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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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<S> <C>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
</TABLE>
For the transition period from to
Commission File No. 0-25900
REPUBLIC ENGINEERED STEELS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 52-1635079
- -------------------------------------- --------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
410 OBERLIN ROAD, S.W.
MASSILLON, OHIO 44647
- -------------------------------------- --------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (330) 837-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
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 twelve (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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of September 15, 1997 the aggregate market value of the voting stock held
by non-affiliates of the Registrant was approximately $39.4 million. For
purposes of this information the outstanding shares of Common Stock owned by
directors and executive officers of the Registrant and the ESOP were deemed to
be shares of Common Stock held by affiliates.
As of September 15, 1997 there were 19,706,578 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Certain information required to be
furnished pursuant to Part III of this Form 10-K will be set forth in, and
incorporated by reference from, the registrant's definitive proxy statement for
the annual meeting of stockholders to be held October 23, 1997, which definitive
proxy statement will be filed by the registrant with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year ended June
30, 1997.
Exhibit Index begins on page 53
This is page 1 of 62
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TABLE OF CONTENTS
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ITEM PAGE
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1. Business.......................................................................................... 3
2. Properties........................................................................................ 12
3. Legal Proceedings................................................................................. 12
4. Submission of Matters to a Vote of Security Holders............................................... 13
5. Market for the Registrant's Common Stock and Related Stockholder Matters.......................... 13
6. Selected Financial Data........................................................................... 14
7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 16
8. Financial Statements and Supplementary Data....................................................... 22
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 46
10. Directors and Executive Officers.................................................................. 46
11. Executive Compensation............................................................................ 46
12. Security Ownership of Certain Beneficial Owners and Management.................................... 46
13. Certain Relationships and Related Transactions.................................................... 46
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................... 47
</TABLE>
2
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PART I
ITEM 1. BUSINESS
GENERAL
Republic Engineered Steels, Inc. (the "Company"), is a major producer of
special bar quality ("SBQ") steel and specialty steel bars (collectively,
"Engineered Steels"). SBQ steel bars are higher quality hot-rolled and
cold-finished carbon and alloy steel bars, and specialty steels are stainless,
tool and vacuum remelted steels. Engineered Steels generally contain more alloys
than merchant quality and commodity grades of carbon and alloy steel and require
precise metallurgical content and compliance with rigorous customer quality
specifications for consistency, internal soundness, straightness and surface
finish. The Company is organized into three operating divisions: the Hot-rolled
Division, the Cold-finished Division and the Stainless and Specialty Steels
Division.
The Company believes that, on the basis of net tons shipped, it is the
leading domestic producer of SBQ steel bars and one of the top three domestic
producers of specialty steel bars. The Company produces the widest range of SBQ
products in the domestic industry, as measured by dimension, shape, process and
grade, and the Company's SBQ and specialty steel products are widely recognized
for their quality and strength. SBQ products sell for higher prices per net ton
than merchant and commodity grade bar products and, within the SBQ market, the
Company concentrates on higher end products (i.e. ones that require greater
product sophistication and, therefore, usually carry a higher selling price per
net ton). The principal markets for SBQ steel bars are automotive, heavy
equipment manufacturing and independent forgers. Within the specialty steels
market, the Company is one of the two largest domestic producers of vacuum
remelted steels, which are used for critical aerospace and power generation
applications, and is one of a number of producers of commodity grade stainless
steel bars and tool steels.
HISTORY
In November 1989, the Company was formed to purchase substantially all of
the assets of LTV Steel Company Inc.'s ("LTV Steel") Bar Division (the
"Acquisition"). Until the initial public offering (the "IPO") of 8,050,000
shares of its Common Stock, par value $.01 per share (the "Common Stock") in
April 1995, the Company had been virtually wholly-owned by its employees through
an employee common stock ownership plan ("ESOP"). The ESOP is a defined
contribution plan, designed to be invested primarily in shares of Common Stock
of the Company and intended to be qualified under Section 401(a) of the Internal
Revenue Code which the Company maintains for the benefit of substantially all of
its salaried and hourly employees. As of June 30, 1997 the ESOP held
approximately 56% of the outstanding shares of Common Stock of the Company.
The Company is a Delaware corporation and its principal executive offices
are located at 410 Oberlin Road, S.W., Massillon, Ohio 44647, and its telephone
number at that address is (330) 837-6000. The Company has two wholly-owned
subsidiaries, Nimishillen & Tuscarawas Railway Company and The Oberlin Insurance
Company, the assets and operations of which are not material to the Company.
PRODUCTS
The principal products of the Company are SBQ hot-rolled carbon and alloy
bar steels produced by the Hot Rolled Bar Division, cold-finished carbon and
alloy bar steels produced by the Cold Finished Bar Division and stainless, tool
and vacuum remelted steel produced by the Specialty Steels Division. The
production of steel by the Company generally begins with the melting of premium
grade scrap in electric arc furnaces. After the scrap is heated, impurities are
removed from the molten steel, and alloys and other materials are added to
create the desired chemical and physical properties of the finished product. The
molten steel is then either poured into ingot molds, with additions of lead and
other additive materials, for subsequent processing by a blooming mill into
blooms and billets, or cast into blooms and rolled into billets
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at the modern CAST-ROLL-TM- facility. These semi-finished products are each
produced to a specified chemical composition, size and quality. After cooling,
blooms and billets are either sold as is or sent to one of the Company's rolling
mills for further processing. Hot-rolled and semi-finished products are
manufactured for both the Stainless and Specialty Steels and Cold Finished Bar
Divisions in various grades to meet the requirements of each Division. For a
discussion of the CAST-ROLL-TM- Facility, see "The CAST-ROLL-TM- Facility"
below.
The following table sets forth net tons shipped and price per net ton
shipped for the Company and its principal product lines for the periods
indicated:
<TABLE>
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FISCAL YEAR ENDED JUNE 30,
---------------------------------
1995 1996 1997
---------- --------- ----------
<S> <C> <C> <C>
Net tons shipped:
Special Bar Quality (SBQ) Hot-rolled bar products...................... 667,574 588,124 713,703
Cold-finished bar products............................................. 308,753 248,228 243,926
Specialty steel products............................................... 65,259 61,009 52,002
---------- --------- ----------
Total net tons shipped............................................... 1,041,586 897,361 1,009,631
---------- --------- ----------
---------- --------- ----------
Selling price per net ton shipped:
Special Bar Quality (SBQ) Hot-rolled bar products...................... $ 614 $ 643 $ 588
Cold-finished bar products............................................. 876 906 861
Specialty steel products............................................... 1,787 2,203 2,314
Average selling price per net ton shipped................................ $ 773 $ 832 $ 746
Average manufacturing cost per net ton shipped........................... 677 768 685
Average gross profit per net ton shipped................................. 96 64 61
</TABLE>
HOT-ROLLED BARS. Hot-rolled bars are processed from blooms and billets on
rolling mills to change the internal physical properties, size or shape of the
steel. Desirable characteristics of hot-rolled bars include internal soundness,
uniformity of chemical composition and freedom from surface imperfection. The
Company's hot-rolled bar products include rounds, squares, hexagons and flats in
both coils and cut-lengths. The Company's customers for hot-rolled bar products
include manufacturers of automotive parts, machinery and industrial equipment,
independent forgers, steel service centers and converters. The Company's
hot-rolled bars are used in the manufacture of end-use products such as
automotive drive trains, engine and transmission parts, bearings and tractor
components.
COLD-FINISHED BARS. Cold-finishing is a value-added process which improves
the physical properties of hot-rolled bars. Cold-finished bars are produced from
hot-rolled bars by cold-drawing, turning, grinding, thermal treating or a
combination of these processes. The manufacturing process allows for production
of products with more precise size and straightness tolerances, as well as a
surface finish, that provides customers with a more efficient means of producing
a number of end products by often eliminating the first processing step in the
customer's process. The Company's cold-finished bar products include rounds,
squares, hexagons, flats and wire, all of which can be further processed by
turning, grinding or polishing, or a combination thereof. The Company's
customers for cold-finished bar products include manufacturers of automotive
parts, machinery, industrial equipment, steel service centers and distributors.
The Company's cold-finished bars are used in the manufacture of end-use products
such as automotive steering assemblies, electrical motor shafts, ball and roller
bearings, valves and hand tools.
SPECIALTY STEELS. Specialty steels include stainless steels, tool steels
and other steels produced through advanced techniques such as consumable
electrode vacuum remelting and electro-slag remelting. The remelt process
produces ultra-clean steels designed to meet the most critical requirements and
the Company believes these steels are among the highest quality in the industry.
These specialty steel products are produced in rolled sizes as well as large
forged rounds, squares and other shapes. Stainless steels are used for corrosion
resistant applications such as food processing equipment, marine products and
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recreational watercraft. These products are primarily sold through steel service
centers. The Company produces tool steels that are engineered with specific
characteristics which enable them to form, cut, shape and shear other materials
in the manufacturing process. Tool steels are utilized in the manufacturing of
metals, plastics, pharmaceuticals, electronics, optics, paper and aluminum
extrusion. The Company's customer base for tool steels are distributors, service
centers and other tool steel producers who market or finish the end products.
The remelted specialty products are used to produce aircraft structural parts
such as landing gear, solid rocket motor casings and aircraft engine mounts. The
power generation industry uses parts made of remelted steel in the manufacture
of steam and land-based turbines.
THE CAST-ROLL-TM- FACILITY
The Company's CAST-ROLL-TM- facility is one of the most modern and
sophisticated in the world. The CAST-ROLL-TM- facility links five proven
technologies with a high level of computer control into one continuous process.
The CAST-ROLL-TM- facility includes a ladle metallurgical facility, a vacuum
tank degasser and a four strand continuous caster supplied with molten steel
from the Company's electric furnaces. Cast steel from the caster moves directly
to an inline reheat furnace and then to a rolling mill which produces SBQ
billets for the Company's other rolling mills. The CAST-ROLL-TM- facility
continues its steady movement toward optimum operation. During the fourth fiscal
quarter of 1997 over fifty-three percent (53%) of the Company's SBQ production
was made by way of the CAST-ROLL-TM- route, representing eighty-five percent
(85%) of the facility's capacity as compared to fifty-nine percent (59%) in the
year ago period. The CAST-ROLL-TM- facility will also provide indirect savings
to the Company's cold-finished facilities by providing a superior quality
semi-finished product that will improve the cold-finished process yields.
Currently, the CAST-ROLL-TM- facility is operating at 85% of capacity with 67%
of the product anticipated to be produced through the CAST-ROLL-TM- facility
having been qualified by its customers. Until the CAST-ROLL-TM- facility
receives certification for the remainder of its products, the Company will
continue to manufacture those products through the existing ingot route. While
there is no assurance that all expected product certifications will actually be
received, as more production is shifted to the CAST-ROLL-TM- facility, the fixed
cost of operating the CAST-ROLL-TM- facility will be absorbed over more tons and
yield will be improved as additional products are certified and sequence casting
is increased, all resulting in the realization of additional savings.
RAW MATERIALS
SCRAP METAL. The Company's major raw material is ferrous scrap metal, which
is generated principally from industrial, automotive, demolition and railroad
sources and is purchased by the Company in the open market through a number of
scrap brokers and dealers or by direct purchase. The Company purchased
approximately 32% of its scrap metal from General Motors during fiscal year
1997. The long-term demand for scrap metal and its importance to the domestic
steel industry is expected to increase as steelmakers continue to expand scrap
metal-based electric furnace 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 the Company's
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
its quality, but the Company generally has not had difficulty purchasing
adequate scrap metal of the required quality. The Company believes that adequate
supplies of scrap metal will continue to be available in sufficient quantities
for the foreseeable future. As demand for high quality scrap is increasing, so
is the effort to develop commercially viable iron substitute products. The
Company is monitoring the progress of these projects and will make a
determination of the Company's involvement once the process has been proven. The
average price of scrap for fiscal year 1997 decreased by 6.2% as compared to the
average price of scrap for fiscal year 1996. Scrap metal represented 23.2% of
the Company's total cost of product sold in fiscal year 1997 as compared to
24.0% in fiscal year 1996. The majority of the Company's competitors also
utilize scrap as their primary raw material, so the Company does not find itself
at a
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competitive disadvantage insofar as scrap cost is concerned. However, certain of
the Company's competitors utilize iron ore in their manufacturing process and,
accordingly, utilize significantly lower amounts of scrap metal than the
Company.
The following table sets forth the average cost of scrap metal per ton and
cost of scrap metal per ton as a percentage of the Company's total cost of
product sold:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Average cost of purchased scrap metal per net ton....................... $ 125 $ 133 $ 139 $ 129
Average cost of total scrap metal per net ton........................... 117 123 129 121
Percentage of cost of product sold...................................... 23.9% 24.8% 24.0% 23.2%
</TABLE>
The Company has attempted to protect itself from fluctuations in the price
of scrap metal by charging certain of its customers a scrap metal surcharge
based on the increase in the price of scrap metal above certain levels while,
with other customers, the Company makes an adjustment in its selling price if
the price of scrap metal exceeds or drops below certain levels. These surcharges
and price adjustments are determined on a monthly or quarterly basis.
ALLOYS AND FLUXES. The Company purchases various materials such as nickel,
chrome, molybdenum, vanadium, manganese, silicon, aluminum, titanium, sulphur,
lead, lime and fluorspar for use as alloying agents and fluxing (cleansing)
materials. Since 1994, prices of many of these materials have fluctuated
dramatically and the cost stated as a percent of cost of product sold has
represented 7.4%, 9.5%, 10.3% and 8.4% for fiscal years 1994, 1995, 1996 and
1997, respectively.
The following table sets forth the average cost of alloys and fluxes as a
cost per ton of product shipped and as a percentage of total cost of product
sold:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Alloys and Fluxes
Average cost per ton of product shipped.................................... $ 47 $ 64 $ 79 $ 57
Percentage of cost of product sold......................................... 7.4% 9.5% 10.3% 8.4%
</TABLE>
The Company uses price surcharges for nickel, chrome, molybdenum and
vanadium in an attempt to protect its profit margins from the affects of
fluctuating prices on these commodities.
CUSTOMERS
The Company's principal customers are manufacturers in the automotive
industry, machinery industry, industrial equipment and tools industry,
independent forgers, service centers and aviation and aerospace industries.
The following table sets forth the percentage of the Company's direct net
sales to various markets:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
------------------------------------------
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Automotive Industry..................................................... 35.0% 37.1% 40.2% 36.7%
Machinery, Industrial Equipment and Tools Industry...................... 18.1 18.8 19.0 16.9
Independent Forgers..................................................... 17.8 15.1 13.8 13.8
Service Centers......................................................... 14.2 14.0 14.0 16.5
Other................................................................... 14.9 15.0 13.0 16.1
--------- --------- --------- ---------
100.0% 100.0% 100.0% 100.0%
--------- --------- --------- ---------
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</TABLE>
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The Company's major customers include American Axle & Manufacturing,
American Steel and Wire, Caterpillar, Crucible Materials, Ford Motor Company,
General Motors, Jernberg Industries, Jorgensen Steel and Aluminum, MascoTech and
TRW. In fiscal year 1997, sales to American Axle constituted approximately 9.5%
of the Company's total net sales. Further, in fiscal year 1997, sales to the
Company's ten largest customers constituted approximately 42.9% of the Company's
total of net sales. Consequently, any disruption of sales to these customers
could adversely affect the Company's results of operations and financial
condition. In general, the Company does not have long-term contracts with its
customers; however, it has long-standing relationships with its largest
customers.
While the Company has a nationwide customer base, approximately 65% of its
shipments were to customers in the states of Indiana, Illinois, Michigan, New
York, Ohio and Pennsylvania for fiscal year 1997.
COMPETITION
The domestic steel industry is highly cyclical in nature. Domestic steel
producers suffered substantial losses in the first half of the 1980's as a
result of a number of factors, including recessionary conditions, a high level
of steel imports, the strength of the U.S. dollar against other currencies,
worldwide production overcapacity, increased domestic and international
competition, high labor costs and inefficient plants. The steel industry also
suffered heavy losses during the early 1990's as a result of a downturn in the
automotive industry, which is also highly cyclical and directly affected by,
among other things, the level of consumer confidence and general economic
conditions.
The Company competes with specialty producers and with a number of
mini-mills, certain merchant bar quality producers, and SBQ producers. Major
competitors of the Company in the specialty steels market include Carpenter
Technology; the Atlas Specialty Steels division of Rio Algoma Ltd.; Latrobe
Steel Company, a subsidiary of The Timken Company ("Timken"); Slater Industries;
and Talley Metals. Major competitors of the Company in the hot-rolled bar market
include CSC Ltd.; Inland Steel Industries, Inc.; North Star Steel Company;
Quanex Corporation (Mac Steel); Timken; and USS-Kobe Steel, a joint venture of
USX Corporation and Kobe Steel. Major competitors of the Company in the
cold-finished bar market include Bar Technologies, Inc. ("Bartech") formerly
("Bliss & Laughlin Industries, Inc."); Corey Steel, Inc.; Niagara Corporation;
and Nucor Cold Finished.
Recent entrants into the SBQ market compete directly with the Company in a
major portion of its products. Bartech now operates recently acquired assets of
the former Bar, Rod and Wire Division of Bethlehem Steel Corporation and Bliss &
Laughlin Industries, Inc. Qualitech Steel Corporation is constructing a $500
million greenfield steelmaking facility. Birmingham Steel Corporation is nearing
completion of a new continuous steelmaking facility and has recently commenced
operation of a new bar mill. This competition is exerting significant downward
pressure on the price level of many of the Company's products. There can be no
assurance that the Company will meet this competition successfully.
Foreign competition is a significant factor in the Engineered Steels
industry. Imports are substantially affected by fluctuations in the value of the
U.S. dollar versus certain foreign currencies. If the U.S. dollar were to
strengthen significantly against the Japanese Yen or European currencies, the
price and sales volume of the Company's products could be adversely affected.
The Company is particularly vulnerable to these currency fluctuations since its
higher priced, higher value-added products used in the manufacture of end
products, such as automobile transmissions, are more susceptible to being
replaced by imported products than other end products.
The principal methods of competition in the Company's markets are product
quality, delivery capability, service and price. Engineered steels are
characterized by special chemistry and precise processing requirements.
Maintaining high standards of product quality while keeping production costs
competitive is essential to the Company's ability to compete in its markets. The
ability of a manufacturer to
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respond quickly to customer orders currently is, and is expected to remain,
important as customers continue to reduce their in-plant raw material inventory.
In June 1997 the U.S. Department of Commerce (DOC) commenced an
investigation to determine whether certain lead billets imported into the United
States circumvented anti-dumping and countervailing duty orders issued by the
DOC in 1993 against imports of hot-rolled lead bars from Germany and the United
Kingdom. The outcome of this investigation could impact the supply, or increase
the price, of lead billets purchased by the Company to supplement its own
production of lead billets and thus adversely affect the Company's sales of
higher value-added cold-finished lead bars.
PATENTS AND TRADEMARKS
The Company has the patents, trademarks and licenses necessary for the
operation of its business as now conducted. The Company does not consider its
patents and trademarks to be material to its business.
BACKLOG
The Company's backlog of orders as of June 30, 1997 was approximately $248
million compared to approximately $230 million as of June 30, 1996. Orders are
generally filled within 6 to 26 weeks of the order depending on the product,
customer needs and other production requirements. Customer orders are generally
subject to cancellation without penalty prior to shipment and actual shipments
depend on the changing production schedules of customers. Accordingly, the
Company does not believe that the amount of its backlog orders is a reliable
indication of future sales.
EMPLOYEES
As of June 30, 1997 the Company had 4,094 employees, of which 3,275 were
represented by the United Steelworkers of America AFL/CIO (the "USWA"). The
balance consisted of 769 salaried employees and 50 employees represented by two
other unions.
In accordance with mid-contract re-opener provisions contained in the six
year collective bargaining agreement dated as of June 1, 1993 between the
Company and the USWA, negotiations between the Company and the USWA on economic
items (wages, payroll items and benefits) did not result in an agreement and,
unresolved issues were submitted to an arbitrator. On February 19, 1997, the
arbitrator issued a decision which, in effect, rejected both the Company's and
Union's demands and ruled that any increases in wages and/or pension benefits
must be derived from future savings, if any, from the previously existing cost
reduction program. On May 19, 1997 the Company filed an appeal in the U.S.
District Court for the Northern District of Ohio challenging the arbitrator's
decision on the basis that the decision did not adhere to the decisional
criteria set forth in the collective bargaining agreement. The appeal is
pending.
ENVIRONMENTAL COMPLIANCE
The domestic steel industry, including 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 believes that it currently is in
substantial compliance with them. The Company does not anticipate the need to
make material expenditures for environmental control measures during the next
twenty-four 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 currently believes that these
costs are most likely to be in the range of $12.3 million to $26.1 million over
the lives of the Company's facilities. The reserve to cover potential
environmental liabilities, including the matters discussed below, was
approximately $17.8 million and $20.0 million as of June 30, 1997 and 1996,
respectively. To the extent the Company incurs any such remediation costs, these
costs will most likely be incurred over a number of
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years; however, no assurance can be given that future regulatory action
regarding historical disposal practices at certain of the Company's facilities,
as well as continued compliance with environmental requirements, will not
require the Company to incur significant costs that may have a material adverse
effect on the Company's future financial performance.
The U.S. Environmental Protection Agency ("EPA") has identified a number of
solid waste management units ("SWMUs") at the Canton (Eighth Street) Plant and
the Chicago Plant. Since the Acquisition, state environmental authorities have
conducted periodic inspections at these plants and found no significant
violations. The Company could incur significant investigation and remediation
costs in the future in connection with the SWMUs. However, the Company is
currently unable to predict precisely the amount or timing of the costs it may
be required to incur to investigate and remediate the SWMUs.
The Company is subject to a 1988 Consent Agreement and Final Order (the
"Final Order") with the EPA. Under the terms of the Final Order, the Company is
required to implement an approved closure plan for the electric arc furnace dust
waste pile (the "Waste Pile") at the Canton Plant (the "Closure Plan"), if so
requested by the EPA. The EPA has not made any such request; however, should the
EPA request the Company to implement the Closure Plan, the Company would incur
significant costs. The Company is currently unable to predict precisely the
amount or timing of the costs it may be required to incur should the EPA request
implementation of the Closure Plan; however, it is possible that the Company
could begin over the next twenty-four months to implement the Closure Plan
depending upon the outcome of discussions with the Ohio Environmental Protection
Agency ("Ohio EPA") which are ongoing.
The Company's Massillon Plant (Rose Avenue) became subject to a 1989
Administrative Consent Order ("ACO") with the Ohio EPA with respect to Kolene
waste that had been deposited at the site prior to Company's acquisition of the
property in 1989. The ACO expired in February 1997 when all of its requirements
were satisfied upon removal of Kolene waste and discontinuance of groundwater
monitoring with the concurrence of the Ohio EPA.
Notices of historical waste disposal activities at one of the two Massillon
plants and the two Canton plants were filed by LTV Steel and its predecessors
with the EPA, under Section 103(c) of the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"). In 1985, the Ohio EPA recommended the
Massillon Plant as a medium priority for further state investigation. In 1986,
the Ohio EPA recommended the Canton (Eighth Street) Plant as a high priority for
further state investigation. During that same year, the Ohio EPA recommended the
Canton (Harrison Avenue) Plant 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 plants since 1986 by any environmental authority. The Company 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 plants. The Company is currently unable to predict precisely the
amount or timing of such costs.
The Company owns a seven-acre parcel of land in Canton, Ohio, commonly
referred to as "Berger Triangle," which appears on the EPA's Comprehensive
Environmental Response, Compensation and Liability Information System list. The
EPA conducted site investigations at Berger Triangle in 1990 and 1995. No
further regulatory action has been taken by any environmental authority. The
Company could incur significant investigation and remediation costs in the
future relating to Berger Triangle. However, the Company is currently unable to
predict precisely the amount or timing of any costs it may be required to incur
to investigate and remediate Berger Triangle.
The Company is currently operating the CAST-ROLL-TM- facility under a permit
from the Ohio EPA which authorized installation and testing. Operating
environmental permits for the CAST-ROLL-TM- facility are expected to be issued
in accordance with applicable regulatory procedures after collection and review
of necessary environmental performance information which has been delayed
primarily as a result of a malfunction of the vacuum tank degasser and the
inadequacy of the existing test protocol to accurately measure sulfur dioxide
emissions from the ladle metallurgical facility. The Company is working
diligently
9
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with the equipment vendor and the Ohio EPA to resolve these problems as soon as
possible, although no deadline has been established and the Company can give no
assurance as to when resolution of these problems might occur.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the name, age and position with the Company
of each person who is an executive officer of the Company, as of September 1,
1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --- -------------------------------------------------------------------------------
<S> <C> <C>
Russell W. Maier 60 Chairman of the Board, President and Chief Executive Officer
Harold V. Kelly 66 Executive Vice President and General Counsel
James B. Riley 45 Executive Vice President and Chief Financial Officer and Director
Joseph F. Lapinsky 47 Corporate Vice President and President of the Hot Rolled Bar Division
Stephen S. Higley 54 Corporate Vice President and President of the Cold Finished Bar Division
John C. Vaught 51 Corporate Vice President and President of the Stainless and Specialty Steels
Division
Charles T. Cochran 43 Vice President-Sales and Marketing of the Cold Finished Bar Division
Edward J. Blot 54 Vice President-Sales and Marketing of the Stainless and Specialty Steels
Division
James T. Thielens, Jr. 39 Vice President-Sales and Marketing of the Hot Rolled Bar Division
James D. Donohoe 54 Secretary and Associate General Counsel
John B. George 50 Corporate Treasurer and Controller of the Cold Finished Bar Division
John W. Sears 52 Corporate Controller and Controller of the Hot Rolled Bar Division
</TABLE>
RUSSELL W. MAIER has been Chairman of the Board, President and Chief
Executive Officer of the Company since November 1989. Mr. Maier has been active
in the steel industry since February 1960. Mr. Maier is also a member of the
Board of Directors of United National Bank and Trust Company and Ohio Edison
Company.
HAROLD V. KELLY has been Executive Vice President and General Counsel of the
Company since November 1993. He was formerly Vice President and General Counsel
of the Company from 1989 to October 1993. Mr. Kelly has been active in the steel
industry since 1973.
JAMES B. RILEY has been Executive Vice President and Chief Financial Officer
and a Director of the Company since November 1993. He was formerly Vice
President and Chief Financial Officer and a Director of the Company from 1989 to
October 1993. Mr. Riley has been active in the steel industry since 1975.
JOSEPH F. LAPINSKY has been a corporate Vice President and President of the
Company's Hot Rolled Bar Division since January 1997. Prior to that time he
served as General Manager of the Company's hot-rolled bar operations from
September 1995 to January 1997. Prior to that time he was Executive Vice
President of Autumn Industries, Inc. from September 1991 to September 1995 and
Executive Vice President of CSC Industries, Inc. from December 1987 to September
1991. Mr. Lapinsky has been active in the steel industry since 1973.
10
<PAGE>
STEPHEN S. HIGLEY has been a corporate Vice President and President of the
Company's Cold Finished Bar Division since January 1997. Prior to that time he
was Vice President and President of the Company's Specialty Steels Division from
January 1995 to January 1997 and he was Vice President - Commercial of the
Company from November 1989 to January 1995. Mr. Higley has been active in the
steel industry since 1966.
JOHN C. VAUGHT has been a corporate Vice President and President of the
Company's Stainless and Specialty Steels Division since January 1997. He served
as a special assistant to the President of the Company's Bar Products Division
from February 1995 to July 1995 and to the Chief Executive Officer from July
1995 to January 1997. Prior to that time he was Vice President of the Company's
Special Metals Division from February 1991 to February 1995 and Vice President
for Purchasing, Transportation and Support Services from November 1989 to
February 1991. Mr. Vaught has been active in the steel industry since 1969.
CHARLES T. COCHRAN has been Vice President, Sales and Marketing of the
Company's Cold Finished Bar Division since January, 1997. He served as
Vice-President, Sales and Marketing of the Company's Bar Products Division from
January 1995 to January 1997. From May 1994 to January 1995 he was General
Manager, Cold Finished Bar Division. Prior to that time he held various regional
sales positions at the Company since its formation in 1989. Mr. Cochran has been
active in the steel industry since 1976.
EDWARD J. BLOT has been Vice President, Sales and Marketing of the Company's
Stainless and Specialty Steels Division since January, 1997. He served as
Vice-President, Sales and Marketing of the Company's Specialty Steels Division
from February 1995 to January 1997. From 1992 to February 1995 he was President
of Ed Blot & Associates, a business consulting firm. From 1989 to 1992, he was
Vice President, Sales and Marketing of Baltimore Specialty Steels Corporation, a
subsidiary of Armco, Inc. Mr. Blot has been active in the steel industry since
1966.
JAMES T. THIELENS, JR. has been Vice President, Sales and Marketing, of the
Company's Hot Rolled Bar Division since March, 1997. He served as General
Manager of Marketing from March 1995 to March 1997 and as a Regional Sales
Manager of the Company's Bar Products Division from April 1994 to March 1995.
Prior to that time he held various sales and marketing positions at the Company
since its formation in 1989. Mr. Thielens has been active in the steel industry
since 1980.
JAMES D. DONOHOE is the Secretary and Associate General Counsel of the
Company and has held that position since November 1989. Mr. Donohoe has been
active in the steel industry since 1973.
JOHN B. GEORGE is the Treasurer of the Company and has held that position
since April 1991. From November 1989 to April 1991 he was Assistant Treasurer of
the Company. Mr. George has been active in the steel industry since 1969.
JOHN W. SEARS is the Controller of the Company and has held that position
since November 1989. Mr. Sears has been active in the steel industry since 1968.
11
<PAGE>
ITEM 2. PROPERTIES
As of June 30, 1997, the Company had ten operating facilities located in six
states. The aggregate floor area of these facilities was approximately 8.0
million square feet. The Company also owns trackage and railroad rolling stock
for materials movement, power generation facilities and numerous items of heavy
industrial equipment.
The following table sets forth for each of the Company's ten operating
facilities the location, size, use of the facility and shipping capacity as of,
and capacity utilization for, the fiscal year ended June 30, 1997:
<TABLE>
<CAPTION>
APPROXIMATE SHIPPING
SIZE IN CAPACITY*
THOUSANDS OF (TONS IN CAPACITY
LOCATION SQUARE FEET USE OF FACILITY THOUSANDS) UTILIZATION
- --------------------------------------- --------------- -------------------------------- ------------- ---------------
<S> <C> <C> <C> <C>
Canton, Ohio (Eighth Street)........... 2,755 Primary Melting and Rolling 1040 88%
Canton, Ohio (Harrison Avenue)......... 458 Remelt/Forge/Specialty 20 74%
Massillon, Ohio (Oberlin Road)......... 667 Rolling Mill 480 70%
Massillon, Ohio (Rose Avenue).......... 553 Cold-Finished Plant 120 69%
Chicago, Illinois...................... 2,019 Rolling Mill 324 89%
Gary, Indiana (Dunes Highway).......... 266 Cold-Finished Plant 84 72%
Gary, Indiana (Seventh Avenue)......... 200 Cold-Finished Plant 55 98%
Beaver Falls, Pennsylvania............. 176 Cold-Finished Plant 54 74%
Willimantic, Connecticut............... 89 Cold-Finished Plant 24 74%
Baltimore, Maryland.................... 642 Forge/Rolling Mill/Specialty 40 44%
-----
Total.............................. 7,825
-----
-----
</TABLE>
- ------------------------
* Stated tons represent the shipping capacity of the individual facility only
and do not when aggregated together represent the shipping capacity of the
Company as a whole.
Raw steel is produced only at the Company's Canton facility and is usually
processed at several plants before it is considered a finished product. The
maximum annual melt capacity of the Company is approximately 1.45 million tons.
The maximum annual melt capacity of SBQ steel is 1.31 million tons and during
fiscal year 1997 the Company utilized approximately 88% of its practical SBQ
capacity. The maximum annual melt capacity of specialty steels is 0.14 million
tons and the Company utilized approximately 44% of its practical specialty
capacity.
The Company owns all of the above listed facilities. Although most of the
Company's facilities are at least 25 years old, the Company generally believes
that its facilities are in good operating condition and continues to spend
significant amounts on their repair and maintenance.
ITEM 3. LEGAL PROCEEDINGS
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
nineteen former salaried employees of the Company whose employment was
terminated on February 19, 1991. The claims asserted on behalf of each former
employee are 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 is
lost pay and fringe benefits, liquidated damages (doubling the claimed lost pay
and benefits), compensatory damages of $500,000 on each count, punitive damages
of $500,000 under the public policy count, prejudgment interest and attorneys'
fees. The Company denied all of the claims and contested them vigorously. The
Company's motion for summary judgment was partially granted on May 15, 1996,
dismissing all claims of the former employees other than the age discrimination
claims. On July 15, 1997 all nineteen age discrimination claims were settled for
an amount that is not deemed to
12
<PAGE>
be material either individually or in the aggregate. Eighteen of the nineteen
settlements have been finalized. The nineteenth settlement is awaiting approval
by the probate court which is expected in due course.
The Company is involved in other legal proceedings, including various
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. The Company does not believe that any of these proceedings, either
individually or in the aggregate, will have a material adverse effect on the
financial condition or results of operations of the Company.
For a description of various environmental proceedings see "Environmental
Compliance" above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company began trading on the Nasdaq National Market
on April 28, 1995. Prior to that time, virtually all of the issued and
outstanding Common Stock of the Company was held by the ESOP. Approximately 56%
of the outstanding shares of Common Stock of the Company are currently held by
the ESOP. For a detailed discussion of the Company's ESOP see "Item 11.
Executive Compensation."
As of September 15, 1997, there were 354 holders of record of the Company's
stock and more than 4,500 beneficial shareholders. On September 12, 1997, the
last reported sales price of the Company's Common Stock was $2.00 per share.
The Company has not paid any dividends on its Common Stock in the last three
years and is restricted in the payment of cash dividends on the common stock by
covenants contained in certain of the Company's financing arrangements. It is
not anticipated that the Company will pay dividends on its Common Stock in the
near future.
The high and low sales prices for the Common Stock of the Company from the
date of the IPO (April 28, 1995) through fiscal year 1997 were as follows:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ----------------------------------------------------------------------- --------- ---------
<S> <C> <C>
June 30, 1995.......................................................... $ 8.500 $ 6.250
September 30, 1995..................................................... 8.375 6.625
December 31, 1995...................................................... 7.500 4.250
March 31, 1996......................................................... 6.000 4.250
June 30, 1996.......................................................... 4.625 3.250
September 30, 1996..................................................... 4.875 2.500
December 31, 1996...................................................... 4.625 1.375
March 31, 1997......................................................... 2.750 1.375
June 30, 1997.......................................................... 1.750 1.250
</TABLE>
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PER TON AMOUNTS)
The following table sets forth the selected consolidated financial data of
the Company for each of the five fiscal years ended June 30, 1993, 1994, 1995,
1996 and 1997, respectively. The selected consolidated financial data for these
periods are derived from the audited consolidated financial statements of the
Company. The selected consolidated financial data presented herein are qualified
in their entirety by, and should be read in conjunction with, the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Report.
<TABLE>
<CAPTION>
1993(1) 1994(1) 1995 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................................ $ 646,162 $ 744,774 $ 805,098 $ 746,174 $ 753,535
Cost of product sold................................. 573,176 665,779 705,156 688,445 691,318
---------- ---------- ---------- ---------- ----------
Gross profit......................................... 72,986 78,995 99,942 57,729 62,217
Selling, general and administrative expenses......... 39,495 46,374 45,338 46,418 44,024
Special charges...................................... -- -- -- 3,890 2,105
Non-cash deferred compensation charges............... -- 330 2,070 -- --
Other postretirement benefits charges (credits)...... 7,844 10,683 14,610 13,821 16,940
Non-cash ESOP charges(2)............................. 24,954 31,270 33,448 32,304 30,500
Interest expense, net(3)............................. 16,953 18,478 12,499 17,424 26,308
Other charges (credits), net......................... (2,395) (538) (811) (562) (772)
Income tax benefit................................... (1,404) (2,823) (2,405) (22,136) (22,569)
Extraordinary gain (net of tax)...................... -- 1,391 -- -- --
Cumulative effect of changes in accounting
principles......................................... 5,093 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net loss............................................. (7,368) (23,388) (4,807) (33,430) (34,319)
Preferred stock dividends paid....................... 4,957 5,733 6,042 -- --
---------- ---------- ---------- ---------- ----------
Net loss attributable to Common Stock................ $ (12,325) $ (29,121) $ (10,849) $ (33,430) $ (34,319)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
EARNINGS PER SHARE:
Loss before cumulative effect of changes in
accounting principles and extraordinary item (4)... $ (1.35) $ (2.35) $ (0.78) $ (1.69) $ (1.74)
Cumulative effect of changes in accounting principles
(1993) and extraordinary item (1994)............... 0.39 0.11 -- -- --
---------- ---------- ---------- ---------- ----------
Net loss............................................. $ (0.96) $ (2.24) $ (0.78) $ (1.69) $ (1.74)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average shares outstanding.................. 12,896 12,990 13,995 19,756 19,707
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term investments.... $ 48,189 $ 62,192 $ 4,609 $ 2,074 $ 6,412
Working Capital...................................... 163,491 201,016 142,264 137,737 135,331
Property, plant and equipment, net................... 142,085 169,797 309,621 331,079 313,235
Total assets......................................... 408,873 501,240 610,791 639,410 632,368
Total debt........................................... 165,705 200,000 243,272 280,956 273,939
Preferred stock...................................... 34,366 40,684 2 2 2
Total stockholders' equity (deficit)................. 16,526 58,390 88,134 88,973 85,254
OTHER DATA:
Adjusted EBITDA(5)................................... 52,625 50,331 73,068 30,072 46,489
Net cash provided (used) by operating activities..... 55,655 30,627 57,818 6,312 20,389
Net cash provided by (used in) investing
activities......................................... (7,653) (40,577) (154,540) (45,141) (9,699)
Net cash provided by (used in) financing
activities......................................... (24,878) (25,011) 39,139 36,294 (6,352)
Maintenance and repairs expense...................... 65,103 73,359 75,242 72,304 70,975
Depreciation and amortization........................ 16,896 17,525 18,841 24,020 29,560
</TABLE>
- ------------------------
(1) Excludes approximately $2,000 in wages and net periodic postretirement
benefits for June 1993 related to the Company's new collective bargaining
agreement ratified in October 1993, and a comparable compensation program
for salaried employees. This amount was accrued in the six months ended
December 31, 1993.
(2) Non-cash ESOP charges represent contributions made by the Company to the
ESOP, which are immediately returned to the Company as repayment of notes in
respect of the loans owed by the ESOP to the Company. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Net of capitalized interest of $0, $578, $8,616, $8,491 and $0 for fiscal
years 1993, 1994, 1995, 1996 and 1997, respectively.
(4) If the non-cash ESOP charges and non-cash deferred compensation charges were
excluded and a 40% effective state and federal tax rate was applied to
earnings as adjusted, earnings (loss) per share as adjusted (unaudited)
would have been $0.13, $(0.26), $0.78, $(0.71) and $(0.74) for fiscal years
1993, 1994, 1995, 1996 and 1997, respectively.
(5) Management believes that Adjusted EBITDA provides meaningful information for
determining compliance with the Company's debt covenants, including interest
coverage. Adjusted EBITDA represents net income (loss) before cumulative
effect of changes in accounting principles and extraordinary items, net
interest expense, income taxes, depreciation and amortization, adjusted to
exclude non-cash postretirement benefit charges (credits), non-cash ESOP
charges and non-cash deferred compensation charges. Adjusted EBITDA does not
represent operating income or cash flow from operations as determined in
accordance with generally accepted accounting principles and does not
necessarily indicate that the Company's cash flow from operations will be
adequate to satisfy its cash needs. Adjusted EBITDA should also not be
considered as an alternative to net income as an indicator of operating
performance or to cash flow from operations as a measure of liquidity.
15
<PAGE>
SELECTED OPERATING DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PER TON AMOUNTS)
The following table sets forth the selected operating data of the Company
for each of the five fiscal years ended June 30, 1993, 1994, 1995, 1996 and
1997, respectively. The selected operating data is derived from the Company's
internal management reports.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Net tons shipped........................................... 935.8 1,056.6 1041.6 897.4 1,009.6
Average selling price per net ton shipped.................. $ 691 $ 705 $ 773 $ 832 $ 746
Average manufacturing cost per net ton shipped............. 613.0 630.0 677 768.0 685.0
Average gross margin per net ton shipped................... 78.0 75.0 96 64.0 61.0
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The steel industry is highly cyclical in nature and is affected by imports,
world-wide production over-capacity, intense domestic and international
competition, as well as general economic conditions. The Company believes that a
majority of its total net sales in fiscal year 1997 were derived from products
sold directly and indirectly to the automotive industry, which also has been
highly cyclical and directly affected by, among other things, the level of
consumer confidence and general economic conditions. Commencing in fiscal year
1993, the steel industry experienced an increase in demand which enabled the
Company and other domestic steel producers to obtain price increases for many of
their major product lines. The Company announced numerous price increases in
1994 and 1995, excluding raw material surcharges, with the preponderance of the
impact commencing in January 1995. Erosion of these price increases began in the
fourth quarter of fiscal year 1996 and with the expected entry of new
competitors in the SBQ market there can be no assurance that further erosion
will not occur.
Scrap metal is the principal raw material used in the Company's products and
accounted for approximately 23% of the Company's total cost of product sold
during fiscal year 1997. The average price of scrap for fiscal year 1997
decreased by 6.2% as compared to the average price of scrap for fiscal year
1996, and, as a result, scrap metal represented 23.2% of the Company's total
cost of product sold in fiscal year 1997 as compared to 24.0% for fiscal year
1996. Scrap metal prices are affected by cyclical, seasonal and other market
factors. These fluctuations in scrap metal prices affect the Company's revenues,
costs and earnings. While the Company believes that it has been generally
successful in passing on scrap metal price increases to its customers through a
surcharge and price increases in the spot market, significant increases in the
price of scrap metal coupled with significant decreases in demand for bar steel
products could adversely affect the Company's financial results. See "Item 1.
Business -- Raw Materials."
Average manufacturing cost per ton of steel shipped decreased by $83 per ton
or 10.8% from $768 per ton in fiscal year 1996 to $685 per ton in fiscal year
1997. The change reflects a decrease in the cost of raw materials from $264 per
ton of product shipped in fiscal year 1996 to $216 per ton in fiscal year 1997
and improved operating costs associated primarily with increased CAST-ROLL-TM-
utilization rates.
ESOP charges are non-cash expenses that represent the principal repayment of
the ESOP Loans (as hereinafter defined). On a quarterly basis, the Company makes
a contribution to the ESOP to reflect certain percentages of cash compensation
received by the ESOP participants in the quarter. The ESOP Trustee in turn
utilizes the entire contribution to pay principal and interest on the
Acquisition loans to the Company incurred to purchase the original twelve
million shares of the Company's Common Stock (the
16
<PAGE>
"ESOP Loans"). The percentage of cash compensation utilized for calendar year
1996 was 18% and will continue at that rate until the ESOP Loans are repaid
which is anticipated to occur in fiscal year 1998. Contributions to the ESOP are
tax deductible, thereby significantly reducing the Company's tax payments. Over
the last five fiscal years, the tax deductions relating to the ESOP were $152.5
million in total and will result in cash savings of approximately $61.0 million
(assuming a 40% state and federal tax rate), when fully realized. In addition,
as the Company generates taxable net income, the remaining ESOP tax deductions
of approximately $17.1 million are expected to result in additional cash savings
of approximately $6.8 million (assuming a 40% state and federal tax rate) in the
future.
The Company's business is subject to some degree of seasonality. In
particular, many of the Company's customers shutdown operations for certain
periods for the maintenance of their facilities and holidays during the
Company's first two fiscal quarters of each year. In fiscal year 1997, the
Company's net sales for its first fiscal quarter and second fiscal quarter
constituted approximately 24.3% and 23.2%, respectively, of the Company's total
net sales for the fiscal year.
In 1989, the Company adopted an Executive Incentive Compensation Plan (the
"Executive Plan") to provide long term incentives and rewards to the executives
and other senior managers of the Company in order to attract, motivate and
retain qualified and capable executives. The Executive Plan provided stock
appreciation rights to all unit holders based upon a predetermined "floor value"
of the Company's common stock. In connection with the IPO, participants in the
Executive Plan surrendered their units in the Executive Plan for stock options
pursuant to the 1995 Stock Option Plan. Stock options, totaling 1,771,200
shares, have been granted under the 1995 Stock Option Plan which are exercisable
after May 5, 1998 and expire on November 28, 2001. Compensation expense relating
to these plans totaled $2,070 for the fiscal year ended June 30, 1995. There was
no expense relating to these plans for fiscal years 1997 or 1996.
Since the options outstanding as of June 30, 1997 were granted prior to the
effective date of SFAS No. 123 and no additional options have been granted
thereafter, pro forma net income and pro forma net income per share data are not
considered necessary.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated income statement data of
the Company as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales......................................................................... 100.0% 100.0% 100.0%
Cost of product sold.............................................................. 87.6 92.3 91.7
--------- --------- ---------
Gross profit...................................................................... 12.4 7.7 8.3
Selling, general and administrative expenses...................................... 5.6 6.2 5.9
Special charges................................................................... -- 0.5 .3
Non-cash deferred compensation charge............................................. 0.2 -- --
Other postretirement benefits charges............................................. 1.8 1.9 2.2
Non-cash ESOP charges............................................................. 4.2 4.3 4.1
Interest expense, net............................................................. 1.6 2.3 3.5
Other charges (credits), net...................................................... (0.1) (0.1) (0.1)
--------- --------- ---------
Loss before income taxes, extraordinary gain and cumulative effect of change in
accounting principles........................................................... (0.9) (7.4) (7.6)
Income tax benefit................................................................ 0.3 2.9 3.0
Net loss.......................................................................... (0.6)% (4.5)% (4.6)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
17
<PAGE>
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1996
Net sales for fiscal year 1997 totaled $753.5 million on shipments of
1,009,631 net tons compared to $746.2 million on shipments of 897,361 tons
during fiscal year 1996. The increased revenues reflect the 12.5% increase in
shipping volume, a decrease in realized selling prices per ton and an increased
percentage of lower priced semi-finished products coupled with a corresponding
decreased percentage of higher priced value-added cold finished and specialty
products. The average selling price, decreased by 10.3% for all products to $746
per ton for fiscal year 1997 compared to $832 per ton during 1996.
Cost of products sold increased by only $2.9 million or .4% to $691.3
million despite the 12.5% increase in shipping volume and increased depreciation
charges of $5.4 million associated with the CAST-ROLL-TM- facility which was in
service for only 6 months during fiscal year 1996. On a per ton basis,
manufacturing costs decreased 10.8% to $685 per ton in fiscal year 1997 versus
$768 per ton for the prior fiscal year. The decrease is due to overall increased
utilization rates; increased CAST-ROLL-TM- throughput from 33.3% of capacity in
fiscal year 1996 to 74.0 % of capacity in fiscal year 1997; decreased raw
material prices for scrap, nickel and molybdenum; and lower average
manufacturing costs associated with the increased percentage of semi-finished
shipments.
Selling, general and administrative expenses totaled approximately $44.0
million or 5.8% of sales for fiscal year 1997 versus approximately $46.4 million
or 6.2% of sales in fiscal year 1996. The decrease is primarily the result of
the reduction of the salaried workforce in connection with the restructuring
which was announced on January 29, 1997.
In fiscal year 1997, the Company recorded a charge for the reduction of the
salaried workforce and for the impairment of assets which will be idled during
the next fiscal year. In addition, the Company revised its estimate of the cost
associated with the June 1996 shutdown of its 8" bar mill. The net of these
adjustments total a pretax charge of $2.1 million compared with the fiscal year
1996 pretax charge of $3.9 million for the shutdown of the 8" mill.
The charge for other postretirement benefits totaled $16.9 million for
fiscal year 1997 compared to $13.8 million for fiscal year 1996. The increase
was due primarily to actuarial losses. Cash payments totaled $2.0 million and
$1.9 million for fiscal years 1997 and 1996, respectively.
Non-cash ESOP charges totaled $30.5 million during fiscal year 1997 compared
to $32.3 million for the prior fiscal year. The decrease was effected despite
the 12.5% increase in shipment level and reflects lower total wages resulting
from improved manpower utilization. This improvement is attributed to the
increased throughput of the CAST-ROLL-TM- facility, the idling of the man-hour
intensive 8" bar mill and other initiatives which resulted in labor productivity
improvement.
Net interest expense totaled $26.3 million for fiscal year 1997 compared to
$17.4 million for fiscal year 1996. The increase is primarily the result of
capitalized interest of $8.5 million for fiscal year 1996 associated with the
construction of the CAST-ROLL-TM- facility. Effective January 1, 1996, the new
facility was placed in operation and, accordingly, interest is no longer being
capitalized.
FISCAL YEAR ENDED JUNE 30, 1996, COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1995
Net sales for fiscal year 1996 totaled $746.2 million on shipments of
897,361 net tons compared to fiscal year 1995 sales of $805.1 million on
shipments of 1,041,586 net tons. This decrease in net sales reflected a weaker
demand in the automotive sector coupled with a substantial overall inventory
reduction by many other customers during the July through December 1995 period.
The average selling price increased by 7.6% to $832 per net ton shipped during
fiscal year 1996 compared to $773 per ton during fiscal year 1995. The overall
price reflected increases in hot rolled, cold-finished and specialty products
and an increased percentage of shipments of the higher priced value-added
specialty products.
18
<PAGE>
Cost of products sold increased from 87.6% of sales to 92.3% of sales in
fiscal year 1996 versus the year ago average. The increase was due to lower
utilization rates, added costs resulting from operating three steel processing
routes instead of two during the first six months of the fiscal year while
customer approvals were being obtained for the use of products from the
CAST-ROLL-TM- facility to replace the then idled vertical caster, cost penalties
associated with inclement weather during the third fiscal quarter, start-up
costs associated with the CAST-ROLL-TM- facility, increased depreciation charges
associated with the new facility which was officially placed in service in
January 1996, charges relating to the shutdown of the 8" mill, by steel scrap
costs which increased by 4.2% versus the prior year, and other raw material cost
increases.
Net periodic postretirement benefits charges for fiscal year 1996 totaled
$13.8 million, $.8 million less than the year earlier period. The decrease was
primarily the result of favorable experience during 1996. Cash payments totaled
$1.9 million and $1.2 million for years 1996 and 1995, respectively.
Non-cash ESOP charges totaled $32.3 million during fiscal year 1996, a
decrease of $1.1 million versus 1995. The decrease was a result of decreased
wages related to the lower level of business activity.
Net interest expense for fiscal year 1996 totaled $17.4 million, an increase
of $4.9 million versus fiscal year 1995. The increase was a result of higher
outstanding debt and decreased interest income on lower cash reserves throughout
fiscal year 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity consist of cash on hand, cash
flow from operations and available borrowings under its revolving credit
facility with BankBoston, N.A. Net cash provided from operating activities was
$55.7 million, $30.6 million, $57.8 million, $6.3 million and $20.4 million in
fiscal years 1993, 1994, 1995, 1996 and 1997, respectively.
The Company's revolving credit facility, which had permitted borrowings up
to $90 million and was due to expire in December 1997, was amended on April 25,
1997 to expire on April 25, 2000 and permit borrowings up to $115 million (the
"Revolving Credit Agreement"), secured by the Company's receivables,
inventories, subsidiaries stock, short term investments and certain intangible
assets. As of June 30, 1997, the full $115 million was available under the
Revolving Credit Agreement.
The Revolving Credit Agreement provides up to $20 million for letters of
credit. Borrowings under the Revolving Credit Agreement bear interest at a per
annum rate equal to the higher of the base rate of BankBoston and 1/2 percent
above the Federal Funds effective rate plus 1/4 percent; or LIBOR plus 2 1/4
percent, at the Company's option. 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." 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.
During the period from the Acquisition through September 1993, the Company's
primary focus was on improving the Company's capital structure by reducing
indebtedness. During this period, the Company repaid approximately $119.2
million of indebtedness incurred in connection with the Acquisition. The
proceeds from the issuance in December 1993 of the $200.0 million First Mortgage
Notes were used to retire all $61.6 million of the Company's outstanding 15 1/2%
Subordinated Debentures at a discount for approximately $58.9 million and to pay
down $110.0 million of outstanding bank debt with the balance being applied
towards the cost of the CAST-ROLL-TM- facility. Since January 1994, the Company
has focused
19
<PAGE>
on improving liquidity in order to meet its ongoing cash requirements, including
those relating to the CAST-ROLL-TM- facility.
Maintenance expenses for facilities and equipment were $65.1 million, $73.4
million, $75.2 million, $72.3 million and $71.0 million for fiscal years 1993,
1994, 1995, 1996 and 1997, respectively. Capital expenditures were $6.6 million,
$41.6 million, $154.5 million, $45.1 million and $9.7 million for fiscal years
1993, 1994, 1995, 1996 and 1997, respectively. The Company expects that capital
expenditures in fiscal year 1998 will be approximately $12 million.
On October 28, 1994, the Ohio Water Development Authority (the "Authority")
issued $20.2 million of 8 1/4% Solid Waste Revenue Bonds (the "1994 Bonds") due
2014, on behalf of the State of Ohio, at 98% of face amount in connection with
the solid waste disposal facilities installed at the CAST-ROLL-TM- facility.
Additionally, on June 1, 1996, the Authority issued $53.7 million of 9.0% Solid
Waste Revenue Bonds (the "1996 Bonds") due June 1, 2021 in connection with the
solid waste recycling facilities installed at the CAST-ROLL-TM- facility. The
proceeds of the 1996 Bonds were used to reduce outstanding borrowings under the
Revolving Credit Facility. As of June 30, 1997 the Company had available $1.183
million from the 1996 Bonds which is classified as restricted cash in the
accompanying consolidated balance sheet, and zero from the 1994 Bonds.
The IPO was completed on May 5, 1995 at a price of $8.00 per share. Of the
shares of Common Stock sold to the public, the Company sold 6,895,020 shares,
the trustee of the ESOP sold 342,076 shares beneficially owned by former
employees and LTV Steel Company, Inc. sold to the underwriters the warrant which
entitled the holder thereof to purchase 812,904 shares of Common Stock for $.05
per share and the underwriters, in turn, exercised the warrant and sold 812,904
shares as part of the offering. The Company used substantially all of the net
proceeds of the IPO received by it to redeem all of the issued and outstanding
shares of its Preferred Stock (approximately $47.6 million) in May 1995 at a
redemption price of $10.10 per share (stated value of $10.00 per share plus a 1%
premium).
The Company believes that its cash on hand, cash flow provided from
operations and borrowings available under its current financing arrangements
will be sufficient to meet its liquidity needs during the next eighteen months,
including working capital requirements, capital expenditures and debt service.
Although the Company believes that based upon its historical performance, it
should be able to satisfy its obligations with a combination of cash flow from
operations and appropriate refinancings, no assurance to this effect can be
given.
With its inception, the Company established a reserve of $27.1 million for
estimated environmental liabilities assumed as part of the Acquisition, which
has been reduced to $17.8 million as of June 30, 1997 due to lower than
anticipated spending and revised estimates of certain items covered by the
reserve. The Company believes it has sufficient resources to meet its
environmental liabilities; however, no assurance can be given that future
regulatory action regarding historical disposal practices at certain of the
Company's facilities, as well as continued compliance with environmental
requirements, will not require the Company to incur significant costs that could
have a material adverse effect on the future financial performance of the
Company. See "Item 1. Business -- Environmental Compliance."
As of June 30, 1997, the Company had a net operating loss ("NOL")
carryforward for federal income tax purposes of approximately $249 million and
an alternative minimum tax carryforward of $128 million, subject to adjustment
by the Internal Revenue Service. If the Company were to undergo an "ownership
change" within the meaning of Section 382 of the U.S. Internal Revenue Code of
1986, as amended (the "Code"), the use by the Company of its NOL carryforwards
would be subject to an annual limitation equal to the product of (i) the fair
market value of the equity of the Company immediately before the ownership
change (subject to certain adjustments, including a reduction for certain
capital contributions made within two years before such ownership change); and
(ii) the federal long-term tax exempt rate in effect on the date of the
ownership change. Such limitation would be increased by certain built-in gains,
if any, that are recognized by the Company within five years after the ownership
change. In general, an ownership change
20
<PAGE>
would occur when there has been a more than 50 percentage point increase in the
amount of the Company's stock owned by its "5% shareholders" (as defined in the
Code) over the lowest percentage owned by those 5% shareholders at any time
during a three-year testing period. The consummation of the IPO by itself did
not result in an ownership change. As of June 30, 1997, the ESOP held
approximately 56% of the Common Stock of the Company. However, future sales or
other dispositions of the Common Stock, outside the control of the Company might
result in such an ownership change. In regards to ownership change as it relates
to ESOP participants, the Company requested and in October 1996 received a
favorable ruling from the Internal Revenue Service which provides that
distributions of Company stock from the ESOP to ESOP participants will not
constitute an ownership shift for purposes of Section 382 of the Code.
Forward looking statements herein are made pursuant to safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such forward
looking statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected. Readers are
cautioned not to place undue reliance on these forward looking statements which
speak only as of the date hereof. Such risks and uncertainties include, but are
not limited to, general business and economic conditions; competitive factors
such as the availability and pricing of steel, fluctuations in demand,
specifically in the automotive market; potential equipment malfunction; and
construction and repair delays.
IMPACTS OF ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS 128: "Earnings Per
Share" effective for fiscal years beginning after December 15, 1997; SFAS 129:
"Disclosure of Information about Capital Structure" effective for fiscal years
beginning after December 15, 1997; SFAS 130: "Reporting Comprehensive Income"
effective for fiscal years beginning after December 15, 1996; and SFAS 131:
"Disclosures about Segments of an Enterprise and Related Information" effective
for fiscal years beginning after December 15, 1997. The Company does not believe
that the adoption of these standards will have a material effect on its
financial statements.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INDEX TO FINANCIAL STATEMENTS
Independent Auditors Report................................................................................ 22
Consolidated Balance Sheets June 30, 1997 and 1996......................................................... 24
Consolidated Statements of Income (Loss)
Years ended June 30, 1997, 1996 and 1995............................................................... 25
Consolidated Statements of Shareholders' Equity
Years ended June 30, 1997, 1996 and 1995............................................................... 26
Consolidated Statements of Cash Flows
Years ended June 30, 1997, 1996 and 1995............................................................... 27
Notes to Consolidated Financial Statements
June 30, 1997, 1996 and 1995........................................................................... 28
INDEX TO FINANCIAL STATEMENT SCHEDULES
Accountant's Report on Schedules and Consent........................................................... 59
II. Valuation of Qualifying Accounts...................................................................... 61
V. Supplementary Income Statement Information............................................................. 62
</TABLE>
22
<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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1997, in conformity with generally accepted
accounting principles.
<TABLE>
<S> <C>
/s/ KPMG Peat Marwick LLP
- --------------------------------------------
KPMG Peat Marwick LLP
Pittsburgh, PA
August 1, 1997
</TABLE>
23
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................................................. $ 6,412 2,074
Receivables, less allowance for doubtful accounts of $1,624 in 1997 and $1,949 in 1996
(note 5)............................................................................ 75,596 76,712
Inventories (notes 2 and 5)........................................................... 151,708 163,426
Prepaid expenses...................................................................... 2,012 1,774
Deferred income taxes (note 9)........................................................ 7,382 6,196
Other current assets.................................................................. 55 278
----------- -----------
Total current assets............................................................ 243,165 250,460
Property, plant and equipment, net (notes 3 and 5)...................................... 313,235 331,079
Intangibles and other assets, net (notes 4 and 5)....................................... 27,711 29,930
Restricted cash (note 5)................................................................ 1,183 2,250
Deferred income taxes (note 9).......................................................... 47,074 25,691
----------- -----------
$ 632,368 639,410
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable...................................................................... $ 60,280 65,272
Accrued compensation and benefits..................................................... 29,128 31,194
Accrued liabilities................................................................... 18,225 16,098
Accrued ESOP contribution............................................................. 201 159
----------- -----------
Total current liabilities....................................................... 107,834 112,723
Long-term debt (note 5)................................................................. 273,939 280,956
Other postretirement benefits (note 8).................................................. 128,073 113,169
Defined benefit pension obligations (note 7)............................................ 16,885 20,434
Environmental costs (note 16)........................................................... 16,862 19,605
Other liabilities....................................................................... 3,521 3,550
----------- -----------
Total liabilities............................................................... 547,114 550,437
----------- -----------
Shareholders' equity
Special preferred stock, $.01 par value; one share authorized, one share issued,
liquidation value of $1,500 (note 11)............................................... 2 2
Common stock, $.01 par value; authorized 27,000,000 shares; issued 19,707,923 shares;
outstanding 19,706,578 (note 12).................................................... 197 197
Additional paid-in capital............................................................ 275,270 275,270
Accumulated deficit................................................................... (173,086) (138,767)
----------- -----------
102,383 136,702
Less receivable from Employee Stock Ownership Trust................................... 17,121 47,721
Less treasury stock, at cost, 1,345 shares............................................ 8 8
----------- -----------
Total shareholders' equity...................................................... 85,254 88,973
Commitments and contingencies (notes 3, 7, 8, 14, 15, and 16)...........................
----------- -----------
$ 632,368 639,410
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
YEARS ENDED JUNE 30, 1997, 1996, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net sales.................................................................... $ 753,535 746,174 805,098
Cost of product sold (including depreciation of $25,972 in 1997, $20,617 in
1996, and $15,317 in 1995)................................................. 691,318 688,445 705,156
---------- ---------- ----------
Gross profit............................................................. 62,217 57,729 99,942
Selling expenses............................................................. 9,955 11,043 9,670
General and administrative expenses.......................................... 34,069 35,375 35,668
Special charges (notes 19 and 20)............................................ 2,105 3,890 --
Other postretirement benefits charges (note 8)............................... 16,940 13,821 14,610
Noncash ESOP charges......................................................... 30,500 32,304 33,448
Deferred compensation (note 6)............................................... -- -- 2,070
Other charges (credits), net
Interest charges........................................................... 26,820 26,453 23,185
Capitalized interest (note 3).............................................. -- (8,491) (8,616)
Interest income............................................................ (512) (538) (2,070)
Miscellaneous, net......................................................... (772) (562) (811)
---------- ---------- ----------
119,105 113,295 107,154
---------- ---------- ----------
Loss before income tax benefit........................................... (56,888) (55,566) (7,212)
Income tax benefit (note 9).................................................. 22,569 22,136 2,405
---------- ---------- ----------
Net loss................................................................. (34,319) (33,430) (4,807)
Preferred stock dividends paid (note 6)...................................... -- -- 6,042
---------- ---------- ----------
Net loss attributable to common stock.................................... $ (34,319) (33,430) (10,849)
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares outstanding.......................................... 19,707 19,756 13,995
Net loss per common share (note 1[i])........................................ $ (1.74) (1.69) (.78)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1996, AND 1995
(IN THOUSANDS, EXCEPT AS INDICATED*)
<TABLE>
<CAPTION>
NUMBER OF SHARES
OUTSTANDING
------------------------ ADDITIONAL
PREFERRED COMMON PREFERRED SPECIAL PAID-IN
STOCK STOCK STOCK PREFERRED STOCK COMMON STOCK CAPITAL
----------- ----------- ----------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance as of June 30, 1994.................... 4,027 11,999 $ 40,684 -- 120 225,280
Net loss....................................... -- -- -- -- -- --
Preferred stock (note 10)...................... 678 -- 6,777 -- -- --
Preferred stock retired........................ (126) -- (1,263) -- -- --
Preferred treasury stock retired............... 41 -- -- -- -- --
Warrants purchased from LTV (note 18).......... -- -- -- -- -- (541)
Preferred stock dividend (note 6).............. -- -- -- -- -- --
Preferred stock redeemed (notes 6 and 10)...... (4,620) -- (46,198) -- -- --
Issued special preferred stock (note 11)....... 1* -- -- 2 -- --
Common stock issued............................ -- 8,050 -- -- 80 51,254
Common stock sold from ESOP Trust.............. -- (342) -- -- (3) (2,549)
Stock options.................................. -- -- -- -- -- 1,826
Minimum pension liability adjustment, net of
tax (note 7)................................. -- -- -- -- -- --
ESOP loan repayment............................ -- -- -- -- -- --
--
----------- ----------- ----------- --- -----------
Balance as of June 30, 1995.................... 1* 19,707 -- 2 197 275,270
Net loss....................................... -- -- -- -- -- --
Minimum pension liability adjustment, net of
tax (note 7)................................. -- -- -- -- -- --
ESOP loan repayment............................ -- -- -- -- -- --
--
----------- ----------- ----------- --- -----------
Balance as of June 30, 1996.................... 1* 19,707 -- 2 197 275,270
Net loss....................................... -- -- -- -- -- --
ESOP loan repayment............................ -- -- -- -- -- --
--
----------- ----------- ----------- --- -----------
Balance as of June 30, 1997.................... 1* 19,707 $ -- 2 197 275,270
--
--
----------- ----------- ----------- --- -----------
----------- ----------- ----------- --- -----------
<CAPTION>
RECEIVABLE
FROM
MINIMUM EMPLOYEE
ACCUMU- PENSION STOCK TOTAL
LATED LIABILITY OWNERSHIP TREASURY SHAREHOLDERS'
DEFICIT ADJUSTMENT TRUST STOCK EQUITY
--------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance as of June 30, 1994.................... (93,953) -- (113,286) (455) 58,390
Net loss....................................... (4,807) -- -- -- (4,807)
Preferred stock (note 10)...................... -- -- -- -- 6,777
Preferred stock retired........................ (71) -- -- -- (1,334)
Preferred treasury stock retired............... -- -- -- 447 447
Warrants purchased from LTV (note 18).......... (2) -- -- -- (543)
Preferred stock dividend (note 6).............. (6,042) -- -- -- (6,042)
Preferred stock redeemed (notes 6 and 10)...... (462) -- -- -- (46,660)
Issued special preferred stock (note 11)....... -- -- -- -- 2
Common stock issued............................ -- -- -- -- 51,334
Common stock sold from ESOP Trust.............. -- -- -- -- (2,552)
Stock options.................................. -- -- -- -- 1,826
Minimum pension liability adjustment, net of
tax (note 7)................................. -- (1,604) -- -- (1,604)
ESOP loan repayment............................ -- -- 32,900 -- 32,900
--------- ------------- ----------- ----- -------------
Balance as of June 30, 1995.................... (105,337) (1,604) (80,386) (8) 88,134
Net loss....................................... (33,430) -- -- -- (33,430)
Minimum pension liability adjustment, net of
tax (note 7)................................. -- 1,604 -- -- 1,604
ESOP loan repayment............................ -- -- 32,665 -- 32,665
--------- ------------- ----------- ----- -------------
Balance as of June 30, 1996.................... (138,767) -- (47,721) (8) 88,973
Net loss....................................... (34,319) -- -- -- (34,319)
ESOP loan repayment............................ -- -- 30,600 -- 30,600
--------- ------------- ----------- ----- -------------
Balance as of June 30, 1997.................... (173,086) -- (17,121) (8) 85,254
--------- ------------- ----------- ----- -------------
--------- ------------- ----------- ----- -------------
</TABLE>
- ------------------------------
* Not in thousands
See accompanying notes to consolidated financial statements.
26
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1997, 1996, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss....................................................................................... $ (34,319) (33,430) (4,807)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization................................................................ 29,560 24,020 18,841
Provision for ESOP contribution.............................................................. 30,500 32,304 33,448
Deferred income tax benefit.................................................................. (22,569) (21,984) (2,575)
Change in operating assets and liabilities
Receivables, net........................................................................... 1,116 3,754 (7,549)
Inventories................................................................................ 11,440 3,178 (13,236)
Prepaid expenses........................................................................... (238) 40 (29)
Other current assets....................................................................... 223 126 1,100
Intangibles and other assets............................................................... (164) 1,516 (6,090)
Accounts payable........................................................................... (3,140) (6,866) 18,636
Accrued compensation and benefits.......................................................... (1,924) (784) 1,169
Accrued liabilities........................................................................ 704 1,098 2,972
Accrued ESOP contribution.................................................................. 42 (144) 280
Accrued income taxes....................................................................... -- (177) 170
Other postretirement benefits.............................................................. 14,904 11,890 13,422
Defined benefit pension obligations........................................................ (3,549) (3,095) 3,432
Environmental costs........................................................................ (2,168) (3,288) (261)
Other liabilities.......................................................................... (29) (1,846) (1,105)
--------- --------- ---------
Total adjustments........................................................................ 54,708 39,742 62,625
--------- --------- ---------
Net cash provided by operating activities................................................ 20,389 6,312 57,818
--------- --------- ---------
Cash flows from investing activities
Additions to property, plant and equipment, including capitalized
interest of $8,491 in 1996 and $8,616 in 1995................................................ (9,699) (45,141) (154,540)
--------- --------- ---------
Net cash used in investing activities.................................................... (9,699) (45,141) (154,540)
--------- --------- ---------
Cash flows from financing activities
Proceeds from issuance of long-term debt....................................................... -- 53,700 20,200
Repayment of long-term debt.................................................................... (17) (16) --
Revolver activity, net......................................................................... (7,000) (16,000) 23,000
Deferred financing costs associated with long-term debt........................................ (923) (1,807) (1,163)
Net proceeds from IPO (note 1[a]).............................................................. -- -- 48,782
Redemption of preferred stock (note 10)........................................................ -- -- (47,139)
Purchase of LTV warrants....................................................................... -- -- (543)
Preferred stock payable........................................................................ -- -- 5,643
Preferred stock dividend....................................................................... -- -- (6,042)
Retirement of preferred stocks................................................................. -- -- (887)
Other financing activities, net................................................................ 1,588 417 (2,712)
--------- --------- ---------
Net cash provided by (used in) financing activities...................................... (6,352) 36,294 39,139
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................................. 4,338 (2,535) (57,583)
Cash and cash equivalents at beginning of year................................................... 2,074 4,609 62,192
--------- --------- ---------
Cash and cash equivalents at end of year......................................................... $ 6,412 2,074 4,609
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow information
Interest paid, net of amounts capitalized...................................................... $ 27,072 19,801 13,820
--------- --------- ---------
--------- --------- ---------
Income taxes paid.............................................................................. $ -- 25 --
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997, 1996, AND 1995
(DOLLARS 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 obtains
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 is repaying Loan A and Loan B (plus
interest) over their respective maturity periods. As of June 30, 1997 and 1996,
the ESOP owned approximately 56 percent and 59 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 65
percent and 67 percent of its shipments for fiscal years 1997 and 1996,
respectively, were to customers in the states of Indiana, Illinois, Michigan,
New York, Ohio, and Pennsylvania. See also note 13.
(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.
28
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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.
The Company has 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.
29
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
(I) NET LOSS PER COMMON SHARE
The net loss per common share computations are based upon the weighted
average number of shares of common stock outstanding during each fiscal year.
(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.
(L) RECLASSIFICATION
Certain previously reported amounts have been reclassified to conform with
the current presentation.
30
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Raw materials.......................................................... $ 10,923 10,401
Finished and semifinished product...................................... 138,950 150,711
Supplies, molds, and stools............................................ 1,835 2,314
---------- ---------
$ 151,708 163,426
---------- ---------
---------- ---------
</TABLE>
The above inventory amounts are net of LIFO reserves which decreased the
value of the inventory by $8,301 and $17,362 as of June 30, 1997 and 1996,
respectively, and reserves to value inventory at the lower of cost or market
which decreased the value of inventory by $1,204 and $730 as of June 30, 1997
and 1996, respectively.
During fiscal 1997, inventory quantities were reduced, which resulted in a
liquidation of LIFO inventory layers carried at lower costs which prevailed in
prior years. The effect of this liquidation was to decrease cost of goods sold
by $849 and decrease the net loss by $340 or $.02 per share. There was also a
shift in the product mix, with a reduction in higher-valued specialty steels. In
addition, due to continued cost savings associated with the Cast-Roll-TM-
facility and a reduction in raw material prices, the current cost of inventory
was lower in fiscal 1997 versus fiscal 1996. These factors resulted in a $9,061
reduction in the LIFO reserve. In order to adjust the LIFO reserve, net of other
offsetting inventory reserves of $2,707, credits of $3,000 and $3,354 were taken
in the third and fourth quarters, respectively, of fiscal 1997 (note 19).
In fiscal 1996, inventory quantities were also reduced, which resulted in a
liquidation of LIFO inventory layers. The effect of this liquidation was to
decrease cost of goods sold by $1,831 and decrease the net loss by $1,101 or
$.06 per share. Despite the gain generated by the liquidation of certain layers,
product mix shifts to higher-valued products in other nonliquidated pools
resulted in a net charge to income. The net result of the gains from LIFO
liquidations and the adverse impact of product mix shifts was a charge of $4,535
during the fourth quarter of 1996 to adjust the LIFO reserve. There was no
significant reduction of inventory in fiscal 1995.
31
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Land................................................................... $ 10,816 10,816
Buildings.............................................................. 38,828 36,575
Machinery and equipment................................................ 372,635 361,648
---------- ---------
422,279 409,039
Less accumulated depreciation.......................................... 116,539 92,439
---------- ---------
305,740 316,600
Construction in progress............................................... 7,495 14,479
---------- ---------
$ 313,235 331,079
---------- ---------
---------- ---------
</TABLE>
The Cast-Roll-TM- facility was officially placed in service January 1, 1996.
Interest was capitalized on this facility during the construction period through
December 31, 1995.
As of June 30, 1997, the Company was formally committed to spend $2,582 on
capital expenditures.
(4) INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Intangible pension asset (note 7)........................................ $ 17,596 18,711
Deferred loan and bond fees.............................................. 10,529 12,101
Deposits................................................................. 2,626 2,668
Other.................................................................... 218 218
--------- ---------
30,969 33,698
Less accumulated amortization............................................ 3,258 3,768
--------- ---------
$ 27,711 29,930
--------- ---------
--------- ---------
</TABLE>
32
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) LONG-TERM DEBT
Long-term debt of the Company consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1997 1996
---------- ---------
<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...................... 200,000 200,000
Revolving credit agreement............................................. -- 7,000
Other.................................................................. 39 56
---------- ---------
273,939 280,956
Less current maturities of long-term debt.............................. -- --
---------- ---------
$ 273,939 280,956
---------- ---------
---------- ---------
</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
roll process plant. 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, 1997 and 1996, the Company had available $1,183 and $2,250,
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-Roll-TM- facility. The proceeds of this financing were fully expended
during 1996.
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, 1998 at specified premiums
set forth therein which decline over three years. At any time before December
15, 1996, the Company had the right to redeem a portion of the Notes with the
proceeds of a public offering of its common stock at a redemption price of
109 7/8 percent of the principal amount thereof plus accrued interest, provided
that at least $140,000 aggregate principal amount remained outstanding. 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 $249,923 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, 1997. 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).
33
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) LONG-TERM DEBT (CONTINUED)
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, 1997 and 1996, 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, 1997.
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 $8,618, $8,683, and $8,538 for the fiscal years
ended June 30, 1997, 1996, and 1995, 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.
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.
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
34
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) BENEFIT PLANS (CONTINUED)
percentages of the consolidated excess cash flows of the Company as defined in
the Revolving Credit Agreement (see note 5).
Prior to May 1995, the Company had a preferred stock plan which was
established for the benefit of all USWA and nonbargained-for salaried employees
of Republic Engineered Steels, Inc. With the proceeds from the IPO, all
4,619,787.7 outstanding shares of preferred stock were redeemed and the plan was
terminated. Prior to the redemption of the outstanding preferred stock, the
Company accrued $61 in fiscal 1995 for preferred stock payable to
nonbargained-for salaried employees of Republic Engineered Steels, Inc., and
accrued an additional $6,042 representing dividends-in-kind on the total
preferred stock payable which covers all USWA and nonbargained-for employees of
Republic Engineered Steels, Inc. The Company issued, net, 551,362.6 shares of
preferred stock in fiscal 1995, which included 19,963.6 of earned shares,
657,705.8 of shares issued as dividends-in-kind as required by the plan, and
126,306.8 of treasury shares retired.
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 1,771,200 shares, are exercisable after May
5, 1998 at an exercise price of $6.67 per share and expire on November 28, 2001.
Compensation expense relating to these plans totaled $2,070 for the fiscal year
ended June 30, 1995; there was no expense relating to these plans for fiscal
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.
35
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(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 securities, and common stocks. The following table sets forth
the funded status of the plan as of June 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations
Vested benefits....................................................... $ 17,182 16,791
---------- ---------
---------- ---------
Accumulated benefit obligation........................................ $ 24,166 23,657
---------- ---------
---------- ---------
Projected benefit obligation............................................ $ 24,166 23,657
Plan assets at fair value............................................... 7,281 3,224
---------- ---------
Projected benefit obligation in excess of plan assets................... 16,885 20,433
Items not yet recognized in earnings
Prior service cost.................................................... (18,394) (20,008)
Net gain.............................................................. 798 1,298
Adjustment required to recognize minimum liability...................... 17,596 18,711
---------- ---------
Accrued pension cost as reflected on the consolidated balance
sheets............................................................ $ 16,885 20,434
---------- ---------
---------- ---------
</TABLE>
Net pension expense included in operating income for the years ended June
30, 1997, 1996, and 1995 consists of the following components:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost (benefit)........................................... $ (1,471) (1,721) (909)
Interest cost.................................................... 1,899 2,113 1,561
Actual return on plan assets..................................... (732) (144) (74)
Net amortization and deferred items.............................. 1,614 1,567 1,334
--------- --------- ---------
Net periodic pension cost........................................ $ 1,310 1,815 1,912
--------- --------- ---------
--------- --------- ---------
</TABLE>
Actuarial assumptions used in accounting for the pension plan for the fiscal
years ended June 30, 1997, 1996, and 1995 were as follows:
<TABLE>
<S> <C>
Discount rate........................................................ 8.0%
Rate of increase in future compensation levels....................... 5.0%
Expected long-term rate of return on assets.......................... 8.0%
</TABLE>
36
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) DEFINED BENEFIT PENSION OBLIGATIONS (CONTINUED)
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, 1997 and 1996, the minimum pension liability of $17,596 and
$18,711, 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.
(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 defer benefits for
future salaried retirees until attaining the age of 65. 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 is 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,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees............................................................. $ 27,758 18,120
Fully eligible active plan participants.............................. 28,183 32,249
Other active plan participants....................................... 71,944 81,737
---------- ---------
127,885 132,106
Unrecognized prior service cost
Original amount at adoption of FASB No. 106.......................... (16,437) (18,937)
Deferral of benefits for future salaried retirees.................... 16,625 --
---------- ---------
188 (18,937)
---------- ---------
Accrued postretirement benefits as reflected on the consolidated
balance sheets....................................................... $ 128,073 113,169
---------- ---------
---------- ---------
</TABLE>
37
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS 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>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost--benefit attributed to service during the period... $ 3,759 3,761 3,260
Interest cost on accumulated postretirement benefit
obligation.................................................... 10,249 10,058 9,176
Immediate recognition of change in accumulated postretirement
benefit obligation due to actuarial (gains) losses, including
change in assumptions......................................... 983 (2,498) (325)
Net amortization of unrecognized amounts for net gain and prior
service cost.................................................. 1,949 2,500 2,499
--------- --------- ---------
Net periodic postretirement benefit charges..................... $ 16,940 13,821 14,610
--------- --------- ---------
--------- --------- ---------
</TABLE>
The health care cost trend rates used in determining the APBO as of June 30,
1997 and 1996, were as follows:
<TABLE>
<CAPTION>
YEAR 1997 1996
- ------------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
1997.......................................................................... 8.0% 8.0%
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.......................................................................... 5.5% 5.0%
Thereafter.................................................................... 5.5% 5.0%
</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, 1997 from $127,885 to $153,187
and the aggregate of the service and interest cost components of net periodic
postretirement benefit charges for 1997 from $14,008 to $17,286.
The discount rate used in determining the APBO was 8.0 percent as of June
30, 1997 and 1996. The discount rate used in determining the net periodic
postretirement benefit charge was 8.0 percent for fiscal 1997, 1996, and 1995.
The withdrawal assumptions were revised in 1996 to meet Internal Revenue Service
requirements, and health care cost trend rates were changed as noted above,
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.
The Company's policy is to fund claims as incurred. Claims paid were $2,037,
$1,931, and $1,169 during the fiscal years ended June 30, 1997, 1996, and 1995,
respectively. The Company also recognizes
38
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) OTHER POSTRETIREMENT BENEFITS (CONTINUED)
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 1997, 1996, and 1995 includes a
current tax (benefit) charge of $-0-, ($152), and $170, respectively, due to the
federal alternative minimum tax, which was increased by a deferred benefit of
$22,569 and $21,984 in 1997 and 1996, respectively, and offset by a deferred
benefit of $2,575 in 1995.
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>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax benefit............................. $ 19,911 19,448 2,524
State and local income tax benefit............................... 2,844 2,778 361
Change in valuation allowance for deferred tax assets............ -- -- 123
Other............................................................ (186) (90) (603)
--------- --------- ---------
Income tax benefit............................................. $ 22,569 22,136 2,405
--------- --------- ---------
--------- --------- ---------
Effective book income tax benefit rate........................... 39.7% 39.8% 33.3%
</TABLE>
39
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS 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,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Deferred tax assets
Accounts receivable, principally due to allowance for doubtful
accounts........................................................... $ 650 780
Postretirement benefits.............................................. 21,628 15,667
Environmental costs.................................................. 6,451 7,240
Other liabilities.................................................... 11,620 11,992
Net operating loss carryforwards..................................... 99,474 70,560
Other................................................................ 938 971
---------- ---------
Total gross deferred tax assets.................................... 140,761 107,210
Less valuation allowance............................................. 25,187 25,187
---------- ---------
Net deferred tax assets.............................................. 115,574 82,023
---------- ---------
Deferred tax liabilities
Inventory valuation.................................................. 9,762 12,738
Plant and equipment, principally due to differences in
depreciation....................................................... 50,513 36,901
Other................................................................ 843 497
---------- ---------
Total gross deferred tax liabilities............................... 61,118 50,136
---------- ---------
Net deferred tax asset............................................. $ 54,456 31,887
---------- ---------
---------- ---------
</TABLE>
The Company had available as of June 30, 1997, net operating loss (NOL)
carryforwards, for regular federal income tax purposes, totaling approximately
$249 million ($128 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. 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 $194 million during its eight-year existence,
deductible noncash ESOP contributions have totaled $199 million during that same
period. Further, five of the eight years reflect substantial income on a
pretax/pre-ESOP contribution basis. The Company's current business plan
anticipate that ESOP contributions will be fully allocated during fiscal 1999,
or seven 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.
40
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(10) PREFERRED STOCK
Prior to the redemption of the preferred stock in connection with the IPO,
there were six million shares authorized with a par value of $.01 per share and
a stated value of $10.00 per share. Dividends on the preferred stock were
payable semiannually in arrears.
On October 28, 1993, as approved by the shareholders of the Company, an
amendment was made to the Company's Certificate of Incorporation that (i)
eliminated the requirement that the Company mandatorily redeem on November 28,
2004 all of the then outstanding shares of its preferred stock, and (ii) in the
case of an optional redemption by the Company, provided for a premium of $.10
per share for shares of preferred stock redeemed after November 28, 1994 and
prior to November 28, 1995, and a premium of $.05 per share for shares of
preferred stock redeemed after November 28, 1995 and prior to November 28, 1996.
The redemption price was equal to the greater of stated value or the then
current market price plus the aforementioned applicable premium. In connection
with the IPO, the preferred stock was redeemed at the $.10 per share premium for
an aggregate redemption value of $47,139.
(11) 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 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.
(12) COMMON STOCK
As of June 30, 1997 and 1996, 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, 1997 and 1996, of which
11,004,663 and 11,554,352 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. 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 three
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
41
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(12) COMMON STOCK (CONTINUED)
(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.
(13) CONCENTRATIONS OF CREDIT RISK
The Company has one customer which accounted for approximately 9 percent of
total sales in each of the fiscal years ended June 30, 1997, 1996, and 1995. A
majority of the Company's business is directly or indirectly related to the
automobile industry.
(14) LEASE COMMITMENTS
Minimum rental payments due under noncancelable operating leases are
estimated to be as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
- ---------------------------------------------------------------------------
<S> <C>
1998....................................................................... $ 1,115
1999....................................................................... 549
2000....................................................................... 292
2001....................................................................... 25
2002....................................................................... 13
Thereafter................................................................. --
---------
$ 1,994
---------
---------
</TABLE>
Rent expense was approximately $3,983, $4,118, and $4,199 for the fiscal
years ended June 30, 1997, 1996, and 1995, respectively.
(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
42
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(15) LITIGATION (CONTINUED)
discrimination claims. In July 1997, the age discrimination lawsuit was
tentatively settled. Accordingly, the Company recorded a charge, in an amount
which is not material, against income in fiscal year 1997.
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 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 $12,300 to $26,100 over the lives of the
Company's facilities. This range represents the estimated aggregate cost to
resolve the environmental contingencies. The Company does not anticipate any
third-party recoveries. The reserve to cover potential current and noncurrent
environmental liabilities was approximately $17,800 and $20,000 as of June 30,
1997 and 1996, 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.
- CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, AND ACCOUNTS PAYABLE -- The
carrying amount approximates fair value because of the short-term maturity
of these instruments.
- LONG-TERM DEBT -- The fair value of the First Mortgage Notes classified
under long-term debt (see note 5), based on quoted market values, was
approximately $185,500 as of June 30, 1997. The
43
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(17) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 $20,800 and $55,300, respectively, as of June 30, 1997.
(18) WARRANT PURCHASE AGREEMENT
On May 13, 1994, the Company entered into an agreement with LTV Steel
covering a certain warrant, assented to by the Pension Benefit Guaranty
Corporation (PBGC), which warrant was pledged to the PBGC and held in trust for
the benefit of certain LTV Steel pension plans. Such agreement (Warrant Purchase
Agreement) provided for the purchase by the Company of the warrant which
entitled the holder thereof to purchase, subject to the provisions of the
warrant, 903,226 shares of the Company's common stock (warrant shares). The
purchase price for any portion of the warrant was established by the Warrant
Purchase Agreement at $6.00 per warrant share. The Company was contractually
required to purchase the warrant for 903,226 warrant shares in equal
installments at six-month intervals beginning September 30, 1994 over a
five-year period, subject to extensions and limitations. Several contingencies
also existed which limited any purchases to be made by the Company. On September
30, 1994, the Company purchased the first installment of 90,322 warrant shares
at $6.00 per share. In connection with the IPO in May 1995, LTV Steel sold to
the underwriters the warrant which entitled the holder thereof to purchase the
remaining 812,904 shares of common stock for $.05 per share and the
underwriters, in turn, exercised the warrant and sold 812,904 shares as part of
the IPO. As part of this transaction, the Warrant Purchase Agreement was
terminated.
(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERLY PERIODS IN 1997
-------------------------------------------
1ST QTR 2ND QTR. 3RD QTR. 4TH QTR.
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales........................................ $ 183,421 174,673 196,610 198,831
Gross profit..................................... 12,902 9,824 16,446 23,045
Special charges.................................. -- -- 2,763 --
Net loss......................................... (10,355) (11,604) (9,150) (3,210)
Net loss per common share........................ (0.53) (0.59) (0.46) (0.16)
</TABLE>
<TABLE>
<CAPTION>
QUARTERLY PERIODS IN 1996
-------------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales........................................ $ 183,005 172,926 197,749 192,494
Gross profit..................................... 18,339 16,607 8,962 13,821
Special charges.................................. -- -- 3,890 --
Net loss......................................... (4,779) (5,404) (15,012) (8,235)
Net loss per common share........................ (0.24) (0.27) (0.76) (0.42)
</TABLE>
During the fourth quarters of 1997 and 1996, the Company recorded LIFO
reserve adjustments representing a credit of $3,354 ($.17 per share) in 1997 and
a charge of $4,535 ($.23 per share) in 1996.
44
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
The Company revised its estimate of other liabilities during the fourth
quarter of 1997 due to the results of actual spending on major maintenance
projects, which resulted in a credit to operations of $1,866 ($.09 per share).
During the fourth quarter of 1996, the Company concluded its valuation of
the cost of postretirement benefits other than pensions (FASB No. 106). As a
result, the Company changed its estimate of postretirement benefit charges for
1996 and recorded an adjustment to reduce expense by $2,498 ($.13 per share) in
the fourth quarter of 1996.
The Company revised its estimates of certain liabilities during the fourth
quarter of 1996, resulting in a credit to operations of $4,870 ($.25 per share).
These changes in estimate included a reduction of the environmental cost of
$3,170 based on actual experience to date and obtaining certain permits from the
Ohio EPA, and a reduction of other liabilities in the amount of $1,700 due to
the results of actual spending on major maintenance projects.
(20) 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 eligibility requirements for
receiving retiree health care benefits from age 57 with 30 years service or age
70 with 15 or more years service to age 65 with 15 or more years service. For
the transition to the new plan, the plan will 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 over the next several months 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-Roll-TM- facility and completes
other smaller capital projects.
The financial impact of the restructuring of the salaried workforce is
estimated to be $2.8 million and is reflected as a special charge in the 1997
third quarter financial statements. 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.
45
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be furnished pursuant to this item with respect
to Directors of the Company will be set forth under the caption "Election of
Directors" in the registrant's proxy statement (the "Proxy Statement") to be
furnished to stockholders in connection with the solicitation of proxies by the
Company's Board of Directors for use at the 1997 Annual Meeting of Stockholders
to be held on October 23, 1997, and is incorporated herein by reference, and the
information with respect to Executive Officers is set forth, pursuant to General
instruction G on Form 10-K, under Part I of this Report.
The information required to be furnished pursuant to this item with respect
to compliance with Section 16(a) of the Securities Exchange Act of 1934 will be
set forth under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be furnished pursuant to this item will be set
forth under the caption "Executive Compensation" in the Company's Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be furnished pursuant to this item will be set
forth under the captions "Voting Securities" and "Security Ownership of
Management and Principal Stockholders" of the Proxy Statement, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
46
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
Audited financial statements and supplementary data required by this item
are presented and listed in Part II, Item 8.
(2) Financial Statement Schedules
A list of financial statement schedules required to be filed as part of
this report is presented in Part II, Item 8.
(3) Executive Compensation Arrangements
-- 1989 Executive Incentive Compensation Plan(1)
-- 1995 Stock Option Plan(2)
-- Amended and Restated Employee Common Stock Ownership Plan(2)
-- Amendment No. 1 to Amended and Restated Employee Common Stock
Ownership Plan(2)
-- Employee Common Stock Ownership Plan Trust Agreement(1)
-- Amendment No. 1 to Employee Common Stock Ownership Plan Trust
Agreement(2)
-- Salaried Employees' Termination Plan, as amended, effective as of
October 26, 1995.(3)
(1) Incorporated by reference to similarly identified exhibits to the
registrant's Registration Statement, No. 33-70578 on Form S-1, as
amended, filed with the Securities and Exchange Commission on
December 13, 1993.
(2) Incorporated by reference to similarly identified exhibits to the
registrant's Registration Statement No. 33-89686 on Form S-1, as
amended, filed with the Securities and Exchange Commission on
February 23, 1995.
(3) Filed as Exhibit 10.24.
- ------------------------
(4) Exhibits
<TABLE>
<S> <C>
3.1 -- Restated Certificate of Incorporation of the Company.(4)
3.2 -- By-Laws of the Company.(4)
4.1 -- Form of Indenture between the Company and Bankers Trust Company, as
trustee.(1)
4.2 -- Form of Mortgage (relating to Exhibit 4.1).(1)
4.3 -- Form of Security Agreement (relating to Exhibit 4.1).(1)
4.4 -- Securities Agreement, dated as of November 28, 1989, between LTV Steel
and the Company.(1)
10.1 -- Revolving Credit Facility between The First National Bank of Boston and
the Company, dated December 21, 1993 (the "Revolving Credit Facility").(1)
10.1 (a) -- Amendment No. 1 to the Revolving Credit Facility, dated as of May 17,
1994.(4)
</TABLE>
47
<PAGE>
(4) Exhibits (Cont'd)
<TABLE>
<S> <C>
10.1(b) -- Amendment No. 2 to the Revolving Credit Facility, dated as of October
19, 1994.(4)
10.1(c) -- Form of Amendment No. 3 to the Revolving Credit Facility.(4)
10.1(d) -- Amendment No. 5 to the Revolving Credit Facility, dated as of June 1,
1996.(6)
10.1(e) -- Amendment No. 6 to the Revolving Credit Facility, dated as of April 25,
1997.(7)
10.2 -- Republic Engineered Steels, Inc. Amended and Restated Employee Common
Stock Ownership Plan, effective as of January 1, 1994.(4)
10.2(a) -- Form of Amendment No. 1 to the Amended and Restated Republic Engineered
Steels, Inc. Employee Common Stock Ownership Plan.(4)
10.3 -- Republic Engineered Steels, Inc. Employee Common Stock Ownership Plan
Trust Agreement.(1)
10.3(a) -- Form of Amendment No. 1 to the Republic Engineered Steels, Inc.
Employee Common Stock Ownership Plan Trust Agreement.(4)
10.4 -- Loan Agreement for ESOP Loan A.(1)
10.5 -- Loan Agreement for ESOP Loan B.(1)
10.6 -- Republic Engineered Steels, Inc. Amended and Restated Preferred Stock
Plan, effective as of January 1, 1994.(4)
10.7 -- Republic Engineered Steels, Inc. Preferred Stock Plan Trust
Agreement.(1)
10.8 -- Republic Engineered Steels, Inc. 1989 Executive Incentive Compensation
Plan.(1)
10.9 -- Warrant held by LTV to purchase 903,226 shares of Common Stock of the
Company.(1)
10.10 -- Agreement between the Company and the United Steelworkers of America,
dated June 1, 1993.(1)
10.11 -- Employment Agreement, dated as of November 28, 1989, between Russell W.
Maier and the Company.(1)
10.12(a) -- Employment Agreement, dated as of November 28, 1989, between James T.
Anderson and the Company.(1)
10.12(b) -- Employment Agreement Termination Agreement dated November 2, 1995
between James T. Anderson and the Company.(6)
10.13(a) -- Employment Agreement, dated as of November 28, 1989, between Stephen S.
Higley and the Company.(1)
10.13(b) -- Employment Agreement Termination Agreement dated November 2, 1995
between Stephen S. Higley and the Company.(6)
10.14(a) -- Employment Agreement, dated as of November 28, 1989, between Harold V.
Kelly and the Company.(1)
10.14(b) -- Employment Agreement Termination Agreement dated November 2, 1995
between Harold V. Kelly and the Company.(6)
10.15 (a) -- Employment Agreement, dated as of November 28, 1989, between James B.
Riley and the Company.(1)
</TABLE>
48
<PAGE>
(4) Exhibits (Cont'd)
<TABLE>
<S> <C>
10.15(b) -- Employment Agreement Termination Agreement dated November 2 ,1995
between James B. Riley and the Company.(6)
10.16 -- Warrant Purchase Agreement, dated May 13, 1994 between the Company and
LTV Steel.(2)
10.17(a) -- Trust Indenture dated as of October 1, 1994 between Bank One, Columbus,
NA, Columbus, Ohio (the "Trustee") and the Ohio Water Development
Authority (the "Authority").(3)
10.17(b) -- Trust Indenture dated as of June 1, 1996 between the Trustee and the
Authority.(6)
10.18(a) -- Loan Agreement dated as of October 1, 1994 between the Company and the
Authority.(3)
10.18(b) -- Loan Agreement dated as of June 1, 1996 between the Company and the
Authority.(6)
10.19(a) -- Project Note, dated October 1, 1994 in the amount of $20,200,000.00
issued by the Company to the Trustee.(3)
10.19(b) -- Project Note, dated June 1, 1996 in the amount of $53,700,000.00 issued
by the Company to the Trustee.(6)
10.20(a) -- Project Bond, dated as of October 1, 1994, issued by the Authority in
connection with the Project.(3)
10.20(b) -- Project Bond, dated as of June 1, 1996, issued by the Authority in
connection with the Project.(6)
10.21 -- Form of 1995 Stock Option Plan.(4)
10.22 -- Form of SPS Trust Agreement, to be entered into between the Company and
the trustee of the Special Preferred Stock Trust.(4)
10.23 -- Pioneer Agreement, dated May 3, 1995, by and between the Company and
the USWA.(5)
10.24 -- Salaried Employees Termination Plan, as amended, effective as of
October 26, 1995.(6)
12.1 -- Ratio of Earnings to Fixed Charges.*
21.1 -- Subsidiaries of the Company.(1)
23.1 -- Consent of KPMG Peat Marwick LLP.*
27 -- Financial Data Schedule*
</TABLE>
- ------------------------
* Filed herewith.
(1) Incorporated by reference to similarly numbered exhibits to the
registrant's Registration Statement, No. 33-70578 on Form S-1, as
amended, filed with the Securities and Exchange Commission on
December 13, 1993.
(2) Incorporated by reference to similarly numbered exhibits to the
registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1994.
(3) Incorporated by reference to similarly numbered exhibits to the
registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994.
49
<PAGE>
(4) Incorporated by reference to similarly numbered exhibits to the
registrant's Registration Statement No. 33-89686 on Form S.1, as
amended, filed with the Securities and Exchange Commission on
February 23, 1995.
(5) Incorporated by reference to similarly numbered exhibits to the
registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
(6) Incorporated by reference to similarly numbered exhibits to the
registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1996.
(7) Incorporated by reference to similarly numbered exhibits to the
registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997.
- ------------------------
(b) Reports on Form 8-K The Company filed the following Current Report on Form
8-K:
A Current Report on Form 8-K, filed with the Securities and Exchange
Commission on July 1, 1996, in respect of a Press Release issued by the
Company on June 27, 1996 in connection with the sale of $53.7 million of
tax-exempt solid waste revenue bonds issued by the Ohio Water Development
Authority.
50
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
<TABLE>
<S> <C> <C>
REPUBLIC ENGINEERED STEELS, INC.
By: /s/ Russell W. Maier
-----------------------------------------
Russell W. Maier
Chairman of the Board, President and
Chief Executive Officer
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ Russell W. Maier Chairman of the Board, September 15, 1997
- ------------------------------ President and Chief
Russell W. Maier Executive Officer
/s/ James B. Riley Executive Vice President, September 15, 1997
- ------------------------------ Chief Financial Officer
James B. Riley and Director (Chief
Accounting Officer)
/s/ Stephen S. Higley Vice President and September 15, 1997
- ------------------------------ President Stainless and
Stephen S. Higley Specialty Steels Division
and Director
/s/ Sam Camens Director September 15, 1997
- ------------------------------
Sam Camens
/s/ Carol A. Cartwright Director September 15, 1997
- ------------------------------
Carol A. Cartwright
/s/ Richard F. Celeste Director September 15, 1997
- ------------------------------
Richard F. Celeste
/s/ Wayne A. Hardy Director September 15, 1997
- ------------------------------
Wayne A. Hardy
/s/ Rudy Kogut Director September 15, 1997
- ------------------------------
Rudy Kogut
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ Douglas M. Lawson Director September 15, 1997
- ------------------------------
Douglas M. Lawson
/s/ Gary E. Lenhart Director September 15, 1997
- ------------------------------
Gary E. Lenhart
/s/ Martin Manley Director September 15, 1997
- ------------------------------
Martin Manley
/s/ Walter C. Meck Director September 15, 1997
- ------------------------------
Walter C. Meck
/s/ William J. Williams Director September 15, 1997
- ------------------------------
William J. Williams
</TABLE>
52
<PAGE>
EXHIBIT INDEX
(4) Exhibits
<TABLE>
<S> <C>
3.1 -- Restated Certificate of Incorporation of the Company.(4)
3.2 -- By-Laws of the Company.(4)
4.1 -- Form of Indenture between the Company and Bankers Trust Company, as
trustee.(1)
4.2 -- Form of Mortgage (relating to Exhibit 4.1).(1)
4.3 -- Form of Security Agreement (relating to Exhibit 4.1).(1)
4.4 -- Securities Agreement, dated as of November 28, 1989, between LTV Steel
and the Company.(1)
10.1 -- Revolving Credit Facility between The First National Bank of Boston and
the Company, dated December 21, 1993 (the "Revolving Credit Facility").(1)
10.1(a) -- Amendment No. 1 to the Revolving Credit Facility, dated as of May 17,
1994.(4)
10.1(b) -- Amendment No. 2 to the Revolving Credit Facility, dated as of October
19, 1994.(4)
10.1(c) -- Form of Amendment No. 3 to the Revolving Credit Facility.(4)
10.1(d) -- Amendment No. 5 to the Revolving Credit Facility, dated as of June 1,
1996.(6)
10.1(e) -- Amendment No. 6 to the Revolving Credit Facility, dated as of April 25,
1997.(7)
10.2 -- Republic Engineered Steels, Inc. Amended and Restated Employee Common
Stock Ownership Plan, effective as of January 1, 1994.(4)
10.2(a) -- Form of Amendment No. 1 to the Amended and Restated Republic Engineered
Steels, Inc. Employee Common Stock Ownership Plan.(4)
10.3 -- Republic Engineered Steels, Inc. Employee Common Stock Ownership Plan
Trust Agreement.(1)
10.3(a) -- Form of Amendment No. 1 to the Republic Engineered Steels, Inc.
Employee Common Stock Ownership Plan Trust Agreement.(4)
10.4 -- Loan Agreement for ESOP Loan A.(1)
10.5 -- Loan Agreement for ESOP Loan B.(1)
10.6 -- Republic Engineered Steels, Inc. Amended and Restated Preferred Stock
Plan, effective as of January 1, 1994.(4)
10.7 -- Republic Engineered Steels, Inc. Preferred Stock Plan Trust
Agreement.(1)
10.8 -- Republic Engineered Steels, Inc. 1989 Executive Incentive Compensation
Plan.(1)
10.9 -- Warrant held by LTV to purchase 903,226 shares of Common Stock of the
Company.(1)
10.10 -- Agreement between the Company and the United Steelworkers of America,
dated June 1, 1993.(1)
10.11 -- Employment Agreement, dated as of November 28, 1989, between Russell W.
Maier and the Company.(1)
</TABLE>
53
<PAGE>
(4) Exhibits (Cont'd)
<TABLE>
<S> <C>
10.12(a) -- Employment Agreement, dated as of November 28, 1989, between James T.
Anderson and the Company.(1)
10.12(b) -- Employment Agreement Termination Agreement dated November 2, 1995
between James T. Anderson and the Company.(6)
10.13(a) -- Employment Agreement, dated as of November 28, 1989, between Stephen S.
Higley and the Company.(1)
10.13(b) -- Employment Agreement Termination Agreement dated November 2, 1995
between Stephen S. Higley and the Company.(6)
10.14(a) -- Employment Agreement, dated as of November 28, 1989, between Harold V.
Kelly and the Company.(1)
10.14(b) -- Employment Agreement Termination Agreement dated November 2, 1995
between Harold V. Kelly and the Company.(6)
10.15(a) -- Employment Agreement, dated as of November 28, 1989, between James B.
Riley and the Company.(1)
10.15(b) -- Employment Agreement Termination Agreement dated November 2, 1995
between James B. Riley and the Company.(6)
10.16 -- Warrant Purchase Agreement, dated May 13, 1994 between the Company and
LTV Steel.(2)
10.17(a) -- Trust Indenture dated as of October 1, 1994 between Bank One, Columbus,
NA, Columbus, Ohio (the "Trustee") and the Ohio Water Development
Authority (the "Authority").(3)
10.17(b) -- Trust Indenture dated as of June 1, 1996 between the Trustee and the
Authority.(6)
10.18(a) -- Loan Agreement dated as of October 1, 1994 between the Company and the
Authority.(3)
10.18(b) -- Loan Agreement dated as of June 1, 1996 between the Company and the
Authority.(6)
10.19(a) -- Project Note, dated October 1, 1994 in the amount of $20,200,000.00
issued by the Company to the Trustee.(3)
10.19(b) -- Project Note, dated June 1, 1996 in the amount of $53,700,000.00 issued
by the Company to the Trustee.(6)
10.20(a) -- Project Bond, dated as of October 1, 1994 issued by the Authority in
connection with the Project.(3)
10.20(b) -- Project Bond, dated as of June 1, 1996, issued by the Authority in
connection with the Project.(6)
10.21 -- Form of 1995 Stock Option Plan.(4)
10.22 -- Form of SPS Trust Agreement, to be entered into between the Company and
the trustee of the Special Preferred Stock Trust.(4)
10.23 -- Pioneer Agreement, dated May 3, 1995, by and between the Company and
the USWA.(5)
10.24 -- Salaried Employees Termination Plan, as amended, effective as of
October 26, 1995.(6)
12.1 -- Ratio of Earnings to Fixed Charges.*
</TABLE>
54
<PAGE>
(4) Exhibits (Cont'd)
<TABLE>
<S> <C>
21.1 -- Subsidiaries of the Company.(1)
23.1 -- Consent of KPMG Peat Marwick LLP.*
27 -- Financial Data Schedule*
</TABLE>
- ------------------------
* Filed herewith.
(1) Incorporated by reference to similarly numbered exhibits to the registrant's
Registration Statement, No. 33-70578 on Form S-1, as amended, filed with the
Securities and Exchange Commission on December 13, 1993.
(2) Incorporated by reference to similarly numbered exhibits to the registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1994.
(3) Incorporated by reference to similarly numbered exhibits to the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.
(4) Incorporated by reference to similarly numbered exhibits to the registrant's
Registration Statement No. 33-89686 on Form S.1, as amended, filed with the
Securities and Exchange Commission on February 23, 1995.
(5) Incorporated by reference to similarly numbered exhibits to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
(6) Incorporated by reference to similarly numbered exhibits to the registrant's
Annual Report on Form 10-K for the fiscal year ended June 30, 1996.
(7) Incorporated by reference to similarly numbered exhibits to the registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
55
<PAGE>
CONSENT OF KPMG PEAT MARWICK LLP
EXHIBIT 23.1
58
<PAGE>
ACCOUNTANTS' REPORT ON SCHEDULES AND CONSENT
The Board of Directors
Republic Engineered Steels, Inc.:
The audits referred to in our report dated August 1, 1997, included the
related financial statement schedules as of June 30, 1997, and for each of the
years in the three-year period ended June 30, 1997, included herein. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
We consent to the incorporation by reference of our report dated August 1,
1997 included herein to registration statement No. 33-91814, relating to The
Republic Engineered Steels, Inc. Employee Common Stock Ownership Plan and to
registration statement No. 33-91816 relating to The Republic Engineered Steels,
Inc. 1995 Stock Option Plan.
<TABLE>
<S> <C>
/s/ KPMG Peat Marwick LLP
- --------------------------------------------
KPMG Peat Marwick LLP
Pittsburgh, PA
September 15, 1997
</TABLE>
59
<PAGE>
FINANCIAL
STATEMENT
SCHEDULES
60
<PAGE>
SCHEDULE II
REPUBLIC ENGINEERED STEELS, INC.
VALUATION OF QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND (DEDUCTIONS) AT END
OF PERIOD EXPENSES RECOVERIES OF PERIOD
----------- ----------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1995
Allowance for doubtful accounts................................. $ 1,912 $ 0 $ 36 $ 1,948
YEAR ENDED JUNE 30, 1996
Allowance for doubtful accounts................................. $ 1,948 $ 0 $ 1 $ 1,949
YEAR ENDED JUNE 30, 1997
Allowance for doubtful accounts................................. $ 1,949 $ 0 $ (325) $ 1,624
</TABLE>
61
<PAGE>
SCHEDULE V
REPUBLIC ENGINEERED STEELS, INC.
SUPPLEMENTARY INCOME STATEMENT INFORMATION
YEARS ENDED JUNE 30, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
CHARGED TO COSTS
AND EXPENSES
-------------------------------------
FISCAL 1995 FISCAL 1996 FISCAL 1997
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Maintenance and repairs..................................................... $ 75,242 $ 72,304 $ 70,975
Depreciation and amortization of intangible assets.......................... $ 18,841 $ 24,020 $ 29,560
</TABLE>
Taxes, other than payroll taxes and income taxes, royalties and advertising
are not set forth since each such item does not exceed 1% of total net sales as
shown in the related consolidated statement of income.
62
<PAGE>
RATIO OF EARNINGS
TO FIXED CHARGES
EXHIBIT 12.1
56
<PAGE>
EXHIBIT 12.1
REPUBLIC ENGINEERED STEELS, INC.
RATIO OF EARNINGS TO FIXED CHARGES
FOR FISCAL YEARS ENDING JUNE 30, 1993, 1994, 1995 1996 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL FISCAL FISCAL
1993 1994 1995 1996 1997
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
RATIO OF EARNINGS TO FIXED CHARGES.......................... -- -- -- -- --
COVERAGE DEFICIENCY......................................... $ 8,772 $ 27,602 $ 7,212 $ 55,566 $ 56,888
</TABLE>
Note: For the purposes of calculating the ratio of earnings to the fixed
charges, earnings represent earnings (losses) before income taxes, extraordinary
gain and cumulative effect of changes in accounting principles plus fixed
charges. Fixed charges consist of net interest expense, amortization of discount
and deferred financing costs and the portion of rental expense which management
believes is representative of the interest component of rent expense. If
earnings were adjusted to eliminate non-cash ESOP charges, the ratio of
earnings, as adjusted, to fixed charges would have been 1.62x, 1.19x, 2.85x,
(0.21)x and 0.07x, respectively.
57
<PAGE>
CONSENT OF KPMG PEAT MARWICK LLP
EXHIBIT 23.1
58
<PAGE>
ACCOUNTANTS' REPORT ON SCHEDULES AND CONSENT
The Board of Directors
Republic Engineered Steels, Inc.:
The audits referred to in our report dated August 1, 1997, included the
related financial statement schedules as of June 30, 1997, and for each of the
years in the three-year period ended June 30, 1997, included herein. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
We consent to the incorporation by reference of our report dated August 1,
1997 included herein to registration statement No. 33-91814, relating to The
Republic Engineered Steels, Inc. Employee Common Stock Ownership Plan and to
registration statement No. 33-91816 relating to The Republic Engineered Steels,
Inc. 1995 Stock Option Plan.
<TABLE>
<S> <C>
/s/ KPMG Peat Marwick LLP
- --------------------------------------------
KPMG Peat Marwick LLP
Pittsburgh, PA
September 15, 1997
</TABLE>
59
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 6,412
<SECURITIES> 0
<RECEIVABLES> 77,220
<ALLOWANCES> 1,624
<INVENTORY> 151,708
<CURRENT-ASSETS> 243,165
<PP&E> 313,235
<DEPRECIATION> 114,944
<TOTAL-ASSETS> 632,368
<CURRENT-LIABILITIES> 107,834
<BONDS> 273,939
0
2
<COMMON> 197
<OTHER-SE> 85,055
<TOTAL-LIABILITY-AND-EQUITY> 632,368
<SALES> 753,535
<TOTAL-REVENUES> 753,535
<CGS> 691,318
<TOTAL-COSTS> 691,318
<OTHER-EXPENSES> 92,797
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,308
<INCOME-PRETAX> (56,888)
<INCOME-TAX> (22,569)
<INCOME-CONTINUING> (34,319)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,319)
<EPS-PRIMARY> (1.74)
<EPS-DILUTED> (1.74)
</TABLE>
