<PAGE> 1
FORM 10-Q/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the three month period ended March 31, 2000 Commission File Number:
333-90709-04
------------
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 34-1902647
--------------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3770 EMBASSY PARKWAY
AKRON, OHIO 44333-8367 (330) 670-3000
---------------------------------------- ----------------------------------
(Address of principal executive offices) (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of shares outstanding of common stock as of May 11, 2000: AS OF MAY 11,
2000, THERE WERE 1,100 CLASS A UNITS OF MEMBERS' INTEREST, 1,000 CLASS B UNITS
OF MEMBERS' INTEREST AND 30,000 CLASS C UNITS OF MEMBERS' INTEREST OUTSTANDING.
<PAGE> 2
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
------------------------------
This 10-Q/A is being filed to restate the financial statements as of March 31,
2000 and for the three months ended March 31, 2000 to restate depreciation
expense and accumulated depreciation related to certain of the Registrant's
property, plant and equipment and to restate segment profit.
Item 1. Unaudited Financial Statements
Consolidated/Combined Statements of Operations for the
Three Months Ended March 31, 2000 and 1999 3
Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 4
Consolidated/Combined Statements of Members'
Interest/Stockholders' Deficit for the Period from January
1, 1999 to August 12, 1999 and the Period from August 13,
1999 to December 31, 1999 and the Three Months Ended March
31, 2000 5
Consolidated/Combined Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 6
Notes to Consolidated/Combined Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-17
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 17
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1 - UNAUDITED FINANCIAL STATEMENTS
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED/COMBINED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2000 and 1999
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
The Company -
Consolidated The Predecessor -
Three Months Combined
Ended March 31, 2000 Three Months
(As Restated-See Note 8) Ended March 31, 1999
------------------------------ ---------------------------
<S> <C> <C>
Net sales $351,843 $220,408
Cost of goods sold 327,445 208,840
------------------------------ ---------------------------
Gross profit 24,398 11,568
Selling, general and administrative expense 15,574 13,392
Depreciation and amortization expense 15,695 8,460
Workforce reduction charges (Note 5) 2,783 21,454
Other (income) expense, net 944 (228)
------------------------------ ---------------------------
Operating loss (10,598) (31,510)
Interest expense, net 26,721 19,245
------------------------------ ---------------------------
Loss before income taxes (37,319) (50,755)
Provision for income taxes 175 93
------------------------------ ---------------------------
Net loss $ (37,494) (50,848)
==============================
Preferred stock dividends 96
---------------------------
Net loss applicable to common shares $ (50,944)
============================
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and December 31, 1999
(In thousands of dollars)
(Unaudited)
March 31, 2000
(As Restated-See Note 8) December 31, 1999
--------------------------- --------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,902 $ 4,637
Accounts receivable, less allowances of $20,808 and $27,237, respectively 203,421 157,166
Inventories (Note 4) 233,267 284,668
Assets held for sale (Note 7) 12,800 15,219
Prepaid expenses and other current assets 6,425 7,907
--------------------------- --------------------
Total current assets 460,815 469,597
Property, plant and equipment:
Land and improvements 15,714 15,875
Buildings and improvements 41,983 43,032
Machinery and equipment 754,725 736,300
Construction-in-progress 9,515 25,361
--------------------------- --------------------
Total property, plant and equipment 821,937 820,568
Accumulated depreciation (70,463) (56,802)
--------------------------- --------------------
Net property, plant and equipment 751,474 763,766
Assets held for sale (Note 7) 8,565 9,009
Intangible assets, net of accumulated amortization of $13,493 and $11,203,
respectively 161,185 163,479
Other assets 9,525 9,567
--------------------------- --------------------
Total assets $1,391,564 $1,415,418
=========================== ====================
LIABILITIES AND MEMBERS' INTEREST
Current liabilities:
Accounts payable $ 196,723 $ 196,050
Accrued interest 18,359 26,494
Accrued compensation and benefits 50,669 50,162
Other postretirement benefits 15,365 15,365
Defined benefit pension obligations 47,500 42,000
Other accrued liabilities 45,384 57,599
Current maturities of long-term debt 2,391 2,391
Revolving credit facilities 365,616 336,397
--------------------------- --------------------
Total current liabilities 742,007 726,458
Long-term debt 481,165 481,062
Accrued environmental liabilities 17,166 17,373
Other postretirement benefits 215,577 204,268
Defined benefit pension obligations 43,526 56,480
Other liabilities 40,641 40,758
--------------------------- --------------------
Total liabilities 1,540,082 1,526,399
Members' interest:
Class A Units of Members' interest 5,757 5,661
Class B Units of Members' interest (184,559) (146,594)
Class C Units of Members' interest 31,000 30,625
Accumulated other comprehensive loss (716) (673)
--------------------------- --------------------
Total members' interest (148,518) (110,981)
--------------------------- --------------------
Total liabilities and members' interest $1,391,564 $1,415,418
=========================== ====================
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED/COMBINED STATEMENTS OF MEMBERS' INTEREST/STOCKHOLDERS' DEFICIT
For the Period From January 1, 1999 to August 12, 1999 and the Period from August 13, 1999 to December 31, 1999
and the Three Months Ended March 31, 2000
(As Restated - See Note 8)
(In thousands of dollars)
(Unaudited)
Members' Interest
---------------------------------------------------------------------------
Class A Class B Class C
Units Units Units
------------------------ ---------------------- ------------------------
<S> <C> <C> <C>
Balance, January 1, 1999
Net loss
Other comprehensive income:
Foreign currency translation
adjustment
Minimum pension liability
adjustment
Preferred stock dividends
------------------------ ---------------------- ------------------------
Balance, August 12, 1999
Exchange of members' interest to
effect combination $ 5,500 $ 67,468 $ 30,000
Preferred return 161 (786) 625
Net loss (213,276)
Other comprehensive income:
Foreign currency translation
adjustment
------------------------ ---------------------- ------------------------
Balance, December 31, 1999 5,661 (146,594) 30,625
Preferred return 96 (471) 375
Net loss (37,494)
Other comprehensive income:
Foreign currency translation
adjustment
------------------------ ---------------------- ------------------------
Balance, March 31, 2000 $ 5,757 $ (184,559) $ 31,000
======================== ====================== ========================
<CAPTION>
Bar Technologies Inc.
-------------------------------------------------------------------------------------
Series B Class A Class B Class C
Preferred Common Common Common Warrants
Stock Stock Stock Stock Outstanding
------------- -------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $ - $ - $ 1 $ 1 $ 5,119
Net loss
Other comprehensive income:
Foreign currency translation
adjustment
Minimum pension liability
adjustment
Preferred stock dividends
------------- -------------- --------------- ---------------- ----------------
Balance, August 12, 1999 - - 1 1 5,119
Exchange of members' interest to
effect combination (1) (1) (5,119)
Preferred return
Net loss
Other comprehensive income:
Foreign currency translation
adjustment
------------- -------------- --------------- ---------------- ----------------
Balance, December 31, 1999 $ - $ - $ - $ - $ -
============= ============== =============== ================ ================
Preferred return
Net loss
Other comprehensive income:
Foreign currency translation
adjustment
Balance, March 31, 2000
<CAPTION>
Total
Accumulated Members'
Additional Other Interest/
Paid-In Accumulated Comprehensive Stockholders' Comprehensive
Capital Deficit Income (Loss) Deficit Income (Loss)
---------------- ----------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $ 158,510 $ (230,004) $ (3,682) $ (70,055) $ (116,746)
================
Net loss (114,913) (114,913) $ (114,913)
Other comprehensive income:
Foreign currency translation
adjustment 157 157 157
Minimum pension liability
adjustment 2,491 2,491 2,491
Preferred stock dividends (224) (224)
---------------- ----------------- --------------- ----------------- ----------------
Balance, August 12, 1999 158,510 (345,141) (1,034) (182,544) $ (112,265)
================
Exchange of members' interest to
effect combination (158,510) 345,141 284,478
Preferred return
Net loss (213,276) $ (213,276)
Other comprehensive income:
Foreign currency translation
adjustment 361 361 361
---------------- ----------------- --------------- ----------------- ----------------
Balance, December 31, 1999 $ - $ - (673) (110,981) $ (212,915)
================ ================= ================
Preferred return
Net loss (37,494) $ (37,494)
Other comprehensive income:
Foreign currency translation
adjustment (43) (43) (43)
--------------- ----------------- ----------------
Balance, March 31, 2000 $ (716) $ (148,518) $ (37,537)
=============== ================= ================
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
5
<PAGE> 6
<TABLE>
<CAPTION>
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2000 and 1999
(In thousands of dollars)
(Unaudited)
The Company -
Consolidated
Three Months The Predecessor -
Ended March 31, 2000 Combined
(As Restated - See Three Months
Note 8) Ended March 31, 1999
-------------------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(37,494) $(50,848)
Adjustments to reconcile net cash used
in operating activities:
Loss on sale of fixed assets 26 --
Depreciation and amortization 15,695 8,460
Accretion of original issue discount 658 2,771
Amortization of deferred financing cost 709 1,893
Changes in operating assets and liabilities:
Increase in accounts receivable (46,255) (52,941)
(Increase) decrease in inventory 51,401 (12,281)
(Increase) decrease in other current assets 1,482 (545)
Increase in accounts payable 673 48,313
Increase in accrued compensation and
benefits 507 4,476
Decrease in defined benefit pension obligations (7,454) (6,037)
Increase in other postretirement benefits 11,309 3,144
Increase (decrease) in accrued environmental
liabilities (207) 1,377
Increase (decrease) in other current liabilities (20,382) 19
Other 2,678 929
-------------------------- ---------------------
NET CASH USED IN OPERATING ACTIVITIES (26,654) (51,270)
-------------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,487) (8,290)
Disposition of property, plant and equipment 1,785 --
-------------------------- ---------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,702) (8,290)
-------------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt -- 61,400
Net proceeds (repayments) under revolving credit
facilities 29,219 (1,082)
Repayments of long-term debt (555) (2,432)
Preferred stock dividends -- (96)
-------------------------- ---------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 28,664 57,790
-------------------------- ---------------------
Effect of exchange rate changes on cash (43) 139
-------------------------- ---------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 265 (1,631)
Cash and cash equivalents - beginning of period 4,637 5,948
-------------------------- ---------------------
Cash and cash equivalents - end of period $ 4,902 $ 4,317
========================== =====================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized $ 33,489 $ 3,248
======================== =======================
Cash paid for income taxes $ 317 $ 17
======================== ======================
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
6
<PAGE> 7
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
(In thousands of dollars, except as noted)
(Unaudited)
1. NATURE OF OPERATIONS, ORGANIZATION AND OTHER RELATED INFORMATION
Republic Technologies International Holdings, LLC and subsidiaries ("RTI" or the
"Company") manufactures and markets special bar quality ("SBQ") steel bar
products. SBQ steel bar products are high quality hot-rolled and cold-finished
carbon and alloy steel bars and rods used primarily in critical applications in
automotive and industrial equipment industries. The Company produces a wide
range of SBQ steel products and supplies a diverse customer base that includes
leading automobile and industrial equipment manufacturers and their first tier
suppliers.
The Company was formed in a combination completed on August 13, 1999 (the
"Combination"). The Combination was completed through a series of mergers, asset
transfers and related steps as set forth in a Master Restructuring Agreement
among Bar Technologies Inc. ("BarTech"), Republic Engineered Steels, Inc.
("Republic"), USS/Kobe Steel Company and various of their affiliates. Following
the Combination, Republic Technologies International, LLC ("Republic
Technologies"), a newly formed legal entity and wholly owned subsidiary of the
Company, directly or indirectly owns and operates all of the assets of BarTech,
Republic and USS/Kobe Steel Company's SBQ steel products business ("USS/Kobe").
BarTech and Republic have been operated under common management and ownership
control since prior to the Combination. The consolidated financial statements of
RTI are being presented from the date of the Combination. Comparative combined
financial statements are being presented for BarTech and Republic for the
periods that they were under common control prior to the Combination (the
"Predecessor").
The Company and the individual companies included in the Combination, BarTech,
Republic and USS/Kobe, have historically incurred substantial losses. As a
result of the Combination, the Company has substantial indebtedness and is
highly leveraged. The Company's future performance is subject to the success of
its consolidation plan pursuant to which the Company expects to create a more
efficient, higher quality network of production facilities operated by a smaller
and more flexible workforce. The success of the consolidation plan will depend
on many factors including the Company's ability to rationalize its production
facilities and headcount, enhance the productivity of its remaining facilities
through facility specialization and targeted capital investment, eliminate
redundant overhead costs and produce internally more raw materials currently
purchased from third parties. The Company's future success will also depend on
general economic conditions and financial competitive, regulatory, labor and
other factors, many of which are unforeseen and beyond the Company's control.
While the Company's performance met expectations during the first quarter of
2000, it's performance during the third and fourth quarters of 1999 was below
expectations, causing the Company's liquidity to be negatively affected. The
Company's liquidity position has also been negatively impacted by the
implementation of the Company's consolidation plan as a result of the time lag
between the incurrence of certain costs and the receipt of the expected cash
flow benefits, such as in the case of headcount reductions requiring lump sum
payouts. The Company's net availability on its revolving credit facility at
April 30, 2000 was $16.5 million.
Management has sought to improve the Company's liquidity position by taking a
number of actions including, increasing spot prices, reducing administrative
staff, aggressive cost cutting programs, scaling back operations at its
Johnstown facility and reducing inventories. The Company has also reduced its
planned capital expenditures from $48 million to $19 million for the year 2000,
has obtained deferrals of $11 million of certain quarterly Pension Benefit
Guaranty Corporation ("PBGC") funding requirements until July 2000, obtained
deferrals of trade credit from a significant supplier from June through October
of 2000, and obtained a deferral from the Ohio Environmental Protection Agency
(the "Ohio EPA") of $1.2 million of committed environmental expenditures until
2001. Management is also pursuing additional financing from the State of Ohio.
The Company is in the process of selling its specialty steels division and
expects to complete the sale in the second quarter of this year (see Note 7).
The Company is also in the process of selling certain real estate from
facilities closed as part of the consolidation plan.
Notwithstanding these efforts, the Company may need to obtain additional
financing to meet its cash flow requirements, including financing through the
sale of additional debt or equity securities. Restrictive covenants included in
the indenture relating to the senior secured notes and other debt obligations
limit the Company's ability to incur additional indebtedness, or
7
<PAGE> 8
sell assets (most of which are pledged), and may otherwise limit the operational
and financial flexibility of the Company. The ability to sell its assets may
also be constrained by the provisions of the Company's new labor agreement.
2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated/combined financial statements contain results for
BarTech and Republic for the three months ended March 31, 2000 and 1999, and the
results for USS/Kobe for the three months ended March 31, 2000. Prior period
results are not comparable with the current periods due to the acquisition
USS/Kobe on August 13, 1999.
These consolidated/combined statements are unaudited. Certain information and
footnote disclosures normally prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Although management
believes that all adjustments, including normal recurring adjustments necessary
for a fair presentation, have been made, interim periods are not necessarily
indicative of the results of operations for a full year. As such, these
financial statements should be read in conjunction with the audited financial
statements and notes thereto for the year ended December 31, 1999 included in
the Company's Form 10-K, filed with the Securities and Exchange Commission.
The consolidated financial statements include the accounts of RTI and its wholly
owned subsidiaries. The combined financial statements include the accounts of
BarTech and its wholly owned subsidiaries and Republic and its wholly owned
subsidiaries for the periods that they were under common control prior to the
Combination. All significant intercompany balances have been eliminated in
consolidation. Certain reclassifications have been made to prior period
financial statements to conform to current period presentation.
Republic has been under common management and control since September 8, 1998,
the date acquired. The acquisition of Republic has been accounted for as a
purchase. The combining of BarTech and Republic in the Combination is being
accounted for as a common control merger like a pooling of interests. The
acquisition of USS/Kobe as part of the Combination is being accounted for as a
purchase. See Note 3 for additional information related to the common control
combination of BarTech and Republic and information related to the acquisition
of USS/Kobe.
The Company operates in three separate segments: hot-rolled, cold-finished and
specialty steels. In connection with the acquisition of Republic, the Company
determined its intent to sell the specialty steels segment of the business. The
Company manages the reportable segments as separate strategic business units.
Differences between the segments include manufacturing techniques and equipment,
competition and end-users. The Company is in the process of selling its
specialty steels division. The accompanying consolidated/combined financial
statements reflect the specialty division as a discontinued business in
accordance with Accounting Principles Board Opinion No. 30. See Note 7 for
further information related to discontinued operations.
3. BUSINESS COMBINATIONS
On August 13, 1999, the Combination of BarTech, Republic and USS/Kobe was
completed. The Combination occurred through a series of mergers, asset transfers
and related steps that resulted in the formation of the Company. Assuming
exercise of outstanding warrants and conversion of outstanding convertible
preferred stock of the Company's parent and exchange of Members' Interests by
USX Corporation ("USX") and Kobe Steel, Ltd. ("Kobe"), Blackstone Capital
Partners II Merchant Banking Fund L.P. and its affiliates (together,
"Blackstone") and Veritas Capital Fund, L.P. and its affiliates (together,
"Veritas") indirectly own approximately 51.5 percent of the newly combined
operations, while USX and Kobe each indirectly own approximately 15 percent of
the newly combined operations. In conjunction with the Combination, the Company
entered into a new credit facility and applied proceeds from borrowings under
this new credit facility, together with proceeds of an offering of the senior
secured notes and warrants, including warrants sold separately from the senior
secured notes concurrent with the Combination, and new equity contributions, to
refinance a substantial portion of the indebtedness of Republic, RES Holding
(Republic's parent), BarTech and USS/Kobe.
8
<PAGE> 9
Combined and separate results of BarTech and Republic during the periods
preceding the Combination, while under common control, were as follows:
<TABLE>
<CAPTION>
BarTech Republic Adjustment Combined
---------------- --------------- -------------- ---------------
Three months ended March 31, 1999
<S> <C> <C> <C> <C>
Net sales $ 59,777 $160,631 -- $220,408
Net loss (7,262) (43,586) -- (50,848)
</TABLE>
The adjustments made to conform accounting policies of the two companies had no
impact on the combined financial results presented above. The amount of
intercompany profit in inventory at the end of each period is not significant.
The acquisition of USS/Kobe has also been accounted for using the purchase
method of accounting. The purchase price for USS/Kobe totaled approximately
$102,743, including transaction costs and net of cash acquired of $14,621.
Consideration in the transaction included equity to the sellers valued at
approximately $83,756 and seller debt assumed of $23,844. Under purchase
accounting, the total purchase cost is allocated to the assets acquired and
liabilities assumed of USS/Kobe based on their respective fair values as of
August 12, 1999, based on valuations and other studies that are not yet
finalized. The actual allocation of purchase price and the resulting effect on
income from operations may differ significantly from these preliminary
estimates. The excess of the fair value of the net assets of USS/Kobe over the
purchase price (i.e., purchase discount) of $5,445 has been recorded as a
reduction of property, plant and equipment.
The purchase price has been allocated to the assets purchased and liabilities
assumed based upon the fair values on the date of the acquisition as follows:
<TABLE>
<CAPTION>
USS/Kobe
--------------
<S> <C>
Purchase price:
Fair value of equity consideration $ 83,756
Additional seller debt assumed 23,844
Acquisition fees and expenses 9,764
--------------
Total purchase price 117,364
Book value of net assets acquired 206,859
==============
Excess purchase price over (discount from) book value
of net assets acquired (89,495)
Allocation of purchase price:
Increase in inventory (3,290)
Decrease in prepaids and other current assets 1,077
Decrease in property, plant and equipment 6,838
Decrease in intangible and other assets 2,475
Decrease in accounts payable (217)
Increase in accrued expenses 3,888
Increase in other postretirement benefits 47,032
Increase in defined benefit pension obligation 26,247
--------------
Purchase discount $ (5,445)
==============
</TABLE>
The following pro forma information presents the consolidated results of
operations assuming the Combination was completed as of the beginning of January
1999:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
(in millions) 1999
-------------------
<S> <C>
Net sales $ 350.4
Net loss from continuing operations $ (71.5)
</TABLE>
9
<PAGE> 10
The pro forma results have been prepared for comparative purposes only and
include certain adjustments, such as reduced depreciation expense as a result of
fair value adjustments to the basis of property, plant and equipment, net of the
purchase discount, and increased interest expense resulting from borrowing under
the new revolving credit facility and senior secured notes. They do not purport
to be indicative of the results of operations which actually would have resulted
had the Combination been in effect on January 1, 1999.
4. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
------------------------- ----------------------
<S> <C> <C>
Raw materials $ 29,522 $ 64,055
Semi-finished and finished goods 203,745 220,613
------------------------- ----------------------
Total $233,267 $284,668
========================= ======================
</TABLE>
At March 31, 2000 and December 31, 1999, inventories are net of market reserves
and obsolescence reserves aggregating $5,500 and $13,585, respectively.
5. WORKFORCE REDUCTION CHARGES
The new Master Collective Bargaining Agreement and settlement agreement
(collectively, the "Master CBA") requires Republic Technologies to offer Early
Retirement Buyouts ("ERB's") to at least 1,000 employees and permits Republic
Technologies to offer a Voluntary Severance Plan ("VSP"). The purpose of these
programs is to reduce the hourly workforce by a net reduction of over 1,900
hourly employees over four years. These programs are substantially voluntary in
nature. Accordingly, the costs associated with these workforce reductions are
being recognized as charges to operations as the offers for ERB's and VSP's are
accepted by the employees and intended to be awarded by Republic Technologies.
Through March 31, 2000, 755 voluntary ERB packages were accepted. As such,
Republic Technologies has recorded $97,985 of workforce reduction charges to
date for early retirement benefits, including pension and other postretirement
obligations and special termination payments. During the three months ended
March 31, 2000 and 1999, 6 and 190, respectively, voluntary ERB packages were
accepted and corresponding workforce charges of $1,236 and $21,454,
respectively, were recorded.
Under the terms of Master CBA, if the ERB's and VSP's do not achieve targeted
headcount reductions, Republic Technologies will have the flexibility to reduce
the hourly workforce by approximately 300 employees in addition to the number of
accepted ERB's and VSP's. Pursuant to the Master CBA, USWA represented employees
will be eligible for Supplemental Unemployment Benefits (SUB) and the
continuation of certain health insurance benefits.
During the three months ended March 31, 2000, workforce reduction charges
included $1,547 of severance related costs for administrative staff reductions.
6. SEGMENT INFORMATION
The Company operates in three reportable segments: hot-rolled, cold-finished and
specialty steels. As discussed previously in Note 1, the Company intends to sell
its specialty steel division and accordingly, the accompanying
consolidated/combined financial statements reflect that division as a
discontinued operation in accordance with Accounting Principles Board Opinion
No. 30. As such the following tables do not reflect specialty steels as a
reportable segment. The Company manages the reportable segments as separate
strategic business units. Differences between the segments include manufacturing
techniques and equipment, competition, and end-users. The Company measures
segment performance based on earnings before net interest expense, income taxes,
depreciation and amortization expense, other postretirement benefit charges,
workforce reduction charges and other (income) loss, net ("EBITDA, as defined").
HOT-ROLLED
Hot-rolled bars and rods are processed from blooms and billets on rolling mills
to change the internal physical properties, size or shape of the steel.
Desirable characteristics of hot-rolled products include internal soundness,
uniformity of chemical composition and freedom from surface imperfection. The
Company's hot-rolled products include rounds, squares and hexagons, in both
cut-lengths and coils. Customers for hot-rolled products include manufacturers
of automotive parts, industrial equipment, independent forgers, steel service
centers and converters. The Company's hot-rolled products are used in the
manufacture of end-use products such as automotive drive trains, engine and
transmission parts, bearings and tractor components.
10
<PAGE> 11
COLD-FINISHED
Cold-finishing is a value-added process which improves the physical properties
of hot-rolled bars and rods. Cold-finished products are produced from hot-rolled
bars by cold-drawing, turning, grinding, thermal treating or a combination of
these processes. The manufacturing process allows for production of products
with more precise size and straightness tolerances, as well as improved strength
and surface finish, that provides customers with a more efficient means of
producing a number of end products by often eliminating processing steps in the
customers' use of the products. The Company's cold-finished products include
rounds, squares, hexagons, and flats, all of which can be further processed by
turning, grinding or polishing, or a combination thereof. Customers for
cold-finished products include manufacturers of automotive parts, industrial
equipment, steel service centers and distributors. The Company's cold-finished
products are used in the manufacture of end-use products such as automotive
steering assemblies, electrical motor shafts, ball and roller bearings, valves
and hand tools.
Intersegment sales are made at an agreed upon transfer cost which is adjusted
quarterly and are eliminated in consolidation. Selling, general and
administrative and other costs are allocated 80% to hot-rolled and 20% to
cold-finished. Pension costs are allocated based on the amount of payroll
incurred by each segment.
<TABLE>
<CAPTION>
For the Three Months Ended March 31, 2000 (As Restated - See Note 8)
-----------------------------------------------------------------------------
Inter Segment
Cold- Total Elimination/
Hot-Rolled Finished Segments Other Consolidated
<S> <C> <C> <C> <C> <C>
Net sales $ 309,079 $ 81,321 $ 390,400 $ (38,557) $ 351,843
Depreciation and amortization 14,479 1,216 15,695 -- 15,695
Segment profit (EBITDA,
as defined) 10,838 3,500 14,338 -- 14,338
Segment assets 1,200,718 265,925 1,466,643 (75,079) 1,391,564
Capital expenditures 3,248 239 3,487 -- 3,487
<CAPTION>
For the Three Months Ended March 31, 1999
-----------------------------------------------------------------------------
Inter Segment
Cold- Total Elimination/
Hot-Rolled Finished Segments Other Consolidated
<S> <C> <C> <C> <C> <C>
Net sales $ 140,277 $ 89,163 $ 229,440 $ (9,032) $ 220,408
Depreciation and amortization 7,247 1,213 8,460 -- 8,460
Segment profit (EBITDA,
as defined) (333) 663 330 -- 330
Segment assets 1,324,612 149,963 1,474,575 (59,157) 1,415,418
Capital expenditures 7,621 669 8,290 -- 8,290
</TABLE>
7. DISCONTINUED OPERATIONS
In connection with its acquisition of Republic, the Company determined its
intent to sell its specialty steel division and accordingly, the accompanying
consolidated financial statements reflect that division as a discontinued
operation in accordance with Accounting Principles Board Opinion No. 30. An
estimate of the operating results of the specialty steels division during the
phase-out period from the acquisition date to the estimated ultimate disposition
date was made and included as a fair value adjustment as part of the allocation
of the Republic purchase price.
In April 1999, the Company entered into an agreement with Haynes, a leading
manufacturer of nickel and cobalt based alloys, to manage the Company's
Specialty Steels division. According to the terms of the agreement, the Company
pays Haynes a management fee based upon the allocable portion of total costs
incurred by Haynes attributable to management activities of the combined
operations. The Company and Haynes are affiliates as both companies are
controlled directly or indirectly by entities associated with The Blackstone
Group. The Company is currently in the process of selling its specialty
division. Management anticipates the sale to be completed during the second
quarter of this year.
11
<PAGE> 12
Sales and related losses for the discontinued operations were as follows (net
loss on discontinued operations has been reflected in the Company's financial
statements as a reduction in the accrual for losses on the discontinued
operations that was provided as part of the estimated loss on disposition):
Three Months Ended March 31,
----------------------------------------
2000 1999
----------------------------------------
Net sales $ 12,662 $ 13,028
Gross loss (2,651) (869)
Loss before income taxes (3,843) (2,071)
Provision for income taxes -- --
----------------------------------------
Net loss $ (3,843) $ (2,071)
========================================
The components of net assets of discontinued operations included in the
Company's consolidated balance sheets as assets held for sale were as follows:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
----------------- -----------------
<S> <C> <C>
Assets held for sale, current- Inventories $12,800 $15,219
============ ===========
Assets held for sale, non-current - Property, plant
and equipment $ 8,565 $ 9,009
============ ===========
</TABLE>
8. RESTATEMENT
Subsequent to the issuance of the Registrant's financial statements for the
three months ended March 31, 2000, management determined that depreciation
expense in the first quarter of 2000 was recorded on the property, plant and
equipment related to the acquisition of USS/Kobe based on historical costs prior
to purchase accounting adjustments. Additionally, the Company determined that
expenses should be reallocated between its hot-rolled and cold-finished segments
causing a change in segment profit by segment. Accordingly, the accompanying
financial statements as of March 31, 2000 and for the three months ended March
31, 2000, have been restated to account for the transactions identified. A
summary of the significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
As Previously
Reported As Restated
--------------- --------------
<S> <C> <C>
COMBINED/CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 2000:
Depreciation and amortization expense $ 20,467 $ 15,695
Operating loss (15,370) (10,598)
Loss before income taxes (42,091) (37,319)
Net loss (42,266) (37,494)
COMBINED BALANCE SHEET AS OF MARCH 31, 2000:
Accumulated depreciation $ (75,235) $ (70,463)
Class A Units of Members' interest (189,331) (184,559)
NOTE 6 - SEGMENT INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 2000:
Depreciation and amortization - Hot-Rolled $ 19,251 $ 14,479
Segment profit (loss) - Hot-Rolled (2,296) 10,838
Segment profit - Cold-Finished 16,634 3,500
Segment assets - Hot-Rolled 1,195,946 1,200,718
</TABLE>
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Subsequent to the issuance of the Registrant's financial statements for the
three months ended March 31, 2000, management determined that depreciation
expense in the first quarter of 2000 was recorded on the property, plant and
equipment related to the acquisition of USS/Kobe based on historical costs prior
to purchase accounting adjustments. Additionally, the Company determined that
expenses should be reallocated between its hot-rolled and cold-finished segments
causing a change in segment profit by segment. Accordingly, the accompanying
financial statements as of March 31, 2000 and for the three months ended March
31, 2000, have been restated to account for the transactions identified.
GENERAL
The Company is the largest producer of special bar quality steel products in the
United States with a market share of approximately 22%, based on 1999 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. The Company produces the widest range of SBQ steel products in the
United States and supplies a diverse customer base that includes leading
automobile and industrial equipment manufacturers and their first tier
suppliers.
RESULTS OF OPERATIONS
The consolidated/combined results of operations include BarTech and Republic for
the three months ended March 31, 2000 and 1999, and for USS/Kobe for the three
months ended March 31, 2000. The results for USS/Kobe are included in the
Company's consolidated results of operations from its acquisition date, August
13, 1999. Accordingly, prior period results are not comparable with the current
period. The results for the three months ended March 31, 2000, are not
necessarily indicative of the results to be expected for the full year ended
December 31, 2000.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1999
Net sales for the three months ended March 31, 2000 totaled $351.8 million on
shipments of approximately 708,800 net tons compared with net sales of $220.4
million for the three months ended March 31, 1999 on shipments of approximately
325,800 tons. The increase in net sales and tons shipped reflects the inclusion
of the results of USS/Kobe in the results for the three months ended March 31,
2000. Net sales for the three months ended March 31, 2000 were comprised of
$270.5 million for hot-rolled and $81.3 million for cold-finished, compared with
hot-rolled net sales of $131.2 million and cold-finished net sales of $89.2
million for the three months ended March 31, 1999.
There was an overall decrease in net selling value per ton shipped of $180.12
from the three months ended March 31, 1999 to the three months ended March 31,
2000. The Company's hot-rolled net selling value per ton shipped decreased
because of a shift in the product mix which includes seamless rounds and other
lower priced semi-finished products from the Company's Lorain plant that was not
produced prior to the Combination. This was partially offset with an increase in
net selling value per ton shipped for the Company's cold-finished products. The
reason for this increase is due to the several thousand ton decrease in
shipments of a lower value cold-finished product. Additionally, there were two
spot price increases in both cold-finished and hot-rolled products during the
three months ended March 31, 2000, due to strengthening demand in the domestic
steel market.
Cost of sales totaled $327.4 million, or 93.1% of net sales, for the three
months ended March 31, 2000 compared with cost of sales of $208.8 million, or
94.8% of net sales, for the similar period ended March 31, 1999. Cost of sales
for the three months ended March 31, 2000 consisted of $252.7 million on
hot-rolled products and $74.7 million on cold-finished products compared with
$132.8 million on hot-rolled products and $76.0 million on cold-finished
products for the three months ended March 31, 1999. The overall decrease in cost
of sales as a percentage of net sales from the three months ended March 31, 1999
to the three months ended March 31, 2000 was primarily due to the decrease in
sales of a specific cold-finished product that sold at a negative margin. In
addition, the Company's cold-finished segment sourced significantly more
hot-rolled bar internally at lower costs than purchased materials.
Selling, general and administrative expenses were $15.6 million, or 4.4% of net
sales, for the three months ended March 31, 2000 compared with $13.4 million, or
6.1% of net sales, for the three months ended March 31, 1999. The overall
decrease in selling, general and administrative expenses as a percentage of net
sales is due in part to the continuing benefits derived from combining selling,
general and administrative functions following the Combination. Additionally
there was a further reduction in selling, general and administrative headcount
during the quarter that was not initially contemplated as part of the
Combination.
13
<PAGE> 14
Depreciation and amortization expense was $15.7 million for the three months
ended March 31, 2000, compared with $8.5 million for the three months ended
March 31, 1999. Approximately $6.8 million of the increase was due to the
increase in property, plant and equipment associated with the acquisition of
USS/Kobe.
Workforce reduction charges were $2.8 million for the three months ended March
31, 2000, compared with $21.5 million for the three months ended March 31, 1999.
The reason for the decrease was due to only 6 voluntary early retirement buyouts
("ERBs") being accepted during the first three months of 2000 as compared to 190
ERBs accepted during the first three months of 1999. The workforce reduction
charges for the three months ended March 31, 2000 also included $1.5 million of
severance related costs for administrative staff reductions.
Net interest expense was $26.7 million for the three months ended March 31, 2000
compared with $19.2 million for the three months ended March 31, 1999. The $7.5
million increase in net interest expense was attributable to the higher average
borrowings outstanding following the completion of the Combination and higher
average interest rates of the new borrowings compared to the borrowings repaid
in connection with the Combination.
The provision for income taxes for the three month periods ended March 31, 2000
and 1999, consisted of currently payable income taxes, primarily foreign income
taxes owed by Canadian Drawn Steel Company ("CDSC").
As a result of the above, the Company reported a net loss of $37.5 million for
the three months ended March 31, 2000 compared with a net loss of $50.9 million
for the three months ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs relate to working capital needs, funding
requirements relating to its agreement with the PBGC, capital expenditures and
other costs relating to the Company's consolidation plan, debt service
requirements and tax distributions to the Company's members.
PBGC Obligations
----------------
In connection with the Combination, Republic Technologies agreed with the PBGC
to fund $178 million into the Republic Engineered Steels, Inc. USWA Defined
Benefit Plan, a defined benefit pension plan for employees represented by the
USWA in connection with the headcount reduction and related early retirement
benefits contemplated by the Company's consolidation plan. Of the $178 million,
$58.5 million has been funded through April 11, 2000 with an additional $33.7
million to be funded by January 1, 2001, $18.5 million of which is due July 1,
2000. After such time Republic Technologies will be required to make the
additional quarterly contributions in accordance with the following schedule:
$7.6 million per quarter for the next two payments, $9.1 million per quarter for
the next four payments and $8.5 million per quarter for the final four payments.
In addition, pursuant to the Company's consolidation plan, Republic Technologies
will offer a combination of ERB packages and voluntary severance plans to its
employees, which the Company currently expects will include expenditures outside
its defined benefit plan of up to approximately $36 million over the next 5
years. The actual cost of the ERB packages and voluntary severance plans will
depend on the mix of such arrangements offered to and accepted by the hourly
employees represented by the USWA.
In addition, with respect to the USS/Kobe Union Eligible Pension Plan, a defined
benefit plan for union employees, Republic Technologies has agreed with the PBGC
to maintain a specified level of funding based on statutory funding
requirements. The contributions shall be made as follows: for the year 2000, an
amount necessary to avoid an accumulated funding deficiency plus $4 million ($6
million); for 2001, an amount so that the December 31, 2001 credit balance
equals that of December 31, 2000 with interest plus $2 million; for 2002, an
amount so that the December 31, 2002 credit balance equals that of December 2001
with interest plus $2 million; for 2003, an amount so that the December 31, 2003
credit balance equals that of December 31, 2002 with interest plus $2 million.
Beginning with 2004, Republic Technologies shall make contributions to maintain
the December 31, 2003 credit balance with interest. As security for such
obligation, Republic Technologies has provided the PBGC with a $5 million letter
of credit. The Company currently estimates that approximately $53.6 million of
fundings will be required in connection with these obligations.
Capital Expenditures
--------------------
The Company has incurred approximately $3.5 million on capital expenditures
during the first three months of 2000. The Company's four year consolidation
plan contemplates capital expenditures of an additional $15.5 million in 2000,
$56 million in 2001, $113 million in 2002 and $88 million in 2003. The
consolidation plan originally contemplated construction of new large
14
<PAGE> 15
bar mill which management estimates would cost approximately $90 million. The
Company anticipates receiving an estimated $11 million in government assisted
borrowings to fund a portion of this construction. The remaining funds required
to construct the new bar mill may be obtained from a combination of operating
cash flow, additional borrowings under the new credit facility, to the extent
then available, and proceeds from sales of assets and/or sales of debt or equity
securities. The plan to construct this facility is currently under review.
Debt Service Requirements
-------------------------
In conjunction with the Combination, Republic Technologies completed a private
offering of $425 million of senior secured notes and warrants and entered into
the $425 million new credit facility. The proceeds of this private offering,
together with approximately $239 million of borrowings under the new credit
facility and the proceeds from new equity contributions, were applied to
refinance a substantial portion of the indebtedness of Republic, RES Holding,
BarTech and USS/Kobe.
As a result of the Combination and the other transactions, the Company and
Republic Technologies have significant amounts of debt, with the interest
payments on the senior secured notes and interest and principal repayments under
the new credit facility representing significant obligations. The senior secured
notes will require semi-annual interest payments on January 15 and July 15 every
year until they mature on July 15, 2009. The senior secured notes require that
tender offers be made for such securities with certain proceeds from asset sales
in the event that such proceeds are not applied to specified purposes within
certain time periods. The loans under the new credit facility will require
periodic payments of interest and mature on August 13, 2004. The new credit
facility requires prepayment of loans and reductions of commitments with net
proceeds of specified asset dispositions, casualty and condemnation recovery
events, issues of equity and incurrences of permitted indebtedness. The 1984
environmental improvement revenue bonds, of which $9.0 million was outstanding
as of December 31, 1999, mature on December 1, 2001. In addition, the $5.5
million Series A Preferred Stock of Republic Technologies International, Inc.
("RTI, Inc.") is mandatorily redeemable on September 26, 2000. Payment of the
redemption price would require distributions or loans from Republic Technologies
to RTI followed by distributions or loans from RTI to RTI, Inc.
The senior secured notes and the new credit facility each contain significant
affirmative and negative covenants including separate provisions imposing
restrictions on additional borrowings, certain investments, certain payments,
sale or disposal of assets, payment of dividends and change of control
provisions, in each case, subject to certain exceptions. The ability of RTI to
receive distributions from Republic Technologies and its subsidiaries is
significantly restricted by the terms of the senior secured notes and the new
credit agreement. Under the terms of the senior secured notes, subject to
certain exceptions, generally neither Republic Technologies nor its subsidiaries
may declare or pay any dividend or make any other distribution or payment on or
in respect of capital stock, unless, at the time of and after giving effect to
the proposed payment, (1) no Default (as defined in the senior secured note
indenture) shall have occurred and be continuing, (2) immediately after giving
effect to such payment, the Consolidated Fixed Charge Coverage Ratio (as defined
in the senior secured note indenture) of Republic Technologies would be equal to
or greater than 2.5 to 1, and (3) the aggregate amount of all restricted
payments declared or made from and after the issue date would not exceed the 50%
of the Consolidated Net Income (as defined in the senior secured note indenture)
of Republic Technologies accrued on a cumulative basis during the period, taken
as one accounting period, beginning on October 1, 1999 and ending on the last
day of the fiscal quarter of Republic Technologies immediately preceding the
date of such proposed restricted payment or, if such aggregate cumulative
Consolidated Net Income of Republic Technologies for such period shall be a
deficit, minus 100% of such deficit, plus the cash proceeds from certain equity
offerings and value of certain investments. Under the terms of the new credit
facility, neither Republic Technologies nor its subsidiaries may declare or pay
any dividend to RTI or make any other distribution or payment to RTI on or in
respect of capital stock other than distributions or payments for certain
limited purposes and in limited amounts.
The senior secured notes are secured, subject to exceptions and limitations, by
(1) a first priority lien on, and security interest in, substantially all of the
existing assets of the issuers and the restricted subsidiaries, other than (a)
the CAST-ROLL and Cartersville, Georgia facilities, (b) inventory, (c) accounts
receivable and (d) intellectual property and related assets, and (2) a first
priority lien, shared on an equal and ratable basis with the lenders under the
new credit facility, on the equity interests of Republic Technologies and its
restricted subsidiaries. This collateral is subject to release without
substitution under a limited number of circumstances. Borrowings under the new
credit facility are secured by a first priority perfected security interest in
(1) the equity interests of Republic Technologies and its restricted
subsidiaries, shared on an equal and ratable basis with the senior secured notes
and (2) all presently owned and subsequently acquired accounts, inventory,
intellectual property and related assets of Republic Technologies and guarantors
and the real estate and fixed assets comprising, and the intellectual property
relating to, the CAST-ROLL facility, including the related melt shop.
The obligations under the senior secured notes are unconditionally and
irrevocably guaranteed jointly and severally by RTI and each of its subsidiaries
other than Republic Technologies, RTI Capital Corp. (the co-issuer of the senior
secured notes) and
15
<PAGE> 16
Oberlin Insurance Company. The obligations under the new
credit facility are unconditionally and irrevocably guaranteed jointly and
severally by RTI and each of its subsidiaries other than Republic Technologies
and Oberlin Insurance Company.
The high level of long-term debt relative to total capitalization could have
important consequences, including, among others, the following:
- RTI and Republic Technologies, may be unable to obtain
additional financing for working capital, capital
expenditures, debt service requirements and general
corporate purposes;
- a substantial portion of cash flow from operations will
need to be used to pay principal and interest on
indebtedness, which will reduce the funds available for
other purposes, including operations and future business
opportunities;
- RTI and Republic Technologies may need to make payments in
connection with environmental improvement revenue bonds
related to USS/Kobe facilities earlier than scheduled if
USX makes early payment on these bonds, and any such early
payment may adversely affect liquidity;
- borrowings under the new credit facility as well as other
future borrowings, may be at variable interest rates of
interest, which create the risk of increased interest
rates; and
- this leverage may make RTI and Republic Technologies more
vulnerable to economic downturns and competitive pressures.
Tax Distributions
-----------------
The Company and Republic Technologies are limited liability companies that are
expected to be treated as a partnership for income tax purposes and accordingly
are not an income taxpaying entity. However, pursuant to the limited liability
company agreement of the Company's parent, the Company's parent will be required
to make cash distributions to its members to the extent necessary to satisfy tax
obligations regarding members' investment in RTI, Inc. To the extent the
Company's parent is required to make these tax distributions, Republic
Technologies will be required to make equivalent cash distributions to the
Company. However, the Company believes that certain of its parent's members have
net operating loss carryforwards which may be available to offset a significant
portion of their taxable income attributable to their investment in the
Company's parent and reduce but not eliminate, the need for tax distributions.
Use of these net operating losses is subject to various limitations and
uncertainties and accordingly, the Company cannot make any assurances that these
net operating loss carryforwards will reduce the need for tax distributions or
that they will not be otherwise utilized.
Liquidity Sources and Other Factors Affecting Liquidity
-------------------------------------------------------
The Company intends to fund its working capital, pension contribution
requirements, capital expenditure, debt service requirements and tax
distributions to its parent company's members through cash flows generated from
operations and borrowings under the $425.0 million new credit facility.
Availability under the new credit facility is limited to a borrowing base equal
to (1) 60% of eligible inventory, plus (2) 85% of eligible accounts receivable,
plus (3) the lesser of 67% of the appraised value of the CAST-ROLL facility and
$125 million, which will decrease by $4.5 million per quarter beginning the
quarter ended December 31, 2000, minus (4) a reserve between $35.0 million and
$50.0 million. The CAST-ROLL facility is subject to reappraisal after March 31,
2001 or upon a default under the new credit facility. The Company's net
availability on its revolving credit facility as of April 30, 2000 was
approximately $16.5 million.
In connection with the Combination, RTI, Inc. issued 30,000 shares of its Series
C convertible preferred stock. The Series C convertible preferred stock accrues
dividends at a rate of 5% per year, which can be paid in cash or by the issuance
of additional shares of Series C convertible preferred stock at the election of
RTI, Inc.
While the Company's performance during the first quarter of 2000 met
expectations, it's performance during the third and fourth quarters of 1999 was
below expectations, causing the Company's liquidity position to be negatively
affected. The Company's liquidity position has also been negatively impacted by
the implementation of the Company's consolidation plan as a result of the time
lag between the incurrence of certain costs and the receipt of expected cash
flow benefits, such as in the case of headcount reductions requiring lump sum
payouts.
16
<PAGE> 17
Management has sought to improve the Company's liquidity position by taking a
number of actions including, increasing spot prices, reducing administrative
staff, aggressive cost cutting programs, scaling back operations at its
Johnstown facility and reducing inventories. The Company has also reduced its
planned capital expenditures from $48 million to $19 million for this year, has
obtained deferrals of $11 million of certain quarterly Pension Benefit Guaranty
Corporation ("PBGC") funding requirements until July, obtained deferrals of
trade credit from a significant supplier from June through October, and obtained
a deferral from the Ohio EPA of $1.2 million of committed environmental
expenditures until 2001. Management is also pursuing additional financing from
the State of Ohio.
The Company is in the process of selling its specialty steels division and
expects to complete the sale in the second quarter of this year. The Company is
also in the process of selling certain real estate from facilities closed as
part of the consolidation plan.
Notwithstanding these efforts, the Company may need to obtain additional
financing to meet its cash flow requirements, including financing through the
sale of additional debt or equity securities. Restrictive covenants included in
the indenture relating to the senior secured notes and other debt obligations
limit the Company's ability to incur additional indebtedness, or sell assets
(most of which are pledged), and may otherwise limit the operational and
financial flexibility of the Company. The ability to sell its assets may also be
constrained by the provisions of the Company's new labor agreement.
As a result of the factors mentioned above, the Company is highly leveraged and
could be considered a risky investment. Further information regarding the risk
factors of the Company can be found in the Company's S-4 Registration Statement.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was
recently enacted by the FASB. SFAS No. 133, as amended by SFAS No. 137,
establishes accounting and reporting standards for derivative instruments and
hedging activities and is effective for fiscal years beginning after June 15,
2000. We have not yet determined the impact that the adoption of this standard
will have on our financial statements.
FORWARD LOOKING STATEMENTS
Statements included in this filing with the Securities and Exchange Commission
(including those portions of Management's Discussion and Analysis that refer to
the future) may contain forward-looking statements that are not historical facts
but refer to management's intentions, beliefs, or expectations for the future.
It is important to note that the Company's actual results could differ
materially from those projected in such forward-looking statements. Certain
factors that could cause actual results to differ from those in such
forward-looking statements include, but are not limited to, the following:
- the Company's ability to increase sales to existing and new
customers, particularly sales to automotive and industrial
equipment manufacturers;
- the Company's ability to implement its consolidation plan and to
realize the expected benefits of the Combination in the time frame
and at the costs currently contemplated; and
- market conditions and general risks associated with the steel
industry; and
- the matters discussed under the caption "Risk Factors" in the
Company's Registration Statement on Form S-4.
The reader should not place undue reliance on the forward-looking statements
contained in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks due to changes in interest rates with
respect to certain of its long-term debt. The fair value of the Company's Senior
Notes was determined using quoted market prices. At March 31, 2000, the fair
value of the Company's senior notes was $99.9 million based on the quoted price
of $23.50 per $100 of par value. There was no significant change in the fair
value of the remainder of the Company's debt from December 31, 1999.
17
<PAGE> 18
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various legal proceedings
occurring in the ordinary course of business. It is the opinion of management,
after consultation with legal counsel, that except for certain environmental
proceedings (which is discussed in detail in the Company's Annual Report filed
on Form 10-K), these matters will not materially affect the Company's
consolidated financial position, results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(27) Financial Data Schedule
a.) Reports on Form 8-K
None.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS,
LLC
Date: August 11, 2000 By: /s/ Joseph F. Lapinsky
---------------------
Joseph F. Lapinsky
Chief Executive Officer,
President and Chief
Operating Officer
Date: August 11, 2000 By: /s/ Stephen Graham
-----------------
Stephen Graham
Executive Vice President and
Chief Financial Officer
Date: August 11, 2000 By: /s/ Joseph A. Kaczka
--------------------
Joseph A. Kaczka
Vice President of Finance, Controller
and Chief Accounting Officer
19
