the new credit facility and the
Notes, which is recorded as deferred financing costs and
amortized over the life of the related indebtedness.
(2) Represents unamortized deferred financing costs of
$5.6 million for BarTech, $3.2 million for Republic, and
$0.7 million for USS/Kobe, each of which is eliminated
with the retirement of the related debt.
(h) The net decrease is comprised of the following:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Accrued interest (1)........................................................ $ (16.7)
Reclassification of other current liabilities (2)........................... 4.4
-------
$ (12.3)
-------
-------
</TABLE>
------------------------------------
(1) Represents accrued interest of $7.2 million for BarTech,
$6.1 million for Republic and $3.4 million for USS/Kobe,
which is eliminated with the refinancing of the related
debt.
(2) Represents reclassification of other current liabilities
($2.2 million for Republic and $2.2 million for USS/Kobe)
from short-term borrowings to other current liabilities.
(i) Pro forma amounts represent the initial borrowings under the new credit
facility ($221.9 million), the issuance of the Notes ($373.5 million,
including the effect of the discount associated with the Warrants),
retained indebtedness ($110.3 million), the assumption of additional
USS/Kobe debt ($2.2 million) and the retirement of certain other
indebtedness including associated premiums ($758.2 million).
(j) We are a limited liability company that will be treated as a partnership
for income tax purposes and accordingly will have no deferred tax assets or
liabilities.
(k) Represents Series A Preferred Stock that was retained in RTI. This stock is
mandatorily redeemable on September 26, 2000, payment for which is expected
to be made by RTI from distributions or loans from us.
(l) Represents the net adjustment to shareholders' equity as a result of the
Transactions, calculated as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Partners' interests in USS/Kobe (1)......................................... $(239.2)
Purchase price of USS/Kobe (2).............................................. 111.6
New cash equity (3)......................................................... 155.0
Warrants.................................................................... 46.0
BarTech redeemable preferred stock not contributed.......................... 5.5
Additional USS/Kobe debt assumed............................................ (23.9)
Other (4)................................................................... (33.4)
-------
Net Acquisition and Combination and Refinancing adjustments....... $ 21.6
-------
-------
</TABLE>
------------------------------------
(1) Represents the elimination of the partners' interest of
USS/Kobe.
(2) Refer to footnote (f)
(3) Represents new cash equity provided at the closing of the
Combination.
(4) Represents call premiums ($18.0 million), transaction fees
($10.9 million), write off of deferred financing costs
($9.5 million), offset by a deferred tax liability not
assumed ($5.0 million).
17
<PAGE>
REPUBLIC TECHNOLOGIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED JANUARY 2, 1999 FOR BARTECH AND
DECEMBER 31, 1998 FOR REPUBLIC AND USS/KOBE (A)
(IN MILLIONS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
ACQUISITION
AND
COMBINATION REFINANCING
BARTECH REPUBLIC USS/KOBE(B) ADJUSTMENTS ADJUSTMENTS PRO FORMA
------- -------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales $271.9 $670.7 $ 614.4 $ 10.5 (c) $ -- $ 1,567.5
Cost of goods sold 262.5 610.6 576.4 (35.8)(d) -- 1,413.7
------- ------ ------- ------- ------- ---------
Gross profit 9.4 60.1 38.0 46.3 -- 153.8
Selling, general and
administrative expense 20.4 59.3 17.2 (2.5)(d) -- 94.4
Depreciation and amortization
expense 6.0 -- 45.9 17.6 (d) -- 69.5
Other postretirement benefits 0.7 2.6 16.6 -- -- 19.9
Non-cash ESOP charges -- 2.0 -- -- -- 2.0
Workforce reduction charges -- 18.7 -- -- -- 18.7
------- ------ ------- ------- ------- ---------
Operating loss (17.7) (22.5) (41.7) 31.2 -- (50.7)
Interest expense, net 27.0 34.1 11.2 -- 19.9 (e) 92.2
Other (income) loss, net (2.7) (0.6) -- -- -- (3.3)
Income tax expense (benefit) -- 1.3 -- (1.3)(f) -- --
------- ------ ------- ------- ------- ---------
Net loss from continuing
operations(g) $(42.0) $(57.3) $ (52.9) $ 32.5 $ (19.9) $ (139.6)
------- ------ ------- ------- ------- ---------
------- ------ ------- ------- ------- ---------
OTHER DATA:
EBITDA, as defined(h) $ (5.2) $ 47.0 $ 45.2 $ 87.0
Adjusted EBITDA(i) 223.4
Fixed charges(j) 95.8
Pro forma ratio of earnings to
fixed charges(j) --
PRO FORMA RATIOS:
Earnings to fixed charges(j) --
Debt to Adjusted EBITDA(k) 3.2x
Adjusted EBITDA to interest
expense(l) 2.4x
</TABLE>
See Notes to Unaudited Pro Forma Combined Statements of Operations
18
<PAGE>
REPUBLIC TECHNOLOGIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED MARCH 31, 1999 (A)
(IN MILLIONS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
ACQUISITION
AND
COMBINATION REFINANCING
BARTECH REPUBLIC USS/KOBE(B) ADJUSTMENTS ADJUSTMENTS PRO FORMA
------- -------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales $250.0 $ 642.9 $ 543.1 $ 4.2 (c) $ -- $ 1,440.2
Cost of goods sold 240.5 600.9 527.0 (32.5)(d) -- 1,335.9
------- -------- ------- ------- ------- ---------
Gross profit 9.5 42.0 16.1 36.7 -- 104.3
Selling, general and
administrative expense 18.3 60.8 17.2 (4.4)(d) -- 91.9
Depreciation and amortization
expense 5.8 -- 46.2 18.9 (d) -- 70.9
Other postretirement benefits 0.6 1.1 15.8 -- -- 17.5
Workforce reduction charges -- 40.2 -- -- -- 40.2
------- -------- ------- ------- ------- ---------
Operating loss (15.2) (60.1) (63.1) 22.2 -- (116.2)
Interest expense, net 26.8 40.4 11.9 -- 13.1 (e) 92.2
Other (income) loss, net (2.6) (0.7) (0.1) -- -- (3.4)
Income tax (benefit) expense (0.1) 1.3 -- (1.2)(f) -- --
------- -------- ------- ------- ------- ---------
Net loss from continuing
operations(g) $(39.3) $(101.1) $ (74.9) $ 23.4 $ (13.1) $ (205.0)
------- -------- ------- ------- ------- ---------
------- -------- ------- ------- ------- ---------
OTHER DATA:
EBITDA, as defined(h) $ (3.1) $ 28.4 $ 14.7 $ 40.0
Adjusted EBITDA(i) 193.1
Fixed charges(j) 97.0
PRO FORMA RATIOS:
Earnings to fixed charges(j) --
Debt to Adjusted EBITDA(k) 3.7x
Adjusted EBITDA to interest
expense(l) 2.1x
</TABLE>
See Notes to Unaudited Pro Forma Combined Statements of Operations
19
<PAGE>
REPUBLIC TECHNOLOGIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 (A)
(IN MILLIONS)
<TABLE>
<CAPTION>
ACQUISITION
AND
COMBINATION REFINANCING
BARTECH REPUBLIC USS/KOBE(B) ADJUSTMENTS ADJUSTMENTS PRO FORMA
------- -------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales $59.8 $160.6 $ 128.9 $ 1.1 (c) $ -- $ 350.4
Cost of goods sold 56.8 155.8 130.7 (7.3)(d) -- 336.0
----- ------ ------- ----- ----- -------
Gross profit 3.0 4.8 (1.8) 8.4 -- 14.4
Selling, general and
administrative expense 2.8 12.3 4.6 (1.8)(d) -- 17.9
Depreciation and amortization
expense 1.2 -- 11.8 5.2 (d) -- 18.2
Other postretirement benefits 0.1 1.9 3.3 -- -- 5.3
Workforce reduction charges -- 21.5 -- -- -- 21.5
----- ------ ------- ----- ----- -------
Operating loss (1.1) (30.9) (21.5) 5.0 -- (48.5)
Interest expense, net 6.0 13.2 3.6 -- 0.4 (e) 23.2
Other loss (income), net 0.1 (0.2) (0.1) -- -- (0.2)
Income tax expense (benefit) 0.1 -- -- (0.1)(f) -- --
----- ------ ------- ----- ----- -------
Net loss from continuing
operations(g) $(7.3) $(43.9) $ (25.0) $ 5.1 $(0.4) $ (71.5)
----- ------ ------- ----- ----- -------
----- ------ ------- ----- ----- -------
OTHER DATA:
EBITDA, as defined(h) (2.0)
Adjusted EBITDA(i) 20.2
</TABLE>
See Notes to Unaudited Pro Forma Combined Statements of Operations
20
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS.
(a) 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, 1999; its 1999 fiscal first quarter ended March 31, 1999.
Republic utilizes a fiscal year ending June 30; its 1999 fiscal third
quarter ended March 31, 1999. USS/Kobe utilizes a fiscal year ending
December 31, 1999; its 1999 fiscal first quarter ended March 31, 1999.
(b) 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 herein 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 and trade payables attributable to
USS/Kobe are not fully consistent with the treatment of such items agreed
in the Master Restructuring Agreement.
(c) In connection with the Combination, we 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 on net sales resulting from
the price increases of certain items, as specified in the agreements.
(d) Represents the net effect of conforming Republic's accounting
classification of depreciation expense, conforming the fixed asset
capitalization policy of Republic and USS/Kobe and applying purchase
accounting to Republic and USS/Kobe, as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS THREE MONTHS
ENDED ENDED ENDED
DECEMBER 31, 1998 MARCH 31, 1999 MARCH 31, 1999
----------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Conforming accounting classifications:
Classification of depreciation expense (1)
Cost of goods sold.............................. $ (24.0) $(23.2) $ (5.4)
Selling, general and administrative expense..... (2.5) (4.4) (1.8)
Depreciation and amortization expense........... 26.5 27.6 7.2
------- ------ ------
$ -- $ -- $ --
------- ------ ------
------- ------ ------
Fixed asset capitalization (2)
Cost of goods sold.............................. $ (11.8) $ (9.3) $ (1.9)
Depreciation and amortization expense........... 0.4 0.3 0.1
------- ------ ------
$ (11.4) $ (9.0) $ (1.8)
------- ------ ------
------- ------ ------
Depreciation and amortization expense (3)............ $ (9.3) $ (9.0) $ (2.1)
------- ------ ------
------- ------ ------
Total cost of goods sold adjustment.................. $ (35.8) $(32.5) $ (7.3)
------- ------ ------
------- ------ ------
Total selling, general and administrative expense
adjustment......................................... $ (2.5) $ (4.4) $ (1.8)
------- ------ ------
------- ------ ------
Total depreciation and amortization expense
adjustment......................................... $ 17.6 $ 18.9 $ 5.2
------- ------ ------
------- ------ ------
</TABLE>
- ------------------
(1) Represents adjustments required to conform Republic's
classification of depreciation expense to that of BarTech and
USS/Kobe. Republic has historically recorded
21
<PAGE>
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) The combination of USS/Kobe into Republic Technologies will be,
and the Republic acquisition was, accounted for as a purchase.
Under purchase accounting, the total purchase cost will be
allocated to the assets acquired and liabilities assumed of
USS/Kobe based on their respective fair values as of the date of
the Combination and were allocated to Republic as of
September 8, 1998, 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 may differ
significantly from the estimated pro forma amounts included
herein. The application of purchase accounting is expected to
result in a net decrease in depreciation and amortization
expense, as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS THREE MONTHS
ENDED ENDED ENDED
DECEMBER 31, 1998 MARCH 31, 1999 MARCH 31, 1999
----------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Republic: (A)
Property, plant & equipment depreciation... $(3.3) $ (2.1) $ --
Goodwill amortization...................... 2.5 1.6 --
----- ------ ------
Net adjustment........................... (0.8) (0.5) --
USS/Kobe: (B)
Property, plant & equipment depreciation... (8.5) (8.5) (2.1)
----- ------ ------
Net adjustment........................... $(9.3) $ (9.0) $ (2.1)
----- ------ ------
----- ------ ------
</TABLE>
- ------------------
(A) Represents adjustment for the period of (i) April 1,
1998 through September 7, 1998 for the twelve months
ended March 31, 1999, and (ii) January 1, 1998 through
September 7, 1998 for the twelve months ended
December 31, 1998.
(B) Represents adjustments for all three 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 been used for goodwill and a
fifteen year life has been used for property, plant and equipment.
22
<PAGE>
(e) Represents the net adjustment to interest expense as a result of the
borrowings under the new credit facility and the Notes, calculated as
follows:
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS THREE MONTHS
ENDED ENDED ENDED
DECEMBER 31, 1998 MARCH 31, 1999 MARCH 31, 1999
----------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
New credit facility (1).............................. $ 18.9 $ 18.9 $ 4.7
Commitment fee (2)................................... 1.0 1.0 0.3
Notes (3)............................................ 58.4 58.4 14.6
Retained indebtedness (4)............................ 8.7 8.7 2.2
------- -------- --------
Cash interest expense.............................. 87.0 87.0 21.8
Amortization of deferred financing costs (5)......... 2.7 2.7 0.7
Accretion of issue price discount (6)................ 0.3 0.3 0.1
Accretion of discount relating to Warrants (7)....... 2.2 2.2 0.6
------- -------- --------
Pro forma interest expense......................... 92.2 92.2 23.2
Historical interest expense, net..................... 72.3 79.1 22.8
------- -------- --------
Net interest expense adjustment.................... $ 19.9 $ 13.1 $ (0.4)
------- -------- --------
------- -------- --------
</TABLE>
- ------------------
(1) Represents interest on $221.9 million which will be drawn at closing
of the Combination using an assumed interest rate of 8.5%.
(2) Represents a commitment fee of 0.5% applied to the $203.1 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 will 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, ten years both for the new credit facility and 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:
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS THREE MONTHS
ENDED ENDED ENDED
DECEMBER 31, 1998 MARCH 31, 1999 MARCH 31, 1999
----------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
New credit facility.................................. $ 0.3 $ 0.3 $ 0.1
----- ------ ------
----- ------ ------
</TABLE>
(f) As a limited liability company, we are not subject to corporate income
taxes. To the extent required, Republic Technologies expects to distribute
cash to its members, who will pay income taxes.
(g) The call and tender offer premiums associated with the retirement of the
BarTech senior secured notes and Republic mortgage notes will result in a
charge to be reflected as an extraordinary loss of $14.7 million subsequent
to the Transactions. Costs associated with the extinguishment of debt are
not included in the Pro Forma Combined Statements of Operations.
23
<PAGE>
(h) "EBITDA" 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 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 is included in this offering
memorandum to provide additional information with respect to our ability to
satisfy our debt service, capital expenditure and working capital
requirements. While EBITDA is frequently 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, for Republic Technologies is shown below:
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS THREE MONTHS
ENDED ENDED ENDED
DECEMBER 31, 1998 MARCH 31, 1999 MARCH 31, 1999
----------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
Pro forma net loss from continuing operations...
$(139.6) $ (205.0) $(71.5)
Interest expense, net...................... 92.2 92.2 23.2
Depreciation and amortization expense...... 69.5 70.9 18.2
Other postretirement benefit charges....... 19.9 17.5 5.3
Non-cash ESOP charges...................... 2.0 -- --
Workforce reduction charges................ 18.7 40.2 21.5
Stockholder management fees................ 3.7 4.2 1.3
Non-recurring transaction costs(1)......... 20.6 20.0 --
------- -------- ------
EBITDA, as defined.............................. $ 87.0 $ 40.0 $ (2.0)
------- -------- ------
------- -------- ------
</TABLE>
(1) Represents costs incurred related to investment banking and other
advisory fees, one-time labor-related expenses and certain other
costs directly associated with the acquisition of Republic in
September 1998.
The calculation of EBITDA for each of BarTech, Republic and USS/Kobe
excluding pro forma refinancing adjustments for the twelve months ended
December 31, 1998 and for the twelve and three months ended March 31, 1999
is as follows:
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1998
-------------------------------
BARTECH REPUBLIC USS/KOBE
------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Net loss from continuing operations.................................. $(42.0) $ (57.3) $(52.9)
Pro forma adjustments(1)............................................. -- 2.1 30.4
------- -------- ------
Pro forma net loss from continuing operations........................ (42.0) (55.2) (22.5)
Interest expense, net.............................................. 27.0 34.1 11.2
Depreciation and amortization expense(2)........................... 6.0 25.7 37.8
Other postretirement benefits charges.............................. 0.7 2.6 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 --
------- -------- ------
EBITDA, as defined................................................... $ (5.2) $ 47.0 $ 45.2
------- -------- ------
------- -------- ------
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED
MARCH 31, 1999
-------------------------------
BARTECH REPUBLIC USS/KOBE
------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Net loss from continuing operations.................................. $(39.3) $ (101.1) $(74.9)
Pro forma adjustments(1)............................................. (0.1) 1.8 21.7
------- -------- ------
Pro forma net loss from continuing operations........................ (39.4) (99.3) (53.2)
Interest expense, net.............................................. 26.8 40.4 11.9
Depreciation and amortization expense(2)........................... 5.8 27.1 38.0
Other postretirement benefits charges.............................. 0.6 1.1 15.8
Workforce reduction charges........................................ -- 40.2 --
Stockholder management fees........................................ 0.9 1.1 2.2
Non-recurring transaction costs.................................... 2.2 17.8 --
------- -------- ------
EBITDA, as defined................................................... $ (3.1) $ 28.4 $ 14.7
------- -------- ------
------- -------- ------
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, 1999
-------------------------------
BARTECH REPUBLIC USS/KOBE
------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Net loss from continuing operations.................................. $ (7.3) $ (43.9) $(25.0)
Pro forma adjustments(1)............................................. 0.1 -- 5.0
------- -------- ------
Pro forma net loss from continuing operations........................ (7.2) (43.9) (20.0)
Interest expense, net.............................................. 6.0 13.2 3.6
Depreciation and amortization expense(2)........................... 1.2 7.2 9.8
Other postretirement benefits charges.............................. 0.1 1.9 3.3
Workforce reduction charges........................................ -- 21.5 --
Stockholder management fees........................................ 0.2 0.5 0.6
------- -------- ------
EBITDA, as defined................................................... $ 0.3 $ 0.4 $ (2.7)
------- -------- ------
------- -------- ------
</TABLE>
- ------------------
(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.
(i) Adjusted EBITDA reflects certain changes in the combined cost structure we
intend to effect in the twelve month period subsequent to March 31, 1999,
as set forth below:
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS THREE MONTHS
ENDED ENDED ENDED
DECEMBER 31, 1998 MARCH 31, 1999 MARCH 31, 1999
----------------- -------------- --------------
(IN MILLIONS)
<S> <C> <C> <C>
EBITDA, as defined.............................. $ 87.0 $ 40.0 $ (2.0)
Cost savings:
Plant costs--labor(1)........................... 82.8 102.2 12.3
Plant costs--non-labor(2)....................... 36.9 33.3 6.5
Redundant overhead costs(3)..................... 16.7 17.6 3.4
------- ------ ------
Total cost savings............................ 136.4 153.1 22.2
------- ------ ------
Adjusted EBITDA................................. $ 223.4 $193.1 $ 20.2
------- ------ ------
------- ------ ------
</TABLE>
(footnotes on next page)
25
<PAGE>
(footnotes from previous page)
- ------------------
(1) Represents the salary and benefits expense incurred at the seven
production facilities to be closed in the twelve months
subsequent to March 31, 1999. Such costs include the salary and
benefit expense of 1,516 hourly workers represented by the United
Steelworkers union and 12 salaried workers represented by the
United Steelworkers union at three Republic and two USS/Kobe
facilities, the salary and benefit expense of 78 hourly workers
at two BarTech facilities and 163 salaried workers at BarTech and
Republic. It is anticipated that the reductions in workers
represented by the United Steelworkers union at Republic and
USS/Kobe will be achieved through acceptance of early retirement
buyout and other voluntary severance packages which will be
offered to workers at these facilities. There can be no assurance
that the packages offered will result in the desired headcount
reduction. The hourly workers at the BarTech facility and the
plant salaried workers at BarTech and Republic are not
represented by the United Steelworkers union and, accordingly,
there are no contractual restrictions limiting the number of
involuntary terminations.
(2) Represents the fixed and variable non-labor plant costs related
to the seven production facilities to be closed in the twelve
months subsequent to March 31, 1999. The variable costs included
in the total non-labor plant cost savings for the twelve months
ended December 31, 1998 and the twelve and three months ended
March 31, 1999 are $14.1 million, $11.9 million and $2.9 million
respectively.
(3) Represents the anticipated savings from the rationalization of
the sales, marketing and administrative functions at all
facilities contemplated in the Consolidation Plan.
During each period included in the table above, each of BarTech,
Republic and USS/Kobe incurred certain administrative and selling
costs that were either duplicative between the three or that will
be replaced by internal personnel with no incremental cost to us.
We expect that these costs will be eliminated in the twelve
months subsequent to March 31, 1999.
The headcount reductions and fixed cost savings discussed above are based on
a number of estimates and assumptions that, while considered reasonable in
the aggregate by our management, are inherently uncertain. Accordingly, you
are cautioned not to place undue reliance on these adjustments. See "Risk
Factors."
We expect to incur non-recurring cash charges in the twelve months
subsequent to March 31, 1999 of an estimated $14.9 million, consisting of
$6.9 million for salaried separation costs, $3.8 million for employee
retention and hiring costs, $3.7 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 $28.3 million in
the twelve months subsequent to March 31, 1999 related to the anticipated
level of early retirement buyout and other voluntary severance packages
accepted as part of our hourly workforce reduction plan.
In addition, we have agreed to fund an additional $15.0 million into our
defined benefit pension plan by January 1, 2000. This amount does not
include any additional funding requirement for such period that may be
agreed with the PBGC in relation to the Lorain facility.
(j) 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 $205.0 million and
$139.6 million for the twelve months ended March 31, 1999 and
December 31, 1998, respectively.
(k) For purposes of determining the pro forma ratio of debt to Adjusted EBITDA,
debt is defined as all indebtedness that is interest bearing. On a pro
forma basis, the debt is comprised of borrowings under the new credit
facility ($221.9 million), the Notes ($373.5 million), retained
indebtedness ($110.3 million) and additional USS/Kobe debt ($2.2 million).
(l) For purposes of determining the pro forma ratio of Adjusted EBITDA to net
interest expense, net interest expense is calculated as pro forma interest
expense, as determined in note (e), less historical interest income. See
Note (e) for additional information regarding interest rate sensitivities.
26
<PAGE>
THE COMBINED 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 3.4 million tons,
hot-rolling production capacity of approximately 2.9 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 is 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.
27
<PAGE>
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:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------------------- -------------------------------
1997 1998 1998 1999
-------------------- ------------------- ------------------- --------
(TONS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net tons shipped:
SBQ hot-rolled products....................... 1,669 53% 1,776 60% 516 56% 412
SBQ cold-finished products.................... 489 16 486 17 139 15 120
Seamless rounds............................... 906 29 552 19 241 26 77
Semi-finished steel products.................. 90 3 128 4 24 3 20
----- --- ------ ---- ---- ---- ----
Total net tons shipped...................... 3,154 100% 2,942 100% 920 100% 629
----- --- ------ ---- ---- ---- ----
----- --- ------ ---- ---- ---- ----
Average margin over materials per net ton
shipped:
SBQ hot-rolled products....................... $ 382 $ 387 $382 $363
SBQ cold-finished products.................... 588 601 583 565
Seamless rounds............................... 216 217 214 247
Semi-finished steel products.................. 317 256 313 355
All products................................ 364 385 367 387
<CAPTION>
TWELVE
MONTHS ENDED
MARCH 31, 1999
------------------------------
<S> <C> <C> <C>
Net tons shipped:
SBQ hot-rolled products....................... 66% 1,672 63%
SBQ cold-finished products.................... 19 467 18
Seamless rounds............................... 12 388 15
Semi-finished steel products.................. 3 124 5
---- ------ ----
Total net tons shipped...................... 100% 2,651 100%
---- ------ ----
---- ------ ----
Average margin over materials per net ton
shipped:
SBQ hot-rolled products....................... $ 383
SBQ cold-finished products.................... 597
Seamless rounds............................... 225
Semi-finished steel products.................. 261
All products................................ 392
</TABLE>
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 a supply billet-based product
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 2.6 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.
28
<PAGE>
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 March 31, 1999 by each
shape:
MAJOR END MARKET APPLICATIONS BY PRODUCT SIZES AND SHAPES
<TABLE>
<CAPTION>
ROUNDS SQUARES HEXAGONS
<S> <C> <C> <C>
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
</TABLE>
For the twelve months ended March 31, 1999, we shipped approximately
1,672,000 tons of hot-rolled products, which comprised 63% 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 March 31, 1999, approximately 60% of our cold-finished bar and rod
production 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.
29
<PAGE>
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
<TABLE>
<CAPTION>
ROUNDS HEXAGONS SQUARES FLATS
<S> <C> <C> <C>
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
</TABLE>
For the twelve months ended March 31, 1999, we shipped approximately
467,000 tons of cold-finished products, which comprised 18% 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 March 31,
1999, we shipped approximately 388,000 tons of seamless rounds which comprised
approximately 15% of total shipments.
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 March 31, 1999, we shipped approximately 124,000 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. 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
30
<PAGE>
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 cut
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 from its basic raw
materials, iron and carbon, 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.
The Lorain facility has two blast furnaces but currently operates only one.
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 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 cleansing or
"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 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
31
<PAGE>
products by often eliminating the first processing step in the customer's
process. The four basic cold-finishing processes are the following:
<TABLE>
<CAPTION>
PROCESS DESCRIPTION
- ------------------------------------------ -----------------------------------------------------------
<S> <C>
Cold Drawing.............................. Hot-rolled products that have been descaled by blasting the
surface with hardened steel shot 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.
</TABLE>
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.
32
<PAGE>
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.
<TABLE>
<CAPTION>
APPROXIMATE PRODUCTION NUMBER OF EMPLOYEES
SIZE IN CAPACITY(A) (AS OF 12/31/98)(B)
THOUSANDS OF (TONS IN QS-9000 ---------------------------
LOCATION SQUARE FEET THOUSANDS) CERTIFICATION HOURLY SALARIED TOTAL
- --------------------------------------------------- ------------ ---------- ------------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Melt Shops:
Canton, Ohio..................................... 481 1,300 u 792 147 939
Lorain, Ohio..................................... 688 1,300 u 1,189 132 1,321
Johnstown, Pennsylvania.......................... 1,917 770 Expected 204 26 230
by 12/99
Hot-Rolling and Processing Mills:
Lorain, Ohio (two mills)......................... 1,247 1,115 u 607 55 662
Lackawanna, New York............................. 1,099 600 u 242 48 290
Massillon, Ohio (Oberlin Road) .................. 667 480 u 382 43 425
Canton, Ohio..................................... 743 380 u 510 63 573
Chicago, Illinois................................ 2,019 340 u 269 37 306
Cold-Finishing Facilities:
Harvey, Illinois................................. 331 120 u 122 26 148
Massillon, Ohio (Rose Avenue) ................... 553 120 u 223 29 252
Gary, Indiana (Dunes Highway) ................... 266 90 u 109 12 121
Batavia, Illinois................................ 61 Closed(C) N/A 19 4 23
7/2/99
Cartersville, Georgia............................ 92 60 Expected 38 7 45
by 12/99
Medina, Ohio..................................... 126 Closed(C) N/A 56 10 66
7/2/99
Gary, Indiana (Seventh Avenue)................... 200 60 u 56 4 60
Hamilton, Ontario, Canada........................ 135 60 u 79 13 92
Beaver Falls, Pennsylvania....................... 176 55 u 95 16 111
Willimantic, Connecticut......................... 89 25 u 20 4 24
Corporate Offices.................................. -- 513 513
------ ------ -----
Total Employees................................ 5,012 1,189 6,202
------ ------ -----
------ ------ -----
</TABLE>
- ------------------
(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 those at our Cartersville, Georgia facility,
which is non-unionized.
(C) Virtually all employees at these facilities were terminated effective
July 2, 1999 following the closure of these sites on such date.
33
<PAGE>
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 utilizes two
casting processes: (1) continuous casting at our state-of-the-art
CAST-ROLL(Trademark) facility, which has 750,000 tons of annual capacity,
and (2) ingot casting, which has 500,000 tons of annual capacity. 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 have
shut down the ingot cast route and 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 1.1 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. 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. The Johnstown
facility has annual production capacity of 770,000 tons and is currently
operating at approximately 75% 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."
34
<PAGE>
Hot-Rolling Mills. We currently operate the following six hot-rolling
mills with nameplate capacities shown:
o a 9"/10" mill in Lorain, Ohio with an annual capacity of 465,000 tons;
o an 11" mill in Chicago, Illinois with an annual capacity of 340,000 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 plan to shut down our 11" mill in Chicago,
our 12" mill in Canton and our 18" mill in Massillon and transfer their
production 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 that the improved efficiency of our cold-finishing operations will enable
us 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, seven offices will be
consolidated into one corporate office in Akron, Ohio and a temporary
information technology center at a second location. During 2000, we plan to
consolidate the remaining offices into the Akron, Ohio location and the
temporary information technology location. At a later date, we plan to merge
these two offices into a single location.
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. 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,
35
<PAGE>
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 purchases materials, including scrap, on behalf of
both companies and bills BarTech for their respective share plus an
administrative fee. Over the past several years, Republic has purchased scrap
metal in the open market through a number of scrap brokers and dealers or by
direct purchase. Republic purchased approximately 30% of its scrap metal from
General Motors during fiscal year ended June 30, 1998. USS/Kobe historically has
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:
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR
ENDED ENDED
DECEMBER 31, MARCH 31,
------------ ------------
1997 1998 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average cost of purchased scrap
metal per net ton.................................................... $137 $117 $133 $ 94
</TABLE>
Coke and Iron Ore Pellets. 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 lowest
price offered by USX.
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 8.0% in the
nine months ended March 31, 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 10.6% in the three months ended March 31, 1999. For USS/Kobe, alloys and
fluxes as a percentage of costs of goods sold
36
<PAGE>
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 three months ended March 31, 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 March 31, 1999, our hot-rolling mills
purchased approximately 64,000 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 March 31, 1999, our cold-finishing operations
purchased approximately 167,000 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 60% as of March 31, 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 83.5% of our electricity consumption in the twelve
months ended March 31, 1999. 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 is likely that much
of our energy purchasing requirements will eventually be filled by FirstEnergy.
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
37
<PAGE>
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. We expect to achieve QS-9000 certification at
our Johnstown, Pennsylvania and Cartersville, Georgia facilities by December
1999.
The following table shows the percentage of our pro forma sales to major
market segments for the twelve months ended March 31, 1999:
<TABLE>
<CAPTION>
HOT-ROLLED COLD-FINISHED
PRODUCTS PRODUCTS
---------- -------------
<S> <C> <C>
Automotive industry........................................................ 35% 22%
Machinery, industrial and tools industry................................... 8 19
Independent forgers........................................................ 15 --
Service centers............................................................ 13 47
Other...................................................................... 29 12
---- ---
100% 100%
---- ---
---- ---
</TABLE>
Our major customers include leading automobile and industrial equipment
manufacturers such as DaimlerChrysler, Ford, Honda and Caterpillar, first tier
suppliers to automobile and industrial 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
13% of our total net sales in the twelve months ended March 31, 1999. In total,
our ten largest customers accounted for approximately 36% of our pro forma total
net sales in the twelve months ended March 31, 1999. 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 29 professional sales
representatives 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
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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
in which certifications are not required, and during periods when the U.S.
dollar is strong as compared with foreign currencies. This competition is
exerting significant downward pressure on the price level of some of our
products. 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 March 31, 1999 was $278 million compared to $410 million
as of March 31, 1998. At year end December 31, 1998, our combined backlog was
$306 million. Our booked orders during the first quarter of calendar 1999
totaled 551,000 tons as compared to 393,000 tons during the fourth quarter of
calendar 1998 and 596,000 tons during the first 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.
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EMPLOYEES
Once our new labor agreement is ratified by United Steelworkers union
members at our Lorain facility, the vast majority of our production workers will
be 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 March 31, 1999:
<TABLE>
<S> <C>
USWA hourly employees................................................................ 4,654
IAM hourly employees................................................................. 45
Other union hourly employee.......................................................... 23
Non-union hourly employees........................................................... 50
-----
Total hourly employees.......................................................... 4,772
Salaried employees................................................................... 1,095
-----
Total employees................................................................. 5,867
-----
-----
</TABLE>
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.
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 have 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.
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. This
"partnership" will grant 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 will have 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. 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.
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 will be 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.
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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. Concurrent with this base rate
harmonization, a production based incentive plan will be implemented at the
former BarTech facilities designed to yield up to $2.16 per hour, if all targets
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 up to $2.80 per
hour, if all targets 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 production based incentive plan will
be implemented to yield up to $2.29 per hour, if all targets are met, adjusted
for straight-line harmonization over the term of the agreement.
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 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.
In light of the defined benefit plan improvements during the term of the
new labor agreement, our contributions to the existing defined contribution
plans covering employees at former Republic facilities, the former Bliss &
Laughlin Harvey, Illinois facility and former BarTech facilities will be
discontinued and 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 no later than six
months after consummation of the Transactions at a price per share equal to the
effective price per share paid by the investors for new shares they acquire in
the Transactions. 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 offering memorandum
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.
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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 as they may relate to former Republic
operations and properties are likely to be in the range of $8.9 million to $22.3
million over the lives of the Republic facilities although some third-party
estimates are substantially higher. Republic's reserve to cover probable
environmental liabilities, including the matters discussed below, was
approximately $14.4 million as of March 31, 1999. 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. We
are not 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. 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.
If we can obtain Ohio EPA approval of our closure plan prior to November 1,
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 liner on top of the existing pile, would involve expenditures of
approximately $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.
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
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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 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 $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.
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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. 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 offering memorandum, 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.
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
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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 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. 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
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between USX and Kobe. Although we may 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 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.
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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 filing date of the
Current Report On Form 8-K containing this information.
The Combination combined 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
(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 overhead costs and
(4) in-sourcing more feedstock currently purchased from third parties.
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.
47
<PAGE>
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 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. We phased-out the high-cost, low
productivity ingot route at our Canton, Ohio melt shop shortly after the
completion of the Combination and 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, (2) adding a sixth strand
to the continuous billet caster and an additional ladle station and
(3) utilizing a fourth production shift at the melt shop beginning in the
fourth quarter of 1999. 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.
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 RTI 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. By 2002, we intend to have shut down the Chicago,
Illinois 11" and the
48
<PAGE>
Canton 12" and the hot-rolling mills. We expect to finish construction of a new
large bar mill in 2002 and to close the Massillon, Ohio 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, 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 12" mill. 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.
o Transfer of Production to Lorain 9"/10" Mill. In the fourth quarter of
1999, we plan to close the Chicago 11" mill, 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.
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
constructed in the 1920's, which 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 close one
additional cold-finishing facility and to implement a modernization program that
will expand our finishing capabilities at our remaining 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.
49
<PAGE>
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.
<TABLE>
<CAPTION>
USS/KOBE BARTECH REPUBLIC
<S> <C>
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
</TABLE>
________
* We intend to close one cold-finishing facility in addition to the
cold-finishing facilities at Medina and Batavia, which were closed early in July
1999.
50
<PAGE>
The chart below displays the combined facilities and process flow
following completion of the Consideration Plan:
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
_______________
*We intend to close one of the cold-finishing facilities included
in this chart as part of the Consolidation Plan.
51
<PAGE>
PROJECTIONS FOR REPUBLIC TECHNOLOGIES INTERNATIONAL, LLC
AND ITS SUBSIDIARIES
All statements other than statements of historical facts included in this
section regarding our future financial position, business strategy, budgets,
projected costs, and plans and objectives of management for future operations
are forward-looking statements. The projections necessarily are based upon
numerous estimates and assumptions, including principally that we will
successfully implement the Consolidation Plan on a timely basis and achieve the
improvements in production costs, operating efficiencies and selling, general
and administrative expenses described herein. These estimates and assumptions
are inherently subject to significant business, economic and competitive
uncertainties, contingencies and risks, many of which are beyond our control. We
include assumptions with respect to future business decisions and conditions
that are likely to change. Actual results will vary from the projections and
these variations may be material. There can be no assurance that any of the
benefits from the Consolidation Plan or other benefits referred to below will be
realized or, if realized, that such benefits will not be offset by other changes
in actual results from projected results. See "Risk Factors--We may not be able
to achieve the operating synergies and cost savings that we expect from the
Combination" and "--Our future operational and financial performance may vary
materially from the projections." Financial projections are necessarily
speculative in nature. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the filing date of the
Current Report on Form 8-K containing this information.
GENERAL
We do not as a matter of course publicly disclose projected financial
information. These projections are qualified by and subject to the assumptions
set forth below and the other information contained herein. The projections were
not prepared with a view toward compliance with published guidelines of the
Securities and Exchange Commission, the American Institute of Certified Public
Accountants or any other regulatory or professional agency or body, generally
accepted accounting principles or consistency with the audited financial
statements of Republic, BarTech or USS/Kobe. In addition, none of the auditors
for Republic, BarTech or USS/Kobe has compiled or examined the projections and,
accordingly, do not express any opinion or any other form of assurance with
respect to, assumes no responsibility for, and disclaims any association with,
the projections. No person other than us assumes any responsibility for the
projections. The projections should be read together with the information
contained under the headings "Risk Factors," "Unaudited Pro Forma Combined
Financial Information for Republic Technologies International, LLC and its
Subsidiaries," "The Combined Business" and "The Consolidation Plan."
We do not intend to update or otherwise revise the projections, including
any revisions to reflect circumstances existing after the filing date of the
Current Report on Form 8-K including this information or to reflect the
occurrence of unanticipated events, even if any or all of the underlying
assumptions do not prove to be valid. Furthermore, we do not intend to update or
revise the projections to reflect changes in general economic or industry
conditions. The assumptions described below are those that we believe are most
significant to the projections; however, not all of the assumptions used in
preparing the projections have been set forth below or elsewhere herein. If we
are substantially delayed or unsuccessful in implementing the Consolidation
Plan, actual results will vary significantly from the projected financial
information and our business, results of operations and financial condition will
be adversely affected.
THE PROJECTIONS ARE BASED UPON A NUMBER OF ASSUMPTIONS AND ESTIMATES THAT,
WHILE PRESENTED WITH NUMERICAL SPECIFICITY AND CONSIDERED REASONABLE BY US WHEN
TAKEN AS A WHOLE, ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND
COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND OUR
CONTROL. IN ADDITION, THE PROJECTIONS ARE BASED UPON SPECIFIC ASSUMPTIONS WITH
RESPECT TO FUTURE BUSINESS CONDITIONS, SOME OR ALL OF WHICH WILL CHANGE.
PROJECTIONS ARE
52
<PAGE>
NECESSARILY SPECULATIVE IN NATURE AND IT CAN BE EXPECTED THAT THE ASSUMPTIONS
UPON WHICH THE PROJECTIONS ARE BASED WILL NOT PROVE TO BE VALID OR WILL VARY
FROM ACTUAL RESULTS. ACTUAL RESULTS WILL VARY FROM THE PROJECTIONS AND THE
VARIATIONS MAY BE MATERIAL. CONSEQUENTLY, THE INCLUSION OF THESE PROJECTIONS IN
THE CURRENT REPORT ON FORM 8-K SHOULD NOT BE REGARDED AS A REPRESENTATION BY US
OR ANY OTHER PERSON OF RESULTS THAT WILL ACTUALLY BE ACHIEVED. YOU ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON THESE PROJECTIONS.
METHODOLOGY
Product prices in the SBQ steel industry are significantly influenced by
the price of raw materials because raw materials represent the principal cost of
production of hot-rolled products. For this reason, we have derived prices for
hot-rolled products based on a projected cash margin over raw materials ("margin
over materials") principally the cost of ferrous scrap per ton.
We have based our projected labor costs on a detailed, facility-by-facility
analysis of manning requirements, taking into account the terms of our new labor
agreement with the United Steelworkers union. We have projected our other
production costs, including variable costs and non-labor fixed costs, based on
historical trends as adjusted for the anticipated effects of the Consolidation
Plan.
We have provided 1998 and estimated 1999 results on a basis consistent with
our projections, as well as provided the necessary adjustments to these results
to reconcile them to our unaudited pro forma combined financial information
presented elsewhere herein. The principal adjustment is to the cost of sales to
eliminate timing differences between capitalized raw material costs and our
actual current period costs. The 1999 results combine the three predecessor
businesses' actual results for the three months ended March 31, 1999, their
estimated results for the three months ended June 30, 1999 and our projections
for the remaining six months of calendar 1999 without giving pro forma effect in
the prior periods for improvements that we expect to achieve in the remaining
six months of 1999. However, these projections have not been prepared in
accordance with generally accepted accounting principles and reported results
may differ accordingly.
ASSUMPTIONS
We have assumed that no changes occur in the U.S. macroeconomic environment
and in the market conditions of our principal end-use industries during the
projection period. Regarding market conditions in the SBQ steel products
industry, we have assumed that the recovery in shipments that began during the
first quarter of 1999 will continue, with shipments returning to levels
consistent with market conditions in the first half of 1998. We have assumed
that, based on industry trends, long-term growth is sustainable through the
projection period. Similarly we have assumed that the recovery in SBQ steel
demand will sustain a gradual improvement in margin over materials from 1999 to
2003 to a level consistent with long-term historical trends. In general, our
projected shipment volume growth is lower, taken as a whole, than has been the
case since 1993.
The projections assume that we successfully implement the Consolidation
Plan in a timely manner, achieving all of the improvements in production costs,
operating efficiencies, selling, general and administrative costs, and increases
in production volumes that we discuss below.
An important assumption underlying the implementation of the Consolidation
Plan is the scheduled completion and start-up of (1) the capacity expansions,
(2) capital driven, efficiency and quality improvement projects and (3) a new
large bar mill. We have assumed that the construction and start-up of the new
large bar mill will be completed in a 15 month period. We believe that we will
be able to achieve this schedule, which is shorter than the typical construction
and ramp-up
53
<PAGE>
period of 18 to 24 months, for the following reasons: (1) our extensive
experience in mill start ups, (2) the fact that this project begins only in
2001, which gives us time to complete several initial steps in the Consolidation
Plan before undertaking this large project, and (3) our plan to engage a leading
engineering firm to complete the construction.
FINANCIAL IMPACT OF CONSOLIDATION PLAN
BRIDGE OF 1998 PRO FORMA EBITDA TO PROJECTED EBITDA
We believe that the Combination and the timely implementation of the
Consolidation Plan will significantly improve our financial and operating
performance. We have projected that we achieve improvements in five principal
areas: (1) labor cost and other fixed cost eliminations from the planned closure
of 13 facilities, (2) variable and fixed manufacturing unit cost improvements at
remaining and new facilities, (3) corporate overhead savings, (4) in-sourcing
materials previously purchased externally and (5) volume, spread and other net
changes.
The following is a summary bridge of our 1998 pro forma EBITDA to projected
EBITDA for 1999 through 2003:
<TABLE>
<CAPTION>
PROJECTED
------------------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1998 pro forma EBITDA(1)........................................... $82 $ 82 $ 82 $ 82 $ 82
Change from 1998 due to:
Fixed cost savings from 13 shutdown facilities................... 23 92 104 112 133
Incremental fixed costs at remaining/new facilities.............. (17) (15) (9) (1) (6)
Selling, general & administrative/other cost savings............. 15 24 29 31 31
Variable cost improvement........................................ 22 37 53 60 74
Insourcing cold-finishing feedstock and bar billets.............. 19 31 32 33 33
---- ---- ---- ---- ----
Total cost savings............................................ 62 169 209 235 265
---- ---- ---- ---- ----
Margin over materials.............................................. (36) (43) (32) (23) (9)
Volume/other variables(2).......................................... (21) (18) 2 27 65
---- ---- ---- ---- ----
Total change.................................................. 5 108 179 239 321
---- ---- ---- ---- ----
Projected EBITDA................................................... $87 $190 $261 $321 $403
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
- ------------------
(1) 1998 pro forma EBITDA differs from EBITDA, as defined, of $87.0 million, as
set forth in note (h) in the notes to "Unaudited Pro Forma Combined
Statements of Operations," as the above amount excludes certain
non-recurring income required to be included in the pro forma income from
operations.
(2) Includes selling price, adjustments, cold-finished bar conversion revenues,
pig iron margin, and other revenue effects not captured above.
SUMMARY HEADCOUNT REDUCTION PLAN
A net headcount reduction of 2,401 is the major component of the cost
reductions projected to arise from our Consolidation Plan. Reductions are
projected to be realized in a number of different categories which are discussed
in the following analysis in more detail. The following table
54
<PAGE>
summarizes the net movement expected in headcount by (1) area of Consolidation
Plan, (2) operation, and (3) category of hourly and salaried.
<TABLE>
<CAPTION>
SUMMARY HEADCOUNT
REDUCTION PLAN
------------------------
1998 2003 CHANGE
----- ----- ------
<S> <C> <C> <C>
CONSOLIDATION PLAN
- --------------------------------------------------------------------------------------
13 shutdown plants.................................................................... 1,721 -- (1,721)
De-manned, continuing operations...................................................... 3,256 2,566 (690)
New/expanded facilities............................................................... 712 953 241
Selling, general and administrative................................................... 513 282 (231)
----- ----- ------
Total............................................................................ 6,202 3,801 (2,401)
----- ----- ------
----- ----- ------
<CAPTION>
1998 2003 CHANGE
----- ----- ------
<S> <C> <C> <C>
BY OPERATIONS
- --------------------------------------------------------------------------------------
Melting facilities.................................................................... 2,490 1,711 (779)
Hot-rolling facilities................................................................ 2,257 1,113 (1,144)
Cold-finished facilities.............................................................. 942 695 (247)
----- ----- ------
Subtotal--production operations....................................................... 5,689 3,519 (2,170)
Selling, general and administrative................................................... 513 282 (231)
----- ----- ------
Total............................................................................ 6,202 3,801 (2,401)
----- ----- ------
----- ----- ------
<CAPTION>
1998 2003 CHANGE
----- ----- ------
<S> <C> <C> <C>
HOURLY VERSUS SALARIED
- --------------------------------------------------------------------------------------
Hourly................................................................................ 5,012 3,070 (1,942)
Salaried--Plant....................................................................... 677 449 (228)
Salaried--Selling, general and administrative......................................... 513 282 (231)
----- ----- ------
Total............................................................................ 6,202 3,801 (2,401)
----- ----- ------
----- ----- ------
</TABLE>
FIXED COST SAVINGS FROM 13 SHUTDOWN FACILITIES. We intend to shut down 13
production facilities and thereby eliminate (1) approximately 1,522 hourly
production and repair and maintenance positions, (2) approximately 199 non-union
salaried plant positions, and (3) other fixed plant costs such as baseload
utilities and fuel expense, non-labor repair and maintenance, and real estate
taxes. We believe that we will generate $133 million in annual cost savings by
2003 as a result of this fixed cost reduction at the shutdown facilities,
representing approximately 50% of the total cost savings contemplated in the
Consolidation Plan. Of the $133 million, $101 million is due to headcount
reduction, $10 million reflects baseload utility savings and $22 million is due
to non-labor repair and maintenance expense and real estate taxes. The following
summarizes our targeted headcount reduction at the 13 shutdown facilities:
<TABLE>
<CAPTION>
HOURLY & SALARIED
13 SHUTDOWN FACILITIES PERSONNEL
--------------------------------------------------
1998
BASE 1999 2000 2001 2002 2003
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Total headcount............................................ 1,721 1,150 357 355 -- --
Cumulative headcount reduction............................. -- 571 1,364 1,366 1,721 1,721
</TABLE>
The following summarizes the fixed plant labor savings we believe that we
can achieve at the 13 shutdown facilities.
<TABLE>
<CAPTION>
PLANT CLOSURE LABOR COSTS--13 SHUTDOWN FACILITIES
----------------------------------------------------
1998
BASE 1999 2000 2001 2002 2003
------ ----- ----- ----- ----- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Total labor costs....................................... $ 101 $ 84 $ 33 $ 24 $ 17 $ --
Cumulative annual savings............................... -- 17 68 77 84 101
</TABLE>
In connection with the shutdown of selected facilities, we plan to
eliminate $32 million of non-labor related fixed costs representing
approximately 12% of the total cost reductions contemplated by the Consolidation
Plan. These savings are comprised of two principal categories: non-labor related
repairs and maintenance expense and baseload utilities and fuel. Repair and
maintenance
55
<PAGE>
expense includes basic materials required for on-going facilities upkeep.
Baseload utilities and fuel represent the minimum demand charge to provide the
facilities' power requirements.
The following summarizes the non-labor plant fixed costs we plan to
eliminate by 2003 at the 13 shutdown facilities:
<TABLE>
<CAPTION>
OTHER PLANT CLOSURE FIXED COSTS
--------------------------------------------------
1998
BASE 1999 2000 2001 2002 2003
----- ----- ----- ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Total non-labor fixed expense.............................. $ 32 $ 26 $ 8 $ 5 $ 4 $ --
Cumulative annual savings.................................. -- 6 24 27 28 32
</TABLE>
INCREMENTAL FIXED COSTS AT REMAINING/NEW FACILITIES. We intend to reduce
manning at over-staffed facilities such as the Lorain complex, heat treat, and
cold-finishing facilities. Selective capital investment and a flexible new labor
agreement provide an opportunity to optimize manning at certain continuing
facilities. The implementation of the new agreement with the United Steelworkers
union is expected to permit us to reduce union-represented headcount at our
ongoing facilities by 632 positions which, combined with a salaried headcount
reduction of 58, yields total savings of $43 million by 2003.
Also, we expect to incur additional fixed costs at certain expanding or new
facilities including the Johnstown complex, CAST-ROLL(Trademark) facility,
Lackawanna 13" mill and the new large bar mill. The increased labor flexibility
provided by the new labor agreement will enable us to meet our incremental
manning requirements in a cost-effective manner. We project incremental fixed
costs to equal $49 million by 2003, yielding a net fixed cost increase of
$6 million in 2003.
<TABLE>
<CAPTION>
INCREMENTAL FIXED COSTS AT CONTINUING
FACILITIES
-------------------------------------------
1999 2000 2001 2002 2003
------ ------ ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Reduced manning................................................. $ (2) $ 10 $ 23 $ 36 $ 43
Fixed costs increases........................................... (15) (25) (32) (37) (49)
------ ------ ----- ----- -----
Total net fixed savings (costs)............................ $ (17) $ (15) $ (9) $ (1) $ (6)
------ ------ ----- ----- -----
------ ------ ----- ----- -----
</TABLE>
56
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE/OTHER COST SAVINGS. The overhead
consolidation entails merging three stand-alone selling, general and
administrative areas as well as integrating management information systems.
Through this consolidation we intend to reduce our selling, general and
administrative headcount by 231 from 513 in 1998 to 282 in 2003. Of the
$32 million, $18 million is attributable to labor cost reductions and
$14 million relates to non-labor fixed cost savings. These savings are achieved
at both the corporate and plant level where we consolidate duplicative functions
in areas such as finance, business planning, sales and marketing and production
planning and quality control. We believe these actions should reduce our annual
selling, general and administrative expenditures from $94 million in 1998 to
$62 million in 2003. Selling, general and administrative cost reductions
represent 12% of the total cost improvements contemplated in the Consolidation
Plan.
<TABLE>
<CAPTION>
SELLING, GENERAL & ADMINISTRATIVE/OTHER
SAVINGS
--------------------------------------------
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
(HEADCOUNT)
<S> <C> <C> <C> <C> <C> <C>
Total selling, general and administrative headcount................... 513 368 343 310 293 282
Yearly reductions..................................................... -- 145 25 33 17 11
Cumulative reductions................................................. -- 145 170 203 220 231
<CAPTION>
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Total selling, general and administrative expense..................... $94 $77 $70 $65 $62 $ 62
Cumulative selling, general and administrative expense reductions..... -- 17 24 29 32 32
Other expense......................................................... 11 13 12 12 12 12
Cumulative selling, general and administrative/other expense
reduction........................................................... -- $15 $24 $29 $31 $ 31
</TABLE>
As a result of our Consolidation Plan, we project that our selling, general
and administrative expenses will decline from 6% of sales in 1998 to 4% of sales
in 2003, which compares to a public steel company composite average for 1998 of
4%.
VARIABLE COST IMPROVEMENT. We intend to shut down our least efficient
facilities and reallocate production to our more efficient, lower cost mills and
to a new state-of-the-art large bar mill which we intend to finish constructing
in 2002. The increasing use of the modernized facilities is expected to result
in more efficient use of consumables, less rejects and reduced repair expenses,
which is expected to reduce our variable conversion costs. We believe that we
will achieve lower variable costs at the remaining facilities due to higher
production yields and lower per unit fuel, utility and consumables costs
achieved through longer run lengths per product size and fewer product
changeovers. For example, the average yield at the Canton ingot route is 68%
and, on the margin, tonnage will be absorbed by additional production at
Johnstown, which has an 89% yield. The projections assume a 2.8% increase in
yields in the melt shops and 1.3% in the hot-rolling mills producing
approximately $29 million of savings. The reduction in consumables and supplies
reflects improvements principally at the melt shops where cumulative annual
savings of $26 million are projected. The savings projected to be realized
principally result from the shutdown of the Canton ingot route which has
significantly higher consumables and supplies unit consumption rates than our
more modern facilities.
In addition, we believe that targeted capital expenditures will enable us
to eliminate outsourcing costs, gain additional value-added margin and improve
yields and operating efficiency at certain facilities. The installation of a new
$25 million thermal treating, processing, and quality verification line center
in 2000 will eliminate the need for outside processing at our Lorain hot-rolling
mill, contributing $14 million in variable cost savings. We project that new
equipment at our 13" mill in
57
<PAGE>
Lackawanna and our cold-finishing facilities, which we project will cost
$62 million, will reduce yield loss and variable unit costs. The following
summarizes our targeted variable cost reductions:
<TABLE>
<CAPTION>
VARIABLE COSTS
------------------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Lackawanna yield gain...................................................... $ 4 $ 5 $ 6 $ 6 $ 7
Melt shop/caster yield gain................................................ (2) 3 10 10 15
Cold-finished/other yield gain............................................. 4 5 6 5 7
---- ---- ---- ---- ----
Subtotal, yield gain.................................................. 6 13 22 21 29
---- ---- ---- ---- ----
Lorain processing center................................................... -- 1 1 10 14
Melt shop consumables and supplies......................................... 11 17 24 24 26
New bar mill/cold-finished/other savings................................... 5 6 6 5 5
---- ---- ---- ---- ----
Subtotal, other efficiencies.......................................... 16 24 31 39 45
---- ---- ---- ---- ----
Total variable costs savings....................................... $22 $37 $53 $60 $ 74
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
IN-SOURCING COLD-FINISHING FEEDSTOCK AND BAR BILLETS. We project that the
Combination will result in a company with a significantly broader product range
than the individual predecessor companies and enable us to decrease our
purchases from external suppliers of both hot-rolled bar for our cold-finishing
facilities and semi-finished billet for our hot-rolled bar mills. Prior to the
Combination, Republic and BarTech lacked the product breadth and depth to fully
supply the hot-rolled bar size requirements of their captive cold-finished
divisions. As a result of the Combination, we have the product range to supply
nearly 90% of our needs, enabling us to recapture the margin currently being
paid to outside suppliers. During calendar 1998, our cold-finishing facilities
purchased 214,000 tons of hot-rolled bar, or 35% of total cold-finished inputs,
from external suppliers. By 2003, we project that we will purchase only 81,000,
or 15% of total inputs, from external suppliers, resulting in annual cost
savings of approximately $26 million. In addition, during 1998, our hot-rolling
mills purchased 34,000 tons of semi-finished billet from external suppliers. As
a result of melt shop capacity increases arising from the Combination, we do not
anticipate purchasing semi-finished billet from external suppliers, which we
believe will result in approximately $7 million of annual cost savings.
Combined, annual cost savings from internally sourcing billets and bars
previously purchased from third parties represent 12% of the total cost savings
contemplated by the Consolidation Plan.
<TABLE>
<CAPTION>
SAVINGS FROM INSOURCING
------------------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total hot-rolled bar in-sourced (tons in thousands)..................... 67 123 126 134 133
Total semi-finished billets in-sourced (tons in thousands).............. 27 34 34 34 34
Savings from in-sourcing semi-finished billets ($/ton).................. 210 204 204 204 204
Savings from in-sourcing hot-rolled bar ($/ton)......................... 204 195 195 195 195
Savings from in-sourcing hot-rolled bar ($ millions).................... $ 13 $ 24 $ 25 $ 26 $ 26
Savings from in-sourcing semi-finished billets ($ millions)............. 6 7 7 7 7
---- ---- ---- ---- ----
Total savings from in-sourcing................................ $ 19 $ 31 $ 32 $ 33 $ 33
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
MARGIN OVER MATERIALS. We project a decline in margin over materials from
1998 levels resulting in a negative impact, particularly in 1999 and 2000. By
2003, we project spreads to
58
<PAGE>
approximate 1998 levels and thus only a modest $9 million margin shortfall is
projected through 2003.
<TABLE>
<CAPTION>
MARGIN OVER MATERIALS
----------------------------------------
1999 2000 2001 2002 2003
----- ----- ----- ----- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Cumulative change in hot-rolled bar margin.............................. $ (32) $ (26) $ (18) $ (14) $ (4)
Cumulative change in trade semi-finished margin......................... 9 (4) (9) (8) (9)
Cumulative change in cold-finished margin............................... (13) (13) (6) (2) 4
----- ----- ----- ----- ----
Cumulative change in aggregate margin over materials............... $ (36) $ (43) $ (33) $ (24) $ (9)
----- ----- ----- ----- ----
----- ----- ----- ----- ----
</TABLE>
VOLUME/OTHER VARIABLES. Increases in volume partially offset by declines
in other revenues, such as cold-finished bar conversion, sales of blast furnace
pig iron and other production by-products account for a cumulative increase in
projected EBITDA of approximately $65 million by 2003. The largest component of
this incremental EBITDA is the increase in trade hot-rolled product shipments.
Out of these savings, approximately $60 million are attributable to increases in
hot-rolled bar volume largely arising from the planned completion of the high
capacity, new large bar mill in 2002.
<TABLE>
<CAPTION>
VOLUME/OTHER VARIABLES
--------------------------------------
1999 2000 2001 2002 2003
----- ----- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Cumulative change in volume/other......................................... $ (21) $ (18) $2 $27 $ 65
</TABLE>
59
<PAGE>
PROJECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
5 YEAR
COMPOUND
YEAR ENDED DECEMBER 31, ANNUAL
----------------------------------------------------------- GROWTH
1998 PRO FORMA 1999 2000 2001 2002 2003 RATE
-------------- ------ ------ ------ ------ ------ --------
(IN MILLIONS, TONS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SHIPMENT VOLUMES:
Hot-rolled bars and rods................. 1,776 1,796 1,790 1,792 1,869 2,025 2.7%
Seamless rounds and semi-finished bars... 680 439 459 475 525 575 (3.3)%
Semi-finished SBQ billet and bloom....... -- 14 -- 139 45 -- 0.0%
Cold-finished bars....................... 486 515 530 530 535 540 2.1%
------ ------ ------ ------ ------ ------ ----
Total trade shipments.................. 2,942 2,764 2,779 2,936 2,974 3,140 1.3%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
STATEMENT OF OPERATIONS DATA:
Net sales................................ $1,568 $1,414 $1,422 $1,488 $1,530 $1,628 0.8%
Material costs........................... 514 398 381 401 404 429
Variable conversion costs................ 382 362 360 361 363 372
Fixed plant costs........................ 486 480 409 391 375 359
Other(1)................................. 3 10 12 10 5 4
Adjustments(2)........................... 29 10 -- -- -- --
------ ------ ------ ------ ------ ------
Total cost of goods sold............... 1,414 1,260 1,162 1,163 1,147 1,164
Gross profit............................. 154 154 260 325 383 464
Selling, general and administrative
expenses............................... 94 77 70 65 62 62
Depreciation and amortization............ 70 71 55 58 63 66
OPEB..................................... 22 14 16 16 16 16
------ ------ ------ ------ ------ ------
Operating income (loss), per
Projections............................ (32) (8) 119 186 242 320
------ ------ ------ ------ ------ ------
Interest expense, net.................... 92 87 87 82 78 72
Other (income) loss, net................. (3) -- -- -- -- --
------ ------ ------ ------ ------ ------
Net income (before workforce reduction
charges)............................... (121) (95) 32 104 164 248
Workforce reduction charges(3)........... (19) (17) (13) -- -- --
------ ------ ------ ------ ------ ------
Net income............................... $ (140) $ (112) $ 19 $ 104 $ 164 $ 248
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 2 $ 2 $ 2 $ 2 $ 43
Total debt less government assisted
debt................................... 657 638 570 497 425
Total debt............................... 767 746 667 622 548
OTHER DATA:
Pro forma EBITDA(4)...................... $ 82 $ 87 $ 190 $ 261 $ 321 $ 403
</TABLE>
- ------------------
(1) Includes real estate use taxes and other non-plant expenses.
(2) Reflects timing differences between book value of inventories and market
value at time of sale and other non-operational accounting adjustments.
(3) Reflects non-cash pension curtailment charges in connection with workforce
reduction program.
(4) 1998 Pro Forma EBITDA excludes certain non-recurring income which is
included in EBITDA, as defined. Projected EBITDA equals operating income
(loss) plus OPEB, depreciation and amortization, and adjustments.
60
<PAGE>
PROJECTIONS ANALYSIS
SHIPMENTS
The following table represents our projections of shipments to third
parties:
<TABLE>
<CAPTION>
5 YEAR
COMPOUND
SHIPMENTS ANNUAL
-------------------------------------------------- GROWTH
1998 1999 2000 2001 2002 2003 RATE
----- ----- ----- ----- ----- ----- --------
(IN THOUSANDS OF TONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Hot-rolled bar and rod........................ 1,776 1,796 1,790 1,792 1,869 2,025 2.7%
Seamless rounds and semi-finished bar......... 680 439 459 475 525 575 (3.3)%
Semi-finished billet and bloom................ -- 14 -- 139 45 -- 0.0%
Cold-finished bar............................. 486 515 530 530 535 540 2.1%
----- ----- ----- ----- ----- -----
Total trade shipments....................... 2,942 2,764 2,779 2,936 2,974 3,140 1.3%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
Hot-Rolled Bar and Rod. We project that from 1998 to 2003 our total
shipments of hot-rolled SBQ steel bar and rod will increase by 249,000 tons,
representing a compound annual growth rate of 2.7%, as compared to historical
annual domestic shipment growth rates of 3-5%, as a result of growth in large
bar and small bar and rod shipments. We believe that we have sufficient
production capacity to accommodate increased shipments, despite plant closures,
due to increased productivity at our remaining mills resulting from (1) reduced
mill downtime and lower yield loss due to fewer size changeovers, as each mill
will produce a specific range of product sizes, (2) increased capacity
utilization, and (3) expanded production capacity through selected capital
expenditures. We project large bar sales volume growth to result from both
underlying industry growth and our belief that we will be able to capture
incremental market share from the less competitive participants in this market.
We believe that the small bar and rod market represents a growth opportunity for
us because a significant portion of the high-quality segment of this market is
currently served by foreign capacity at a high cost. We have already had late
stage discussions with three large fastener manufacturers who have expressed
interest in replacing a portion of their current domestic supply, as well as
their high-cost foreign supply, with a high-quality domestic producer. We
believe that we can increase our shipment volumes of small products by
approximately 160,000 during the projected period.
Seamless Rounds and Semi-Finished Bar. As described earlier, we entered
into a long-term agreement with the tubular joint venture between USX
Corporation and Kobe Steel, Ltd. to supply seamless rounds and semi-finished
bars to the tubular joint venture and, in specified circumstances, to USX's
Fairfield, Alabama operations. Over the last five years, our Lorain facility has
supplied on average approximately 776,000 tons per year to these operations.
Seamless tubes are used in oil and gas exploration and production and
historically have tracked activity in this sector. The significant downturn in
oil prices during the second half of 1998 and the first quarter of 1999 and the
subsequent curtailment of drilling activity adversely impacted seamless tube
shipments. We believe that short-term seamless tube demand will recover from
depressed levels in 1999 and stabilize at shipment levels slightly below 1998
levels. Additionally, we anticipate selling a small quantity of semi-finished
products to existing trade customers, approximately 40,000 tons per year,
consistent with historical volume levels.
Semi-Finished Billet and Bloom. Historically, we have operated our melt
shop production at levels exceeding our internal hot-rolling production and have
sold the surplus billets and blooms as semi-finished products to other
hot-rolled bar manufacturers and to other large diameter bar manufacturers.
Consistent with this experience, we have projected, in future years in which our
melt shop production exceeds our hot-rolling mill production, that we will sell
semi-finished products to third parties, including competitors.
61
<PAGE>
Cold-Finished Bar. We plan to continue to grow our cold-finishing business
from the 1998 level of 486,000 tons to 540,000 tons, an increase of 2.1% per
year during the projection period. Our projected volume growth is driven
principally by increases in our market share and underlying industry demand
growth. We believe that our ability to supply substantially all of our internal
hot-rolled product requirements for cold-finishing will allow us to improve our
cost position, which in turn will enable us to compete more aggressively. The
expected market growth is based on our expectations of automotive and industrial
equipment manufacturers' requirements for increased SBQ steel product quality
and performance.
PRODUCT SELLING PRICES AND ASSUMED MARGINS
The following table represents the projected selling prices and margins
over cash material costs:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
(WEIGHTED AVERAGE SELLING PRICE PER TON)
<S> <C> <C> <C> <C> <C> <C>
PRODUCT PRICES:
Hot-rolled bar and rod....................................... $529 $488 $496 $500 $503 $508
Seamless rounds and semi-finished bar........................ 358 362 332 327 330 333
Semi-finished SBQ billet and bloom........................... -- 341 -- 340 435 --
Cold-finished bar............................................ 769 721 720 732 742 752
<CAPTION>
(WEIGHTED AVERAGE MARGIN PER TON)
<S> <C> <C> <C> <C> <C> <C>
PRODUCT MARGIN OVER MATERIALS:
Hot-rolled bar and rod(1).................................... $387 $365 $367 $372 $375 $380
Seamless rounds and semi-finished bar(2)..................... 224 246 216 209 209 209
Semi-finished SBQ billet and bloom........................... -- 222 -- 219 319 --
Cold-finished bar(3)......................................... 601 575 565 577 587 597
</TABLE>
- ------------------
(1) The margin for hot-rolled bar shown represents a weighted average of the
costs of production for the electric arc and basic oxygen process routes
that we employ. In addition, the margin over materials includes other items
including cold-finished tolling revenues, pig iron sales, and various
selling price adjustments to reflect claims and allowances. These
adjustments total less than $10 million during any one year.
(2) Includes margin earned on shipments of semi-finished bar to existing trade
customers
(3) Material costs for cold-finished bar equal gross scrap costs plus $23 per
ton of freight costs incurred to transport hot-rolled bar or rod from the
hot-rolling mills to the cold-finishing mills.
Hot-Rolled Bar and Rod. We have projected a flat average margin over
materials for SBQ steel products at the long-term historical average for the
industry during the projection period. We believe that SBQ steel product
industry margin over materials have fluctuated around an average of $379 per ton
during the past 10 years. From recent lows, we have projected that our average
hot-rolled product margin over materials will recover over the projection period
to the historical average. The principal cause of the recovery is improvement in
our product mix. For example, we anticipate reorienting shipments of our
billet-based product from lower value-added products to automotive applications,
which have historically commanded higher selling prices.
Seamless Rounds and Semi-Finished Bar. The terms of the long-term supply
agreement with the tubular joint venture establishes prices at our cash cost of
production plus $40 per ton for annual purchases of up to 400,000 tons and cash
cost of production plus $80 per ton for purchases in excess of the base 400,000
tons up to an additional 200,000 tons. While the margin over material decreases
over the projection period as our cash conversion costs decline due to our
improving
62
<PAGE>
efficiency and cost structure, the cost-plus pricing methodology will result in
a constant gross margin per ton.
Semi-Finished SBQ Billet and Bloom. The average margin over materials for
semi-finished products reflects a change in product mix. We intend to increase
sales of higher value-added semi-finished blooms produced at the Canton facility
that our customers can use to manufacture finished products without further
processing.
Cold-Finished Bar. We have projected a gradual recovery in prices for our
cold-finished products to normalized levels over the next five years based on
the recovery in hot-rolled product prices. Specifically, the recovery reflects
the expected decline in low priced imported hot-rolled large bar which have
pushed down cold-finished large bar prices. In addition, we believe that we will
be able to increase our production and sales of heat-treated cold-finished
products, which have higher selling prices than our average cold-finished
products.
Scrap Prices. We believe that average scrap costs for an equivalent product
mix over the past five years have ranged from about $118 per ton to as high as
$151 per ton and have averaged $132 per ton. We project scrap rising from $123
per ton in 1999 to $133 per ton by 2003 as prices recover from the low levels
that resulted from the market disruptions in the third and fourth quarter of
1998. Nevertheless, we do not anticipate a return to scrap price levels reached
during the first half of 1998. We base this projection on our view that the
speculative buying that affected scrap prices and increased SBQ steel product
inventory levels in early 1998 will not reoccur during the projection period. In
addition, the increasing production of alternative materials such as hot
briquetted iron, direct reduced iron and pig iron is expected to have a
dampening effect on scrap prices.
Iron Pellets and Coke. We have entered into long-term supply agreements
with USX Corporation to purchase iron pellets and coke, the primary raw
materials that we require for our basic oxygen process route. These requirements
agreements guarantee a consistent supply of quality materials to our company
going forward at prices that will be most favorable as compared to market prices
due to the "most favored nations" status in the agreements. This "most favored
nations" provision guarantees us a price matching the lowest price offered by
USX. We also assume that the market demand over the projection period will be
dampened by the increasing availability and consumption by other producers of
alternative iron units such as direct reduced iron, iron carbide and lump iron
ore. We assume that the price for these raw materials over the projection period
will be flat with year-to-year fluctuations of no more than 5%.
Coal. The Lorain blast furnace consumes pulverized coal to offset higher
price metallurgical coke and reduce the material cost for hot metal production.
We purchase this coal under a long-term tolling agreement with Ohio Edison Power
Company. The price over the life of the agreement is fixed. As a result, we have
assumed that the price for this material remains flat over the projection
period.
COST OF GOODS SOLD
We have projected significant reductions in our fixed and variable
conversion costs. These reductions, which result from the rationalization of our
operating facilities, reflect not only the elimination of headcount and other
fixed non-labor costs at the 13 closed facilities but also the efficiency and
productivity gains achieved at the remaining facilities.
Fixed Conversion Costs
We have projected improvements in fixed costs throughout the projection
period due largely to the implementation of our headcount reduction program,
which anticipates the net elimination of 2,170 positions through the closure of
13 facilities including two melt shop facilities, three hot-rolling
63
<PAGE>
mills and two cold-finishing facilities and headcount reductions at our
remaining facilities pursuant to the new collective bargaining agreement.
Additional fixed cost reduction at the shutdown facilities consists of non-labor
related repairs and maintenance, baseload utilities and fuel and real estate
taxes.The combined effect of reducing our fixed costs and increasing our
production volumes is expected to significantly lower our per unit cost by $51
per ton or 31% by 2003. The following table represents selected information
relating to fixed conversion costs.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1999 2000 2001 2002 2003
----- ----- ----- ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Melt shops................................................. $ 265 $ 262 $ 223 $ 219 $ 216 $ 215
Hot-rolling mills.......................................... 162 157 126 122 117 107
Cold-finishing............................................. 59 61 60 50 42 37
----- ----- ----- ----- ----- -----
Total fixed production costs............................... $ 486 $ 480 $ 409 $ 391 $ 375 $ 359
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
Cumulative net total fixed cost reduction.................. -- 6 77 95 111 127
Memo: Labor fixed costs.................................... 320 315 256 241 221 204
Memo: 13 shutdown plants fixed cost savings................ 9 23 92 104 112 133
Memo: Incremented fixed costs at continuing facilities..... -- (17) (15) (9) (1) (5)
Production headcount at end of period...................... 5,689 4,834 3,953 3,876 3,504 3,519
Man-hours per shipped ton.................................. 4.0 3.9 3.3 2.8 2.6 2.2
Total fixed cost per shipped ton........................... $ 165 $ 174 $ 148 $ 134 $ 126 $ 114
Fixed cost savings per shipped ton......................... (9) 17 31 39 51
Memo: Labor fixed cost per shipped ton................ $ 109 $ 114 $ 92 $ 82 $ 74 $ 65
Memo: Labor fixed cost savings per shipped ton........ -- (5) 17 27 35 44
</TABLE>
Melt Shops. We project that our fixed expenses will decline as a result of
the improvements in labor costs achieved through the closure of the teeming shop
and blooming mill in conjunction with the shutdown of the Canton ingot route. We
plan to eliminate 779 positions from the melt shops yielding cumulative labor
cost reduction of $44 million by 2003. Non-labor related reductions total
$7 million.
Hot-Rolling Mills. The shutdown of the Chicago, Canton, and Massillon
hot-rolling mills during the projection period results in headcount reduction,
as well as a decline in other fixed costs. We intend to reduce our labor expense
by approximately 43%, or $54 million, between 1998 and 2003, as we reduce
positions by 1,144. The anticipated start up of our new large bar mill and the
concurrent shutdown of Massillon contribute substantially to the cost savings
between 2002 and 2003.
Cold-Finishing. We have projected that our labor expense in the
cold-finishing operations will decline by $19 million during the projection
period, as we reduce headcount by 247.
Variable Conversion Costs
We project continued improvement in variable costs throughout the
projection period, reflecting the impact of our Consolidation Plan and other
improved efficiencies through targeted capital expenditures. We intend to
leverage the specific operating advantages at each of the modernized facilities
through "sweet spot" volume loading and increased utilization of available
capacity and shop-hours. Production shift from obsolete plants to our new
modernized operations and further gains from efficiency enhancements and capital
expenditures are projected to result in variable cost
64
<PAGE>
improvement through lower yield loss and variable costs per ton. The table below
summarizes the per unit improvements we project at our operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1999 2000 2001 2002 2003
----- ----- ----- ----- ----- -----
(AVERAGE COST PER SHIPPED TON)
<S> <C> <C> <C> <C> <C> <C>
Consumables and supplies................................... $ 45 $ 44 $ 42 $ 40 $ 40 $ 39
Yield loss................................................. 39 38 37 36 36 35
Fuels and utilities........................................ 21 23 22 21 21 20
Other variable costs....................................... 21 23 23 21 19 17
Other...................................................... 3 3 5 6 6 7
----- ----- ----- ----- ----- -----
Total unit variable cost.............................. $ 129 $ 131 $ 129 $ 124 $ 122 $ 118
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
Total shipments (tons in thousands)........................ 2,942 2,764 2,779 2,936 2,974 3,140
Total variable cost (in millions)..................... $ 382 $ 362 $ 360 $ 361 $ 363 $ 372
</TABLE>
We intend to shut down our least efficient facilities and reallocate
production to our more efficient, lower cost mills and to a new state-of-the-art
large bar mill which we intend to finish constructing in 2002. The increasing
use of the modernized facilities is expected to result in more efficient use of
consumables, less rejects and reduced repair expenses, which is expected to
reduce our variable conversion costs. The reduction in consumables and supplies
reflects improvements principally at the melt shops. The projected savings
principally result from the shutdown of the Canton ingot route which has
significantly higher consumables and supplies unit consumption rates than our
more modern facilities.
In the remaining rolling mills, we believe that we will achieve lower
variable costs due to higher production yields and lower per unit fuel, utility
and consumables costs achieved through longer run lengths per product size and
fewer product changeovers. Similar improvements occur in the melt shops as we
intend to maximize heats per sequence to reduce fuel and utilities expense and
eliminate delay.
In addition, we believe that targeted capital expenditures will enable us
to eliminate outsourcing costs, gain additional value-added margin and improve
yields and operating efficiency at certain facilities. The installation of a new
$25 million thermal treating, processing, and quality verification line center
in 2000 will eliminate the need for outside processing at our Lorain hot-rolling
mill. We project that new equipment at our 13" mill in Lackawanna and our
cold-finishing facilities, which we project will cost $62 million, will reduce
yield loss and variable unit costs as well.
65
<PAGE>
CORPORATE OVERHEAD SAVINGS
The following table represents our headcount reduction and principal
selling, general and administrative costs by category:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
HEADCOUNT (END OF PERIOD) 1998 1999 2000 2001 2002 2003
- ---------------------------------------------------------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Administrative........................................................ 275 213 192 168 157 148
Sales and marketing................................................... 154 93 91 84 79 79
Plant overhead........................................................ 84 62 60 58 57 55
---- ---- ---- ---- ---- ----
Total............................................................ 513 368 343 310 293 282
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
<CAPTION>
EXPENSE (IN MILLIONS)
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Administrative........................................................ $58 $52 $46 $43 $40 $ 40
Sales and marketing................................................... 18 13 12 11 11 11
Plant overhead........................................................ 18 12 12 11 11 11
---- ---- ---- ---- ---- ----
Total............................................................ $94 $77 $70 $65 $62 $ 62
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
</TABLE>
We anticipate savings across all areas of our selling, general and
administrative functions as these corporate functions for each of our
predecessor companies are combined into one organization. This consolidation
will permit us to eliminate 231 positions, or 45% of the total selling, general
and administrative headcount, which will reduce selling, general &
administrative expense from $94 million to $62 million over the projection
period.
OPEB
Accruals for FAS 106, or Other Postretirement Employee Benefits, which
relate principally to retiree health and medical benefits, were projected in
conjunction with actuarial experts based on estimated mortality rates, the
headcount reduction programs, medical cost inflation factors and evaluation of
the existing retiree population. OPEB cash costs are projected to rise as the
retiree population increases. The following table summarizes the accounting
accrual as well as the actual cash payments made during the projection period:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
OPEB accruals......................................................... $22(A) $14 $16 $16 $16 $ 16
OPEB cash payments.................................................... 10 12 14 15 16 17
</TABLE>
- ------------------
(A) 1998 includes $6 million transition obligation accrual and $2 million ESOP
charge that is excluded from future periods.
INTEREST
We have projected our interest expense using the applicable current
interest rates pursuant to our new credit facility which is priced at LIBOR plus
3.25% or 8.75%. For purposes of our projections, cash interest on the Notes is
reflected at 13.75% of the aggregate principal amount of the Notes per year. In
addition, we have assumed a weighted average interest rate of 9.00% on the
aggregate principal amount of the industrial revenue bonds and other retained
debt. We have assumed that LIBOR will remain flat throughout the projection
period at 5.50%.
SEVERANCE AND PENSION CURTAILMENT CHARGES
The new labor agreement signed with the United Steelworkers union enables
us to significantly reduce our production headcount by offering qualifying
employees early retirement buyouts or voluntary severance packages. Early
retirement buyouts enable eligible workers to receive early,
66
<PAGE>
unreduced pension benefits and a supplemental payment until age 62. A voluntary
severance plan enables non-early retirement buyout eligible employees to receive
a lump sum payment upon termination. Through a combination of early retirement
buyouts, a voluntary severance plan and regular retirements and attrition, we
intend to reduce our United Steelworkers headcount by approximately 1,942
positions. These early retirements will result in incremental cash or actuarial
costs as follows:
o Pension Curtailment Charge--increased pension liability as measured by
the FAS 87 pension benefit obligation resulting in non-cash pension
"curtailment charges" recognized in the period in which the early
retirements occur.
o Pension Plan Funding--reflects both our base pension plan funding and the
increased funding required in connection with accelerated benefit
payments and underlying benefit improvements associated with the new
labor agreement.
o Extra-Plan Funding--incremental cash costs in connection with one-time
payments to early retirement buyouts and voluntary severance plan lump
sum payments, which are funded outside the pension plan.
In addition to the items stated above, we recognize annual pension-related
accruals for our current workforce. These accruals, known as FAS 87 accruals,
are implicit in the wage rate and are part of the operating expenses included in
projected EBITDA. The table below summarizes these various charges and cash
costs:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
2ND HALF
1999 2000 2001 2002 2003
-------- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
RECOGNIZED EXPENSE:
Pension curtailment charge (1).......................................... $ 17 $13 $-- $-- $ --
Ongoing pension accrual (FAS 87)........................................ 5 9 6 4 1
---- ---- ---- ---- ----
Total recognized expense................................................ $ 22 $22 $ 6 $ 4 $ 1
---- ---- ---- ---- ----
---- ---- ---- ---- ----
CASH PAYMENTS:
Pension plan funding.................................................... 21 36 47 46 28
Extra-plan funding...................................................... 13 8 4 2 9
OPEB/FAS 106 cash funding............................................... 6 15 14 16 17
Unallocable ongoing pension accrual (FAS 87)............................ (5) (9) (6) (4) (1)
---- ---- ---- ---- ----
Total cash funding...................................................... 35 50 59 60 53
</TABLE>
- ------------------------
(1) Republic incurred pension curtailment charges related to changes implemented
to its collective bargaining agreement of September 1998 of $11.5 million
during the year ending December 31, 1998 and $54.5 million during the first
half of 1999.
67
<PAGE>
SUMMARY STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
2ND HALF
1999 2000 2001 2002 2003
-------- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATIONS
Projected EBITDA..................................................... $ 60 $190 $261 $321 $403
Cash interest........................................................ (44) (87) (82) (78) (72)
Severance and early retirement funding............................... (35) (50) (59) (60) (53)
Distributions for tax liabilities.................................... (2) (2) (13) (30) (73)
Non-recurring items.................................................. -- -- -- -- --
Changes in working capital........................................... 19 16 28 5 (2)
---- ---- ---- ---- ----
Net cash provided by (used in) operating activities................ (2) 67 135 158 203
CASH FLOW FROM INVESTING ACTIVITIES
Capital expenditures................................................. (17) (48) (56) (113) (88)
Sale of specialty steel division..................................... 35 -- -- -- --
---- ---- ---- ---- ----
Net cash provided by (used in) investing activities................ 18 (48) (56) (113) (88)
CASH FLOW FROM FINANCING ACTIVITIES
Principal repayments................................................. (6) (2) (11) (2) (2)
New large bar mill revenue bonds..................................... -- -- -- 30 --
Asset sales/cash management.......................................... 7 2 -- -- --
Net borrowings (repayments) under new credit facility................ (17) (19) (68) (73) (72)
---- ---- ---- ---- ----
Net cash provided by (used in) financing activities................ (16) (19) (79) (45) (74)
Net increase (decrease) in cash and cash equivalents................. -- -- -- -- 41
Beginning cash balance............................................... 2 2 2 2 2
---- ---- ---- ---- ----
Ending cash balance.................................................. 2 2 2 2 43
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Borrowing base(1).................................................... 368 347 309 283 268
Drawn new credit facility............................................ (232) (213) (145) (72) --
---- ---- ---- ---- ----
New credit facility availability................................... 136 134 164 211 268
Total cash and new credit facility availability................. $138 $136 $166 $213 $311
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
- ------------------------
(1) Reflects a borrowing base equal to the sum of (a) eligible accounts
receivable and inventory at advance rates of 85% and 60%, respectively, and
(b) the lesser of (1) 67% of the "liquidation value in place" of the
CAST-ROLL(Trademark) facility and (2) $125 million as reduced by scheduled
amounts, subject to certain limitations, less reserves ranging from
$35 million to $50 million, and less outstanding letters of credit.
PROJECTED LIQUIDITY AND CAPITAL RESOURCES
Our liquidity will be primarily from our $425 million new credit facility,
for which availability is based on an advance rate on the book value of accounts
receivable and inventory and the liquidation value in place of our
CAST-ROLL(Trademark) facility. Additional sources of liquidity in the projection
period include:
o the receipt of expected funding for the construction of our new large bar
mill from government agencies or authorities. This amount is estimated to
be $30 million and is expected to be received in 2002.
o the proceeds from the planned sale of our specialty steel division during
the second half of 1999. We estimate that the liquidation value of the
current and fixed assets is approximately $35 million, of which
approximately $25 million represents the liquidation value of current
assets.
68
<PAGE>
We are obligated to repay a portion of our industrial revenue bonds each
year in the projection period. Furthermore, we are obligated to redeem
$5.5 million of RTI Series A preferred stock in 2000 and $9 million of
environmental bonds in 2001. No other prepayments of outstanding indebtedness
are assumed until 2003. In addition, the projections assume that our new credit
facility, which amortizes and matures in 2004, will be available to us under the
current terms and conditions throughout the projection period.
Capital Expenditures Our capital expenditure assumptions reflect the
$322 million facility modernization and capital investment program that we have
already begun to implement. This investment plan can be broken down by the
primary areas:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
2ND HALF
1999 2000 2001 2002 2003 CUMULATIVE
-------- ---- ---- ---- ---- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Projects:
Rationalize production facilities:
Melt shops............................................ $ 5 $14 $ 7 $ 6 $21 $ 53
Hot-rolling mills..................................... 8 19 35 75 27 164
Cold-finishing and processing facilities.............. -- 4 6 20 27 57
Information systems upgrade.............................. 2 4 1 -- -- 7
---- ---- ---- ---- ---- ----
Project total......................................... 15 41 49 101 75 281
Unallocated maintenance and other.......................... 2 7 7 12 13 41
---- ---- ---- ---- ---- ----
Total capital expenditures.......................... $ 17 $48 $56 $113 $88 $322
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----
</TABLE>
The largest component of our capital expenditure plan is the construction
of a new large bar mill, scheduled to be completed in 2002 at an estimated cost
of $90 million. Additionally, we intend to invest $53 million in melt shop
repair and upgrade programs, which include the addition of the sixth strand at
the Johnstown billet caster, the consolidation of the Canton furnaces from three
to one and repair and upgrade of the Lorain furnace, primary mill and billet
yard. About $74 million is forecast to be invested in hot-rolling mill upgrades,
including improvements at the Lorain 12" mill, upgrades at the Lackawanna 13"
mill, a new bar processing center in Medina and a new billet inspection,
grinding and shipping center. The planned state-of-the-art cold-finishing
processing center and various other cold-finishing facility upgrade projects
will require total expenditures of approximately $57 million. Other projects
include a new processing center near our Canton facility and investment in
management information systems upgrades. We believe maintenance capital
expenditures will not exceed approximately $10 million per year.
Working Capital. Year-on-year improvement in working capital is forecast
largely due to reductions in inventory which are partially offset by reductions
in payables. The improvement in inventory levels results from lower days
shipments of finished hot-rolled and cold-finished product which we increased
during the fourth quarter in anticipation of the current resurgence in demand.
The inventory reduction yields cumulatively $80 million of cash flow between
2000 and 2003, which is partially offset by $19 million of lower payables.
Tax Distributions. Republic Technologies International Holdings, LLC, our
parent, will be required to make cash distributions to its members, as provided
for in the limited liability company agreement of our parent, sufficient to pay
tax liabilities arising regarding members' investment in us. To the extent our
parent is required to make these tax distributions, we will be required to make
equivalent cash distributions to our parent. For the purposes of our projections
we assumed these distributions to be minimal in the first several years of
operation since we do not expect to generate significant distributable income in
that time period. In years where distributable income is generated we have
estimated the amount of the corresponding distribution.
69
<PAGE>
ANNEX A
------------------------
[LOGO] USS/KOBE
------------------------
ASSESSMENT OF
REPUBLIC ENGINEERED STEELS, INC.,
BAR TECHNOLOGIES INC.,
AND THE BAR DIVISION OF
USS/KOBE STEEL COMPANY
CONSOLIDATION PLAN
[LOGO] 6215 Sheridan Drive
Buffalo, New York, U.S.A. 14221-4884
Tel.: (716) 632-7200 o Fax: (716) 632-7209
A-1
<PAGE>
[LOGO] PROJECT REPORT
- --------------------------------------------------------------------------------
PR22102.001
FL22102.201
Page 2
July 21, 1999
Assessment of
Republic Engineered Steels, Inc.,
Bar Technologies Inc., and the
Bar Division of USS/Kobe Steel Company
Consolidation Plan
Independent Engineer's Report
Table Of Contents
1. Executive Summary..........................................................4
2. Introduction and Scope of Work.............................................7
3. Facility Configuration.....................................................8
3.1 Current...............................................................8
3.2 Future...............................................................10
4. Production Volume Summary.................................................12
4.1 Melting and Casting..................................................12
4.2 Rolling..............................................................12
5. Facilities and Facility Plans.............................................13
5.1 Canton Melting and Casting...........................................13
5.2 Johnstown Melting and Casting........................................15
5.3 USS/Kobe Melting and Casting.........................................16
5.4 Bar Rolling..........................................................18
5.4.1 9"/10" Mill, Lorain, Ohio......................................18
5.4.2 12" Mill, Lorain, Ohio.........................................19
5.4.3 13" Bar Mill, Lackawanna, New York.............................20
5.4.4 New Large Bar Mill.............................................20
5.4.5 Primary Rolling Mill, Lorain, Ohio.............................21
5.5 Cold Finishing.......................................................22
6. Timing/Ramp Up............................................................22
7. Capital Spending..........................................................23
8. Interplant Supply and Shipping............................................24
9. Operating Costs and Cash Flow Implications................................24
9.1 Operating Costs......................................................24
A-2
<PAGE>
[LOGO]
Assessment of - Republic Engineered Steels, Inc.,
Bar Technologies Inc., and the
Bar Division of USS/Kobe Steel Company Consolidation Plan
- --------------------------------------------------------------------------------
Independent Engineer's Report
9.2 Impact of Volume Reductions on Cash Flow.............................27
9.3 New Large Bar Mill Ramp Up...........................................27
9.4 Cash Flow Implication Summary........................................27
- --------------------------------------------------------------------------------
PR22102.001 Rev. 0, Page 3
A-3
<PAGE>
[LOGO]
Assessment of - Republic Engineered Steels, Inc.,
Bar Technologies Inc., and the
Bar Division of USS/Kobe Steel Company Consolidation Plan
- --------------------------------------------------------------------------------
Independent Engineer's Report
1. Executive Summary
Beddows & Company, Hatch Management and Technology Consulting ("Beddows/Hatch"),
has been engaged to evaluate the technical and operational components of the
Consolidation Plan for the proposed combination of Republic Engineered Steels,
Inc. ("Republic"), Bar Technologies, Inc. ("Bar Tech"), and the Bar Division of
USS/Kobe Steel Company ("USS/Kobe"), to form Republic Technologies International
("RTI" or the "Company"). The evaluation encompasses the following areas:
o Production volumes.
o Operating cost reductions including changes in yield and manpower.
o Product line rationalization, facility configuration and utilization,
ramp-up, and timing of consolidation.
o Appropriateness of capital spending.
o Maintenance related issues.
o Overview of interplant supply and shipping plans.
Our analysis excluded an evaluation of the market assumptions (volumes, sizes,
prices) whereas in that regard we assumed that the volumes and sizes associated
with the production forecast could be sold as projected. We also did not audit
the financial plan for consistency nor verify the cash flows included in the
financial plan.
Beddows/Hatch had previously performed various evaluations of Republic and
USS/Kobe and as a result, have working knowledge of the facilities and capital
plans of the companies. Nevertheless, specialists in steelmaking, rolling, and
operating costs made site visits to the major production facilities - Canton,
Ohio; Lorain, Ohio; Johnstown, Pennsylvania; and Lackawanna, New York; as well
as Corporate Headquarters to update our knowledge of recent operations and
facilities.
Consolidation Plan/Business Plan
- --------------------------------
A summary of the consolidation plan follows.
The consolidation plan is a logical extension of the combination of the
companies. The plan retains and improves, where appropriate, the best facilities
and shutters the oldest and least efficient facilities (the Republic bar mills
in Chicago, Canton and Massillon) and eliminates the costly ingot pouring
process.
- --------------------------------------------------------------------------------
PR22102.001 Rev. 0, Page 4
A-4
<PAGE>
[LOGO]
Assessment of - Republic Engineered Steels, Inc.,
Bar Technologies Inc., and the
Bar Division of USS/Kobe Steel Company Consolidation Plan
- --------------------------------------------------------------------------------
Independent Engineer's Report
It has long been recognized in the industry that Republic's bar rolling
facilities, while operated to their optimum efficiency and quality capability,
severely suffer from a lack of modernity and need replacement. The 9"/10" and
12" mills at USS/Kobe eliminate the necessity for RTI to build a new small bar
mill, thereby saving the capital associated with that installation
(approximately $90 million). The 9"/10" mill at USS/Kobe also provides RTI with
the capability to produce small sizes.
A new large bar mill will be constructed, which will replace the Massillon 18"
mill and provide the company with modern, efficient, quality bar capability over
the large bar size range. The steel production facilities will utilize both the
integrated steel route (USS/Kobe) and electric furnace melting route (Canton and
Johnstown) and will provide 100% continuous casting. Some steel production
capacity at the Canton and Lorain melting facilities will be idled as a result
of the consolidation, thereby providing back-up to accommodate unforeseen
circumstances.
Raw steel production, which is defined as first solid (ingot, bloom or billet
cast prior to conditioning or rolling), is planned to increase from 3.1 million
tons in 1998 to 3.4 million tons in 2003. Bar production is expected to increase
from 2.1 million tons in 1998 to 2.5 million tons in 2003. A 33% overall
reduction in manpower is key to the projected operating cost savings. Other
operating cost reductions associated with the capital plan, the increased
production volumes, and other efficiency improvements are significant. Total
production costs of hot rolled bar including melting, casting, freight, and bar
rolling are projected to be reduced by: $17/t (Lackawanna 13"), $108/t (Lorain
12") and $120/t (Lorain 9"/10"). Other significant savings occur due to the
shutdown of the old Republic rolling mills.
The proposed capital spending of $321 million is consistent on a per ton basis
with value added steel producers in the U.S. More than half of the spending is
ear-marked for the rolling mills. The capital certainly appears to be
appropriated to the logical areas and are reasonable estimates for planning
purposes. The timing of the capital spending and the consolidation plan are
linked to the overall production program and are reasonable.
Keys to the Plan
- ----------------
The key aspects (important components) of the plan are:
o The consolidation of the rolling mills and the reduction in the number of
sizes rolled at each mill increases the tons per size for each rolling. This
has a significant impact on delay time in the mills and is a very important
factor allowing the three rolling mills (Lorain 9"/10" and 12" and
Lackawanna 13") to achieve high production levels. Interplant shipping
volume and costs will increase as a result, but the benefits far outweigh
the added costs.
o The increase in production, particularly in the rolling mills and at the
Johnstown melt shop, results in significant operating cost reductions. This
is due to both dilution of fixed costs (per ton) and to reduction of
variable cost (consumption per ton) naturally associated with large
increases in production.
- --------------------------------------------------------------------------------
PR22102.001 Rev. 0, Page 5
A-5
<PAGE>
[LOGO]
Assessment of - Republic Engineered Steels, Inc.,
Bar Technologies Inc., and the
Bar Division of USS/Kobe Steel Company Consolidation Plan
- --------------------------------------------------------------------------------
Independent Engineer's Report
o Continued improvement in operating efficiencies, beyond those naturally
expected from the increase in production, are expected as well. RTI has
entered a four year technical agreement with Sanyo of Japan to provide
assistance to the RTI facilities. This assistance should help RTI reach its
production and cost goals at these facilities.
o Reductions in manpower due to closure of facilities and to labor-management
negotiations, particularly at USS/Kobe, are a major factor in the cost
reductions. Last year, Republic and Bar Tech entered into a collective
bargaining agreement applicable to their facilities, permitting the
contemplated headcount reductions there. The workers at USS/Kobe are
expected to ratify such an agreement and such ratification is a condition to
financings related to the combination.
o The streamlined steel producing facilities (Canton, Johnstown, Lorain) will
be 100% continuous cast and more than 70% bloom cast. Bloom casting is a
prime component for the production of high quality steel bars, placing the
new company in a strong competitive position in that regard.
o The capital spending plan provides for appropriate and judicious use of
capital. The synergies among the combined companies reduce the capital
otherwise necessary for the stand-alone companies to achieve similar
results.
Comments on Plan
- ----------------
The combination and the associated consolidation plan are well conceived and
have a very high likelihood of resulting in a successful company. The projected
production volumes and operating costs are aggressive targets. It is likely that
the company will approach their projections but fall slightly short on both
aspects (production volume and costs). The impact of the shortfall which we are
projecting is $19.5 million in 2003, increasing to $22.9 million in 2004. As a
first approximation, the shortfall would be proportionately less in years 2000
through 2002. Conversely, there may be other operating cost savings associated
with the increased purchasing power of the new company, which have not been
considered in our analysis due to the very subjective nature of such
opportunities.
The timing of the production increases in the 9"/10", 12", and 13" mills
coincides with the shut down of the 11" mill in Chicago and the 12" mill in
Canton.
As indicated, the 3" to 6" size capability of the new bar mill will complete the
requirement for efficient, high quality capability across a wide size range. We
believe that the ramp-up time to achieve full production will be 18 to 24 months
(which is more typical for a mill of this nature) rather than the 15 months
which the company is projecting. If a longer time is required to ramp up the new
mill, the production and shipment plans can be achieved by operating the 18"
mill for a longer period than planned. The additional costs associated with
operating the 18" mill for this longer period of time is estimated (by
Beddows/Hatch) at $5.5 million (18 months) to $16.5 million (24 months). These
additional costs would only occur in 2003 and 2004.
- --------------------------------------------------------------------------------
PR22102.001 Rev. 0, Page 6
A-6
<PAGE>
[LOGO]
Assessment of - Republic Engineered Steels, Inc.,
Bar Technologies Inc., and the
Bar Division of USS/Kobe Steel Company Consolidation Plan
- --------------------------------------------------------------------------------
Independent Engineer's Report
Concerns also exist on our part over the improvements required to the Lorain
primary mill (where cast blooms are rolled to billets needed for the bar mills),
particularly improvements to the reheat furnace. We feel that investigation may
reveal that additional, modest, capital (of the order of a maximum of $3
million) is required to achieve the projected tonnage.
Management Considerations
- -------------------------
The proposed management team of the new company is regarded as one of the
strongest in the steel industry. The track record of success of the team and of
the individuals within the team is noteworthy. The personal experience of this
consultant with these individuals confirms the high regard in which they are
held.
Certification
- -------------
We certify that the attached report titled "Technical and Operational Evaluation
of Combination of Republic Engineered Steels, Inc., Bar Technologies Inc. and
Bar Division of USS/Kobe Steel Company" is, to the best of our knowledge,
accurate and complete with regard to our defined scope of work. Beddows/Hatch
consents to the inclusion of the above report in the Offering Memorandum
financings related to the combination. The information contained in the report
represents Beddows/Hatch's best judgement based on available information as of
the report date. Projections of future performance necessarily involve
considerations that are subject to uncertainty. The ability to successfully
negotiate manning concessions and to achieve operating efficiencies and cost
reductions are among the most subjective considerations.
Beddows/Hatch is an internationally recognized consulting company specializing
in the metallurgical industries for over 44 years. The activities undertaken in
this evaluation are well within the range of services and capabilities offered
by Beddows/Hatch. Neither Beddows/Hatch nor any person acting on its behalf i.)
makes any warranty, express or implied, with respect to the use of any
information provided by the company which is disclosed in the report or, ii.)
assumes any liability with respect to the use of information provided by the
company which is described in the report. The Beddows/Hatch review of
information relating to the Consolidation Plan in no way serves to transfer to
Beddows/Hatch the responsibility for the correctness and/or accuracy of such
information or modeling.
2. Introduction and Scope of Work
Beddows & Company, Hatch Management and Technology Consulting, has been engaged
to evaluate the technical and operational components of the Consolidation Plan
for the proposed combination of Republic Engineered Steels, Inc., Bar
Technologies Inc., and the Bar Division of USS/Kobe Steel Company. The
evaluation encompasses the following areas:
o Production volumes.
o Operating cost reductions including changes in yield and manpower.
- --------------------------------------------------------------------------------
PR22102.001 Rev. 0, Page 7
A-7
<PAGE>
[LOGO]
Assessment of - Republic Engineered Steels, Inc.,
Bar Technologies Inc., and the
Bar Division of USS/Kobe Steel Company Consolidation Plan
- --------------------------------------------------------------------------------
Independent Engineer's Report
o Product line rationalization, facility configuration and utilization,
ramp-up, and timing of consolidation.
o Appropriateness of capital spending.
o Maintenance related issues.
o Overview of interplant supply and shipping plans.
Our analysis excluded an evaluation of the market assumptions (volumes, sizes,
prices) whereas in that regard we assumed that the volumes and sizes associated
with the production forecast could be sold as projected. We also did not audit
the financial plan for consistency nor verify the cash flows included in the
financial plan.
Beddows/Hatch had previously performed various evaluations of Republic and
USS/Kobe and as a result, have some working knowledge of the facilities and
capital plans of the companies. Nevertheless, site visits were made by
specialists in steelmaking, rolling, and operating costs to the major producing
facilities - Canton, Ohio; Lorain, Ohio; Johnstown, Pennsylvania; and
Lackawanna, New York, as well as Corporate Headquarters - to update our
knowledge of recent operations and facilities.
The spreadsheet package titled "RTI Historical Operating Results and the Five
Year Financial Plan", dated July 20, 1999, provided a basis of data for our
analysis. Information obtained during a visit to RES Headquarters as well as
during and subsequent to the site visits, was also used in our analysis.
Although the assessment of the Consolidation Plan focuses through year 2003, we
often also note production in year 2004 since the planned production level does
not stabilize until 2004.
Excellent and complete cooperation was provided by Republic, Bar Tech, and
USS/Kobe management throughout our evaluation.
3. Facility Configuration
3.1 Current
The current facility configuration of the three companies, Republic and Bar Tech
and USS/Kobe is depicted in Figure 3.1. The steelmaking and casting facilities
are: USS/Kobe in Lorain, Ohio which utilizes the integrated steel production
route (blast furnace and oxygen steelmaking), Republic's facilities in Canton,
Ohio, and Bar Tech's facility in Johnstown, Pennsylvania. Both the Canton and
Johnstown facilities utilize electric arc furnace for steel production.
USS/Kobe utilizes both billet continuous casting and bloom continuous casting.
Bar Tech utilizes billet casting and Republic, Canton utilizes bloom casting
(their new cast roll facility) and ingot casting.
- --------------------------------------------------------------------------------
PR22102.001 Rev. 0, Page 8
A-8
<PAGE>
[LOGO]
Assessment of - Republic Engineered Steels, Inc.,
Bar Technologies Inc., and the
Bar Division of USS/Kobe Steel Company Consolidation Plan
- --------------------------------------------------------------------------------
Independent Engineer's Report
Blooming/billet mills are used at USS/Kobe and Republic, Canton for rolling
either blooms or ingots to the size required for feeding the bar mills.
There currently are 6 bar rolling mills: 9"/10" and 12" at USS/Kobe, the 13" at
Lackawanna, New York, the 12" mill at Canton, the 18" mill at Massillon, Ohio,
and the 11" mill at Chicago. There is much overlap and redundancy in the sizes
which these mills roll, particularly in the 0.75" to 2.0" range. Each bar mill
is currently supplied from one particular melt shop: the USS/Kobe mills by their
own melt shop, the Lackawanna 13" by Johnstown, and the Republic mills by the
Canton melt shop. This will change in the future as there will be much more
interplant shipment of billets. Interplant shipment of billets is addressed in
Section 8 of this report. Ten cold finishing plants currently exist to serve the
cold finished bar market although two of these plants were closed at the
beginning of July, 1999.
<TABLE>
<CAPTION>
<S> <C>
USS/KOBE BAR TECH REPUBLIC
-------- -------- --------
NO.3 Blast Furnace NO. 4 Blast Furnace
| |
------------------------- EAF NO.4(A) NO.4(B) NO.4(C)
|-------------- Pig Iron | EAF EAF EAF
BOP | | | |
| | ---------------------
------------ Billet Caster | |
| | | Cast Roll Teeming Shop
NO. 1 Billet NO. 2 Bloom | | |
Caster Caster | | |
| | | | Blooming Mill
| | | | |
Offtake to | 6 Stand Billet | | |
Seamless | Mill | | |
| | | 4 Stand | | |
| | | Billet | | |
| | | Mill | | |
------------------------------| | | |
| | | |
Large Rounds | | |
| | |
-----------------------------------------------------------------------
| | | | | | |
9"/10" 12" 13" 12" 18" 11" Large
Bar Mill Bar Mill Bar Mill Bar Mill Bar Mill Bar Mill Bar Mill
Lorain Lorain Lackawanna Canton Massillon Chicago Canton(New)
| | | | | | |
-----------------------------------------------------------------------
| | |
External Customers Internal Cold Finished* Further Processed
| | |
---------------------------------------------------- External Customers
| |
Facilities to be | Harvey Medina Batavia Hamilton Cartersville
Shuttered |
|--Massillon----Gary----Gary----Bvr Falls----Willimantic
Facilities to Remain
</TABLE>
Figure 3.1
- ----------------------------------------
* In addition to closing the two cold finishing plants indicated, the company
intends to close one additional cold finishing plant
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Bar Technologies Inc., and the
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- --------------------------------------------------------------------------------
Independent Engineer's Report
3.2 Future
The planned future facility configuration is shown in Figure 3.2. The proposed
facility configuration utilizes the best and most modern of the facilities among
the companies, allowing less efficient, less productive facilities to be shut
down. The size range rolled in each rolling mill will be consolidated, thereby
greatly increasing the tons rolled per size and reducing the roll changing time
significantly. The major facility changes are:
o USS/Kobe will shut down the smaller of its two blast furnaces and reduce
production capacity through its oxygen steelmaking shop (BOP). The billet
caster at USS/Kobe will also be shut, with more production earmarked for
their bloom caster. USS/Kobe will also shut down a portion of their billet
mill.
o In the Republic, Canton melt shop ingot pouring and rolling will be
eliminated. All of the existing Republic bar mills will ultimately be shut
down - 12" Canton, 11" Chicago, and 18" Massillon. A new large bar mill with
a size range of 3" to 6" will be installed somewhere in Ohio.
o An existing second electric arc furnace at Johnstown will be utilized as
production volume at Johnstown will be increased significantly. A sixth
strand will be added to Johnstown's billet caster if needed (capital is
allocated for it).
o New bar processing facilities and Quality Verification lines will be
installed.
o Two cold finishing plants have been closed and one other facility will be
closed. In addition, a new processing facility will be constructed.
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<TABLE>
<CAPTION>
<S> <C>
LORAIN JOHNSTOWN/LACKAWANNA CANTON/MASSILLON/CHICAGO
------ -------------------- ------------------------
NO.3 Blast Furnace
|
| EAF NO.4(A)
|-------------- Pig Iron | EAF
BOP | |
| |
Billet Caster |
| Cast Roll
NO. 2 Bloom | |
Caster | |
| Offtake to | |
| Seamless | |
6 Stand Billet | |
Mill | |
| Offtake to | |
Large Rounds--|------------Seamless | |
| | |
-------------------------------------------------------------------------------
| | | |
9"/10" 12" 13" Large
Bar Mill Bar Mill Bar Mill Bar Mill
Lorain Lorain Lackawanna Canton(New)
| | | |
---------------------------------------------------------------------------------
| | |
External Customers Internal Cold Finished* Further Processed
| |
------------------------------------ External Customers
| |
| Harvey Hamilton Cartersville
|
|--Massillon----Gary----Gary----Beaver Falls----Willimantic
</TABLE>
Figure 3.2
- ----------------------------------------
* In addition to closing the two cold finishing plants indicated, the company
intends to close one additional cold finishing plant
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Independent Engineer's Report
4. Production Volume Summary
4.1 Melting and Casting
Increases in bloom/billet production are projected in order to meet bar
production requirements. A summary of actual production (cast/roll and rolled
from ingot at Canton, cast billet or bloom at Johnstown and Lorain) in 1998, and
projections for 2003 is shown in Table 4.1 below.
Table 4.1
--------------------------------- -------------------- -------------------
Melt Shop 1998 Production 2003 Projection
(tons x 1,000) (tons x 1,000)
--------------------------------- -------------------- -------------------
Canton, Ohio 991 932
--------------------------------- -------------------- -------------------
Johnstown, Pennsylvania 490 964
--------------------------------- -------------------- -------------------
Lorain, Ohio 1,643 1,504
--------------------------------- -------------------- -------------------
Total 3,124 3,400
--------------------------------- -------------------- -------------------
The largest increase in production will be at Johnstown, which already has
melting capacity but is under-utilized due to weak market demand.
Sufficient steelmaking capacity will exist in the new company to achieve the
projected levels. Additional reserve capacity also exists at each of the
facilities as a back-up for unforeseen circumstances. We (Beddows/Hatch) have
some concern whether the expectations for the bloom caster at Lorain are too
optimistic despite the modifications planned for it. This will be discussed in
more detail in Section 5.
4.2 Rolling
Under the Consolidation Plan, each rolling mill will roll fewer sizes with
significantly more tonnage rolled on the remaining sizes. The result is that
significant increases in production are projected from the rolling mills as
summarized in Table 4.2.
Table 4.2
-------------------------- --------------------- ------------------
Mill 1998 Production 2003 Projection
(tons x 1,000) (tons x 1,000)
-------------------------- --------------------- ------------------
Lorain 9"/10" 362 550
-------------------------- --------------------- ------------------
Lorain 12" 389 650
-------------------------- --------------------- ------------------
Canton 12" 333 0
-------------------------- --------------------- ------------------
Massillon 18" 365 0
-------------------------- --------------------- ------------------
Chicago 11" 199 0
-------------------------- --------------------- ------------------
Lackawanna 13" 466 720
-------------------------- --------------------- ------------------
New large mill --- 591
-------------------------- --------------------- ------------------
Total 2,114 2,511
-------------------------- --------------------- ------------------
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Independent Engineer's Report
As will be discussed in more detail in the next section, it is our opinion that
the production expectations for the Lorain 9"/10", Lorain 12", and the new large
bar mill are overly optimistic and will fall short of annual expectations by
25,000 tons (starting in 2001), 30,000 tons (starting in 2002), and 22,600 tons
(starting in 2004) respectively, for a total reduction of hot rolled bar
shipments of 77,600 tons (starting in 2004) (or 3.0% of 2,567,000 tons). The
financial implications of this reduction in shipments is discussed in Section 9.
5. Facilities and Facility Plans
5.1 Canton Melting and Casting
The electric furnace melt shop at Canton currently utilizes two furnaces - #7
and #9. A third furnace, #6, is currently mothballed. Ladle furnaces and vacuum
degassers are present and extensively utilized for both productivity and quality
purposes. Ingot pouring and rolling is currently used, but is planned for a
third quarter, 1999 shut down. Continued productivity improvements through the
cast-roll facility have made the termination of ingot pouring possible.
The cast-roll facility is quite new, 1998 start-up, and casts a 10" x 13" bloom
which is then rolled to the various billet sizes required for the bar mills.
Assessment
Generally speaking, the technology employed is considered to be
"state-of-the-art". The operation was running smoothly during the visit. There
is a new EAF vessel for furnace #9 on site, of the EBT design concept, however
the installation has been delayed by one year. This design is considered to be
the best available technology for an efficient operation.
The scrap is of good quality and handling is relatively efficient. However, the
EAF requires three (3) charges to optimize heat size. This does not present a
problem, though, as there are ample scrap loading canes, six scrap bucket
transfer cars, and two charging cranes to do the work. Logistics is not a
problem relative to handling scrap in the melt shop.
The EAF operation utilizes a good "foamy slag' practice with a long arc and low
current that is reflected in their good (low) electrode consumption numbers. The
AMI regulator and hydraulic systems are well synchronized and very responsive.
However, it appears that a lack of stabilizing components in the electrical
system may be responsible for a higher than expected electrical power
consumption (410 kWh/ton). Electrical consumption could be reduced by upgrading
the electrical.
The heats are tapped excessively hot mostly because of the large alloy additions
that are required. The power profiles are changed regularly to suit the changes
in scrap recipes. The B.S.E. manipulator lance appears to be working well and
accomplishes the intended purpose. The average power is higher than most shops
at levels ranging from 70 to 78 MW.
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The ladles average about 50+ heats per lining which is respectable for a large
heat size shop and the downstream processes that they encounter. They are also
equipped with porous plugs for argon stirring.
The cast/roll complex averages 12 to 13 heats per day with an average liquid
weight of 210 tons. The caster routinely performs tundish fly's (30+ per week)
which allows them to maximize the caster availability. The capacity of this
machine is easily 16+ heats per day, which would generate more than 1,000,000
tons per year of bloom. The caster is readily available for production with the
exception of a 1 week annual shut down and a 10 hour maintenance period every 10
days. The cast time for one heat is approximately 1-1/2 hours (140 tons per
hour). With these considerations, the machine should be available to cast more
than 8,100 hours per year. With a typical uptime of 90%, the tonnage will more
than exceed requirements. The average number of sequences is 3.6 heats, dictated
by grade-specific tonnage restrictions. Dissimilar grades are separated by the
utilization of the "tundish-fly" practice.
The billet mill portion of the cast-roll is a 9-stand, continuous mill of heavy
construction. Space has been allocated for two additional stands in the future,
if desired. It is situated in-line with the casting machine and is hot-charged
about 99% of the time. The 10" x 13" blooms are reduced to 8-1/4" square in the
first 3 stands, 6-1/4" square through 5 stands, and 4" square after 9 stands.
The billets can be sheared as the length increases dramatically from the
original bloom length of 40 feet. The additional two stands could produce a 3'
round for direct sale if desired in the future.
The ladle furnace in the cast/roll complex has been well designed and is
complete with the required alloy and flux systems. It has sufficient power and
is capable of processing a heat in about 45 minutes.
The VD (vacuum degasser) is utilized about 98% of the time and is very
effective. This equipment ensures the ability to control the low gas levels
required for the O.E.M. applications of the special bar quality steels that are
produced.
With the technology employed, this facility will not have any trouble meeting
the quality requirements and the cast/roll tonnage projection of 932,000 tons
per year. The only issues revolve around the costs of production, where with
minimal investment the company could achieve additional cost savings. The cost
saving opportunities revolve primarily around the ability to increase in tonnage
through the caster and the ability to decrease the consumable costs by longer
sequences. The new plasma torch is presently being commissioned and was
justified for tundish temperature control so that the crews can comfortably cast
closer to liquidus temperatures, thereby gaining temperature homogeneity, strand
reliability, and more consistent quality relative to cast structure.
From the tonnage perspective, the melt shop plans to utilize both #9 and #7 EAFs
to ensure the plan volume requirements. It is technically possible to produce
all the required production with #9 EAF only, especially in light of the
available electrical and chemical energy. Given a rationalization of scrap, it
is possible to reduce the electrical energy required per ton which in turn will
reduce the power-on times and increase production. The facility will need to
operate
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Independent Engineer's Report
around 140 tons per hour for 7,200 hours per year. To accomplish this while
utilizing only one EAF, the heat cycle will have to average 90 minutes (75
minutes power-on, and 15 minutes power-off). The new EBT should facilitate this
as the average EBT power-off times in the U.S. is about 15 minutes today.
5.2 Johnstown Melting and Casting
The electric furnace melt shop at Johnstown was previously owned by Bethlehem
Steel Corporation's bar division and more recently by Bar Tech. The shop
consists of two electric furnaces, a ladle furnace, a vacuum degasser, and a
five stand billet casting machine (6-3/4" x 6-3/4" billets).
Assessment
This facility has the appearance of a shop that was designed in the early
1980's. The technology employed is adequate, but certain key areas have been
upgraded for cost and quality reasons. The two operating EAFs (#10 and #20)
appear to be similar in design and are operated one at a time as dictated by the
tonnage demand. The shop was running well with no apparent problems. The
equipment seemed to be well maintained and reliable. The EAFs were segregated
from the ladle aisle by well constructed walls to contain the dust generated by
the EAF during operations.
The volume of scrap was not abundant, however the quality appeared to be good
given the product mix and the handling is very efficient. The top of the scrap
buckets are at the same elevation as the top of the rail cars which minimizes
hoisting operations and loading time; a well engineered layout. The loading
capacity well exceeds the demand of the production plan for the next 4 years.
The EAFs have relatively tall shells that is actually in vogue today because it
allows for improved post combustion and minimum number of charges. Bar Tech's
EAFs require 2 charges to optimize heat size. As long as both EAFs are not
operated simultaneously, scrap supply should not be a concern. The number of
transfer cars and cranes will serve the facility well to generate the volume
required.
The EAFs are fitted with "buss tube" type arms typical of a high impedance
system however, they are operating at reasonable power levels averaging about 56
MW. The "outdated" cable-winch drives and modified Robicon regulator limits the
ability of the EAF to increase its production rate by increased power levels
under stable conditions. This restriction is mitigated by the present plan which
is to operate one EAF 24 hours per day and the other one 16 hours per day.
The EAFs are fitted with an efficient water-cooled supersonic oxygen lance that
is very capable of delivering the oxygen required for decarburization. The wall
burners seem to be efficient and well utilized for preheat and post combustion.
Like Republic, operations utilize a good "foamy slag" practice with a long arc
and low current that is reflected in their good electrode consumption numbers.
The ladle practice appears to be good with no apparent weaknesses. The ladles
are equipped with porous plugs for argon stirring. The lining life is now
averaging about 52 heats.
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Independent Engineer's Report
The 5-strand (expandable to 6) Rokop billet caster is a 9.9 meter radius machine
that is equipped with electromagnetic stirring from JME (Inverpower). This is
particularly important given the qualities that are produced. The pouring
practice utilizes a stopper rod and submerged entry nozzle S.E.N. for
reoxidation control that minimizes internal cleanliness deterioration.
Presently, the casting speeds are a little conservative at about 68 to 72" per
minute. The production rate is 27 tons per hour per strand. The productivity of
the caster presently stands at around 135 tons per hour, requiring about 66
minutes to cast a heat of steel. The design weaknesses of this caster
historically are in the oscillators and the straighteners. These components do
not appear to be robust enough for continuous use, utilizing only preventive
maintenance techniques. The load on the oscillator, due to the weight of the
mold assembly, the EMS coil, and the billet-to-mold friction will take its toll
and frustrate the ability to perform the tundish fly practice. The consolidation
plan includes the capital expenditures necessary to make changes to the caster
which address these problems.
The plan to add an additional ladle furnace and the sixth strand may not be
necessary from a production perspective. From a capital and operating cost
perspective, it is our opinion that the required tonnage of 964,000 tons of cast
billets in 2003 could be accomplished by mechanically and electrically upgrading
one EAF to produce at the effective rate of 135 tons per hour in which case it
would have to realistically be on line about 7,200 hours annually (90% of
8,000). The present capacity, before improvements of the existing 5-strand
caster, is already 135 tons per hour which if operated 7,200 hours annually
(actual uptime by using a "tundish fly" practice), the production requirement
can be met. This scenario balances the production rates of the EAF and the
caster so that the production becomes more steady state and consistent.
5.3 USS/Kobe Melting and Casting
USS/Kobe, Lorain is an integrated steel producer, reducing and melting iron ore
through a blast furnace followed by the basic oxygen steelmaking process (BOP)
for production of liquid steel. Coke for the blast furnace is supplied from
other USS coke production facilities. Currently, two blast furnaces are in
operation, with plans to shut down the smaller of the furnaces (#4). Two BOP
vessels are utilized. Ladle furnaces are utilized for productivity and quality
purposes. A billet caster and a bloom caster are currently utilized.
Assessment
The #3 blast furnace, which will continue to operate, has a furnace volume of
50,945 cubic feet. The projected future requirement of 3,978 tons per day can be
achieved provided the charge (or burden) to the furnace utilizes more scrap than
current practice. This should present no problem other than a slight increase in
operating cost ($.28 per ton of hot metal or $400,000 per year).
The blast furnace was last relined in 1992 and is scheduled for its next major
reline in 2005. A mini reline is planned and budgeted for year 2000.
The #4 blast furnace, which will be shut down, will remain in operable condition
and could be used in emergency situations.
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Independent Engineer's Report
The casting of pigs for merchant sale or for use at the RTI electric furnaces is
possible if excess blast furnace metal is available. Plans call for pig casting
of 12,500 tons per year, but ending in 2004 due to lack of availability of hot
metal.
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Independent Engineer's Report
The BOP Shop is a standard, two vessel shop, tapping 220 tons of liquid steel
per heat. In the past, liquid steel production far exceeded the future plan
levels of RTI (1,676,000 liquid tons per year). The plans are to operate only
one vessel which will require 21.1 heats per day. The second vessel will be
available if needed to augment production from the one vessel. No problems are
foreseen in the capacity to produce the liquid steel required.
Ladle furnaces are utilized in the process.
As indicated, the existing billet caster will be shut down.
The bloom caster currently utilizes a "tundish fly" practice successfully.
Production through the machine will increase from a historical high of 104,000
tons per month to a planned 125,000 tons per month in 2003. Although the bloom
caster has historically been under-utilized, changes are planned in order to
increase its capability. Some changes to the bloom runout system have already
been made and have reduced delays on the machine.
The capital plan has recently been modified to include $7 million for further
changes to the bloom caster ($5 million in 2003 and $2 million in 2004). The
change will involve increasing the cast bloom size to 12.9" x 17.5" (from 12.2"
to 14.6"). Nonetheless, it is our opinion that the caster will be hard pressed
to achieve its requirements of 125,000 tons per month in 2003. We have stated
elsewhere in this report that the Lorain bar mills and the new large mill may
not meet their expected production levels. We feel that any bloom caster
shortfall in production will not exceed the shortfall of the bar mills,
therefore no additional reduction in revenues should be associated with the
shortfall of the bloom caster.
5.4 Bar Rolling
5.4.1 9"/10" Mill, Lorain, Ohio
This is an 18 stand, 2-high mill, arranged in horizontal-vertical configuration,
with a single strand rod outlet. The bar and rod products can be finished in
coil form, in the size range of 7/32" to 1-1/16"; large diameter bars in pouring
reels and small diameter rods through the rod outlet. The rod outlet is new and
equipped with the latest technology, and consists of a 10 stand No-Twist Mill
followed by a 4 stand Reducing and Sizing Mill and 300' long Stelmor Conveyor.
This provides the flexibility to produce small diameter coils. The 130 ton per
hour reheat furnace is a walking beam type and is suitable for uniform heating
to produce quality product. The overall mill layout and the equipment
configuration are very flexible to achieve high mill availability. A brief
comparison of key present and projected production parameters is as follows:
--------------------------------- ------------------------- -------------------
1998 Actual Future (2003)
--------------------------------- ------------------------- -------------------
Annual production (000's) 362 550
--------------------------------- ------------------------- -------------------
Product range 7/32" - 1-1/16" 7/32" - 3/4"
--------------------------------- ------------------------- -------------------
Scheduled hours 7,920 8,100
--------------------------------- ------------------------- -------------------
Operating hours 4,340 5,670
--------------------------------- ------------------------- -------------------
Delays 45.2% 30%
--------------------------------- ------------------------- -------------------
Tons per size 229 1,000
--------------------------------- ------------------------- -------------------
Yield 91.8% 94.5%
--------------------------------- ------------------------- -------------------
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- --------------------------------------------------------------------------------
Independent Engineer's Report
--------------------------------- ------------------------- -------------------
Prime tons per operating hour 83.4 97.0
--------------------------------- ------------------------- -------------------
The proposed improvements in mill yield, a reduction of delays, an increase in
tons per size and limiting the product range are feasible and will enhance the
production capability of this mill. These improvements are based on changing to
a four week rolling schedule from two week rolling schedule, electrical upgrades
to the mill controls before the rod outlet, implementation of one common size
for 12 stands and use of carbide rolls. Furthermore, it is proposed that the
billet size will be increased from 6" x 6" to 6-1/4" x 6-1/4" which will further
improve mill utilization and production.
The proposed rate of production of 97.0 prime tons per hour, with a gap time of
5 seconds and over 50 sizes to be rolled in each rolling cycle, may be
optimistic and should be maintained at a lower level for planning purposes.
Therefore, the projected production of 550,000 tons per year may be slightly
optimistic, perhaps by 5%, reducing production by 25,000 tons per year.
The 9"/10" mill can be compared favorably to modern rolling mills. The maximum
tonnage of 525,000 tons per year which we anticipate, is within the range of
capability of this mill and of other mills of this design.
5.4.2 12" Mill, Lorain, Ohio
The 16 stand, 2-high mill is arranged in horizontal-vertical configuration, with
finishing outlets through pouring reels for coiled products and through a 420'
long cooling bed for cut-to-length products. A 150 tons per hour, pusher type,
reheat furnace is provided for heating billets. The collection, tying, and
bundling arrangement for cut to length products is manual. The mill electrical
control system is old. A brief comparison of present and projected production
parameters is as follows:
--------------------------------- ------------------------- -------------------
1998 Actual Future (2003)
--------------------------------- ------------------------- -------------------
Annual production (000's) 389 650
--------------------------------- ------------------------- -------------------
Product range 13/16" - 3-1/16" 13/16" - 2"
--------------------------------- ------------------------- -------------------
Scheduled hours 5,712 7,900
--------------------------------- ------------------------- -------------------
Operating hours 2,909 5,135
--------------------------------- ------------------------- -------------------
Delays 49.3% 35.0%
--------------------------------- ------------------------- -------------------
Tons per size 273 1,000
--------------------------------- ------------------------- -------------------
Yield 91.5% 92.9%
--------------------------------- ------------------------- -------------------
Prime tons per operating hour 133.8 126.6
--------------------------------- ------------------------- -------------------
The proposed improvements in mill yield and reduction of delays are achievable.
Furthermore, reduction in product range and number of sizes to be rolled will
also improve mill productivity. The upgrades to the mill controls, new reheat
furnace, mechanical upgrades to the mill and the bundling equipment are
essential to achieve the desired improvements and mill productivity. Tonnage
projections appear slightly optimistic; we believe 620,000 tons per year is a
more realistic figure and in line with other mills in Japan and North America.
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Independent Engineer's Report
5.4.3 13" Bar Mill, Lackawanna, New York
The mill consists of 22 stands arranged in horizontal-vertical configuration
with outlets for coiled products through pouring reels and cut to length
products through a 400' long cooling bed. A walking beam type, 180 tons per
hour, reheat furnace is provided for heating billets. At present, the billet
size rolled in this mill is 6-3/4" x 6 -3/4". At one time (early 1980's) this
was the most modern bar mill in North America. With the proposed modernization
program and recent upgrades to the electrical control system this mill can still
be viewed as a modern mill. The installation of 1 - QVL (quality verification
line) is in progress and the second line will be installed by next year. A brief
comparison of present and projected production parameters is as follows:
--------------------------------- ------------------------- -------------------
1998 Actual Future (2003)
--------------------------------- ------------------------- -------------------
Annual production (000's) 466 720
--------------------------------- ------------------------- -------------------
Product range 9/16" - 3-1/4" 1" - 3"
--------------------------------- ------------------------- -------------------
Scheduled hours 6,681 7,900
--------------------------------- ------------------------- -------------------
Operating hours 3,561 5,310
--------------------------------- ------------------------- -------------------
Delays 46.7% 32.8%
--------------------------------- ------------------------- -------------------
Tons per size 687 1,200
--------------------------------- ------------------------- -------------------
Yield 90.0% 91.0%
--------------------------------- ------------------------- -------------------
Prime tons per operating hour 130.8 135.6
--------------------------------- ------------------------- -------------------
Deletion of smaller sizes from the rolling program and restricting the product
mix from 1" - 3" will provide improved production capability. Proposed yield
improvement is achievable and perhaps can be further improved. Reduction of
delays and improvements to the production rate are slightly optimistic. Due to
limited pass life, perhaps in the range of 650 - 800 tons per pass, the gain in
operating time due to increased tons per size may not be achievable. In summary,
the production target of 720,000 tons per annum is slightly optimistic, but
achievable for a suitable product mix. The proposed mill modifications to reduce
delays and minimize rejections are essential to achieve the improvements in
productivity. Additional hours (perhaps 200 per year) could be scheduled if
necessary to achieve the projected tonnage.
This mill is competitive and comparable productivity-wise to the best mills in
the world.
5.4.4 New Large Bar Mill
The new large bar mill will essentially replace the Massillon 18"mill. The
product mix of the Canton and Chicago mills will be redistributed to the Lorain
and Lackawanna Mills. This will complete the plan to provide modern, efficient
bar and rod rolling capabilities from 7/32" to 6" size range. The projected key
production parameters are as follows:
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- --------------------------------------------------------------------------------
Independent Engineer's Report
--------------------------------- -----------------------
Future (2003)
--------------------------------- -----------------------
Annual production (000's) 591
--------------------------------- -----------------------
Product range 3" - 6"
--------------------------------- -----------------------
Scheduled hours 7,900
--------------------------------- -----------------------
Operating hours 6,715
--------------------------------- -----------------------
Delays 15%
--------------------------------- -----------------------
Tons per size 1,500
--------------------------------- -----------------------
Yield 92.4%
--------------------------------- -----------------------
Prime tons per operating hour 88.0
--------------------------------- -----------------------
The plan calls for the mill to operate at capacity in 2004 at a level of 646,625
tons at a rate of 963 tons per hour.
Since the detailed product mix and mill technical details were not available,
the comments are based on experience of similar mills. First of all, the
proposed learning curve of 15 months to reach full production level is
aggressive; even with good automation, quick pass change and stand change
system, and the well trained workforce, it may take 18 to 24 months to reach
capacity. The expected yield of 92.4% and delays at 15% are aggressive
assumptions; 90% yield and 20% delays may be more realistic assumptions. The net
result is likely a decrease in capacity to approximately 624,000 tons per annum,
22,600 less than projected.
The impact of the longer start-up time which we are estimating can be mitigated
by operating the 18" mill for a slightly longer period of time. This will impact
operating costs but not projected bar shipments. The financial impact of a
longer start-up time is elaborated in Sections 6 and 9 of this report.
5.4.5 Primary Rolling Mill, Lorain, Ohio
The Primary Rolling Mill consists of 2-high, 40" breakdown mill, followed by an
inline scarfer, and 2-high, 6 stand continuous mill to roll billets and round
products. The reheat furnace is rated at 190 tons per hour for hot charged
blooms, size 12.2" x 14.5". The additional 4 stands after the 6 stands will be
removed. The key present and projected production parameters are as follows:
------------------------------ --------------------- -------------------------
1998 Actual Future (2003)
------------------------------ --------------------- -------------------------
Annual production (000's) 720 1,166
------------------------------ --------------------- -------------------------
Product range
------------------------------ --------------------- -------------------------
Billets 6" x 6" 6" x 6", 6-1/4" x 6-1/4"
------------------------------ --------------------- -------------------------
Rounds 7", 6-3/4" 7", 6-3/4"
------------------------------ --------------------- -------------------------
Scheduled hours 5,889 7,128
------------------------------ --------------------- -------------------------
Operating hours 4,278 5,779
------------------------------ --------------------- -------------------------
Delays 27.4% 18.9%
------------------------------ --------------------- -------------------------
Yield 90.9% 90.8%
------------------------------ --------------------- -------------------------
Tons per operating hour 168.3 201.8
------------------------------ --------------------- -------------------------
The plan calls for the mill to operate at a production level of 1,220,000 tons
in 2004.
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Bar Technologies Inc., and the
Bar Division of USS/Kobe Steel Company Consolidation Plan
- --------------------------------------------------------------------------------
Independent Engineer's Report
This mill rolls cast blooms down to sizes which fit the requirements of the bar
mills and seamless mills of USS/Kobe. Several changes are contemplated to
improve productivity and reliability. The proposed improvements include new
saws, mechanical upgrades to the breakdown mill, and electrical automation. It
appears that in the 2000 when changes to the mill are in progress, a significant
increase in production volume from this mill is projected. Since this mill is
essential in the rolling and billet supply chain, a detailed analysis of its
capability and required changes is warranted. Furthermore, this mill will
receive larger cast blooms (12.9"x 17"), to improve caster and mill
productivity. To accommodate bigger blooms the reheat furnace would likely need
upgrading (capital expenditure of $1- $3 million) which is not included in the
capital plan. It may be optimistic to achieve the projected tonnage through the
mill, however, alternative supply of billets may be possible.
5.5 Cold Finishing
There currently are eight cold finishing plants in operation. In 1998 shipments
totaled 485,000 tons and are expected to reach 515,000 tons in 1999. The plan
for year 2003 is 540,000 tons of shipments. During that time frame, plans are to
shut down one additional plant and to construct a processing center. In
addition, some equipment will be transferred from the shut down plants to the
remaining facilities. Other existing equipment in the remaining plants will be
replaced or upgraded. Forty-four (44) million dollars will be spent on the cold
finishing facilities over the next 4-1/2 years.
6. Timing/Ramp Up
As indicated in Section 4, bloom/billet production increases from 3,124,000 tons
in 1998 to a projected 3,400,000 tons in 2003, stabilizing at a projected
3,468,000 tons in 2004. Hot rolled bar production rises from 2,114,000 tons
(1998) to a projected 2,511,000 tons in 2003, stabilizing at a projected
2,567,000 tons in 2004. The increases in production are gradual throughout the
plan and are consistent with the timing of capital spending.
The detailed production plan for the bar mills is consistent with the
consolidation plan where certain mills are shut down and others have increased
throughout due to the consolidation of sizes or capital improvement. The Lorain
mills and the Lackawanna 13" mill increase production as the Chicago 11" mill
and Canton 12" mill are shut down by the end of year 2000.
The new large bar mill replaces tonnage from the Massillon 18" mill. In our
opinion, the planned production for the new bar mill ramp up, 15 months to reach
capacity, is overly aggressive for a bar mill. An 18 to 24 month ramp up is more
in-line with industry performance. A ramp up time longer than 15 months can be
mitigated by prolonging the operation of the 18" mill during this period. Our
estimate of the additional costs associated with the longer start-up is
approximately $1.85 million per month (the fixed costs of the 18" mill) or $5.5
million (18 month start-up), to $16.5 million (24 month start-up).
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Bar Technologies Inc., and the
Bar Division of USS/Kobe Steel Company Consolidation Plan
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Independent Engineer's Report
7. Capital Spending
The major capital projects for the time period - second half 1999 through 2003 -
are shown in Table 7-1.
Table 7-1
Major Capital Projects
-------------------------------------------------------- ---------------------
Project(s) $ Millions
-------------------------------------------------------- ---------------------
RTI Melting and Casting 26.7
-------------------------------------------------------- ---------------------
Lorain #3 Blast Furnace Repair 5.0
-------------------------------------------------------- ---------------------
Lorain Bloom Caster Upgrade 5.0
-------------------------------------------------------- ---------------------
Lorain Environmental 9.0
-------------------------------------------------------- ---------------------
Lorain Blooming/Billet Upgrade 3.5
-------------------------------------------------------- ---------------------
Lorain Billet Yard Improvements 5.0
-------------------------------------------------------- ---------------------
Subtotal - Melting, Casting, Billet Production 54.2
-------------------------------------------------------- ---------------------
New Large Bar Mill 89.5
-------------------------------------------------------- ---------------------
Lorain 10" Mill Upgrade 3.4
-------------------------------------------------------- ---------------------
Lorain 12" Mill Upgrade including Reheat Furnace 25.0
-------------------------------------------------------- ---------------------
Lorain Processing Center (New) 15.0
-------------------------------------------------------- ---------------------
Lackawanna Quality Verification Line (QVL) 7.0
-------------------------------------------------------- ---------------------
Lackawanna 13" Upgrades 9.6
-------------------------------------------------------- ---------------------
QVL and Shipping Center for New Bar Mill 13.6
-------------------------------------------------------- ---------------------
Subtotal - Bar Rolling 163.1
-------------------------------------------------------- ---------------------
Cold Finishing 38.8
-------------------------------------------------------- ---------------------
New Processing Center 19.0
-------------------------------------------------------- ---------------------
Management Information System (MIS) 6.0
-------------------------------------------------------- ---------------------
RTI Maintenance 19.0
-------------------------------------------------------- ---------------------
USS/Kobe Maintenance 21.3
-------------------------------------------------------- ---------------------
Subtotal - Other 104.1
-------------------------------------------------------- ---------------------
TOTAL 321.4
-------------------------------------------------------- ---------------------
The plan enhances the production capabilities of the most modern facilities
(Lorain bar mills, Lorain bloom caster, Lackawanna bar mill, and Canton melting
and casting) allowing the least modern facilities to be shut down. In addition
to increasing production capability, the capital plan also contributes to
reducing manning levels, improving quality and quality control and reducing
operating costs.
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Bar Technologies Inc., and the
Bar Division of USS/Kobe Steel Company Consolidation Plan
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Independent Engineer's Report
The budget estimates for many of the individual projects have been previously
reviewed by Hatch and are reasonable. The budget for projects which had not been
previously reviewed are, in general, reasonable for planning purposes. One minor
exception is that upgrades to the Lorain blooming/billet mill reheat furnace are
likely to be required to allow the increased production level through that
facility. Definition of the upgrade requirements for the reheat furnace has not
been completed. It is uncertain whether the capital budget is sufficient to
accommodate the upgrade, however the cost is likely to be relatively minor (less
than $3 million).
The planned spending of $321 million over this 4-1/2 year time period is
consistent with that of integrated and other value added steel producers.
The plan obviates the need for RTI to construct a new small bar mill, saving
capital and the costs associated with starting up a new facility and is less
than the companies would logically spend as stand-alone operations.
8. Interplant Supply and Shipping
One of the key components of the plan is the optimization of scheduling and
production in the melt shops, casting, and rolling mills. The Lorain bar mills
and the Lackawanna bar mill will all be capable of accepting the same billet
size (6-1/4" or 6-1/2" are likely). This will aid steel production greatly and
will allow longer sequence lengths on the casters. The consolidation of sizes
among the bar mills will aid their productivity by reducing roll change time.
The down side of these synergies is that interplant shipment of billets will
increase drastically from 1.06 million tons in 1999 (37% of production) to 2.03
million tons in 2003 (60% of production).
The interplant shipment costs in the plan are reasonable and remain constant per
ton throughout the plan period. It may be possible to reduce unit transportation
costs (cost per ton of billet) in the future due to the increase in volume
shipped. However, reductions have not been incorporated into the plan at this
time.
9. Operating Costs and Cash Flow Implications
9.1 Operating Costs
Reductions in operating cost, particularly conversion costs, are planned for
each of the facilities. The cost reductions are due to:
o Capital spending
o Manpower reduction
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Bar Technologies Inc., and the
Bar Division of USS/Kobe Steel Company Consolidation Plan
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Independent Engineer's Report
o Operating practice improvements
o Reduction in unit consumptions associated with efficiencies gained through
increased production volumes
o Reduction of fixed costs per ton due to increased production volumes
A summary of the fully loaded costs (including materials, freight, and
conversion) at the major process steps comparing second quarter 1999 to year
2003 is shown in Table 9-1.
Table 9.1
Operating Cost Comparison
<TABLE>
<CAPTION>
-------------------------------------------- ------------------- -------------------
Q2, 1999 2003
($ per ton) ($ per ton)
-------------------------------------------- ------------------- -------------------
<S> <C> <C>
Johnstown billet (direct cast) 244 230
-------------------------------------------- ------------------- -------------------
Canton billet (through cast-roll) 306 298
-------------------------------------------- ------------------- -------------------
Lorain billet (rolled from cast bloom) 356 287
-------------------------------------------- ------------------- -------------------
Hot rolled bar - Lorain 9"/10" mill 461 341
-------------------------------------------- ------------------- -------------------
Hot rolled bar - Lorain 12" mill 468 360
-------------------------------------------- ------------------- -------------------
Hot rolled bar - Lackawanna 13" mill 370 353
-------------------------------------------- ------------------- -------------------
Hot rolled bar - new bar mill --- 368
-------------------------------------------- ------------------- -------------------
</TABLE>
The higher cost of billets from Canton and Lorain compared to Johnstown reflect
the cost associated with rolling of billets from cast blooms (Canton and Lorain)
compared to direct casting of billets (Johnstown). The hot rolled bar costs
consider the weighted average cost of billets from the planned sources (Canton,
Johnstown, Lorain) and include the transportation costs of the billets to the
mill.
The plan includes a $10 per gross ton increase in purchased scrap between second
quarter 1999 and year 2001. This increase could be understated however, further
increases in scrap prices could be offset by scrap surcharges built into bar
selling prices, negating the effect of higher scrap prices. The changes in
conversion cost included in the plan, although significant in several processing
units, are generally reasonable. In our opinion, some reductions in conversion
cost are overestimated, primarily "Support and Services" and "Non-Labor Repair
and Maintenance". Conversely, we feel that reductions in conversion costs for
"Consumables/Supplies" and "Fuel/Utilities" are understated in some areas.
Additionally, other adjustments to operating costs which we feel are appropriate
are explained below.
o For blast furnace output to achieve the necessary 3,900 tons per day, scrap
charge per ton of hot metal must increase above planned numbers (minimal
impact of $0.28 per ton of hot metal or $0.4MM per year).
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Bar Technologies Inc., and the
Bar Division of USS/Kobe Steel Company Consolidation Plan
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Independent Engineer's Report
o $4.7MM annual manpower savings is explicitly shown in the plan associated
with contracting out 88 positions at Lorain. However, the additional costs
associated with contracting out have not been included. This could reduce
the savings to approximately $1.3MM annually or $3.4MM less savings than
expected.
o If the new large bar mill only achieves 90.0% yield instead of the expected
92.4%, the additional cost would be approximately $4.80 per ton or $3.1
million per year.
These adjustments (conversion costs and others) to operating cost total $11.3
million per year, and are itemized in Table 9-2.
Table 9-2
Operating Cost Adjustments
<TABLE>
<CAPTION>
------------------------------------ ------------------ ------------------ -------------------
Area Savings Savings Net Operating
Overstated Understated Cost Adjustment
($ million per ($ million per ($ million per
year) year) year)
------------------------------------ ------------------ ------------------ -------------------
<S> <C> <C> <C>
Lorain billet mill - Conversion 5.3 3.1 + 2.2
Cost
------------------------------------ ------------------ ------------------ -------------------
Lorain bar mill - Conversion Cost 1.2 2.4 - 1.2
------------------------------------ ------------------ ------------------ -------------------
Johnstown billet - Conversion Cost 3.6 1.9 + 1.7
------------------------------------ ------------------ ------------------ -------------------
Lackawanna bar mill - Conversion 1.7 --- + 1.7
Cost
------------------------------------ ------------------ ------------------ -------------------
Lorain blast furnace - Additional 0.4 --- + 0.4
scrap required
------------------------------------ ------------------ ------------------ -------------------
Lorain manpower - Contracting out 3.4 --- + 3.4
costs not explicitly stated
------------------------------------ ------------------ ------------------ -------------------
New large bar mill - Yield 3.1 --- + 3.1
------------------------------------ ------------------ ------------------ -------------------
Total + 11.3
------------------------------------ ------------------ ------------------ -------------------
</TABLE>
Other factors could reduce operating cost. However, we have not considered them
due to their subjectiveness and difficulty to quantify. These factors include:
o Reduction in repair and maintenance expense that may result from increased
effectiveness of predictive maintenance activities.
o The plan incorporates input cost savings derived through increased
purchasing power, while our more conservative analysis only considers
improvements in unit consumptions.
o The plan is conservative in its transportation cost estimates by assuming no
efficiency savings in future years.
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Bar Technologies Inc., and the
Bar Division of USS/Kobe Steel Company Consolidation Plan
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Independent Engineer's Report
9.2 Impact of Volume Reductions on Cash Flow
As indicated earlier in our report, we feel that the eventual production volumes
expected from the Lorain 9"/10" mill, Lorain 12" mill, and new large bar mill
are slightly overstated. Using weighted average costs and prices from the plan
for these mills, we estimate an annual reduction of EBITDA of $11.6 million as a
result of the reduced volume of bar shipments as summarized in Table 9-3. EBITDA
as used herein has the same meaning as that referred to in the Offering
Memorandum.
Table 9-3
Summary of Bar Mill Volume Adjustments
<TABLE>
<CAPTION>
--------------------- ------------ ------------ ------------- ---------------- ---------------
Mill Projected Starting in Beddows/ Difference Annual
Tons Year Hatch (tons per year) EBITDA
(per year) Opinion Reduction
--------------------- ------------ ------------ ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Lorain 9"/10" 550,000 2001 525,000 25,000 3.7
--------------------- ------------ ------------ ------------- ---------------- ---------------
Lorain 12" 650,000 2002 620,000 30,000 4.5
--------------------- ------------ ------------ ------------- ---------------- ---------------
New large bar mill 646,600 2004 624,000 22,600 3.4
--------------------- ------------ ------------ ------------- ---------------- ---------------
Total 1,846,600 1,769,000 77,600 11.6
--------------------- ------------ ------------ ------------- ---------------- ---------------
</TABLE>
9.3 New Large Bar Mill Ramp Up
As previously indicated, we feel that the new large bar mill will require 18 to
24 months to reach capacity rather than 15 months as stated in the plan. The
planned production volumes for 2003 and 2004 can be maintained by operating the
18" mill for a longer period of time prior to shutting it down. At an
approximate monthly fixed cost of $1.85 million for the 18" mill (Republic
values), the added costs would be $5.5 million for an 18 month start-up or $16.5
million for a 24 month start-up. This reduction would occur only over years 2003
- - 2004.
9.4 Cash Flow Implication Summary
In summary, we expect EBITDA to be decreased by $19.5 million and $22.9 million
in 2003 and 2004 respectively, as shown in Table 9-4.
Table 9.4
Summary of Recurring EBITDA Reductions
------------------------ -------------------------- -------------------------
Reason Year 2003 Year 2004
EBITDA Reduction EBITDA Reduction
($ million) ($ million)
------------------------ -------------------------- -------------------------
Operating costs 11.3 11.3
------------------------ -------------------------- -------------------------
Production volume 8.2 11.6
------------------------ -------------------------- -------------------------
Total 19.5 22.9
------------------------ -------------------------- -------------------------
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Bar Technologies Inc., and the
Bar Division of USS/Kobe Steel Company Consolidation Plan
- --------------------------------------------------------------------------------
Independent Engineer's Report
Additionally, we expect an EBITDA reduction of between $5.5 million and $16.5
million occurring only over the 2003 - 2004 time period due to a longer ramp-up
period required for the new large bar mill.
The EBITDA reductions shown here are based on our judgement of the technical and
operational aspects of the business plan. Certainly, new decreased production
levels due to a downturn in RTI steel markets could have significant impact on
revenues and operating costs. Such market related sensitivities were outside of
our scope of work.
Beddows & Company
Hatch Management and Technology Consulting
/s/ Gerald A. Karelus
By: Gerald A. Karelus
Director
GAK:ml
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