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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
<TABLE>
<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, 1998
/ / 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)
<TABLE>
<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
"REPUBLIC ENGINEERED STEELS, INC. COMMON STOCK TRADES ON THE NASDAQ
STOCKMARKET-TM-
UNDER THE SYMBOL REPS"
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 3, 1998 the aggregate market value of the voting stock held
by non-affiliates of the Registrant was approximately $137.9 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 3, 1998 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 is set forth in, and
incorporated by reference from, the registrant's Information Statement pursuant
to Section 14(f) of the Securities Exchange Act of 1934, as amended, and Rule
14f-1, thereunder, (the "Information Statement") which Information Statement was
filed by the registrant with the Securities and Exchange Commission on July 30,
1998.
Exhibit Index begins on page 54
This is page 1 of 64
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
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<S> <C> <C>
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....................................................... 23
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 47
10. Directors and Executive Officers.................................................................. 47
11. Executive Compensation............................................................................ 47
12. Security Ownership of Certain Beneficial Owners and Management.................................... 47
13. Certain Relationships and Related Transactions.................................................... 47
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................... 48
</TABLE>
2
<PAGE>
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. ("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, 1998 the ESOP held
approximately 54% 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
3
<PAGE>
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>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------------
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Net tons shipped:
Special Bar Quality (SBQ)
Hot-rolled bar products.............................................. 588,124 713,703 786,607
Cold-finished bar products........................................... 248,228 243,926 259,281
Specialty steel products............................................... 61,009 52,002 45,054
--------- ---------- ----------
Total net tons shipped............................................. 897,361 1,009,631 1,090,942
--------- ---------- ----------
--------- ---------- ----------
Selling price per net ton shipped:
Special Bar Quality (SBQ)
Hot-rolled bar products.............................................. $ 643 $ 588 $ 595
Cold-finished bar products........................................... 906 861 856
Specialty steel products............................................... 2,203 2,314 2,225
Average selling price per net ton shipped................................ $ 832 $ 746 $ 736
Average manufacturing cost per net ton shipped........................... 768 685 653
Average gross profit per net ton shipped................................. 64 61 83
</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
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
4
<PAGE>
Company believes these steels are among the highest quality in the industry.
These specialty steel products are produced in rolled sizes as well as large
forged rounds, squares and other shapes. Stainless steels are used for corrosion
resistant applications such as food processing equipment, marine products and
recreational watercraft. These products are primarily sold through steel service
centers. The Company produces tool steels that are engineered with specific
characteristics which enable them to form, cut, shape and shear other materials
in the manufacturing process. Tool steels are utilized in the manufacturing of
metals, plastics, pharmaceuticals, electronics, optics, paper and aluminum
extrusion. The Company's customer base for tool steels are distributors, service
centers and other tool steel producers who market or finish the end products.
The remelted specialty products are used to produce aircraft structural parts
such as landing gear, solid rocket motor casings and aircraft engine mounts. The
power generation industry uses parts made of remelted steel in the manufacture
of steam and land-based turbines.
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 1998 sixty-one percent (61%) of the Company's SBQ production was made
by way of the CAST-ROLL-TM- route, representing ninety-eight percent (98%) of
the facility's current rated capacity as compared to eighty-five percent (85%)
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 near rated
capacity with 84% of the product anticipated to be produced through the
CAST-ROLL-TM- facility having been qualified by its customers.
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 30% of its scrap metal from General Motors during fiscal year
1998. 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 1998 increased by 4.2% as compared to the
average price of scrap for fiscal year 1997. Scrap metal represented 25.0% of
the Company's total cost of product sold in fiscal year 1998 as compared to
23.2% in fiscal year 1997. The majority of the Company's competitors also
utilize scrap as their primary raw material, so the Company does not find itself
at a 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.
5
<PAGE>
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,
------------------------------------------
1995 1996 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Average cost of purchased scrap metal per net ton......................... $ 133 $ 139 $ 129 $ 133
Average cost of total scrap metal per net ton............................. 123 129 121 126
Percentage of cost of product sold........................................ 24.8% 24.0% 23.2% 25.0%
</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, sulfur,
lead, lime and fluorspar for use as alloying agents and fluxing (cleansing)
materials. Since 1995, prices of many of these materials have fluctuated
dramatically and the cost stated as a percent of cost of product sold has
represented 9.5%, 10.3%, 8.4% and 9.1% for fiscal years 1995, 1996, 1997 and
1998, 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,
------------------------------------------------
1995 1996 1997 1998
----- --------- ----- -----
<S> <C> <C> <C> <C>
Alloys and Fluxes
Average cost per ton of product shipped..................................... $ 64 $ 79 $ 57 $ 60
Percentage of cost of product sold.......................................... 9.5% 10.3% 8.4% 9.1%
</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,
------------------------------------------
1995 1996 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Automotive Industry..................................................... 37.1% 40.2% 36.7% 30.2%
Machinery, Industrial Equipment and Tools Industry...................... 18.8 19.0 16.9 17.0
Independent Forgers..................................................... 15.1 13.8 13.8 15.9
Service Centers......................................................... 14.0 14.0 16.5 23.8
Other................................................................... 15.0 13.0 16.1 13.1
--------- --------- --------- ---------
100.0% 100.0% 100.0% 100.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
6
<PAGE>
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 1998, sales to American Axle constituted approximately 10.1%
of the Company's total net sales. Further, in fiscal year 1998, sales to the
Company's ten largest customers constituted approximately 43.5% 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 70% of its
shipments were to customers in the states of Indiana, Illinois, Michigan, New
York, Ohio and Pennsylvania for fiscal year 1998.
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"); and Slater
Industries. 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. These include Bartech which now operates the
assets of the former Bar, Rod and Wire Division of Bethlehem Steel Corporation
and Bliss & Laughlin Industries, Inc. and Qualitech Steel Corporation which is
completing construction of a $500 million greenfield steelmaking facility.
Birmingham Steel Corporation is operating a new continuous steelmaking facility
which commenced production in late 1997. This competition keeps 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.
(See also discussion of the recently commenced tender offer for the Company's
outstanding common stock, involving BarTech, in Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations, under the heading
"General").
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. Recently the U.S. dollar has
strengthened significantly against the Japanese Yen and European currencies
resulting in further price and sales volume pressure for the Company's products.
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.
7
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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 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. As a result of its investigation, DOC issued its Preliminary
Determination dated April 23, 1998, finding there was no circumvention of such
1993 orders. It is anticipated the DOC will issue its Final Determination in
this matter during the month of September 1998. The Final Determination, if it
reverses or modifies the Preliminary Determination, 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, 1998 was approximately $243
million compared to approximately $248 million as of June 30, 1997. 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, 1998 the Company had 3,868 employees, of which 3,113 were
represented by the United Steelworkers of America AFL/CIO (the "USWA"). The
balance consisted of 706 salaried employees and 49 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
8
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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 $8.9
million to $22.3 million over the lives of the Company's facilities. The reserve
to cover potential environmental liabilities, including the matters discussed
below, was approximately $14.4 million and $17.8 million as of June 30, 1998 and
1997, respectively. To the extent the Company incurs any such remediation costs,
these costs will most likely be incurred over a number of 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, although these
matters are currently being discussed with respect to the SWMUs at the Canton
(Eighth Street) plant in connection with a proposed Administrative Order on
Consent (the "Proposed Consent Order") issued by U.S. EPA on June 5, 1998 under
Section 3008(h) of the Resource Conservation and Recovery Act.
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 under the Final
Order; however, closure of the Waste Pile is being discussed in connection with
the Proposed Consent Order and may require the Company to incur significant
costs. The Company is currently unable to predict precisely the amount or timing
of such costs; 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") and
EPA in connection with the Proposed Consent Order.
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. The
Berger Triangle is one of the SWMUs being discussed in connection with the
Proposed Consent Order. The Company could incur significant investigation and
remediation costs as a result of such discussions. 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.
9
<PAGE>
The Company is currently operating the CAST-ROLL-TM- facility under permits
issued by the Ohio EPA on December 22, 1993 and June 17, 1998. Operating
environmental permits for the CAST-ROLL-TM- facility are expected to be issued
in due course under applicable regulatory procedures after collection and review
of necessary environmental performance information.
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 3,
1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --- -------------------------------------------------------------------------------
<S> <C> <C>
Russell W. Maier 61 Chairman of the Board, President and Chief Executive Officer
Harold V. Kelly 67 Executive Vice President and General Counsel
James B. Riley 46 Executive Vice President and Chief Financial Officer and Director
Joseph F. Lapinsky 48 Corporate Vice President and President of the Hot Rolled Bar Division
Stephen S. Higley 55 Corporate Vice President and President of the Cold Finished Bar Division
John C. Vaught 52 Corporate Vice President and President of the Stainless and Specialty Steels
Division
Charles T. Cochran 44 Vice President-Sales and Marketing of the Cold Finished Bar Division
Edward J. Blot 55 Vice President-Sales and Marketing of the Stainless and Specialty Steels
Division
James T. Thielens, Jr. 40 Vice President-Sales and Marketing of the Hot Rolled Bar Division
James D. Donohoe 55 Secretary and Associate General Counsel
John B. George 51 Corporate Treasurer
John W. Sears 53 Corporate Controller
</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
10
<PAGE>
President of CSC Industries, Inc. from December 1987 to September 1991. Mr.
Lapinsky has been active in the steel industry since 1973.
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 Divison 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, 1998, 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, 1998:
<TABLE>
<CAPTION>
APPROXIMATE SHIPPING CAPACITY
SIZE IN CAPACITY* UTILIZATION
THOUSANDS OF (TONS IN BASED ON TONS
LOCATION SQUARE FEET USE OF FACILITY THOUSANDS) SHIPPED
- --------------------------------------- --------------- -------------------------------- ------------- -----------------
<S> <C> <C> <C> <C>
Canton, Ohio (Eighth Street)........... 3,175 Primary Melting and Rolling 1040 83%
Canton, Ohio (Harrison Avenue)......... 308 Remelt/Forge/Specialty 20 92%
Massillon, Ohio (Oberlin Road)......... 589 Rolling Mill 480 86%
Massillon, Ohio (Rose Avenue).......... 553 Cold-Finished Plant 120 79%
Chicago, Illinois...................... 2,019 Rolling Mill 324 75%
Gary, Indiana (Dunes Highway).......... 266 Cold-Finished Plant 84 74%
Gary, Indiana (Seventh Avenue)......... 197 Cold-Finished Plant 55 89%
Beaver Falls, Pennsylvania............. 176 Cold-Finished Plant 54 75%
Willimantic, Connecticut............... 89 Cold-Finished Plant 24 74%
Baltimore, Maryland.................... 642 Forge/Rolling Mill/Specialty 40 58%
-----
Total.............................. 8,014
-----
-----
</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.
In addition to the foregoing facilities, the Company leases a 35,000 square
foot facility in Massillon, Ohio, which is used as a centralized machine shop.
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 1998 the Company utilized approximately 95% of its practical SBQ
melt capacity. The maximum annual melt capacity of specialty steels is 0.14
million tons and the Company utilized approximately 36% of its practical
specialty melt capacity.
The Company owns all of the above listed facilities with the exception of
the aforementioned machine shop. 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
12
<PAGE>
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. All nineteen age
discrimination claims have now been settled for an amount that is not deemed to
be material either individually or in the aggregate.
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 54%
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 3, 1998, there were 374 holders of record of the Company's
stock and more than 4,300 beneficial shareholders. On September 3, 1998, the
last reported sales price of the Company's Common Stock was $7.16 per share.
The Company has not paid any dividends on its Common Stock in the last four
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 1998 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
September 30, 1997..................................................... 2.375 1.250
December 31, 1997...................................................... 2.250 1.375
March 31, 1998......................................................... 4.625 1.875
June 30, 1998.......................................................... 6.250 2.625
</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, 1994, 1995, 1996,
1997 and 1998, 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>
1994(1) 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................................ $ 744,774 $ 805,098 $ 746,174 $ 753,535 $ 802,632
Cost of product sold................................. 665,779 705,156 688,445 691,318 712,666
---------- ---------- ---------- ---------- ----------
Gross profit......................................... 78,995 99,942 57,729 62,217 89,966
Selling, general and administrative expenses......... 46,543 45,606 46,200 43,882 44,988
Special charges...................................... -- -- 3,890 2,105 (1,270)
Non-cash deferred compensation charges............... 330 2,070 -- -- --
Other postretirement benefits charges (credits)...... 10,683 14,610 13,821 16,940 5,382
Non-cash ESOP charges(2)............................. 31,101 33,180 32,522 30,642 16,919
Interest expense, net(3)............................. 18,478 12,499 17,424 26,308 25,643
Other charges (credits), net......................... (538) (811) (562) (772) (419)
Income tax benefit................................... (2,823) (2,405) (22,136) (22,569) (373)
Extraordinary gain (net of tax)...................... 1,391 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net loss............................................. (23,388) (4,807) (33,430) (34,319) (904)
Preferred stock dividends paid....................... 5,733 6,042 -- -- --
---------- ---------- ---------- ---------- ----------
Net loss attributable to Common Stock................ $ (29,121) $ (10,849) $ (33,430) $ (34,319) $ (904)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
EARNINGS PER SHARE--BASIC:
Loss before extraordinary item(4).................... $ (2.35) $ (0.78) $ (1.70) $ (1.74) $ (0.05)
extraordinary item................................... 0.11 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net loss............................................. $ (2.24) $ (0.78) $ (1.70) $ (1.74) $ (0.05)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average shares outstanding.................. 12,990 13,995 19,707 19,707 19,707
EARNINGS PER SHARE--DILUTED:
Loss before extraordinary item(4).................... $ (2.35) $ (0.77) $ (1.69) $ (1.74) $ (0.05)
Exraordinary item.................................... 0.11 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net loss............................................. $ (2.24) $ (0.77) $ (1.69) $ (1.74) $ (0.05)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average shares outstanding.................. 12,990 14,056 19,756 19,707 19,707
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term investments.... $ 62,192 $ 4,609 $ 2,074 $ 6,412 $ 22,675
Working Capital...................................... 201,016 142,264 137,737 136,740 159,137
Property, plant and equipment, net................... 169,797 309,621 331,079 313,235 302,624
Total assets......................................... 501,240 610,791 639,410 632,934 636,995
Total debt........................................... 200,000 243,272 280,956 273,939 273,922
Preferred stock...................................... 40,684 2 2 2 2
Total stockholders' equity (deficit)................. 58,390 88,134 88,973 85,254 101,471
OTHER DATA:
Adjusted EBITDA(5)................................... 50,331 73,068 33,962 46,489 72,689
Net cash provided (used) by operating activities..... 30,627 57,818 6,312 20,389 31,991
Net cash provided by (used in) investing
activities......................................... (40,577) (154,540) (45,141) (9,699) (16,327)
Net cash provided by (used in) financing
activities......................................... 25,011 39,139 36,294 (6,352) 598
Maintenance and repairs expense...................... 73,359 75,242 72,304 70,975 73,047
Depreciation and amortization........................ 17,525 18,841 24,020 29,560 29,155
</TABLE>
- ------------------------
(1) Includes 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 $578, $8,616, $8,491, $0 and $0 for fiscal
years 1994, 1995, 1996, 1997 and 1998, respectively.
(4) If the non-cash ESOP charges, non-cash deferred compensation charges,
extraordinary items and special 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 $(0.26), $0.77,
$(0.58), $(0.74) and $0.44 for fiscal years 1994, 1995, 1996, 1997 and 1998,
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 extraordinary
items, special charges, 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, 1994, 1995, 1996, 1997 and
1998, respectively. The selected operating data is derived from the Company's
internal management reports.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Net tons shipped........................................ 1,056.6 1,041.6 897.4 1,009.6 1,090.9
Average selling price per net ton shipped............... $ 705 $ 773 $ 832 $ 746 $ 736
Average manufacturing cost per net ton shipped.......... 630 677 768 685 653
Average gross margin per net ton shipped................ 75 96 64 61 83
</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 1998 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. Modest increases were achieved in the third and fourth quarter
of fiscal year 1998.
Scrap metal is the principal raw material used in the Company's products.
The average price of scrap for fiscal year 1998 increased by 4.2% as compared to
the average price of scrap for fiscal year 1997, and, as a result, scrap metal
represented 25.0% of the Company's total cost of product sold in fiscal year
1998 as compared to 23.2% for fiscal year 1997. 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 $32 per ton
or 4.6% from $685 per ton in fiscal year 1997 to $653 per ton in fiscal year
1998. The change reflects an increase in the cost of raw materials from $216 per
ton of product shipped in fiscal year 1997 to $223 per ton in fiscal year 1998
which was offset by improved operating costs associated primarily with increased
CAST-ROLL-TM- utilization rates and higher volumes.
ESOP charges are non-cash expenses that represent the principal repayment of
the ESOP Loans (as hereinafter defined). On a quarterly basis, the Company made
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 continued at that rate until the ESOP Loans were repaid in the
third quarter of 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 $144.4 million in
total and will result in cash savings of approximately $57.8 million (assuming a
40% state and federal tax rate), when fully realized.
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 1998, the
Company's net sales for its first fiscal quarter and second fiscal quarter
constituted approximately 23.2% and 24.2%, respectively, of the Company's total
net sales for the fiscal year.
On July 23, 1998, the Company, RES Holding Company, a Delaware corporation
("Parent") and RES Acquisition Corporation, a Delaware corporation and wholly
owned subsidiary of Parent ("Purchaser"), entered into an Agreement and Plan of
Merger (the "Merger Agreement") pursuant to which (i) Purchaser agreed to
commence a tender offer (the "Offer") for all outstanding shares of Common
Stock, at a price of $7.25 per Share, net to seller in cash, (ii) all Shares not
purchased pursuant to the Offer will be converted into the right to receive in
cash $7.25 per Share or such higher price as may be offered pursuant to the
Offer, without interest, and (iii) Purchaser will be merged with and into the
Company (the "Merger") following consummation of the Offer. As a result of the
Offer and the Merger, the Company will become a wholly owned subsidiary of
Parent. BarTech is also affiliated with Parent. Following the Merger, the
business operations of BarTech and the Company are expected to be combined.
Pursuant to the Merger Agreement, Purchaser commenced the Offer on July 30,
1998. The Offer, which was scheduled to expire on August 26, 1998, has been
extended to September 4, 1998. The Offer is subject to a number of conditions as
described in the Solicitation/Recommendation Statement on Schedule 14D-9 which
was filed with the Securities and Exchange Commission on July 30, 1998. No
assurances can be given that these conditions will be satisfied or that the
Offer will be consummated.
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 1,764,000 shares
have been granted under the 1995 Stock Option Plan (the "Option Shares") 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 1998,
1997, or 1996. Pursuant to the Merger Agreement, the holder of each Option Share
will receive $0.58 per share in cash for each Option Share that has an exercise
price of $6.67 per share.
Since the options outstanding as of June 30, 1998 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.
17
<PAGE>
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,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales......................................................................... 100.0% 100.0% 100.0%
Cost of product sold.............................................................. 92.3 91.7 88.8
--------- --------- ---------
Gross profit...................................................................... 7.7 8.3 11.2
Selling, general and administrative expenses...................................... 6.2 5.9 5.6
Special charges................................................................... 0.5 0.3 (.2)
Other postretirement benefits charges............................................. 1.9 2.2 0.7
Non-cash ESOP charges............................................................. 4.3 4.1 2.1
Interest expense, net............................................................. 2.3 3.5 3.2
Other charges (credits), net...................................................... (0.1) (0.1) (0.1)
--------- --------- ---------
Loss before income taxes, extraordinary gain and cumulative effect of change in
accounting principles........................................................... (7.4) (7.6) (0.1)
Income tax benefit................................................................ 2.9 3.0 --
Net loss.......................................................................... (4.5)% (4.6)% (0.1)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1997
Net sales for fiscal year 1998 totaled $802.6 million on shipments of
1,090,942 net tons compared to $753.5 million on shipments of 1,009,631 tons
during fiscal year 1997. The increased revenues reflect the 8.1% increase in
shipping volume, a decrease in realized selling prices per ton and an increased
percentage of hot-rolled products coupled with a corresponding decreased
percentage of higher priced value-added specialty products. The average selling
price, decreased by 1.4% for all products to $736 per ton for fiscal year 1998
compared to $746 per ton during 1997.
Cost of products sold totaled $712.7 million or $653 per ton shipped for
fiscal year 1998 versus $691.3 million or $685 per ton shipped for the previous
year. The decrease was due to four major factors: 1) the CAST-ROLL-TM- facility
operated at 93.5% of its current rated capacity for the fiscal year 1998
compared to 74.0% for the previous year; 2) operating cost efficiencies
associated with the higher production and shipment levels, offset somewhat by
moderate increases in the overall cost of raw materials; 3) a pretax gain of
approximately $3.0 million which reflects an independent reassessment of
probable environmental liabilities for certain historical waste disposal sites
versus $2.0 million pretax gain for the year earlier period; 4) a one time $4.4
million pretax gain due to an adjustment in connection with the past supply of
raw materials. The Company recorded pretax LIFO credits of approximately $6.5
million for both the 1998 and 1997 fiscal years, which credit is associated with
the displacement of ingot produced products with lower cost cast products.
Selling, general and administrative expenses increased from $43.9 million to
$45.0 million for years 1997 and 1998, respectively. The net increase is due
primarily to an 18% reduction in salary expense related to the restructuring of
the salaried workforce which was announced in January, 1997, offset by
professional fees related to a possible joint venture and asset sale activities
and the tender offer to acquire all the outstanding common stock of the Company.
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 fiscal 1998, the Company revised its estimate of the
cost associated with the severance expense. The net of these adjustments total a
credit of $1.3 million.
18
<PAGE>
The charge for other post-retirement benefits totaled $5.4 million for
fiscal year 1998 compared to $16.9 million for fiscal year 1997. The net charge
was due to: 1) the discount rate was decreased from 8% to 7%; 2) the ultimate
medical trend rate was lowered from 5.5% to 4.5%; 3) the per capita costs for
the managed care and traditional plans did not increase as anticipated; and 4)
increased enrollment of retirees in Risk Sharing managed care plans.
Non-cash ESOP charges totaled $16.9 million and $30.6 million for fiscal
years 1998 and 1997, respectively. The decrease reflects the final ESOP Loan
payment during the third quarter of fiscal year 1998.
Net interest expense totaled $25.6 million for fiscal year 1998 compared to
$26.3 million for fiscal year 1997. The decrease is the result of lower
outstanding borowings under the Revolving Credit Facility throughout the year.
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 fiscal year 1996 sales of $746.2 million on
shipments of 897,361 net tons. This increase in net sales reflected a stronger
demand in the automotive sector. The average selling price decreased by 10.3% to
$746 per net ton shipped during fiscal year 1997 compared to $832 per ton during
fiscal year 1996. The overall fiscal year 1997 price reflected decreases in hot
rolled, cold-finished and specialty products and a decreased percentage of
shipments of the higher priced value-added specialty products.
Cost of products sold decreased from 92.3% of sales to 91.7% of sales in
fiscal year 1997 versus 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 $43.9
million or 5.9% of sales for fiscal yar 1997 versus approximately $46.2 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 $30.6 million during fiscal year 1997 compared
to $32.5 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.
19
<PAGE>
YEAR 2000
The Year 2000 issue refers to the fact that many computer systems were
originally programmed using two digits rather than four digits to identify the
applicable year. When the year 2000 occurs, these systems could interpret the
year as 1900 rather than 2000. Unless hardware, system software and applications
are corrected to be Year 2000 compliant, computers and the devices they control
could generate miscalculations and create operational problems. Various systems
could be affected ranging from complex information technology (IT)computer
systems to non ITdevices such as an individual machine's programmable logic
controller.
To address this issue, the Company developed a multi-phase corporate plan
including the formation of a team consisting of internal resources and
third-party experts. The phases of the plan include: inventorying affected
technology and assessing the impact of the Year 2000 issue; developing solution
plans; modification or replacement; testing and certification; and developing
contingency plans. All components of software and hardware of the Company are
presently in various phases. The Company expects to have critical IT systems
tested and installed, as well as manufacturing control systems Year 2000
compliant by mid-calendar year 1999.
The Company relies on third-party suppliers for many products and services
and the Company will be adversely impacted if these suppliers do not make the
necessary changes to their own systems and products successfully and in a timely
manner. The Company is working with the Automotive Industry Action Group, which
represents several of its largest automotive customers, to ascertain the state
of Year 2000 readiness and/or compliance of the Company's suppliers by
requesting each supplier to complete a comprehensive Supplier Assessment
Questionnaire. The Company has implemented a structured plan to communicate with
its customers and suppliers on this issue in an effort to minimize any potential
Year 2000 compliance impact; however, it is not possible to guarantee their
compliance.
The total cost of the program is estimated to be $18 million, of which
approximately $11 million has been spent through June 30, 1998. All of the costs
associated with the Company's Year 2000 efforts have come from, or are expected
to come from, cash flow from operations.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. Nevertheless, since it is not
possible to anticipate all possible future outcomes, especially when third
parties are involved, there could be circumstances in which the Company would be
unable to take customer orders, manufacture and ship products, invoice customers
or collect payments. In addition, disruptions in the economy generally resulting
from Year 2000 issues could also materially adversely affect the Company. The
Company could be subject to litigation for computer systems product failure, for
example, equipment shutdown or failure to properly date business or medical
records. The amount of potential liability and lost revenue cannot be reasonably
estimated at this time.
The Company has contingency plans for some critical applications and is
working on such plans for others. These contingency plans involve, among other
actions, manual workarounds, increasing inventories and adjusting staffing
strategies.
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
$30.6 million, $57.8 million, $6.3 million, $20.4 million and $32.0 million in
fiscal years 1994, 1995, 1996, 1997 and 1998, 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, 1998, there were no borrowings outstanding.
20
<PAGE>
The Revolving Credit Agreement provides up to $20 million for letters of
credit, none of which were outstanding as of June 30, 1998. 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 on improving liquidity in order to meet its ongoing cash
requirements, including those relating to the CAST-ROLL-TM- facility.
Maintenance and repair expenses for facilities and equipment were $73.4
million, $75.2 million, $72.3 million, $71.0 million and $73.0 million for
fiscal years 1994, 1995, 1996, 1997 and 1998, respectively. Capital expenditures
were $41.6 million, $154.5 million, $45.1 million, $9.7 million and $16.3
million for fiscal years 1994, 1995, 1996, 1997 and 1998, respectively.
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, 1998 the Company had available $0.7
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, as currently operated, 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. See also discussions of the Offer under
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations, under the heading "General".
21
<PAGE>
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 $14.4 million as of June 30, 1998 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, 1998, the Company had a net operating loss ("NOL")
carryforward for federal income tax purposes of approximately $278 million and
an alternative minimum tax carryforward of $145 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 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, 1998, the ESOP held approximately 54% of the Common Stock of the
Company. 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.
If the Offer is consummated, an "ownership change" within the meaning of
Section 382 of the Code will occur thus limiting the Company's NOL carryforwards
as discussed above.
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 130: "Reporting
Comprehensive Income" effective for fiscal years beginning after December 15,
1997; SFAS 131: "Disclosures about Segments of an Enterprise and Related
Information" effective for fiscal years beginning after December 15, 1997; SFAS
132: "Employers' Disclosures about Pensions and Other Post Retirement Benefits"
effective for fiscal years beginning after December 15, 1997; and SFAS 133:
"Accounting for Derivitive Instruments and Hedging Activities" effective for
fiscal years beginning after June 15, 1999. The Company does not believe that
the adoption of these standards will have a material effect on its financial
statements.
RISK MANAGEMENT
The Company is exposed to market risk from changes in interest rates for its
Revolving Credit Agreement only with other debt instruments being fixed-rate.
The Company is not exposed to foreign exchange rates or market indexed raw
material price fluctuations.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INDEX TO FINANCIAL STATEMENTS
Independent Auditors Report................................................................................ 24
Consolidated Balance Sheets
June 30, 1998 and 1997................................................................................. 25
Consolidated Statements of Income (Loss)
Years ended June 30, 1998, 1997 and 1996............................................................... 26
Consolidated Statements of Shareholders' Equity
Years ended June 30, 1998, 1997 and 1996............................................................... 27
Consolidated Statements of Cash Flows
Years ended June 30, 1998, 1997 and 1996............................................................... 28
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996........................................................................... 29
INDEX TO FINANCIAL STATEMENT SCHEDULES
Accountant's Report on Schedules and Consent........................................................... 60
II. Valuation of Qualifying Accounts...................................................................... 62
V. Supplementary Income Statement Information............................................................. 63
</TABLE>
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Republic Engineered Steels, Inc.:
We have audited the accompanying consolidated balance sheets of Republic
Engineered Steels, Inc. and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of income (loss), shareholders' equity, and cash
flows for each of the years in the three-year period ended June 30, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Republic
Engineered Steels, Inc. and subsidiaries as of June 30, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 1998, in conformity with generally accepted
accounting principles.
<TABLE>
<S> <C>
/s/ KPMG Peat Marwick LLP
- --------------------------------------------
KPMG Peat Marwick LLP
Pittsburgh, PA
July 31, 1998
</TABLE>
24
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 22,675 6,412
Receivables, less allowance for doubtful accounts of $1,575 in 1998 and $1,624 in 1997
(note 5)............................................................................ 72,633 75,596
Inventories (notes 2 and 5)........................................................... 155,800 151,708
Prepaid expenses...................................................................... 2,844 2,012
Deferred income taxes (note 9)........................................................ 7,902 8,791
Other current assets.................................................................. 404 621
----------- -----------
Total current assets............................................................ 262,258 245,140
Property, plant and equipment, net (notes 3 and 5)...................................... 302,624 313,235
Intangibles and other assets, net (notes 4 and 5)....................................... 24,471 27,711
Restricted cash (note 5)................................................................ 715 1,183
Deferred income taxes (note 9).......................................................... 46,927 45,665
----------- -----------
$ 636,995 632,934
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 59,573 60,280
Accrued compensation and benefits..................................................... 29,892 29,128
Accrued liabilities................................................................... 13,656 18,791
Accrued ESOP contribution............................................................. -- 201
----------- -----------
Total current liabilities....................................................... 103,121 108,400
Long-term debt (note 5)................................................................. 273,922 273,939
Other postretirement benefits (note 8).................................................. 131,256 128,073
Defined benefit pension obligations (note 7)............................................ 12,178 16,885
Environmental costs (note 16)........................................................... 13,746 16,862
Other liabilities....................................................................... 1,301 3,521
----------- -----------
Total liabilities............................................................... 535,524 547,680
----------- -----------
Shareholders' equity:
Special preferred stock, $.01 par value; one share authorized, one share issued,
liquidation value of $1,500 (note 10)............................................... 2 2
Common stock, $.01 par value; authorized 27,000,000 shares; issued 19,707,923 shares;
outstanding 19,706,578 (note 11).................................................... 197 197
Additional paid in capital............................................................ 275,270 275,270
Accumulated deficit................................................................... (173,990) (173,086)
101,479............................................................................... 102,383
Less receivable from Employee Stock Ownership Trust................................... -- 17,121
Less treasury stock, at cost, 1,345 shares............................................ 8 8
Total shareholders' equity............................................................ 101,471 85,254
Commitments and contingencies (notes 3, 5, 7, 8, 13, 14, 15, and 16)..................
----------- -----------
$ 636,995 632,934
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales.................................................................... $ 802,632 753,535 746,174
Cost of product sold (including depreciation of $26,336 in 1998, $25,972 in
1997, and $20,617 in 1996)................................................. 712,666 691,318 688,445
---------- ---------- ----------
Gross profit............................................................. 89,966 62,217 57,729
Selling expenses............................................................. 8,221 9,955 11,043
General and administrative expenses.......................................... 36,767 33,927 35,157
Special charges (credits) (notes 19 and 20).................................. (1,270) 2,105 3,890
Other postretirement benefits charges (note 8)............................... 5,382 16,940 13,821
Noncash ESOP charges......................................................... 16,919 30,642 32,522
Other charges (credits), net:
Interest charges........................................................... 26,353 26,820 26,453
Capitalized interest (note 3).............................................. -- -- (8,491)
Interest income............................................................ (710) (512) (538)
Miscellaneous, net......................................................... (419) (772) (562)
---------- ---------- ----------
91,243 119,105 113,295
---------- ---------- ----------
Loss before income tax benefit............................................... (1,277) (56,888) (55,566)
Income tax benefit (note 9).............................................. 373 22,569 22,136
---------- ---------- ----------
Net loss attributable to comon stock......................................... (904) (34,319) (33,430)
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares outstanding--basic................................... 19,707 19,707 19,707
Basic net loss per common share.............................................. $ (.05) (1.74) (1.70)
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares outstanding--diluted................................. 19,707 19,707 19,756
Diluted net loss per common share............................................ $ (0.05) (1.74) (1.69)
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS EXCEPT AS INDICATED OTHERWISE)
<TABLE>
<CAPTION>
RECEIVABLE
FROM
MINIMUM EMPLOYEE
SPECIAL ADDITIONAL ACCUMU- PENSION STOCK
PREFERRED COMMON PREFERRED COMMON PAID-IN LATED LIABILITY OWNERSHIP TREASURY
STOCK STOCK STOCK STOCK CAPITAL DEFICIT ADJUSTMENT TRUST STOCK
--------- ------ --------- ------ ---------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of June 30,
1995...................... 1* 19,707 2 197 275,270 (105,337) (1,604) (80,386) (8)
Net loss.................... -- -- -- -- -- (33,430 ) -- -- --
Minimum pension liability
adjustment net of tax
(note 7).................. -- -- -- -- -- -- 1,604 -- --
ESOP loan repayment......... -- -- -- -- -- -- -- 32,665 --
Balance as of June 30,
1996...................... 1* 19,707 2 197 275,270 (138,767) -- (47,721) (8)
Net loss.................... -- -- -- -- -- (34,319 ) -- -- --
ESOP loan repayment......... -- -- -- -- -- -- -- 30,600 --
--- ------ --- ------ ---------- -------- ---------- --------- ---
Balance as of June 30,
1997...................... 1* 19,707 2 197 275,270 (173,086) -- (17,121) (8)
Net loss.................... -- -- -- -- -- (904 ) -- -- --
ESOP loan repayment......... -- -- -- -- -- -- -- 17,121 --
--- ------ --- ------ ---------- -------- ---------- --------- ---
Balance as of June 30,
1998...................... 1* 19,707 2 197 275,270 (173,990) -- -- (8)
--- ------ --- ------ ---------- -------- ---------- --------- ---
--- ------ --- ------ ---------- -------- ---------- --------- ---
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balance as of June 30,
1995...................... 88,134
Net loss.................... (33,430)
Minimum pension liability
adjustment net of tax
(note 7).................. 1,604
ESOP loan repayment......... 32,665
Balance as of June 30,
1996...................... 88,973
Net loss.................... (34,319)
ESOP loan repayment......... 30,600
-------------
Balance as of June 30,
1997...................... 85,254
Net loss.................... (904)
ESOP loan repayment......... 17,121
-------------
Balance as of June 30,
1998...................... 101,471
-------------
-------------
</TABLE>
- ------------------------------
* Not in thousands
See accompanying notes to consolidated financial statements.
27
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................................................................... $ (904) (34,319) (33,430)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization................................................................ 29,155 29,560 24,020
Provision for ESOP contribution.............................................................. 16,919 30,642 32,522
Deferred income tax benefit.................................................................. (373) (22,569) (21,984)
Change in operating assets and liabilities:
Receivables, net........................................................................... 2,963 1,116 3,754
Inventories................................................................................ (4,092) 11,440 3,178
Prepaid expenses........................................................................... (832) (238) 40
Other current assets....................................................................... 217 (343) 126
Intangibles and other assets............................................................... 1,027 (164) 1,516
Accounts payable........................................................................... 745 (3,140) (6,866)
Accrued compensation and benefits.......................................................... 764 (2,066) (1,002)
Accrued liabilities........................................................................ (6,236) 1,270 1,098
Accrued ESOP contribution.................................................................. (201) 42 (144)
Accrued income taxes....................................................................... -- -- (177)
Other postretirement benefits.............................................................. 3,183 14,904 11,890
Defined benefit pension obligations........................................................ (4,707) (3,549) (3,095)
Environmental costs........................................................................ (3,417) (2,168) (3,288)
Other liabilities.......................................................................... (2,220) (29) (1,846)
--------- --------- ---------
Total adjustments........................................................................ 32,895 54,708 39,742
--------- --------- ---------
Net cash provided by operating activities................................................ 31,991 20,389 6,312
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment, including capitalized interest of $8,491 in 1996... (16,327) (9,699) (45,141)
Net cash used in investing activities.......................................................... (16,327) (9,699) (45,141)
Cash flows from financing activities:
Proceeds from issuance of long-term debt....................................................... -- -- 53,700
Repayment of long-term debt.................................................................... (17) (17) (16)
Revolver activity, net......................................................................... -- (7,000) (16,000)
Deferred financing costs associated with long-term debt........................................ -- (923) (1,807)
Other financing activities, net................................................................ 616 1,588 417
--------- --------- ---------
Net cash provided by (used in) financing activities...................................... 599 (6,352) 36,294
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................................. 16,263 4,338 (2,535)
Cash and cash equivalents at beginning of year................................................... 6,412 2,074 4,609
--------- --------- ---------
Cash and cash equivalents at end of year......................................................... $ 22,675 6,412 2,074
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow information:
Interest paid, net of amounts capitalized...................................................... $ 26,353 27,072 19,801
--------- --------- ---------
--------- --------- ---------
Income taxes paid.............................................................................. $ -- -- 25
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997, AND 1996
(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 obtained
the funds to repay the loans primarily through tax deductible contributions made
by the Company to the ESOP based on annual stipulated percentages of employee
compensation or dividends. The ESOP repaid Loan A and Loan B (plus interest)
over their respective maturity periods. As of June 30, 1998 and 1997, the ESOP
owned approximately 54 percent and 56 percent, respectively, of the common stock
of the Company.
The Company produces a wide range of special bar quality (SBQ) hot-rolled
and cold-finished steels and specialty steel bars for the automotive, heavy
equipment manufacturing, aerospace, and power generation industries.
The Company's principal customers are manufacturers in the automotive,
machinery, industrial equipment, machine and hand tools, and aviation and
aerospace industries, as well as independent forgers who supply finished parts
to the aforementioned industries. The Company also has significant sales to
steel service centers.
Although the Company has a nationwide customer base, approximately 70
percent and 65 percent of its shipments for fiscal years 1998 and 1997,
respectively, were to customers in the states of Indiana, Illinois, Michigan,
New York, Ohio, and Pennsylvania. See also note 12.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Republic
Engineered Steels, Inc. and its wholly owned subsidiaries: The Nimishillen &
Tuscarawas Railway Company and The Oberlin Insurance Company. All significant
intercompany balances have been eliminated in consolidation.
(C) CASH EQUIVALENTS
The Company considers all short-term investments with maturities at date of
purchase of three months or less to be cash equivalents.
(D) INVENTORIES
Inventories are carried at the lower of cost or market, with cost determined
using the last-in, first-out (LIFO) method.
29
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(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 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.
30
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(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) BASIC AND DILUTED NET LOSS PER COMMON SHARE
During fiscal year 1998, the Company adopted FASB No. 128, Earnings per
Share. For the years presented, the Company presents basic and diluted earnings
per share. Basic earnings per share are computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted earning per share reflects the potential dilution that
could occur if common stock equivalents were exercised and then shared in the
earnings of the Company. The weighted average common shares outstanding for both
the basic and diluted per share calculation was 19,707 for fiscal 1998 and 1997,
respectively. For fiscal 1996 the weighted average common shares outstanding for
the basic and diluted per share calculation were 19,707 and 19,756,
respectively. For fiscal 1996, the increase in the weighted average common
shares outstanding was due to the dilutive effect of stock options (see also
note 6).
(J) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In the preparation of the consolidated financial statements, the Company
uses estimates for, among others, deferred income tax benefits, defined benefit
pension obligations, other postretirement benefit obligations, and environmental
remediation, all of which are significant to the consolidated financial
statements taken as a whole. Changes in circumstances in the near term could
have an impact on these estimates, and the change in estimate could have a
material effect on the consolidated financial statements.
(K) STOCK BASED COMPENSATION
During fiscal year 1997, the Company adopted FASB No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the grant date.
Alternatively, FASB No. 123 allows entities to continue to measure the
compensation cost for stock-based awards using the intrinsic value based method
of accounting prescribed by the Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and to provide pro forma net
income and pro forma earnings per share disclosures as if the fair value
31
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
Raw materials.......................................................... $ 12,157 10,923
Finished and semifinished product...................................... 141,938 138,950
Supplies, molds, and stools............................................ 1,705 1,835
---------- ---------
$ 155,800 151,708
---------- ---------
---------- ---------
</TABLE>
The above inventory amounts are net of LIFO reserves which decreased the
value of the inventory by $1,507 and $8,301 as of June 30, 1998 and 1997,
respectively, and reserves to value inventory at the lower of cost or market
which decreased the value of inventory by $2,239 and $1,204 as of June 30, 1998
and 1997, respectively.
During fiscal 1998 and fiscal 1997, inventory quantities were reduced, which
resulted in a liquidation of LIFO inventory layers carried at lower costs which
prevailed in prior years. The effects of these liquidations were to decrease
cost of goods sold by $706 and $849 in fiscal 1998 and 1997, respectively. The
LIFO liquidation amounts decreased the net loss by $282 or $.01 per share in
fiscal 1998 and $340 or $.02 per share in fiscal 1997.
Due to continued cost savings associated with the Cast-Roll facility and a
reduction in certain raw material prices, the current cost of inventory
continued to decrease from fiscal 1996 to fiscal 1998. In addition, there was
also a shift in the product mix, with a reduction in higher-valued specialty
steels. These factors resulted in a reduction in the LIFO reserve in fiscal 1998
and 1997 of $6,794 and $9,061, respectively. In order to adjust the LIFO
reserve, net of other offsetting inventory reserves of $229, credits of $1,200,
$1,800, and $3,565 were taken in the second, third, and fourth quarters,
respectively, of fiscal 1998 (note 18). In fiscal 1997, 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 (note 18).
32
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
Land................................................................... $ 10,816 10,816
Buildings.............................................................. 38,368 38,828
Machinery and equipment................................................ 376,834 372,635
---------- ---------
426,018 422,279
---------- ---------
Less accumulated depreciation.......................................... 139,373 116,539
---------- ---------
286,645 305,740
Construction in progress............................................... 15,979 7,495
---------- ---------
$ 302,624 313,235
---------- ---------
---------- ---------
</TABLE>
The Company's 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, 1998, the Company was formally committed to spend $9,874 on
capital expenditures.
(4) INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Intangible pension asset (note 7)........................................ $ 15,779 17,596
Deferred loan and bond fees.............................................. 10,534 10,529
Deposits................................................................. 2,472 2,626
Other.................................................................... 218 218
--------- ---------
29,003 30,969
Less accumulated amortization............................................ 4,532 3,258
--------- ---------
$ 24,471 27,711
--------- ---------
--------- ---------
</TABLE>
33
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(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,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
9% Solid Waste Revenue Bonds, Series 1996, due June 2021............... $ 53,700 53,700
8 1/44% Solid Waste Revenue Bonds, Series 1994, due October 1, 2014.... 20,200 20,200
9 7/8% First Mortgage Notes due December 15, 2001...................... 200,000 200,000
Revolving credit agreement............................................. -- --
Other.................................................................. 22 39
---------- ---------
273,922 273,939
Less current maturities of long-term debt.............................. -- --
---------- ---------
$ 273,922 273,939
---------- ---------
---------- ---------
</TABLE>
On June 1, 1996, the Company obtained $53,700 of financing through the
issuance of 9 percent Solid Waste Revenue Bonds, Series 1996, due June 1, 2021
in connection with the solid waste disposal facilities installed at its
Cast-Roll-TM- facility. These bonds were issued in addition to the Solid Waste
Revenue Bonds, Series 1994, noted below, to assist in financing the facilities.
As of June 30, 1998 and 1997, the Company had available $715 and $1,183,
respectively, of the $53,700, which is classified as long-term restricted cash
in the accompanying consolidated balance sheets.
On October 28, 1994, the Company obtained $20,200 of financing through the
issuance of 8 1/4 percent Solid Waste Revenue Bonds, Series 1994, due October 1,
2014 in connection with the solid waste disposal facilities installed at the
Cast-Roll-TM- facility.
On December 15, 1993, the Company issued $200,000 aggregate principal amount
of 9 7/8 percent First Mortgage Notes due December 15, 2001 (Notes) in an
underwritten public offering. The Notes are redeemable, in whole or in part, at
the option of the Company, on or after December 15, 1998 at specified premiums
set forth therein which decline over three years. The Notes are secured by a
mortgage on substantially all of the Company's property, plant and equipment as
of December 15, 1993. Capital expenditures subsequent to that date aggregating
approximately $269,000 are not part of the security for the Notes. The Notes
contain affirmative and negative covenants including provisions for restrictions
on additional borrowings, certain investments, certain payments, sale or
disposal of assets, payment of dividends and liens, as well as change of control
provisions. The Company is in compliance with all such covenants as of June 30,
1998. The proceeds from the Notes were used in part to repay the balance
outstanding under the then existing revolving credit and term loan agreement and
the Company's unsecured subordinated debentures held by LTV Steel Company, Inc.
(LTV Steel).
On December 21, 1993, the Company entered into a $90,000 revolving credit
facility which had a four-year term expiring in December 1997. Effective April
25, 1997, the Company amended and restated this $90,000 revolving credit
facility (Revolving Credit Agreement). The amended and restated Revolving Credit
Agreement, which expires April 25, 2000, permits borrowings up to $115,000 and
is secured by the Company's receivables, inventories, subsidiaries' stock,
short-term investments, and certain intangible
34
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) LONG-TERM DEBT (CONTINUED)
assets. Advances under the facility are limited to specified percentages of the
Company's eligible receivables and inventories.
The Revolving Credit Agreement provides up to $20,000 for letters of credit.
Borrowings under the Revolving Credit Agreement bear interest at a per annum
rate equal to, at the Company's option, (i) the higher of the base rate of
BankBoston and 1/2 percent above the Federal Funds effective rate plus 1/4
percent; or (ii) LIBOR plus 2 1/4 percent. The borrowing base under the
Revolving Credit Agreement is the sum of 55 percent of eligible inventory (as
defined) up to a maximum of $75,000 and 85 percent of eligible accounts
receivable (as defined). Fees of 2 1/2 percent per annum on the maximum drawing
amount of each standby or documentary letter of credit are payable on the date
of issuance of such letter of credit. As of June 30, 1998 and 1997, there were
no outstanding letters of credit. A commitment fee of 3/8 percent per annum on
the average unused portion of the facility is payable quarterly. The Revolving
Credit Agreement contains certain limited negative and affirmative covenants,
including failure to pay interest or principal when due, inaccurate or false
representations or warranties, and limitations on restricted payments; the
Company is in compliance with all such covenants as of June 30, 1998.
The Company's $200,000 First Mortgage Notes represent the only long-term
debt which matures during the next five years (December 15, 2001).
(6) BENEFIT PLANS
The Company has defined contribution pension plans that cover substantially
all employees. Company contributions to the plans are based on age and
compensation. The Company funds retirement plan contributions as accrued.
Company contributions totaled $8,223, $8,618, and $8,683, for the fiscal years
ended June 30, 1998, 1997, and 1996, respectively.
The Company's ESOP covers substantially all United Steelworkers of America
(USWA) and nonbargained-for employees of Republic Engineered Steels, Inc. The
plan is designed to enable eligible employees to acquire a beneficial interest
in the Company through the Employee Stock Ownership Trust (ESOP Trust). The
Company expenses ESOP contributions as made or incurred.
With the establishment of a public market for the Company's common stock in
May 1995, distributions from the ESOP Trust will be made to participants upon
request following termination of employment or after attaining age 70 1/2 if
still in active employment. Participants who are 55 years of age and have 10
years of participation under the plan may also elect to receive distributions
annually for a portion of their account balance. All distributions are in the
form of one lump sum payment of whole shares (and cash for fractional shares)
allocated to their account in the plan. See also note 20.
The Company has profit sharing plans covering all employees, excluding
officers, of Republic Engineered Steels, Inc. and subsidiaries. Amounts provided
to the profit sharing pool are based on percentages of the consolidated excess
cash flows of the Company as defined in the Revolving Credit Agreement (see note
5).
From its inception, the Company had an executive incentive plan (Executive
Plan) which covered key executives and management employees. In connection with
the 1995 IPO, the board of directors of the Company adopted the 1995 Stock
Option Plan (1995 Plan), primarily to provide substitute benefits for
35
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) BENEFIT PLANS (CONTINUED)
plan units previously granted under the Executive Plan. Vesting of the plan
units occurred ratably from the date of grant at the rate of 20 percent per
year. The vesting provisions remained unchanged when the plan units were
converted to stock options. The stock options, totaling 1,764,000 shares, are
exercisable after May 5, 1998 with the majority of such options granted having
an exercise price of $6.67 per share and expire on November 28, 2001. There was
no compensation expense relating to these plans for fiscal 1998, 1997 or 1996.
Since the options outstanding as of June 30, 1997 were granted prior to the
effective date of FASB No. 123 and no additional options have been granted
since, the pro forma net income and pro forma net income per share disclosures
required by FASB No. 123 are not applicable.
(7) DEFINED BENEFIT PENSION OBLIGATIONS
The Company maintains a defined benefit 'floor offset' plan which covers all
USWA employees. The plan, when combined with benefits from the Company's defined
contribution pension plan and benefits from an LTV Steel defined benefit pension
plan, will provide a minimum level of pension benefits for USWA employees.
Benefits are based on a combination of employees' age and years of service. The
Company's policy is to fund this plan based on legal requirements and tax
considerations. Assets of the plan are currently invested in money market funds,
U.S. government securities, and common stocks. The following table sets forth
the funded status of the plan as of June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits....................................................... $ 18,400 17,182
---------- ---------
---------- ---------
Accumulated benefit obligation........................................ $ 23,764 24,166
---------- ---------
---------- ---------
Projected benefit obligation............................................ $ 23,764 24,166
Plan assets at fair value............................................... 11,586 7,281
---------- ---------
Projected benefit obligation in excess of plan assets................... 12,178 16,885
Items not yet recognized in earnings:
Prior service cost.................................................... (16,780) (18,394)
Net gain.............................................................. 1,001 798
Adjustment required to recognize minimum liability...................... 15,779 17,596
---------- ---------
Accrued pension cost as reflected on the consolidated balance
sheets............................................................ $ 12,178 16,885
---------- ---------
---------- ---------
</TABLE>
36
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) DEFINED BENEFIT PENSION OBLIGATIONS (CONTINUED)
Net pension expense included in operating income for the years ended June
30, 1998, 1997, and 1996 consist of the following components:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Service cost (benefit)........................................... $ (1,471) (1,498) (1,721)
Interest cost.................................................... 1,899 1,865 2,113
Actual return on plan assets..................................... (1,213) (993) (144)
Net amortization and deferred items.............................. 2,095 2,192 1,567
--------- --------- ---------
Net periodic pension cost........................................ $ 1,310 1,566 1,815
--------- --------- ---------
--------- --------- ---------
</TABLE>
Actuarial assumptions used in accounting for the pension plan for the fiscal
years ended June 30, 1998, 1997, and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Discount rate.................................................... 7.0% 8.0% 8.0%
Rate of increase in future compensation levels................... 5.0% 5.0% 5.0%
Expected long-term rate of return on assets...................... 8.0% 8.0% 8.0%
</TABLE>
During fiscal 1995, the minimum pension liability of $24,089 exceeded
unrecognized prior service costs by $2,468 and was recorded as a $1,604 charge
to shareholders' equity, net of applicable income tax benefits of $864.
As of June 30, 1998 and 1997, the minimum pension liability of $15,779 and
$17,596, respectively, is less than the unrecognized prior service cost;
accordingly, the charge to shareholders' equity made in fiscal 1995 of $1,604,
net of applicable income taxes of $864, was reversed in 1996.
(8) OTHER POSTRETIREMENT BENEFITS
Prior to 1997, the Company provided postretirement health care and life
insurance benefits to substantially all employees who retired from the Company
subsequent to November 28, 1989, upon attaining the following age and years of
service:
<TABLE>
<CAPTION>
AGE AT RETIREMENT YEARS OF SERVICE
- ----------------------------------------- -----------------------------------------
<S> <C>
55 30
60 15
65 10
</TABLE>
In fiscal 1997 the Company adopted a plan amendment to modify the minimum
retirement age to 65 for future salaried retirees. This change resulted in a
decrease in the accumulated postretirement benefit obligation (APBO) of $17,175.
This reduction is being amortized over the estimated remaining life of the
salaried work force, which at the time of the change was 13 years.
37
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table presents the plan's APBO reconciled with amounts
recognized in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................................. $ 28,785 27,758
Fully eligible active plan participants.............................. 29,704 28,183
Other active plan participants....................................... 71,401 71,944
---------- ---------
129,890 127,885
Unrecognized prior service cost:
Original amount at adoption of FASB No. 106.......................... (13,938) (16,437)
Deferral of benefits for future salaried retirees.................... 15,304 16,625
---------- ---------
1,366 188
Accrued postretirement benefits as reflected on the consolidated
balance sheets....................................................... $ 131,256 128,073
---------- ---------
---------- ---------
</TABLE>
Net periodic postretirement benefit charges (credits) recorded for the years
ended June 30, included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefit attributed to service during the
period........................................................ $ 3,593 3,759 3,761
Interest cost on accumulated postretirement benefit
obligation.................................................... 10,114 10,249 10,058
Immediate recognition of change in accumulated postretirement
benefit obligation due to actuarial (gains) losses, including
change in assumptions......................................... (9,503) 983 (2,498)
Net amortization of unrecognized amounts for net gain and prior
service cost.................................................. 1,178 1,949 2,500
--------- --------- ---------
Net periodic postretirement benefit charges..................... $ 5,382 16,940 13,821
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company recorded a fourth quarter 1998 experience gain of $9,503 related
to lower than anticipated per capita costs of indemnity and managed health care
plans coupled with the increased enrollment in Risk Sharing HMO plans for
Medicare eligible retirees.
38
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The health care cost trend rates used in determining the APBO as of June 30,
1998 and 1997, were as follows:
<TABLE>
<CAPTION>
YEAR 1998 1997
- ------------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
1998.......................................................................... 7.5% 7.5%
1999.......................................................................... 7.0% 7.0%
2000.......................................................................... 6.5% 6.5%
2001.......................................................................... 6.0% 6.0%
2002.......................................................................... 5.5% 5.5%
2003.......................................................................... 5.0% 5.5%
Thereafter.................................................................... 4.5% 5.5%
</TABLE>
The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the health care cost trend by 1
percent would increase the APBO as of June 30, 1998 from $129,890 to $155,275
and the aggregate of the service and interest cost components of net periodic
postretirement benefit charges for 1998 from $13,719 to $16,682.
The discount rate used in determining the APBO was 7.0 and 8.0 percent as of
June 30, 1998 and 1997 respectively. The discount rate used in determining the
net periodic postretirement benefit charge was 7.0 percent for fiscal 1998 and
8.0 percent for fiscal 1997 and 1996. The reduction in discount rates combined
with the reduction in health care cost trend rates in fiscal 1998 had an
offsetting impact to the fiscal 1998 net periodic postretirement benefit charge.
The withdrawal assumptions were revised in 1996 to meet Internal Revenue Service
requirements, and health care cost trend rates were changed resulting in the
loss of $129 and gain of $2,498 which were fully recognized in the net periodic
postretirement benefit charges for fiscal 1997, and 1996, respectively.
The Company's policy is to fund claims as incurred. Claims paid were $2,211,
$2,037, and $1,931, during the fiscal years ended June 30, 1998, 1997, and 1996,
respectively. The Company also recognizes actuarial gains and losses, including
the impact of actuarial assumption changes, immediately rather than amortizing
them over future years.
The Company also provides postemployment benefits to its employees in the
form of supplemental unemployment benefits, severance benefits, and disability
income benefits which are subject to the provisions of FASB No. 112, Accounting
for Postemployment Benefits. However, in connection with the Company's
collective bargaining agreement with the USWA, the Company has agreed to perform
annual actuarial valuations; cash fund all deficiencies through a voluntary
employee benefit association as described in Section 501(c)(9) of the Internal
Revenue Code of 1986, as amended; and record the change in liability as an
expense in the current period. Therefore, the adoption of the provisions of FASB
No. 112 effective July 1, 1994 had no effect on the consolidated financial
statements of the Company.
(9) INCOME TAXES
The net income tax benefit for fiscal years 1998, 1997, and 1996, includes a
current tax (benefit) charge of $-0- for fiscal years 1998 and 1997 and ($152)
for fiscal 1996, due to the federal alternative minimum tax, which was increased
by a deferred benefit of $373, $22,569, and $21,984 in 1998, 1997 and 1996,
respectively.
39
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) INCOME TAXES (CONTINUED)
At present, given available state net operating loss carryforwards (NOLs),
the Company is not assessed state income tax. The Company anticipates being
assessed state income tax when certain temporary differences reverse or when
such state NOLs expire beginning in year 2001. Other state taxes are included in
general and administrative expenses.
The difference between the statutory U.S. federal income tax rate of 35
percent and the Company's effective tax rate was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax benefit............................ $ 447 19,911 19,448
State and local income tax benefit.............................. 64 2,844 2,778
Other........................................................... (138) (186) (90)
--------- --------- ---------
Income tax benefit............................................ $ 373 22,569 22,136
--------- --------- ---------
--------- --------- ---------
Effective book income tax benefit rate.......................... 29.2% 39.7% 39.8%
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1998 1997
---------- ---------
<S> <C> <C>
Deferred tax assets
Accounts receivable, principally due to allowance for doubtful
accounts........................................................... $ 630 650
Postretirement benefits.............................................. 22,901 21,628
Environmental costs.................................................. 5,094 6,451
Other liabilities.................................................... 9,431 11,620
Net operating loss carryforwards..................................... 111,385 99,474
Other................................................................ 1,180 938
---------- ---------
Total gross deferred tax assets.................................... 150,621 140,761
Less valuation allowance............................................. 25,187 25,187
---------- ---------
Net deferred tax assets.............................................. 125,434 115,574
---------- ---------
Deferred tax liabilities
Inventory valuation.................................................. 10,626 9,762
Plant and equipment, principally due to differences in
depreciation....................................................... 57,658 50,513
Other................................................................ 2,321 843
---------- ---------
Total gross deferred tax liabilities............................... 70,605 61,118
---------- ---------
Net deferred tax asset............................................. $ 54,829 54,456
---------- ---------
---------- ---------
</TABLE>
40
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) INCOME TAXES (CONTINUED)
The Company had available as of June 30, 1998, net operating loss (NOL)
carryforwards, for regular federal income tax purposes, totaling approximately
$278 million ($145 million for federal alternative minimum tax purposes) with
expirations of: $45 million in year 2006; $24 million in year 2007; $12 million
in year 2008; $16 million in year 2009; $8 million in year 2010; $71 million in
year 2011; and $73 million in year 2012; and $29 million in year 2013. The
Company believes that it is more likely than not that a significant portion of
the aforementioned NOL carryforwards will be used prior to their expiration.
While the Company has incurred pretax losses of nearly $195 million during its
nine-year existence, deductible noncash ESOP contributions have totaled $216
million during that same period. Further, six of the eight years reflect
substantial income on a pretax/pre-ESOP contribution basis and the ESOP loans
have been fully repaid as of June 30, 1998 (eight years prior to the first year
NOL expiration date). Management also believes that future operating results
will be improved as a result of major capital improvements coupled with the
ongoing cost reduction program which is linked to the labor agreement. Based on
the aforementioned factors, but also recognizing the inherent uncertainties
associated with forward looking statements, management believes that the
valuation allowance which has been established is adequate to provide for
deferred tax assets that more likely than not will not be realized during the
NOL carryforward period.
(10) SPECIAL PREFERRED STOCK
In connection with the IPO, the Company issued one share of special
preferred stock to the trustee of a trust, the only asset of which is the
special preferred stock. The special preferred stock has the right to vote as a
separate class on any proposed merger or consolidation of the Company (see note
20) or a sale of all or substantially all of the Company's assets and any
additional issuance of common stock of the Company subsequent to the IPO, other
than issuances pursuant to the 1995 Plan (notes 6 and 7). The agreement with
respect to the trust for the special preferred stock will provide that the
trustee of such trust will vote the share of special preferred stock as
instructed by ESOP participants on a one share/one vote basis. Except as
provided above, the special preferred stock has no voting power. The special
preferred stock is redeemable by the Company for $1.5 at such time as the ESOP
(and/or other benefit arrangement[s]) holds less than 25 percent of the issued
and outstanding shares of common stock.
The special preferred stock is not entitled to receive any dividends but is
entitled to a liquidation preference of $.01 per share. The special preferred
stock may not be transferred without the consent of the Company.
(11) COMMON STOCK
As of June 30, 1998 and 1997, there are 27,000,000 authorized shares of the
Company's common stock (Common Stock); 19,707,923 shares were issued and
19,706,578 shares were outstanding as of June 30, 1998 and 1997, of which
10,546,010 and 11,004,663 shares, respectively, were held by the ESOP Trust.
Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of the stockholders with the exception of the election of
board of directors, which, commencing in 1998, will be one person, one vote.
Shares of Common Stock held by the ESOP Trust may be voted only by the ESOP
trustee. The ESOP provides that the administrative committee is required to
solicit instructions of the
41
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(11) COMMON STOCK (CONTINUED)
participants in the ESOP and to direct the ESOP trustee to vote the shares of
Common Stock held by the ESOP Trust in accordance with the votes of the
participants.
The Company has not paid dividends on its Common Stock during the last four
fiscal years and does not presently anticipate paying any dividends in the
foreseeable future. The Company intends to reinvest earnings in the development
and expansion of its business. Also, the payment of cash dividends on its Common
Stock is restricted by covenants contained in certain of the Company's financing
arrangements (note 5). The payment of dividends in the future will be at the
sole discretion of the board of directors and will depend upon the Company's
profitability, financial condition, capital needs, future prospects, legal
restrictions on the payment of dividends in financing agreements, and other
factors deemed relevant by the board of directors.
The holders of Common Stock are not entitled to any preemptive right to
subscribe for, purchase, or receive any new or additional shares of capital
stock of the Company. Upon the liquidation, dissolution, or winding up of the
Company, the holders of shares of the Common Stock are entitled to receive
ratably the net assets of the Company available after the payment of all debts
and other liabilities and subject to the rights of the holder of the special
preferred stock.
(12) CONCENTRATIONS OF CREDIT RISK
The Company has one customer which accounted for approximately 10 percent of
total sales in each of the fiscal years ended June 30, 1998, 1997, and 1996. A
majority of the Company's business is directly or indirectly related to the
automobile industry.
(13) LEASE COMMITMENTS
Minimum rental payments due under noncancelable operating leases are
estimated to be as follows:
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, 1998 1998
- ------------------------------------------------------------------------------------- ---------
<S> <C>
1999................................................................................. $ 1,179
2000................................................................................. 662
2001................................................................................. 195
2002................................................................................. 62
2003................................................................................. 8
Thereafter........................................................................... --
$ 2,106
---------
---------
</TABLE>
Rent expense was approximately $4,006, $3,983, and, $4,118, for the fiscal
years ended June 30, 1998, 1997, and 1996, respectively.
(14) LONG-TERM COMMITMENT
On December 3, 1997, the Company entered into a technical exchange agreement
with Sanyo Special Steel Company of Japan for a total of $6 million. The
forty-eight (48) month agreement involves technical
42
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) LONG-TERM COMMITMENT (CONTINUED)
assistance in melting, refining, and casting technologies. Obligations under
this agreement as of June 30, 1998 are as follows:
<TABLE>
<S> <C>
1999................................................................ $ 1,200
2000................................................................ 1,200
2001................................................................ 1,200
2002................................................................ 600
$ 4,200
---------
---------
</TABLE>
(15) LITIGATION
In September 1992, a lawsuit was filed against the Company in the U.S.
District Court for the Northern District of Ohio (Eastern Division) on behalf of
19 former Company salaried employees whose employment was terminated on February
19, 1991. The claims asserted on behalf of each former employee were age
discrimination under both federal and state laws, breach of employment contract,
promissory estoppel, and violation of Ohio public policy (by reason of age
discrimination). The relief sought for each former employee was lost pay and
fringe benefits, liquidated damages (doubling the claimed lost pay and
benefits), compensatory damages of $500 on each count, punitive damages of $500
under the public policy count, prejudgment interest, and attorneys' fees. The
Company denied all of the claims with the intent of contesting them vigorously.
The Company's motion for summary judgment with respect to these cases was
partially granted on May 15, 1996, dismissing all claims of the former employees
other than the age discrimination claims. In fiscal 1998, the age discrimination
lawsuit was settled and payment was made in an amount which is not material to
the Company.
The Company is involved in other legal proceedings, including various
environmental proceedings with governmental authorities, product liability
litigation, and claims by present and former employees under federal and
counterpart state anti-discrimination and other laws relating to employment. The
Company does not believe that any of these proceedings, either individually or
in the aggregate, will have a material adverse effect on the consolidated
financial condition or results of operations of the Company.
(16) ENVIRONMENTAL COMPLIANCE
The Company is subject to a broad range of federal, state, and local
environmental laws and regulations, including those governing discharges into
the air and water, the handling and disposal of solid and hazardous wastes, and
the remediation of contamination associated with the disposal of waste. The
Company continuously monitors its compliance with such environmental laws and
regulations and, accordingly, believes that it is currently in substantial
compliance with such laws and regulations. The Company does not anticipate the
need to make material expenditures for environmental control measures during the
next 24 months. As is the case with most steel producers, the Company could
incur significant costs related to environmental compliance, in particular those
arising from remediation costs for historical waste disposal practices at
certain of the Company's facilities. The Company believes that these costs are
most likely to be in the range of $8,900 to $22,300 over the lives of the
Company's facilities. This range
43
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(16) ENVIRONMENTAL COMPLIANCE (CONTINUED)
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 $14,377 and $17,800 as of June 30, 1998 and 1997, respectively,
substantially all of which is classified as a long-term obligation in the
accompanying consolidated balance sheets.
The reserve has been established and is monitored based on continuing
reviews of the reserve, each matter comprising the reserve, and whether any new
matters should be included in the reserve, using currently available information
relative to enacted laws and regulations and existing technology. These reviews
are performed periodically by an in-house committee comprised of representatives
experienced in environmental matters from the environmental, law, operating, and
accounting departments in consultation with outside legal and technical experts,
as necessary.
(17) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment; therefore, they cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
- 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 $199,000 as of June 30, 1998. The Company estimates that the
fair value of the 81/4 percent Solid Waste Revenue Bonds, Series 1994, and
the 9 percent Solid Waste Revenue Bonds, Series 1996, classified under
long-term debt (see note 5) was approximately $22,220 and $64,440,
respectively, as of June 30, 1997.
44
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(18) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERLY PERIODS IN 1998
-------------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales........................................ $ 185,971 194,538 217,470 204,653
Gross profit..................................... 17,298 20,085 25,678 26,905
Special charges (credits) (note 19).............. -- (1,270) -- --
Net income (loss)................................ (7,706) (5,830) 1,070 11,562
Basic and diluted net loss per common share...... (.39) (.30) .05 .59
</TABLE>
<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 (note 19)........................ -- -- 2,763 --
Net loss......................................... (10,355) (11,604) (9,150) (3,210)
Basic and diluted net loss per common share...... (0.53) (0.59) (0.46) (0.16)
</TABLE>
During the fourth quarters of 1998 and 1997, the Company recorded LIFO
reserve adjustments representing credits of $3,565 ($.18 per share) in 1998 and
$3,354 ($.17 per share) in 1997 (note 2).
The Company recorded an experience gain in the fourth quarter of 1998 in the
amount of $9,503, or $.48 per share (note 8). In addition, the Company also
recorded a one-time gain of $4,358 ($.22 per share) in the fourth quarter of
1998 due to an adjustment in connection with the past supply of raw materials.
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).
(19) 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
65 with 15 or more years service to age 65 with 15 or more years service. For
the transition to the new plan, the plan would provide retiree health care
benefits under the old plan to employees who were eligible for benefits as of
March 31, 1997. Sixty-eight (68) individuals elected to avail themselves of this
transition provision.
The Company also announced plans to restructure and reduce its salaried
workforce by approximately 200 people and to further reduce the hourly workforce
by more than 300 people as the Company reaches full capacity utilization of its
Cast-RollTM facility and completes other smaller capital projects.
The financial impact of the restructuring of the salaried workforce was
estimated to be $2,763 and is reflected as a special charge in the 1997 third
quarter financial statements. However, based on higher
45
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(19) ORGANIZATIONAL RESTRUCTURING (CONTINUED)
voluntary terminations than originally estimated, a $1,270 reduction in the
restructuring reserve was recorded in the second quarter of fiscal 1998. The
Company's plan to restructure the hourly workforce has not yet been approved as
negotiations with the USWA continue. Generally, the restructuring of the hourly
workforce will be covered by a supplemental unemployment benefit plan and other
plans covered by union contracts. Therefore, reasonable estimates resulting from
a hourly workforce restructuring cannot be made until negotiations with the USWA
are finalized.
(20) SUBSEQUENT EVENT
The Company, along with an affiliate of Blackstone Capital Partners II
Merchant Banking Fund L.P. and Veritas Capital Partners L.P., announced on July
24, 1998, that they had agreed to the acquisition of Republic by the
Blackstone-Veritas affiliate for a cash price of $7.25 per share of Republic
common stock.
The acquisition of Republic is subject to various approvals and will occur
by means of a cash tender offer for all issued and outstanding shares, followed
by a merger in which all remaining shares will be converted into the same cash
consideration. Including acquired debt, the total purchase price is
approximately $420,000.
Upon consummation of the tender offer, the Employee Stock Ownership Plan
will be amended to allow in-service distributions upon request regardless of age
or service.
46
<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 is set forth under the caption "The Board of
Directors" in the registrant's Information Statement 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 is set
forth under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Information Statement and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be furnished pursuant to this item is set forth
under the caption "Compensation of Executive Officers" in the registrant's
Information 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 is set forth
under the caption "Security Ownership of Certain Beneficial Owners and
Management" in the registrant's Information Statement, and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
47
<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)
-- Amendment No. 4 to the Employee Common Stock Ownership Plan(3)
-- 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.(4)
-- Salaried Employees Termination Plan, amended and restated as of
January 23, 1997(5)
-- Form of Severance Agreement for six senior executive officers(6)
-- Form of Change of Control Agreement for six senior executive
officers(6)
-- Form of Change of Control Agreement for other executive officers(7)
(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 10.2(b).
(4) Incorporated by reference to similarly identified exhibit to
registrant's Annual Report on Form 10-K for the fiscal year ended
June 30, 1997.
(5) Filed as Exhibit 10.25.
(6) Incorporated by reference to similarly identified exhibits to
registrant's amended Quarterly Report on Form 10-Q/A for the fiscal
quarter ended December 31, 1997.
(7) Filed as Exhibit 10.26.
- ------------------------
48
<PAGE>
(4) Exhibits
<TABLE>
<C> <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)
10.2(b) -- Amendment No. 4 to the Employee Common Stock Ownership Plan.*
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)
</TABLE>
49
<PAGE>
(4) Exhibits (Cont'd)
<TABLE>
<C> <S> <C>
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)
10.25 -- Salaried Employees Termination Plan, as amended and restated as of
January 23, 1997.*
10.26 -- Form of Change of Control Agreement for other executive officers.*
</TABLE>
50
<PAGE>
(4) Exhibits (Cont'd)
<TABLE>
<C> <S> <C>
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.
(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 28, 1998 in respect of a Press Release issued by
Registrant on July 24, 1998 announcing the execution of an Agreement and
Plan of Merger dated July 23, 1998 between the Registrant, RES Holding
Corporation and RES Acquisition Corporation.
51
<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 2, 1998
- ------------------------------ President and Chief
Russell W. Maier Executive Officer
/s/ JAMES B. RILEY Executive Vice President, September 2, 1998
- ------------------------------ Chief Financial Officer
James B. Riley and Director (Chief
Accounting Officer)
/s/ STEPHEN S. HIGLEY Vice President and September 2, 1998
- ------------------------------ President Cold Finished
Stephen S. Higley Bar Division and Director
/s/ DANIEL A. ALBERT Director September 2, 1998
- ------------------------------
Daniel A. Albert
/s/ SAM CAMENS Director September 2, 1998
- ------------------------------
Sam Camens
/s/ CAROL A. CARTWRIGHT Director September 2, 1998
- ------------------------------
Carol A. Cartwright
/s/ ANTHONY J. CELEBREZZE, Director September 2, 1998
JR.
- ------------------------------
Anthony J. Celebrezze, Jr.
/s/ ROBERT J. FARLING Director September 2, 1998
- ------------------------------
Robert J. Farling
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ JEFFREY K. FERNANDEZ Director September 2, 1998
- ------------------------------
Jeffrey K. Fernandez
/s/ NORMAN T. GRAYBILL Director September 2, 1998
- ------------------------------
Norman T. Graybill
/s/ GARY E. LENHART Director September 2, 1998
- ------------------------------
Gary E. Lenhart
/s/ MARTIN MANLEY Director September 2, 1998
- ------------------------------
Martin Manley
/s/ WALTER C. MECK Director September 2, 1998
- ------------------------------
Walter C. Meck
</TABLE>
53
<PAGE>
EXHIBIT INDEX
(4) Exhibits
<TABLE>
<C> <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)
10.2(b) -- Amendment No. 4 to the Republic Engineered Steels, Inc.Employee Common
Stock OwnershipPlan.*
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>
54
<PAGE>
(4) Exhibits (Cont'd)
<TABLE>
<C> <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)
</TABLE>
55
<PAGE>
(4) Exhibits (Cont'd)
<TABLE>
<C> <S> <C>
10.25 -- Salaried Employees Termination Plan, as amended and restated as of
January 23, 1997.*
10.26 -- Form of Change of Control Agreement for other executive officers.*
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.
(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.
56
<PAGE>
RATIO OF EARNINGS
TO FIXED CHARGES
EXHIBIT 12.1
57
<PAGE>
EXHIBIT 12.1
REPUBLIC ENGINEERED STEELS, INC.
RATIO OF EARNINGS TO FIXED CHARGES
FOR FISCAL YEARS ENDING JUNE 30, 1994, 1995, 1996 1997 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1994 FISCAL 1995 1996 1997 FISCAL 1998
--------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
RATIO OF EARNINGS TO FIXED CHARGES........................... -- -- -- -- --
COVERAGE DEFICIENCY.......................................... $ 27,602 $ 7,212 $ 55,566 $ 56,888 $ 1,277
</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 1.19x, 2.85x, (0.21)x,
0.07x and 1.59, respectively.
58
<PAGE>
ACCOUNTANT'S REPORT ON SCHEDULES AND CONSENT
The Board of Directors
Republic Engineered Steels, Inc.:
The audits referred to in our report dated July 31, 1998, included the
related financial statement schedules as of June 30, 1998, and for each of the
years in the three-year period ended June 30, 1998, 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 July 31,
1998 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.
[SIG]
KPMG Peat Marwick LLP
Pittsburgh, PA
September 3, 1998
<PAGE>
FINANCIAL
STATEMENT
SCHEDULES
<PAGE>
ACCOUNTANT'S REPORT
ON
SCHEDULES AND CONSENT
59
<PAGE>
SCHEDULE II
REPUBLIC ENGINEERED STEELS, INC.
VALUATION OF QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND (DEDUCTIONS) END OF
OF PERIOD EXPENSES RECOVERIES PERIOD
----------- --------------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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
YEAR ENDED JUNE 30, 1998
Allowance for doubtful accounts................................. $ 1,624 $ 0 $ (49) $ 1,575
</TABLE>
60
<PAGE>
SCHEDULE V
REPUBLIC ENGINEERED STEELS, INC.
SUPPLEMENTARY INCOME STATEMENT INFORMATION
YEARS ENDED JUNE 30, 1996, 1997, AND 1998
<TABLE>
<CAPTION>
CHARGED TO COSTS
AND EXPENSES
-------------------------------------
FISCAL 1996 FISCAL 1997 FISCAL 1998
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Maintenance and repairs................................................... . $ 72,304 $ 70,975 $ 73,047
Depreciation and amortization of intangible assets.......................... $ 24,020 $ 29,560 $ 29,155
</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.
61
<PAGE>
AMENDMENT NO. 4 TO THE
REPUBLIC ENGINEERED STEELS, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
WHEREAS, Republic Engineered Steels, Inc. (the "Company") adopted the Republic
Engineered Steels, Inc. Employee Stock Ownership Plan (the "ESOP") effective
November 28, 1989;
WHEREAS, according to Section 23 of the ESOP the right is reserved to the Board
of Directors of the Company, with the approval of the United Steelworkers of
America, to amend the ESOP;
WHEREAS, the Company has entered into an Agreement and Plan of Merger, dated
as of July 23, 1998, by and among RES Holding Corporation, RES Acquisition
Corporation and the Company pursuant to which RES Acquisition Corporation has
commenced a tender offer for all of the outstanding shares of common stock,
par value $.01 per share, of the Company, and, if such tender offer is
consummated, thereafter will be merged with and into the Company with the
Company surviving such merger (the "Merger"), and the Company desires to
amend the ESOP to provide participants with the ability to take an in-service
distribution following consummation of the Merger;
NOW, THEREFORE, BE IT RESOLVED, that the ESOP is hereby amended as follows,
effective upon consummation of the Merger:
(i) A new definition, "Merger Date", is added to Section 2, which shall read
as follows:
"Merger Date" . . . The date of the consummation of the merger
contemplated in the Agreement and Plan Of Merger, dated as of July 23,
1998, by and among RES Holding Corporation, RES Acquisition Corporation
and the Company.
(ii) A new subsection (d) is added to Section 12 of the ESOP, which shall read
as follows:
(d) DISTRIBUTIONS FOLLOWING MERGER DATE. From the Merger Date until the
second anniversary thereof, any Participant may, as of the end of any
calendar month, elect to receive a distribution of all of his or her
Capital Accumulation as of the Merger Date, together with any earnings
thereon, other than any of such Capital Accumulation invested in Company
Stock or stock of an affiliate after the Merger Date.
(iii) Former subsection 12(d) shall become subsection 12(e), and shall be
amended to read as follows:
(e) FORM OF DISTRIBUTIONS. All distributions or withdrawals under Sections
12(b), 12(c) and 12(d) shall be paid in the form of one lump sum payment
of cash allocated to the Participant's Cash Account.
<PAGE>
RESOLVED, that the appropriate officers of the Company are hereby authorized,
empowered and directed to do or cause to be done all such further acts and
things as shall be necessary and proper to accomplish the purposes of these
resolutions.
ATTEST: REPUBLIC ENGINEERED STEELS, INC.
/s/ James D. Donohoe /s/ [ILLEGIBLE]
- ----------------------- ---------------------------------------
Name: James D. Donohoe Name: [ILLEGIBLE]
Title: Secretary Title: Exec VP-CFO
Date: 8-19-98
---------
APPROVED, on behalf of the United
Steelworkers of America by a duly
authorized officer, pursuant to the
requirements of Section 23 of the ESOP:
UNITED STEELWORKERS OF AMERICA
/s/ [ILLEGIBLE]
- -------------------------------
Name:
Title: Special Assistant to the President
DATE: 8-16-98
---------
<PAGE>
REPUBLIC ENGINEERED STEELS, INC.
SALARIED EMPLOYEES'
TERMINATION PLAN
Amended and Restated
as of January 23, 1997
<PAGE>
REPUBLIC ENGINEERED STEELS, INC.
SALARIED EMPLOYEES' TERMINATION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Article 1 - Eligibility
1.1 Eligibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Exclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Article 2 - Termination Plan Allowance
2.1 Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Schedule of Termination Plan Allowance . . . . . . . . . . . . . . 3
2.3 Commencement of Termination Plan Allowance . . . . . . . . . . . . 4
2.4 Payment of Termination Plan Allowance. . . . . . . . . . . . . . . 4
2.5 Termination Plan Provisions Applicable to Executive Officers . . . 5
2.6 Cessation of Termination Plan Allowance. . . . . . . . . . . . . . 6
2.7 Limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Article 3 - Other Employee Benefits
3.1 Termination Plan Allowance Period. . . . . . . . . . . . . . . . . 8
3.2 Retirement and Capital Accumulation Plan . . . . . . . . . . . . . 8
3.3 Health Care Plan . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.4 Employee and Spouse Life and Accidental Death Plan . . . . . . . . 9
3.5 Disability Income Plan . . . . . . . . . . . . . . . . . . . . . .10
3.6 Benefit Bank . . . . . . . . . . . . . . . . . . . . . . . . . . .10
3.7 Vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
3.8 Employee Common Stock Ownership Pan ("ESOP") and ESOP Excess
Benefit Plan . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Article 4 - Contributions
4.1 No Employee Contributions. . . . . . . . . . . . . . . . . . . . .12
4.2 No Trust Created . . . . . . . . . . . . . . . . . . . . . . . . .12
Article 5 - General Provisions
5.1 General Provisions . . . . . . . . . . . . . . . . . . . . . . . .13
5.2 Administration . . . . . . . . . . . . . . . . . . . . . . . . . .13
5.3 Establishment of Rules . . . . . . . . . . . . . . . . . . . . . .13
5.4 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Article 6 - Execution. . . . . . . . . . . . . . . . . . . . . . . . . . . .14
</TABLE>
<PAGE>
PREAMBLE
Republic Engineered Steels, Inc. ("Employer") hereby creates the Republic
Engineered Steels, Inc. Salaried Employees' Termination Plan ("Plan"); the
Effective Date shall be November 28, 1989. The Plan was initially amended and
restated on October 26, 1995, and, as described herein, is amended and restated
effective as of January 23, 1997.
The Plan hereby adopted has been approved by the Employer and is intended to
meet the requirements of the Employee Retirement Income Security Act of 1974
("ERISA"), as amended.
The terms and conditions of the Plan, effective January 23, 1997, are as
follows:
<PAGE>
ARTICLE 1
ELIGIBILITY
1.1 ELIGIBILITY
(a) Subject to the provisions of Section 1.2, and Covered Employee, as
defined in Section 1.1(b), whose active employment with the Employer
is terminated because of a reduction in salaried work force due to
restructuring by the Employer or as otherwise necessitated by business
conditions is eligible to receive a Termination Plan Allowance in
accordance with the provisions of this Plan. The determination of
whether a Covered Employee is eligible for coverage under this Plan
shall be in the sole discretion of the Plan Administrator.
(b) For purposes of this Plan, a "Covered Employee" shall mean any
employee who is on the full-time, active salaried payroll of the
Employer and who is not a nonresident alien or represented in a
collective bargaining unit. No person employed by a newly created or
newly purchased organizational unit of the Employer shall become a
Covered Employee unless and until such organization is brought under
the Plan by specific action of the Employer. An employee shall cease
to be a Covered Employee upon the expiration of the Waiver Period, as
defined in Section 2.7, and thereafter shall no longer be eligible to
begin receiving a Termination Plan Allowance under the Plan.
1/1
<PAGE>
1.2 EXCLUSIONS
Notwithstanding anything to the contrary in this Plan, a Termination Plan
Allowance shall not be paid to:
(a) any Covered Employee who is eligible to receive benefits from the
Employer's Disability Income Plan,
(b) a temporary, summer or part-time employee,
(c) an employee hired for specific periods of time (either on contract or
otherwise), except for any Covered Employee described in Section 2.5,
(d) any employee of a plant, division or other unit of the Employer which
is sold or spun-off to new owners, provided such employee is offered
employment with the new owner,
(e) any employee who refuses to accept another job within the Employer,
(f) any employee who, as of the date of termination, owes any sum of money
for any reason (including any expense account advance) to the
Employer, expect to the extent such debt is first satisfied,
(g) any employee who is discharged for cause (including a finding of
unsatisfactory work performance) as determined by the Plan
Administrator, and
(h) any employee who dies, voluntarily quits or retires.
1/2
<PAGE>
ARTICLE 2
TERMINATION PLAN ALLOWANCE
2.1 BENEFITS
Subject to Sections 2.5 and 2.7, each eligible Covered Employee shall be
entitled to receive a Termination Plan Allowance described in Section 2.2,
which includes salary and benefit continuation components.
2.2 SCHEDULE OF TERMINATION PLAN ALLOWANCE
(a) An eligible Covered Employee shall be entitled to receive salary
continuation pursuant to the following schedule:
<TABLE>
<CAPTION>
Termination Plan Allowance
Expressed As
Months of Salary Continuance
----------------------------
Less Than 40 or More
Service 40 Years Old Years Old
------- ------------ ---------
<S> <C> <C>
Less than 3 years 1/2 1-1/2
at least 3 but less than 5 years 1 2
at least 5 but less than 7 years 1-1/2 2-1/2
at least 7 but less than 10 years 1-3/4 2-3/4
at least 10 but less than 15 years 2 3
at least 15 but less than 20 years 3 4
at least 20 but less than 25 years 4 5
at least 25 years 5 6
</TABLE>
(b) For purposes of the above schedule, a Covered Employee's:
(i) age is determined on the day of employment termination;
(ii) service is equal to the amount of "vesting service" such
Covered Employee is credited with under the Republic
Engineered Steels, Inc. Retirement and Capital Accumulation
Plan ("RCAP") on the day of employment termination;
(iii) salary means the total cash remuneration paid to a Covered
Employee for services rendered to the Employer, including any
reduction pursuant to Code
2/3
<PAGE>
Sections 125 or 401(k). Compensation shall include
supplemental salary where applicable, but shall exclude the
amount resulting from any cost-of-living adjustment provision
and all items exceeding straight-time pay or base salary for
the Covered Employee's job, such as bonuses, management
variable compensation programs, pay for vacation not taken,
and contributions to any benefit plan.
(c) The Termination Plan Allowance also includes coverage under employee
benefit plans sponsored by the Employer which are described in Article
3, in which the Covered Employee was a participant on the employment
termination date.
2.3 COMMENCEMENT OF TERMINATION PLAN ALLOWANCE
(a) A Termination Plan Allowance shall be payable to a Covered Employee
beginning with the regularly scheduled payroll date immediately
following the end of the Waiver Period, as described in Section 2.7.
(b) The first of such salary continuation payments under the Termination
Plan Allowance shall be calculated on a basis retroactive to the day
following the Covered Employee's termination of employment.
2.4 PAYMENT OF TERMINATION PLAN ALLOWANCE
(a) The salary continuation portion of the Covered Employee's Termination
Plan Allowance shall be paid in the same manner as the Employer's
regular monthly salary payroll schedule. Payroll deductions, based
upon the authorizations in effect on the Covered Employee's employment
termination date, shall continue to be made for:
2/4
<PAGE>
(i) taxes,
(ii) bonds,
(iii) Social Security,
(iv) United Way,
(v) outstanding RCAP loans,
(vi) any "Design Your Benefit" options (except for the disability
supplement or optional vacation), and
(vii) any other deduction being made prior to payment of the
Termination Plan Allowance.
(b) A Covered Employee shall continue to accrue "continuous service" for
all employee benefit purposes during the period for which he is
receiving a Termination Plan Allowance.
2.5 TERMINATION PLAN PROVISIONS APPLICABLE TO EXECUTIVE OFFICERS
(a) The provisions of this Plan shall apply to the Employer's Executive
Officers (except the Chairman and Chief Executive Officer) with the
modifications as provided in this Section 2.5. An Executive Officer
is a Covered Employee who is designated as an Executive Officer by the
Employer's Board of Directors.
(b) Executive Officers shall be eligible for coverage under this Section
in the following situations:
(1) immediately upon completing two years of service as an
Executive Officer; or
(2) prior to completing two years of service as an Executive
Officer immediately upon designation as such by the Employer's
Board of Directors in its sole discretion.
2/5
<PAGE>
(c) Subject to Section 2.7, any eligible Executive Officer, whose active
employment with the Employer is terminated, is eligible to receive a
Termination Plan Allowance as provided below:
(1) An eligible Executive Officer with two or more years of
service as an Executive Officer on October 26, 1995 shall
receive a Termination Plan Allowance of salary and benefits
for a period of one (1) year beginning on the day following
termination of employment.
(2) Any other eligible Executive Officer shall receive a
Termination Plan Allowance of salary and benefits for a period
of up to one (1) year beginning on the day following
termination of employment as determined by the Employer's
Board of Directors in its sole discretion, but in no event for
less than the period of time described in Section 2.2(a).
(d) In addition to any other event of cessation of the Termination Plan
Allowance provided in Section 2.6, an Executive Officer's Allowance
shall be offset by any salary or wages received by the former
Executive Officer from any employer during the Termination Allowance
Period during which the full Allowance would have been payable.
2.6 CESSATION OF TERMINATION PLAN ALLOWANCE
A Covered Employee's Termination Plan Allowance shall cease as of the
earliest of the date:
(a) described in the Schedule in Section 2.2(a), or
(b) upon which he retires with an immediate retirement benefit under the
RCAP or other qualified retirement plan of the Employer, or
2/6
<PAGE>
(c) of his re-employment by the Employer.
2.7 LIMITATIONS
Notwithstanding any Plan provision to the contrary, the right to payment of
any and all benefits described under this Plan to an eligible Covered
Employee is subject to:
(a) the eligible Covered Employee completing and signing any and all
forms, including any waivers and releases relating to employment,
currently in use by the Plan Administrator and/or Employer
("Release"); and
(b) the Plan Administrator and/or Employer's timely receipt of such
Release; and
(c) compliance with any statutory or regulatory waiting and revocation
period ("Waiver Period").
Upon satisfaction of the above requirements, payments will be made in
accordance with Plan terms.
The Waiver Period is the period of time which begins on the day following
the Covered Employee's termination of employment date and ends on the
eighth day after the date on which the Covered Employee signs the Release
referred to in Section 2.7(a) above. Notwithstanding any Plan provision to
the contrary, the Waiver Period shall not extend:
(d) beyond 53 days after the Covered Employee's termination of employment
date if such termination is part of a program involving 2 or more
employees; or
(e) beyond 29 days after the Covered Employee's termination of employment
date if such termination is not part of a program involving 2 or more
employees.
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ARTICLE 3
OTHER EMPLOYEE BENEFITS
3.1 TERMINATION PLAN ALLOWANCE PERIOD
During the period a Covered Employee is receiving salary continuation under
the Termination Plan, the Employer sponsored employee benefit plans, as
described in Sections 3.2 through 3.9, shall be provided to such Covered
Employee if said plans are maintained by the Employer during such period
and if such Covered Employee was a participant in such plan on the last
day of employment. The benefits under said plans are subject to the terms
and conditions set forth in the plan document of each such plan.
3.2 RETIREMENT AND CAPITAL ACCUMULATION PLAN
(a) During the period of time for which a Covered Employee receives a
Termination Plan Allowance:
(i) such Covered Employee shall continue to accrue "vesting
service" as defined under the RCAP, and
(ii) the Employer shall continue to make monthly contributions to
such Covered Employee's RCAP account based on his Termination
Plan Allowance.
(b) A Covered Employee shall not be considered to have a "severance date"
as defined under the RCAP until the date immediately following the
cessation of his Termination Plan Allowance.
3/8
<PAGE>
3.3 HEATH CARE PLAN.
(a) A Covered Employee shall continue to participate in the Employer's
Health Care Plan as if he was actively employed during the period such
Covered Employee receives a Termination Plan Allowance.
(b) A Covered Employee shall no longer be considered actively employed for
purposes of the Employer's Health Care Plan as of the date immediately
following the cessation of his Termination Plan Allowance, except that
a Covered Employee who is a member of a Health Maintenance
Organization ("HMO") shall continue his coverage under such HMO until
the end of the month in which his Termination Plan Allowance ceases.
(c) Upon the cessation of participation in the Employer's Health Care Plan
described in subsection (b), a Covered Employee may elect to continue
coverage under the Health Care Plan as required by the Consolidated
Omnibus Budget Reconciliation Act of 1985. As provided in the Health
Care Plan, continuation coverage may be available through an
individual policy at the Covered Employee's cost.
3.4 EMPLOYEE AND SPOUSE LIFE AND ACCIDENTAL DEATH PLAN
(a) A Covered Employee may continue to purchase life insurance and/or
accidental death coverage under the Employer's Life and Accidental
Death Plan, covering himself and/or his spouse during the period such
Covered Employee receives a Termination Plan Allowance, however,
coverage cannot be increased during such period.
(b) Coverage under such plan ends at the end of the month in which the
Covered Employee's Termination Plan Allowance ceases.
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<PAGE>
(c) Conversion privileges for extended coverage at the Covered Employee's
cost are available pursuant to the provisions of the Life and
Accidental Death Plan applicable to terminated employees.
3.5 DISABILITY INCOME PLAN
(a) If a Covered Employee is receiving benefits under the Disability
Income Plan on his termination of employment date, those benefits
shall continue as provided under the Disability Income Plan.
(b) Notwithstanding any Termination Plan provision to the contrary, a
Covered Employee shall not be eligible to participate in the
Disability Income Plan during any time in which he is receiving a
Termination Allowance under this Plan.
3.6 BENEFIT BANK
(a) A Covered Employee shall be eligible to continue deposits under the
Employer's Benefit Bank through the end of the month in which his
Termination Plan Allowance ceases.
(b) Eligible expenses under the Benefit Bank will qualify for
reimbursement during the calendar year in which deposits were made.
Reimbursement of eligible expenses shall be limited to the amount of
deposits made during the calendar year.
3.7 VACATION
(a) Regular vacation time not taken in the year of termination of
employment shall be paid to a Covered Employee when his Termination
Plan Allowance ceases.
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(b) Payments received pursuant to subsection (a) do not extend "continuous
service" under any Employer sponsored employee benefit plan.
(c) No contributions for "optional vacation" shall be made by a Covered
Employee upon his termination from employment.
(d) Contributions made by a Covered Employee for unused optional vacation
days shall be refunded by the Employer upon the cessation of his
Termination Plan Allowance.
3.8 EMPLOYEE COMMON STOCK OWNERSHIP PLAN ("ESOP") AND ESOP EXCESS BENEFIT PLAN
(a) A Covered Employee shall continue to be a participant in the
Employer's ESOP and ESOP Excess Benefit Plan while receiving a
Termination Plan Allowance.
(b) A Covered Employee's Termination Plan Allowance shall be included in
the calculation for allocation of common stock under such plans
through the end of the calendar year in which his Termination Plan
Allowance ceases.
(c) For purposes of receiving a distribution from the ESOP and ESOP Excess
Benefit Plan, a Covered Employee is not considered to have incurred a
Termination of Service until his Termination Plan Allowance ceases.
3/11
<PAGE>
ARTICLE 4
CONTRIBUTIONS
4.1 NO EMPLOYEE CONTRIBUTIONS
No contributions shall be made to this Plan by the Covered Employee.
4.2 NO TRUST CREATED
Unless otherwise required by ERISA or the Code, no assets of the Employer
shall be specifically set aside for the payment of any benefits under the
Plan. The Plan does not create a trust in favor of a Covered Employee or
any person claiming on the Covered Employee's behalf, and the obligations
of the Employer are solely contractual obligations to make payments due
hereunder. The obligation to make a benefit payable under the Plan shall
be considered a liability of the Employer, and the Covered Employee's right
thereto shall be the same as that of any unsecured general creditor of the
Employer. Neither a Covered Employee nor any other person shall, pursuant
to the Plan, acquire any right, title or interest in or to any asset of the
Employer other than the right to the actual payment of benefits in
accordance with the terms of the plan.
4/12
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ARTICLE 5
GENERAL PROVISIONS
5.1 GENERAL PROVISIONS
The Republic Engineered Steels, Inc. General Welfare Plan provisions are
hereby Incorporated by reference.
5.2 ADMINISTRATION
The Employer shall be designated as the Plan Administrator. The general
administration of the Plan and the responsibility for carrying out the
provisions of the Plan shall be placed with the Plan Administrator. In
providing for the administration of the Plan, the Plan Administrator may
delegate responsibilities for the operation and administration of the Plan
by written document filed in the Plan records.
5.3 ESTABLISHMENT OF RULES
Subject to the limitations of the Plan, the Plan Administrator from time to
time shall establish rules for the administration of the Plan and the
transaction of its business. The Plan Administrator shall have
discretionary authority to interpret the Plan. The determination of the
Plan Administrator as to any disputed question shall be conclusive and
final to the extent permitted by applicable law.
5.4 TAXES
The Employer may withhold from any payment due under this Plan any taxes
required to be withheld under applicable federal, state or local tax laws
or regulations.
5/13
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ARTICLE 6
EXECUTION
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the foregoing,
Republic Engineered Steels, Inc. has caused its corporate seal to be affixed
hereto and has caused the Plan to be duly executed in its name and on it behalf
by its proper officers duly authorized this 24th day of January, 1997, as of
January 23, 1997..
ATTEST: REPUBLIC ENGINEERED STEELS, INC.:
/s/ James D. Donahue /s/ James Burns Riley
- ------------------------------ -----------------------------------
6/14
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REPUBLIC ENGINEERED STEELS, INC.
CHANGE OF CONTROL AGREEMENT
AGREEMENT, made this _____ day of June, 1998 by and between ___________
("Executive") and Republic Engineered Steels, Inc. (the "Company").
W I T N E S S E T H
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that it is in the best interests of the Company and its shareholders
for the Company to agree to provide benefits under circumstances described below
to Executive; and
WHEREAS, the Board recognizes that the possibility of a change of
control of the Company, followed by a termination of the Executive's employment
or a reduction in his responsibility or compensation, is unsettling to the
Executive and wishes to make arrangements at this time to help assure his
continuing dedication to his duties to the Company and its shareholders,
notwithstanding any attempts by outside parties to gain control of the Company;
and
WHEREAS, the Board believes it important, should the Company receive
proposals from outside parties, to enable the Executive, without being
distracted by the uncertainties of his own employment situation, to perform his
regular duties;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the parties hereto agree as follows:
1. If, within 24 months following a Change of Control that occurs
at any time prior to the fifth anniversary of the date hereof, Executive's
employment with the Company or any successor thereto by merger or acquisition is
terminated (a) by the Company or successor other than for "Cause" (as defined in
paragraph 3 below) or as a result of the death or total disability, or (b) by
Executive for "Good Reason" (as defined in paragraph 3 below), then:
i. The Company will pay to Executive within 30 days of such
termination of employment a lump-sum cash payment equal
to the aggregate of (A) his then-current annual base
salary (or, if his base salary has been reduced at any
time after the Change of Control, his base salary in
effect prior to the reduction), which base salary shall
include for purposes of this Agreement any supplemental
amount payable under the Company's program known as
"Target 60," (B) the annual amount then paid by the
Company to lease an automobile for Executive or the
amount of any automobile allowance provided to
Executive, (C) the annual cost of life insurance then
furnished to him by the Company and (D) the annual cost
to the Company of any
<PAGE>
other benefits then provided to Executive that are not
required to be provided under this Agreement (including
without limitation under any cafeteria plan or other
supplemental benefit program) and the amount contributed
by the Company on behalf of the Executive for the
calendar year ending immediately prior to the
termination to any pension plan of the Company.
ii. All of Executive's outstanding stock options, restricted
shares and other similar incentive interests and rights
that have not vested but that would have vested had his
employment continued until the first anniversary of such
termination will become immediately and fully vested.
iii. Executive, together with his dependents, will continue
following such termination of employment to participate
fully, with no contribution to the cost required of him
or them, in all accident and health plans maintained or
sponsored by the Company immediately prior to the Change
of Control, or receive substantially the equivalent
coverage (or the full value thereof in cash) from the
Company, until the first anniversary of such
termination.
iv. The Company will promptly reimburse Executive for any
and all legal fees and expenses incurred by him as a
result of such termination of employment, including
without limitation all fees and expenses incurred in
connection with efforts to enforce the provisions of
this Agreement.
2. A Change of Control will occur for purposes of this Agreement if
a. any individual, corporation, partnership, company, or
other entity (a "Person"), which term shall include a
"group" (within the meaning of section 13(d) of the
Securities Exchange Act of 1934 (the "Act")) who does
not currently own directly or indirectly 20% or more of
the combined voting power of the Company's outstanding
securities becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Act) of securities of the Company
representing more than 20% of the combined voting power
of the company's then-outstanding securities.
b. the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation,
other than a merger or consolidation which would result
in the voting securities of the Company outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted
into voting securities of the surviving entity) at
least 80% of the combined voting power of the voting
securities of the Company or such surviving entity
outstanding immediately after such merger or
consolidation, or the stockholders approve a plan of
complete
2
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liquidation of the Company or an agreement for the sale
or disposition by the Company of all or substantially
all of the Company's assets; PROVIDED, HOWEVER, that if
the merger, plan of liquidation or sale of substantially
all assets is not consummated following such stockholder
approval and the transaction is abandoned, then the
Change of Control shall be deemed not to have occurred.
c. the Board of Directors of the Company is no longer
selected in accordance with the qualification standards
(the "Qualification Standards") set forth in the
Certificate of Incorporation as in effect on the date
hereof and a change occurs in its composition that
results in fewer than a majority of the directors being
Continuing Directors, which term shall mean for purposes
of this Agreement, persons who either (i) were Group C
Directors selected in accordance with the Qualification
Standards or (ii) are elected, or nominated for
election, with the affirmative vote of at least a
majority of the directors of the Company who are
Continuing Directors described in clause (i) or this
clause (ii) of this sentence or at the time of such
election or nomination.
d. the Company shall after the date of this Agreement issue
common stock in an aggregate amount equal to or greater
than 35% of the number of shares of common stock
outstanding on the date of this Agreement (after making
such adjustments as are appropriate to account for stock
splits, reverse stock splits, stock dividends or other
similar events) or the Company shall after the date of
this Agreement otherwise issue voting securities or
securities convertible into voting securities that give
the holder thereof, assuming full conversion of the
convertible securities, combined voting power that in
the aggregate is equal to or greater than 35% of the
voting power of the Company's common stock on the date
of this Agreement (after making such adjustments as are
appropriate to account for stock splits, reverse stock
splits, stock dividends or other similar events).
3. a. "Cause" means only:
(i) the Executive's willful and substantial
misconduct with respect to the business and
affairs of the Company, or any subsidiary or
affiliate thereof;
(ii) the Executive's gross neglect of duties,
dishonesty, deliberate disregard of any material
rule or policy of the Company or the commission
by the Employee of any other action with the
intent to injure the Company, or any subsidiary
or affiliate thereof;
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<PAGE>
(iii) the Executive's commission of an act involving
embezzlement or fraud or commission of a similar
felony.
b. "Good Reason" means any one or more of the following
occurring without Executive's express written consent:
(i) Failure by the Company to maintain Executive in
substantially equivalent positions, with
substantially equivalent titles, that he held
immediately prior to the Change of Control or
downgrading of his responsibilities or
authority. If, following the Change of Control,
the Company is part of a controlled group of
entities, Executive's responsibilities and
authority will be deemed for this purpose to
have been reduced unless he is given and retains
the same responsibilities and authority with the
entity that controls the group as he held with
the Company immediately prior to the Change of
Control.
(ii) Reduction of Executive's base salary.
(iii) Material reduction in the health, disability or
life insurance benefits that the Company was
providing Executive immediately prior to the
Change of Control.
(iv) Failure by the Company to provide Executive with
the opportunity to participate in any executive
compensation or benefit plan or program that is
then generally available to other senior
executives of the Company.
(v) Relocation of Executive's principal place of
business more than 30 miles from the its
location immediately prior to the Change of
Control.
4. In the event that it is determined that any payment or benefit
provided by the Company to or for the benefit of Executive, either under this
Agreement or otherwise, will be subject to the excise tax imposed by section
4999 of the Internal Revenue Code or any successor provision ("section 4999"),
the Company will, prior to the date on which any amount of the excise tax must
be paid or withheld, make an additional lump-sum payment (the "gross-up
payment") to Executive. The gross-up payment will be sufficient, after giving
effect to all federal, state and other taxes and charges (including interest and
penalties, if any) with respect to the gross-up payment, to make Executive whole
for all taxes (including withholding taxes) and any associated interest and
penalties, imposed under or as a result of section 4999.
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<PAGE>
All determinations to be made under this paragraph 4 shall be made at
the Company's cost and expense by the firm that serves as the Company's
independent public accountant immediately prior to the Change of Control, or if
such firm is unwilling or unable to make such determination by such other
certified public accounting firm reasonably acceptable to the Company as may be
designated by the Executive in writing (in either case, the "Firm"), which shall
provide reasonable supporting calculations to the Company and the Executive. If
the Internal Revenue Service asserts a claim that, if successful, would require
the Company to make a gross-up payment or an additional gross-up payment, the
Company and Executive will cooperate fully in resolving the controversy with the
Internal Revenue Service. The Company will make or advance such gross-up
payments as are necessary to prevent Executive from having to bear the cost of
payments made to the Internal Revenue Service in the course of, or as a result
of, the controversy. The Firm will determine the amount of such gross-up
payments or advances and will determine after final resolution of the
controversy whether any advances must be returned by Executive to the Company.
The Company will bear all expenses of the controversy and will gross Executive
up for any additional taxes that may be imposed upon Executive as a result of
its payment of such expenses.
5. If the Company fails to timely make any payment to the Executive
that is required to be made hereunder, the amount not timely paid shall bear
interest after the date it is due hereunder at the rate of 18% per annum until
it is paid.
6. Within ten (10) days after a Change of Control Date, the
Company shall deposit in a trust designed in accordance with Revenue Procedure
92-64 or any successor thereto having a trustee independent of the Company and
any successor thereto an amount equal to the total amount necessary to make the
payments contemplated by paragraph 1. The Executive shall be entitled to
receive funds held in such trust from the trustee upon the Executive's delivery
to the trustee of a written certification by the Executive that a termination of
his employment has occurred and that as a result, the Executive is entitled to
payment under paragraph 1 of this Agreement. Any funds which the Executive so
receives shall be credited against the amount owed by the Company to the
Executive pursuant to this agreement. The Company shall pay any and all
expenses of establishing and maintaining the trust.
7. If the Company is at any time before or after a Change of
Control merged or consolidated into or with any other corporation or other
entity (whether or not the Company is the surviving entity), or if substantially
all of the assets thereof are transferred to another corporation or other
entity, the provisions of this Agreement will be binding upon and inure to the
benefit of the corporation or other entity resulting from such merger or
consolidation or the acquirer of such assets, and this paragraph 7 will apply in
the event of any subsequent merger or consolidation or transfer of assets.
In the event of any merger, consolidation, or sale of assets
described above, nothing contained in this Agreement will detract from or
otherwise limit Executive's right to participate or privilege of participation
in any stock option or purchase plan or any bonus, profit sharing,
5
<PAGE>
pension, group insurance, hospitalization, or other incentive or benefit plan or
arrangement which may be or become applicable to executives of the corporation
resulting from such merger or consolidation or the corporation acquiring such
assets of the Company.
In the event of any merger, consolidation or sale of assets
described above, references to the Company in this Agreement shall unless the
context suggests otherwise be deemed to include the entity resulting from such
merger or consolidation or the acquirer of such assets of the Company.
8. All payments required to be made by the Company hereunder to
Executive or his dependents, beneficiaries, or estate will be subject to the
withholding of such amounts relating to tax and/or other payroll deductions as
may be required by law.
9. There shall be no requirement on the part of the Executive to
seek other employment or otherwise mitigate damages in order to be entitled to
the full amount of any payments and benefits to which Executive is entitled
under this Agreement, and the amount of such payments and benefits shall not be
reduced by any compensation or benefits received by Executive from other
employment.
10. Nothing contained in this Agreement shall be construed as a
contract of employment between the Company and the Executive, or as a right of
the Executive to continue in the employ of the Company, or as a limitation of
the right of the Company to discharge the Executive with or without Cause; the
Executive may, subject to the terms and conditions of this Agreement, have the
right to receive upon termination of his employment the payments and benefits
provided in this Agreement and shall not be deemed to have waived any rights he
may have either at law or in equity in respect of such discharge.
11. In consideration, among other things, for the provisions of
paragraph 9 hereof, the Executive agrees that during a period commencing on the
date (the "Date of Termination") Executive's employment with the Company is
terminated in a manner that entitles Executive to the payments and benefits
described in paragraph 1 hereof and ending one year thereafter (the "Covenant
Period"), the Executive will not, directly or indirectly, own, manage, operate,
control or participate in the ownership, management, operation or control of, or
be connected as an officer, employee, partner, director or otherwise with, or
(other than through the ownership of not more than five percent (5%) of the
voting stock of any publicly held corporation) have any financial interest in,
or aid or assist anyone else in the conduct of, a business which at the time of
such termination competes in the United States with a business conducted by the
Company or by any group, division or subsidiary of the Company (collectively
with the Company, the "Company Group") on the Date of Termination.
Notwithstanding the foregoing, employment of Executive by a business that
competes with the business of the Company Group, or retention of Executive as a
consultant by any such business shall not violate this paragraph if Executive's
duties and actions for the business are solely for groups, divisions or
subsidiaries that are not engaged in a business that competes with a business
conducted by the Company Group. No
6
<PAGE>
business shall be deemed to be a business conducted by the Company Group unless
the Company Group was engaged in the business at the Date of Termination and
continues to be engaged in the business and at least twenty-five percent (25%)
of the Company's consolidated gross sales and operating revenues, or net income,
is derived from, or at least twenty-five percent (25%) of the Company's
consolidated assets are devoted to, such business and no business shall be
deemed to compete with a business conducted by the Company Group unless at least
twenty-five percent (25%) of the consolidated gross sales and operating
revenues, or net income, of any consolidated group that includes the business,
is derived from, or at least twenty-five percent (25%) of the consolidated
assets of any such consolidated group are devoted to, such business.
12. During the Covenant Period, Executive shall not solicit on
behalf of himself or any other person the services, as employee, consultant or
otherwise, of any person who on the Date of Termination is employed by the
Company Group, whether or not such person would commit any breach of his
contract of service in leaving such employment, except for any employee (a)
whose employment is terminated by the Company Group or any successor thereof
prior to such solicitation of such employee, (b) who initiates discussions
regarding such employment without any solicitation by Executive, (c) who
responds to any public advertisement unless such advertisement is designed to
target, or has the effect of targeting, employees of the Company Group, or (d)
who is initially solicited for a position other than by Executive and without
any suggestion or advice from Executive. Nothing herein shall restrict
businesses which employ Executive or retain him as an executive from soliciting
from time to time employees of the Company Group, if (x) such solicitation
occurs in the ordinary course of filling the business's employment needs, and
(y) the solicitation is made by persons at the business other than Executive who
have not become aware of the availability of any specific employees as a result
of the advice of Executive.
13. Paragraphs 11 and 12 shall be of no force or effect if
Executive's employment is terminated and he is not as a result thereof entitled
to any payments or benefits under paragraph 1 hereof or if, within twenty (20)
days after the date of the termination of his employment, he waives his right to
such payments and benefits in writing.
14. It shall be a condition to Executive's right to receive any
payments under paragraph 1 hereof that Executive shall have executed and
delivered to the Company after the termination of his employment a release in
substantially the form attached hereto as Exhibit A, as such form may be changed
by the Company to reasonably account for changes in any applicable law, and that
any applicable waiting periods for the effectiveness of the release shall have
elapsed and expired.
15. No amendment, change, or modification of this Agreement may be
made except in writing, signed by both parties.
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<PAGE>
16. Payments made by the Company pursuant to this Agreement shall be
in lieu of payments and other benefits, if any, to which Executive may be
entitled under any other severance agreement or severance plan of the Company.
17. The provisions of this Agreement shall be binding upon and shall
inure to the benefit of Executive, his executors, administrators, legal
representatives and assigns, and the Company and its successors.
18. The validity, interpretation, and effect of this Agreement shall
be governed by the laws of the State of Delaware.
19. The Company shall have no right of set-off or counterclaims, in
respect of any claim, debt, or obligation, against any payments to Executive,
his dependents, beneficiaries or estate provided for in this Agreement.
20. The invalidity or unenforceability of any provisions of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
21. No right or interest to or in any payments or benefits hereunder
shall be assignable by the Executive; provided, however, that this provision
shall not preclude him from designating one or more beneficiaries to receive any
amount that may be payable after his death and shall not preclude the legal
representative of his estate from assigning any right hereunder to the person or
persons entitled thereto under his will or, in the case of intestacy, to the
person or persons entitled thereto under the laws of intestacy applicable to his
estate. The term "beneficiaries" as used in this Agreement shall mean a
beneficiary or beneficiaries so designated to receive any such amount, or if no
beneficiary has been so designated, the legal representative of the Executive's
estate.
22. No right, benefit, or interest hereunder, shall be subject to
anticipation, alienation, sale, assignment, encumbrance, charge, pledge,
hypothecation, or set-off in respect of any claim, debt, or obligation, or to
execution, attachment, levy, or similar process, or assignment by operation of
law. Any attempt, voluntary or involuntary, to effect any action specified in
the immediately preceding sentence shall, to the full extent permitted by law,
be null, void, and of no effect.
IN WITNESS WHEREOF, Republic Engineered Steels, Inc. and Executive have
each caused this Agreement to be duly executed and delivered as of the date set
forth above.
REPUBLIC ENGINEERED STEELS, INC.
By:
Title:
Agreed:
- -------------------------
8
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EXHIBIT A
RELEASE
In consideration of the payments the undersigned Executive is to receive
under the Change of control Agreement dated as of June __, 1998 between
Executive and Republic Engineered Steels, Inc. (the "Company"), Executive does
for himself, his heirs, executors and assigns, forever release and discharge
Company, its stockholders, directors, officers, employees, agents and
representatives, successors and assigns (hereafter collectively the "Persons")
from any claims Executive may now have, or will have, against them in connection
with his employment or termination from employment with the Company. Executive
confirms and agrees that it is his intention by this general release to release
the Persons from any and all claims, demands, damages, actions, grievances or
suits of any and every nature, known or unknown, from the commencement of his
employment with the Company to the date of this release, including, but not
limited to, claims arising under federal or state statutes, including claims
brought under the Age Discrimination in Employment Act, as amended, 29 U.S.C.
Sections 621-634, the Americans with Disabilities Act, as amended, 42 U.S.C.
Sections 12101 ET SEQ., Title VII of the Civil Rights Act of 1964, as amended,
42 U.S.C. Sections 2000e ET SEQ., the Civil Rights Act of 1991, 42 U.S.C.
Sections 1981 ET SEQ., the Labor Management Relations Act of 1947, as amended,
29 U.S.C. Sections 141 ET SEQ., or at common law, for wrongful discharge, breach
of contract, or any other claims growing out of any legal restriction on the
Company's right to terminate its employees and further including, without
limitation, any claim for disability compensation, bonuses, vacation or
severance pay. Notwithstanding the foregoing, this general release shall not
release the Company from its obligations under the Change of Control Agreement.
THIS RELEASE AFFECTS CERTAIN RIGHTS EXECUTIVE MAY HAVE UNDER THE AGE
DISCRIMINATION IN EMPLOYMENT ACT, AS AMENDED, AND THEREFORE, EXECUTIVE SHOULD
CONSULT WITH AN ATTORNEY BEFORE EXECUTING THIS RELEASE. By executing this
Release, Executive certifies that in accordance with 29 U.S.C. Section
626(f), Executive has carefully read the foregoing Release, knows and
understands the contents and effects thereof, and is executing this Release
knowingly, voluntarily, freely and after the opportunity for consultation
with counsel. Executive further certifies that the Company has given
Executive the opportunity to consider this Release for a period of twenty-one
days prior to its execution, and that neither the Company, nor any of its
officers, directors, stockholders, employees, agents, representatives,
affiliates, subsidiaries, parent or holding companies, successor or assigns,
nor any of its officers, employees, agents or representatives have made any
representations concerning the terms, conditions or effects of this Release
other than those contained herein. Furthermore, the parties acknowledge that
this Release may be revoked by Executive within seven (7) days following the
execution hereof, by sending written notice of revocation via certified mail
to the Company, in which case the Company shall have no obligation hereunder.
9
<PAGE>
RATIO OF EARNINGS
TO FIXED CHARGES
EXHIBIT 12.1
57
<PAGE>
EXHIBIT 12.1
REPUBLIC ENGINEERED STEELS, INC.
RATIO OF EARNINGS TO FIXED CHARGES
FOR FISCAL YEARS ENDING JUNE 30, 1994, 1995, 1996 1997 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1994 FISCAL 1995 1996 1997 FISCAL 1998
--------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
RATIO OF EARNINGS TO FIXED CHARGES........................... -- -- -- -- --
COVERAGE DEFICIENCY.......................................... $ 27,602 $ 7,212 $ 55,566 $ 56,888 $ 1,277
</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 1.19x, 2.85x, (0.21)x,
0.07x and 1.59, respectively.
58
<PAGE>
ACCOUNTANT'S REPORT ON SCHEDULES AND CONSENT
The Board of Directors
Republic Engineered Steels, Inc.:
The audits referred to in our report dated July 31, 1998, included the
related financial statement schedules as of June 30, 1998, and for each of the
years in the three-year period ended June 30, 1998, 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 July 31,
1998 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.
[SIG]
KPMG Peat Marwick LLP
Pittsburgh, PA
September 3, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 22,675
<SECURITIES> 0
<RECEIVABLES> 74,208
<ALLOWANCES> 1,575
<INVENTORY> 155,800
<CURRENT-ASSETS> 262,258
<PP&E> 302,624
<DEPRECIATION> 137,828
<TOTAL-ASSETS> 636,995
<CURRENT-LIABILITIES> 103,121
<BONDS> 273,922
0
2
<COMMON> 197
<OTHER-SE> 101,272
<TOTAL-LIABILITY-AND-EQUITY> 636,995
<SALES> 802,632
<TOTAL-REVENUES> 802,632
<CGS> 712,666
<TOTAL-COSTS> 712,666
<OTHER-EXPENSES> 64,890
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,353
<INCOME-PRETAX> (1,277)
<INCOME-TAX> (373)
<INCOME-CONTINUING> (904)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (904)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1998 JUN-30-1998
<PERIOD-START> JUL-01-1996 JUL-01-1997 JUL-01-1997
<PERIOD-END> JUN-30-1997 DEC-31-1997 MAR-31-1998
<CASH> 6,412 410 8,436
<SECURITIES> 0 0 0
<RECEIVABLES> 77,220 70,884 83,942
<ALLOWANCES> 1,624 3,146 1,575
<INVENTORY> 151,708 169,156 160,011
<CURRENT-ASSETS> 245,140 246,118 259,897
<PP&E> 313,235 304,750 302,847
<DEPRECIATION> 114,944 125,731 131,737
<TOTAL-ASSETS> 632,934 632,075 642,573
<CURRENT-LIABILITIES> 108,400 99,697 110,881
<BONDS> 273,939 279,731 273,926
0 0 0
2 2 2
<COMMON> 197 197 197
<OTHER-SE> 85,055 86,118 89,709
<TOTAL-LIABILITY-AND-EQUITY> 632,934 632,075 642,573
<SALES> 753,535 380,509 597,979
<TOTAL-REVENUES> 753,535 380,509 597,979
<CGS> 691,318 343,126 534,718
<TOTAL-COSTS> 691,318 343,126 534,918
<OTHER-EXPENSES> 92,285 41,156 58,863
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 26,820 13,147 19,781
<INCOME-PRETAX> (56,888) (16,920) (15,583)
<INCOME-TAX> (22,569) (3,884) (3,117)
<INCOME-CONTINUING> (34,319) (13,536) (12,466)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (34,319) (13,536) (12,466)
<EPS-PRIMARY> (1.74) (0.69) (0.63)
<EPS-DILUTED> (1.74) (0.69) (0.63)
</TABLE>
