<PAGE> 1
FORM 10-QA
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarter ended December 31, 1998 Commission File Number: 0-25900
-----------
REPUBLIC ENGINEERED STEELS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-1635079
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3770 EMBASSY PARKWAY
AKRON, OHIO 44333 (330) 670-3000
- ---------------------------------------- -------------------------------
(Address of principal executive offices) (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
----- -----
None of the voting securities of Republic Engineered Steels, Inc.
are held by non-affiliates.
<PAGE> 2
REPUBLIC ENGINEERED STEELS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements Page No.
<S> <C> <C>
Condensed Consolidated Statements of Operations for the Three Month Periods
Ended December 31, 1998 and 1997 3
Condensed Consolidated Statements of Operations for the Period from
September 8, 1998 to December 31, 1998, the Period from July 1, 1998
to September 7, 1998 and the Six Month Period Ended December 31, 1997 4
Condensed Consolidated Balance Sheets as of December 31, 1998 and June 30, 1998 5 - 6
Condensed Consolidated Statements of Cash Flows for the Period from
September 8, 1998 to December 31, 1998, the Period from July 1, 1998
to September 7, 1998 and the Six Month Period ended December 31, 1997 7
Notes to Condensed Consolidated Financial Statements 8 - 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14 - 18
Item 3. Quantitative & Qualitative Disclosures About Market Risk 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submissions of Matters to a Vote of Security Holders 19
Item 5. Other Information 19 - 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
Note 1 (c)
------------------------
Three Month Period Three Month Period Ended
Ended December 31, 1998 December 31, 1997
----------------------- ------------------------
<S> <C> <C>
Net sales $ 147,506 $ 165,456
Cost of products sold (including depreciation of $5,661
and $6,163, respectively) 139,889 147,725
--------- ---------
Gross profit 7,617 17,731
Selling expenses 2,496 1,703
General and administrative expenses 13,090 8,241
Postretirement benefits charges 1,793 3,427
Non-cash ESOP charges -- 6,881
Other charges (credits), net:
Interest expense 13,797 6,891
Interest income (148) (145)
Miscellaneous, net (126) (63)
--------- ---------
Loss from continuing operations
before income taxes (23,285) (9,204)
Income tax benefit -- 1,840
--------- ---------
Loss from continuing operations (23,285) (7,364)
Income from discontinued operations, net of
income tax expense of $383 (Note 4) -- 1,534
--------- ---------
Net loss $ (23,285) $ (5,830)
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO
DECEMBER 31, 1998, THE PERIOD FROM JULY 1, 1998 TO
SEPTEMBER 7, 1998 AND THE SIX MONTH PERIOD ENDED
DECEMBER 31, 1997
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY (Note 1(c))
-------------------------------------
Period from
September 8, Period from Six Month
1998 to July 1, 1998 to Period Ended
December 31, September 7, December 31,
1998 1998 1997
------------ --------------- ------------
<S> <C> <C> <C>
Net sales $ 200,719 $ 102,955 $ 323,031
Cost of products sold (including depreciation of
$7,504, $4,178 and $12,309, respectively) 190,379 97,883 290,249
--------- --------- ---------
Gross profit 10,340 5,072 32,782
Selling expenses 3,086 1,216 3,383
General and administrative expenses 17,426 17,023 15,098
Postretirement benefits charges 2,389 2,082 6,853
Non-cash ESOP charges -- -- 13,569
Other charges (credits), net:
Interest expense 16,471 4,588 13,781
Interest income (208) (236) (278)
Miscellaneous, net (240) (153) (169)
--------- --------- ---------
Loss from continuing operations
before income taxes (28,584) (19,448) (19,455)
Income tax benefit -- -- 3,896
--------- --------- ---------
Loss from continuing operations (28,584) (19,448) (15,559)
Income (loss) from discontinued operations, net of
income tax expense of $0 and $512,
respectively (Note 4) -- (298) 2,023
--------- --------- ---------
Net loss $ (28,584) $ (19,746) $ (13,536)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,1998 AND JUNE 30, 1998
(In thousands of dollars)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------
December 31, June 30,
1998 1998
------------ -------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,760 $ 22,675
Receivables, less allowance for doubtful accounts of
$1,594 and $1,575, respectively 48,437 61,038
Receivables due from affiliate (Note 5) 12,519 --
Inventories (Note 2) 151,443 124,955
Prepaid expenses 7,293 2,844
Deferred income taxes -- 7,902
Assets held for sale (Note 4) 29,872 42,440
Other current assets 4,753 404
-------- --------
Total current assets 258,077 262,258
-------- --------
Property, plant and equipment, net 261,957 290,721
Intangibles and other assets, net 9,625 24,471
Restricted cash 337 715
Deferred income taxes -- 46,927
Receivables due from affiliate, non-current (Note 5) 531 --
Assets held for sale (Note 4) 11,687 11,903
Excess purchase price over net assets acquired (Note 1(b)) 166,360 --
-------- --------
TOTAL ASSETS $708,574 $636,995
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,1998 AND JUNE 30, 1998
(In thousands of dollars)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------
December 31, June 30,
1998 1998
------------ -------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 68,200 $ --
Defined benefit pension obligation (Note 8) 62,001 --
Other current liabilities (Note 6) 103,330 103,121
--------- ---------
Total current liabilities 233,531 103,121
Long-term debt (Note 3) 293,521 273,922
Other postretirement benefits 95,712 131,256
Defined benefit pension obligation (Note 8) 4,848 12,178
Accrued environmental costs (Note 6) 13,057 13,746
Other liabilities 1,035 1,301
--------- ---------
Total liabilities 641,704 535,524
Commitments and contingencies (Notes 3,6,7 and 8) -- --
Stockholders' equity:
Special preferred stock, $.01 par value; one share
authorized, no share issued and outstanding at
December 31, 1998, one share issued and outstanding at
June 30, 1998, liquidation value of $1,500 -- 2
Common stock, $0.01 par value; authorized 27,000,000
shares: 19,706,578 shares issued and outstanding at
December 31, 1998 and 19,707,923 shares issued
at June 30, 1998 197 197
Additional paid-in-capital 95,257 275,270
Accumulated deficit (28,584) (173,990)
--------- ---------
66,870 101,479
Less treasury stock, at cost, no shares at December 31, 1998
and 1,345 shares at June 30, 1998 -- 8
--------- ---------
Total stockholders' equity 66,870 101,471
--------- ---------
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 708,574 $ 636,995
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM SEPTEMBER 8, 1998 TO DECEMBER
31, 1998, THE PERIOD FROM JULY 1, 1998 TO
SEPTEMBER 7, 1998 AND THE SIX MONTH PERIOD
ENDED DECEMBER 31, 1997
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------
Period from Period from Six Month
September 8, 1998 July 1, 1998 to Period Ended
to December 31, 1998 September 7, 1998 December 31, 1997
-------------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (28,584) $ (19,746) $ (13,536)
Adjustments to reconcile net cash provided by
(used in) operating activities:
Depreciation and amortization 12,760 4,934 14,565
Non-cash ESOP charges -- -- 14,759
Deferred income tax benefit -- -- (3,384)
Change in operating assets and liabilities:
(Increase) decrease in working capital 13,153 1,897 (20,821)
(Increase) decrease in other operating assets
and liabilities (13,469) 732 534
--------- --------- ---------
Total adjustments 12,444 7,563 5,653
--------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES (16,140) (12,183) (7,883)
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (5,178) (6,139) (4,936)
Acquisition, net of cash acquired (156,458) -- --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (161,636) (6,139) (4,936)
--------- --------- ---------
Cash flows from financing activities:
Net borrowings under revolving credit facility 13,700 -- 5,792
Proceeds from environmental financing -- -- 75
Proceeds from bridge loan 65,045 -- --
Capital contribution 95,455 -- --
Other financing activities, net 7,336 (312) 950
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 181,536 (312) 6,817
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,760 (18,634) (6,002)
Cash and cash equivalents-beginning of period -- 22,675 6,412
--------- --------- ---------
Cash and cash equivalents-end of period $ 3,760 $ 4,041 $ 410
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 14,820 $ 4 $ 13,147
========= ========= =========
Cash paid for income taxes $ -- $ -- $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE> 8
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER RELATED INFORMATION
(a) General
The condensed consolidated financial statements included herein have been
prepared by Republic Engineered Steels, Inc. ("Republic" or the "Company") and
are unaudited. Certain information and footnote disclosures normally prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. Although management believes that all adjustments, including normal
recurring adjustments, necessary for a fair presentation have been made, interim
periods are not necessarily indicative of the results of operations for a full
year. As such, the condensed consolidated financial statements of the
Predecessor Company (see further discussion below) should be read in conjunction
with the audited financial statements and notes thereto for the fiscal year
ended June 30, 1998, included in the Predecessor Company's Form 10-K, filed with
the Securities and Exchange Commission.
Republic is a major producer of special bar quality steel and specialty steel
bar products for the automotive, heavy equipment manufacturing, aerospace and
power generation industries. Special bar quality steel bars are higher quality
hot-rolled and cold-finished carbon and alloy steel bars, and specialty steels
are stainless, tool and vacuum re-melted steels. The Company is organized into
three operating divisions: hot-rolled, cold-finished and specialty steels. In
connection with the acquisition by RES Acquisition, as more fully described
below, the Company intends to sell its specialty steels division, and
accordingly, the accompanying condensed consolidated financial statements
reflect that division as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30. Pursuant thereto, all revenues and expenses
related to the specialty steels division have been segregated from continuing
operations of Republic for all periods presented.
The Company's principal customers are manufacturers in the automotive,
machinery, industrial equipment, machine and hand tools and aviation and
aerospace industries, as well as independent forgers who supply finished parts
to the aforementioned industries. The Company also has significant sales to
steel service centers.
(b) Organization
In 1989, the Company was formed to purchase substantially all of the assets of
LTV Steel Company Inc. ("LTV Steel") Bar Division. Until the initial public
offering in April 1995 of 8,050,000 shares of its common stock, the Company had
been wholly-owned by its employees through an employee common stock ownership
plan ("ESOP"). As of June 30, 1998, the ESOP held approximately 54% of all the
outstanding shares of common stock of the Company.
On September 8, 1998, Blackstone Management Associates II L.L.C. ("Blackstone")
and Veritas Capital Management, L.L.C. ("Veritas"), serving as general partners
for limited partnerships, acquired Republic in a cash tender offer of $7.25 for
each Republic common share (the "Acquisition"). RES Holding Corporation ("RES
Holding") and its wholly owned subsidiary, RES Acquisition Corporation ("RES
Acquisition") were formed for the purpose of acquiring Republic. The cash price
paid totaled approximately $160.5 million, including transaction related
expenses. The sources of funds contributed to RES Acquisition consisted of i.)
$95.5 million in a capital contribution by RES Holding from the issuance of its
common stock to Blackstone and its affiliates, Veritas and HVR Holdings, L.L.C.
and ii.) borrowings of approximately $65.0 million under a short term bridge
loan credit facility dated September 8, 1998 between RES Holding and Chase
Manhattan Bank, as Administrative Agent. Republic was acquired by RES
Acquisition on September 8, 1998 and subsequently, RES Acquisition was merged
with and into Republic on September 21, 1998.
8
<PAGE> 9
The Acquisition has been accounted for as a purchase and, pursuant to the
provisions of SEC Staff Accounting Bulletin No. 54 ("SAB No. 54") and the rules
of pushdown accounting, the Acquisition gave rise to a new basis of accounting.
Given the timing of the Acquisition, fair value analysis of the net assets
acquired, including appraisals of property and equipment, are not yet completed.
Based upon preliminary assessments through December 31, 1998, the purchase price
and related acquisition expenses exceeded net assets acquired by approximately
$178.0 million. Fair value adjustments, once finalized, may materially increase
or decrease this number. Pending completion of the fair value analysis, the
preliminary excess purchase price over the estimated value of the net assets
acquired is being amortized over 20 years. Upon completion of the fair value
analysis, adjustments will be made to depreciate the fair value of acquired
property, plant and equipment over their estimated useful lives and to amortize
goodwill over a period not to exceed 40 years.
In connection with the Acquisition, the Company has developed preliminary plans
to rationalize and discontinue operations at certain manufacturing locations,
and to eliminate certain general and administrative duties. Management is
conducting a detailed evaluation to finalize the timing and extent of the
further rationalization of the operations. Any adjustments arising from the
finalization of management's plans are expected to be reported as an adjustment
to the purchase price of the Acquisition.
As discussed in Note 8, the Company plans to reduce the hourly workforce through
voluntary retirement and severance programs. During the quarter ended December
31, 1998, 200 voluntary Early Retirement Buyout ("ERB") packages were accepted.
The actuarially determined costs associated with the accepted ERB's, $14.5
million, has been recorded during the quarter ended December 31, 1998 as an
increase in pension liabilities with a corresponding increase to the excess
purchase price over net assets acquired.
The condensed consolidated financial statements included in this Form 10-QA
have been revised from amounts previously reported to reflect the fair value of
refundable assets held in a health and welfare benefits trust at the date of
Acquisition. The adjustment resulted in an increase in other current assets
acquired with a corresponding decrease in the excess purchase price over the
net assets acquired. Miscellaneous income for the three month and year-to-date
periods ended December 31, 1998 has been reduced by $5.4 million from amounts
previously reported. This represents amounts recovered during the quarter,
which had previously been reported as miscellaneous income, rather than as a
revision to the preliminary purchase accounting. General and administrative
expenses for the three month and year-to-date periods have been decreased by
$0.1 million compared to amounts previously reported, to reflect the decrease
in amortization of the excess purchase price over net assets acquired. Interest
expense includes a reclassification for amortization of bank financing costs
previously reported in general and adminstrative expenses for the three months
ended December 31, 1998 and 1997 of $1.6 million and $0.3 million,
respectively, $1.7 million for the period September 8, 1998 to December 31,
1998, $0.2 million for the period from July 1, 1998 to September 7, 1998 and
$0.6 million for the six months ended December 31, 1997. The financial data
schedule included in Exhibit 27 has been revised to reflect such changes.
(c) Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements for the period from
September 8, 1998 to December 31, 1998 and as of December 31, 1998, reflect the
new basis of accounting of the Acquisition. Periods prior to September 8, 1998
(Predecessor Company) have been presented under the historical cost basis of
Republic.
The condensed consolidated financial statement includes the accounts of Republic
Engineered Steels, Inc. and its wholly owned subsidiaries, Nimishillen &
Tuscarawas Railway Company and The Oberlin Insurance Company. All significant
intercompany balances have been eliminated.
(d) Cash Equivalents
The Company considers all short-term investments with maturities at date of
purchase of three months or less to be cash equivalents.
(e) Inventories
Inventories are carried at the lower of cost or market with cost determined
using the last-in, first-out (LIFO) method. Inventories are stated net of assets
held for sale.
(f) Long-Lived Assets
Property, plant and equipment are recorded at cost less depreciation accumulated
to date. Depreciation is computed on the straight-line method over the estimated
useful lives of the assets; the range of useful lives is 39 years for buildings
and 3-30 years for machinery and equipment. Accelerated methods are used for
income tax purposes.
(g) Intangibles and Other Assets
Intangible assets consist primarily of deferred loan and bond fees, and in the
case of the Predecessor Company, an intangible asset related to the Company's
pension plan. The deferred loan and bond fees are being amortized on a
straight-line basis over the lives of the related debt instruments.
9
<PAGE> 10
(h) Income Taxes
The Company accounts for income taxes pursuant to the asset and liability
method. Under that method, deferred tax assets and liabilities are recognized
for the future consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled, and the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Income
taxes for the period subsequent to the Acquisition reflect the pushdown impact
on the consolidated tax position resulting from a change of control.
(i) Environmental Costs
The Company and other steel companies have in recent years become subject to
increasingly demanding environmental laws and regulations. It is the policy of
the Company to endeavor to comply with applicable environmental laws and
regulations. The Company established a liability for an amount which the Company
believes is adequate, based on information currently available, to cover costs
of remedial actions it will likely be required to take to comply with existing
environmental laws and regulations.
(j) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
In preparation of the condensed consolidated financial statements included
herein, the Company uses estimates for, among others, deferred income tax
benefits, defined benefit pension obligations, other postretirement benefit
obligations, environmental remediation and fair value adjustments related to the
Acquisition, all of which are significant to the condensed consolidated
financial statements taken as a whole. Changes in circumstances in the near term
could have an impact on these estimates, and the change in estimate could have a
material effect on the consolidated financial statements.
(k) Reclassifications
Certain previously reported amounts have been reclassified to conform to the
current presentation.
(2) INVENTORIES
In connection with the Acquisition, inventories at December 31, 1998 reflect a
new LIFO base cost as of September 8, 1998. Inventories of the Company at
December 31, 1998 and June 30, 1998 were as follows:
<TABLE>
<CAPTION>
(in thousands)
Predecessor
Company
-------------
December 31, 1998 June 30, 1998
---------------- -------------
<S> <C> <C>
Raw materials $ 11,426 $ 12,157
Finished and semi-finished product 138,639 111,093
Supplies, molds and stools 1,378 1,705
======== ========
$151,443 $124,955
======== ========
</TABLE>
10
<PAGE> 11
(3) LONG-TERM DEBT
Long-term debt of the Company consists of the following:
<TABLE>
<CAPTION>
(in thousands)
Predecessor
Company
-------------
December 31, 1998 June 30, 1998
----------------- -------------
<S> <C> <C>
9% Solid Waste Revenue Bonds, Series 1996, due June 1, 2021 $ 53,700 $ 53,700
8 1/4% Solid Waste Revenue Bonds, Series 1994, due October 1, 2014 20,200 20,200
9 7/8% First Mortgage Notes due December 15, 2001 203,615 200,000
Revolving Credit Agreement 13,700 --
Other 2,306 22
-------- --------
293,521 273,922
Less current maturities of long-term debt -- --
======== ========
$293,521 $273,922
======== ========
</TABLE>
The amended and restated Revolving Credit Agreement ("Revolving Credit
Agreement"), which expires April 25, 2000, permits borrowings up to $115 million
and is secured by the Company's receivables, inventories, stock of a subsidiary,
short-term investments and certain intangible assets. As of December 31, 1998
and June 30, 1998, amounts outstanding under the Revolving Credit Agreement were
$13.7 million and $0, respectively. The Acquisition has not adversely affected
the Company's ability to borrow under its Revolving Credit Agreement.
At December 31, 1998, the Company had letters of credit drawn under its
Revolving Credit Agreement of approximately $47.0 million, which served as
collateral for future funding obligations to the Pension Benefit Guarantee
Corporation. Subsequent to December 31, 1998, the letters of credit had been
reduced to $20.0 million following the Company's initial funding contribution.
Borrowings under the Revolving Credit Agreement bear interest at a per annum
rate equal to, at the Company's option, (i) the higher of the base rate of
BankBoston or 1/2 percent above the Federal funds effective rate, plus 1/2
percent; or (ii) LIBOR plus 2 1/2 percent. The borrowing base under the
Revolving Credit Agreement is the sum of 55 percent of "Eligible Inventory" up
to a maximum of $75 million and 85 percent of "Eligible Accounts Receivable."
Amounts available at December 31, 1998 under the Revolving Credit Agreement were
$40.4 million. Fees of 2 1/2 percent per annum on the maximum drawing amount of
each standby or documentary letter of credit are payable on the date of issuance
of such letter of credit. A commitment fee of 3/8 percent per annum on the
average unused portion of the facility is payable quarterly. The Revolving
Credit Agreement contains certain limited negative and affirmative covenants,
including failure to pay interest or principal when due, inaccurate or false
representations or warranties and limitations on restricted payments.
On October 28, 1994, the Ohio Water Development Authority issued $20.2 million
of 8 1/4% Solid Waste Revenue Bonds due 2014, on behalf of the State of Ohio, at
98% of face amount in connection with the solid waste disposal facilities
installed at the CAST-ROLLTM facility. Additionally, on June 1, 1996, the
Authority issued $53.7 million of 9.0% Solid Waste Revenue Bonds due June 1,
2021 in connection with the solid waste recycling facilities installed at the
CAST-ROLLTM facility. The proceeds of the 1996 Bonds were used to reduce
outstanding borrowings under the Revolving Credit Facility. As of December 31,
1998 the Company had available approximately $0.3 million from the 1996 Bonds
which is classified as restricted cash in the accompanying condensed
consolidated balance sheet, and zero from the 1994 Bonds.
The Company's $200 million 9 7/8% First Mortgage Notes ("Notes") mature on
December 15, 2001. As a result of the Acquisition, the Company was required by
the terms of the indenture to offer to purchase any and all of the Notes at a
purchase price of $1,010 per $1,000 principal amount, plus accrued and unpaid
interest (the "Change of Control Offer"). Such premium has been recorded as a
fair value adjustment to the liabilities assumed in the Acquisition with a
corresponding increase to the excess purchase price over net assets acquired.
11
<PAGE> 12
On October 5, 1998, the Company commenced the Change of Control Offer which
expired on November 5, 1998. Approximately $28.1 million principal amount of
Notes was tendered in accordance with the Change of Control Offer. The purchase
of the tendered Notes was assigned to affiliates of the Lenders (as defined
below).
On October 29, 1998, the Company commenced a new offer to purchase any and all
of the outstanding Notes at a purchase price of $1,042.30 per $1,000 principal
amount plus accrued and unpaid interest (the "Offer"). The Offer is scheduled to
expire on June 30, 1999. The Company is accruing the Offer premium over the
period of the Offer.
For the purpose of funding the Change of Control Offer and the Offer, the
Company entered into an additional senior credit facility (the "Bridge
Facility") with The Chase Manhattan Bank, DLJ Bridge Finance, Inc. and
BankBoston N. A. (the "Lenders") which provides for up to $208.5 million of
borrowings. In November 1999, any outstanding loans under the Bridge Facility
convert into long-term loans and accordingly, the Notes remain classified as
long-term in the accompanying condensed consolidated balance sheet as of
December 31, 1998.
The interest rate on borrowings under the Bridge Facility will be LIBOR
(adjusted to include statutory reserves) plus a margin, increased by 0.5% every
three months, subject to a maximum rate of 15.5% per annum. In the event of any
borrowings under the Bridge Facility, the Company will pay certain fees and RES
Holding will make available warrants to purchase a portion of the common equity
of RES Holding. Such fees are subject to partial refund if the Company
refinances the Bridge Facility. Any warrants will be initially held under
certain circumstances in escrow and all or a portion of such warrants may be
subsequently released to the Lenders or to the holders of the loans, or if the
loans are refinanced, returned to RES Holding. Through December 31, 1998, no
amounts have been borrowed under the Bridge Facility.
(4) DISCONTINUED OPERATIONS
In connection with the Acquisition, the Company intends to sell its specialty
steels division, and accordingly, the accompanying consolidated financial
statements reflect that division as discontinued operations in accordance with
Accounting Principles Board Opinion No. 30. All revenues and expenses related to
the specialty steels division since the Acquisition date have been reported as
adjustments to the purchase price of the Acquisition.
Summarized results of discontinued operations for the specialty steels division
are as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------------
Period From Six Month
Three Months Period From July 1, 1998 to Period Ended
Ended December 31, September 8, 1998 to September 7, December 31,
1998 1997 December 31, 1998 1998 1997
-------- -------- -------------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales $ 15,058 $ 27,551 $ 21,169 $ 14,533 $ 54,468
Gross profit (779) 3,624 (908) 410 5,871
Income (loss) before income taxes (1,775) 1,917 (2,281) (298) 2,535
Provision for income taxes -- 383 -- -- 512
-------- -------- -------- -------- --------
Net income (loss) $ (1,775) $ 1,534 $ (2,281) $ (298) $ 2,023
======== ======== ======== ======== ========
</TABLE>
The components of net assets of discontinued operations included in the
Company's balance sheet as assets held for sale are as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------
December 31, 1998 June 30, 1998
----------------- --------------------
<S> <C> <C>
Receivables $ 7,464 $11,595
Inventory 22,408 30,845
------- -------
Assets held for sale - current $29,872 $42,440
======= =======
Property, plant and equipment, net $11,687 $11,903
------- -------
Assets held for sale - non-current $11,687 $11,903
======= =======
</TABLE>
12
<PAGE> 13
(5) RELATED PARTY TRANSACTIONS
Blackstone Capital Partners II Merchant Banking Fund L. P. and its affiliates,
principal owners of both the Company and Bar Technologies Inc. and subsidiaries
("Bar Tech"), plan to combine the two companies, however, the proposed business
combination has not been completed to date. During the period September 8, 1998
to December 31, 1998, the Company purchased billet and bar products at market
prices from Bar Tech and its subsidiary, Bliss & Laughlin Steel Company,
totaling approximately $3.0 million.
In anticipation of the completion of the combination of the companies, the
Company and Bar Tech are combining sales, marketing and administrative efforts
in order to reduce overhead and improve customer service. The costs of such
services are borne ratably by each company based on their respective sales
volumes achieved through such joint efforts.
The Company participates in an inventory purchasing arrangement with Bar Tech.
Under the terms of this arrangement, the Company purchases inventory products on
behalf of Bar Tech and bills Bar Tech for these purchases plus an administrative
fee. A similar arrangement is in place with regards to insurance. The Company
purchases insurance policies for the combined company and bills Bar Tech for
their respective share. As of December 31, 1998, the Company recently completed
its negotiations for a two-year insurance contract for the combined company for
which the terms of payment included a third-party financing arrangement.
As a result of the above, the Company had a current receivable of approximately
$12.5 million and a non-current receivable of $.5 million due from Bar Tech at
December 31, 1998.
(6) ENVIRONMENTAL COMPLIANCE
The Company is subject to a broad range of federal, state and local
environmental laws and regulations, including those governing discharges into
the air and water, the handling and disposal of solid and hazardous wastes, and
the remediation of contamination associated with the disposal of waste. The
Company continuously monitors its compliance with such environmental laws and
regulations, and accordingly, believes that it is currently in substantial
compliance with such laws and regulations. As is the case with most steel
producers, the Company could incur significant costs related to environmental
compliance, in particular those arising from remediation costs for historical
waste disposal practices at certain of the Company's facilities. The Company
anticipates making expenditures of approximately $1.3 million, which are covered
by the Company's current reserve for environmental investigatory and control
measures during the next 12 months. The reserve to cover potential current and
non-current environmental liabilities was approximately $14.3 million and $14.4
million for December 31, 1998 and June 30, 1998, respectively, substantially all
of which is classified as a long-term obligation in the accompanying
consolidated balance sheets (except for anticipated expenditures during the next
twelve months).
The reserve has been established and is monitored based on continuing reviews of
the reserve, each matter comprising the reserve, and whether any new matters
should be included in the reserve, using currently available information
relative to enacted laws and regulations and existing technology. These reviews
are performed periodically by an in-house committee comprised of representatives
experienced in environmental matters from the environmental, operating and
accounting departments in consultation with outside legal and technical experts,
as necessary.
(7) LEGAL PROCEEDINGS
The Company is involved in various legal proceedings, including environmental
proceedings with governmental authorities, product liability litigation, and
claims by present and former employees under federal and counterpart state
anti-discrimination and other laws relating to employment. The Company does not
believe that any of these proceedings, either individually or in the aggregate,
will have a material adverse effect on the consolidated financial condition or
results of operations of the Company.
13
<PAGE> 14
(8) EMPLOYMENT AND RETIREMENT AGREEMENTS
Effective September 8, 1998, the Company entered into a five-year master
collective bargaining agreement (the "Master CBA") and related settlement
agreement (the "Settlement Agreement") with the United Steelworkers of America
(the "USWA"). Management believes that the Master CBA will offer the Company the
flexibility to rationalize its cost structure so that it may continue to invest
in the business to maintain a position as a low-cost supplier. The Master CBA
allows the Company to reduce the number of job classifications at all
USWA-covered facilities to five from over 34 at certain facilities thereby
permitting employees to be assigned a wider range of responsibilities.
The Settlement Agreement requires the Company to offer voluntary Early
Retirement Buyouts ("ERB's") to at least 1,000 employees and permits the Company
to offer a Voluntary Severance Plan ("VSP"). The purpose of these programs is to
reduce the hourly workforce at Republic and Bar Tech facilities by a net
reduction of over 1,400 hourly employees over four years. Through December 31,
1998, 200 ERB's were accepted. Under the terms of the Settlement Agreement, if
the ERB's and VSP do not achieve targeted headcount reductions, the Company will
have the flexibility to reduce the hourly workforce by approximately 300
employees. Pursuant to the Master CBA, USWA represented employees will be
eligible for Supplemental Unemployment Benefits (SUB) and the continuation of
certain health insurance benefits.
The Company has entered into a memorandum of understanding with the Pension
Benefit Guarantee Corporation (the "PBGC") pursuant to which (1) the PBGC
agreed to forebear from instituting proceedings to terminate the USWA Defined
Benefit Plan as a result of the Acquisition or the prospective combination with
Bar Tech (2) subsequent to December 31, 1998, the Company funded the pension
plan with an approximate $27 million initial contribution and (3) the Company
will make an additional contribution to such pension plan in the amount of $20
million on or before July 1, 1999 (which is supported by a letter of credit).
Additional quarterly contributions will be made by the Company commencing
October 1, 1999 in accordance with the following schedule: $7.5 million per
quarter for the first four payments, $7.6 million per quarter for the next four
payments, $9.1 million per quarter for the next four payments and $8.5 million
per quarter for the final four payments. Of the Company's aggregate pension
obligation, $62.0 million is classified as a current liability and $4.8 million
is classified as a long-term liability in the accompanying condensed
consolidated balance sheet as of December 31, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Acquisition has been accounted for as a purchase and, pursuant to the
provisions of SEC Staff Accounting Bulletin No. 54 and the rules of pushdown
accounting, the Acquisition gave rise to a new basis of accounting. However, the
discussion below compares the three and six month periods ended December 31,
1998 with the three and six month periods ended December 31, 1997. Even though
there may be a new basis of accounting, management believes this comparison
provides more meaningful analysis of the core operations of its business. Any
significant acquisition related items affecting operations are discussed where
applicable.
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH THE THREE MONTHS ENDED
DECEMBER 31, 1997
Net sales from continuing operations for the three month period ended December
31, 1998 totaled $147.5 million on 226,920 net tons of steel shipments compared
to net sales from continuing operations of $165.5 million and shipments of
254,274 net tons for the similar three month period in the prior year, or a 10.8
% decrease in net sales. Shipping volume also decreased 10.8% from the prior
year level reflecting a continuation of the general weakening in demand within
the domestic steel industry. The average selling price per ton remained
relatively unchanged at approximately $650 per ton for the three month period
ended December 31, 1998 compared with approximately $651 per ton for the similar
three month period in the prior year.
Cost of products sold in continuing operations for the three month period ended
December 31, 1998 was $139.9 million or $616 per ton shipped compared with
$147.7 million or $581 per ton shipped for the similar three month period in the
prior year. Manufacturing costs for the three months ended December 31, 1998
included approximately $0.3 million in signing bonuses, a base labor rate
increase of $.30 per hour and $2.4 million in defined benefit costs all of which
are attributable to the new five-year labor agreement. In addition,
manufacturing costs for the three month period ended December 31, 1998 were
adversely affected by an increase in vacation costs
14
<PAGE> 15
resulting from the new labor agreement. As a result of the above, cost of
products sold in continuing operations was 94.8% of net sales for the three
months ended December 31, 1998 as compared with 89.3% for the similar period in
the prior year.
Selling, general and administrative expenses totaled approximately $15.6 million
for the three month period ended December 31, 1998 compared with $9.9 million
during the similar three month period in the prior year and represent
approximately 10.6% and 6.0% of net sales, respectively. The increase is
partially due to amortization of the excess purchase price over net assets
acquired resulting from the Acquisition totaling $1.9 million for the three
month period ended December 31, 1998 compared to $0 in the prior year period.
Also contributing to the increase in selling, general and administrative
expenses for the three month period ended December 31, 1998 were one-time costs
relating to the Acquisition of $0.9 million.
Net periodic postretirement benefit charges totaled approximately $1.8 million
for the three month period ended December 31, 1998, or a decrease of $1.6
million, as compared with the $3.4 million in the similar period in 1997. The
net change was due primarily to the establishment of a limit on the Company's
liability for future medical cost increases in connection with the new five-year
labor agreement. In addition, there was a reduction in the discount rate
assumption from 8% to 7% and a reduction in the medical rate trend assumption
from 5.5% to 4.5%.
There was no charge for non-cash ESOP charges in the three month period ended
December 31, 1998 as compared with a charge of $6.9 million in the similar
period of the prior year. The decrease reflects the final ESOP loan payment made
during the third quarter of fiscal year 1998.
Interest expense totaled approximately $13.8 million for the three month period
ended December 31, 1998 as compared with $6.9 million for similar period in
1997. The increase is the result of increased borrowings and greater
amortization of bank financing costs, both of which are associated with the
Acquisition.
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH THE SIX MONTHS ENDED
DECEMBER 31, 1997
Net sales from continuing operations for the six month period ended December 31,
1998 totaled $303.7 million on 460,614 net tons of steel shipments compared to
net sales from continuing operations of $323.0 million and shipments of 495,104
net tons for the similar six month period in the prior year, or a 6.0% decrease
in net sales. Shipping volume for the six month period ended December 31, 1998
decreased 7.0% from the prior year level reflecting a continuation of the
general weakening in demand within the domestic steel industry. The decrease in
shipping volume, however, was slightly offset as the average selling price per
ton increased 1.0% to approximately $659 per ton for the six month period ended
December 31, 1998 compared with approximately $652 per ton for the similar six
month period in the prior year.
Cost of products sold in continuing operations decreased $1.9 million for the
six month period ended December 31, 1998 to $288.3 million from $290.2 million
for the similar period in the prior year as shipping volumes for the six month
period dropped to 460,614 tons in the current year from 495,104 tons shipped in
the prior year. The cost per ton was $626 per ton shipped for the six month
period ended December 31, 1998 compared with $586 per ton shipped for the
similar six month period in the prior year. Manufacturing costs for the six
months ended December 31, 1998 included approximately $2.9 million in signing
bonuses and a base labor rate increase of $.30 per hour and $2.4 million in
defined benefit costs all of which are attributable to the new five-year labor
agreement. In addition, manufacturing costs for the six month period ended
December 31, 1998 were adversely affected by an increase in vacation costs
resulting from the new labor agreement. The manufacturing costs for the similar
six month period in the prior year benefited from a credit of approximately $3.2
million reflecting an independent re-assessment of probable environmental
liabilities for certain historical waste disposal sites. As a result of the
above, cost of products sold in continuing operations was 94.9% of net sales for
the six months ended December 31, 1998 as compared with 89.9% for the similar
period in the prior year.
15
<PAGE> 16
Selling, general and administrative expenses totaled approximately $38.8 million
for the six month period ended December 31, 1998 compared with $18.5 million
during the similar six month period in the prior year and represent
approximately 12.8% and 5.7% of net sales, respectively. The increase is
partially due to amortization of the excess purchase price over net assets
acquired resulting from the Acquisition totaling $2.5 million for the six month
period ended December 31, 1998. Also contributing to the increase in selling,
general and administrative expenses for the six month period ended December 31,
1998 were one-time costs relating to the Acquisition of $12.1 million.
Net periodic postretirement benefit charges totaled approximately $4.5 million
for the six month period ended December 31, 1998, or a decrease of $2.4 million,
as compared with the $6.9 million in the similar period in 1997. The net change
was due primarily to the establishment of a limit on the Company's liability for
future medical cost increases in connection with the new five-year labor
agreement. In addition, there was a reduction in the discount rate assumption
from 8% to 7% and a reduction in the medical rate trend assumption from 5.5% to
4.5%.
There was no charge for non-cash ESOP charges in the six month period ended
December 31, 1998 as compared with a charge of $13.6 million in the similar
period of the prior year. The decrease reflects the final ESOP loan payment made
during the third quarter of fiscal year 1998.
Interest expense totaled approximately $21.1 million for the six month period
ended December 31, 1998 as compared with $13.8 million in the similar six month
period of the prior year. The increase is the result of increased borrowings
and greater amortization of bank financing costs, both of which are associated
with the Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments as of December 31, 1998 totaled $3.8 million
compared to $22.7 million as of June 30, 1998.
The Company's Revolving Credit Agreement, which has permitted borrowings up to
$115 million expires on April 25, 2000, and is secured by the Company's
receivables, inventories, subsidiary stock, short-term investments and certain
intangible assets. As of June 30 and December 31, 1998, amounts outstanding
under the Revolving Credit Agreement were $0 and $13.7 million, respectively. At
December 31, 1998, the Company had letters of credit drawn under its Revolving
Credit Agreement of approximately $47.0 million, which served as collateral for
future funding obligations to the Pension Benefit Guarantee Corporation. Amounts
available under the Revolving Credit Agreement at December 31, 1998 were $40.4
million.
The Revolving Credit Agreement provides up to $50 million 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 Bank
Boston or 1/2 percent above the Federal funds effective rate, plus 1/2 percent;
or (ii) LIBOR plus 2 1/2 percent. The borrowing base under the Revolving Credit
Agreement is the sum of 55 percent of "Eligible Inventory" up to a maximum of
$75 million and 85 percent of "Eligible Accounts Receivable." Fees of 2 1/2
percent per annum on the maximum drawing amount of each standby or documentary
letter of credit are payable on the date of issuance of such letter of credit. A
commitment fee of 3/8 percent per annum on the average unused portion of the
facility is payable quarterly. The Revolving Credit Agreement contains certain
limited negative and affirmative covenants, including failure to pay interest or
principal when due, inaccurate or false representations or warranties and
limitations on restricted payments.
On October 28, 1994, the Ohio Water Development Authority (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-ROLLTM 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-ROLLTM facility. The
proceeds of the 1996 Bonds were used to reduce outstanding borrowings under the
Revolving Credit Facility. As of December 31,
16
<PAGE> 17
1998 the Company had available $0.3 million from the 1996 Bonds which is
classified as restricted cash in the accompanying consolidated balance sheet,
and zero from the 1994 Bonds.
The Acquisition by RES Acquisition of Republic was funded by a cash contribution
from RES Holding to RES Acquisition of approximately $160.5 million including
transaction related expenses. The Republic Acquisition and related fees and
expenses were financed through i.) $95.5 million in a capital contribution by
RES Holding from the sale by RES Holding of its common stock to each Blackstone
and its affiliates, Veritas and HVR Holdings, L.L.C. ("HVR"), and ii.)
borrowings of approximately $65.0 million under the Credit Agreement, dated
September 8, 1998 between RES Holding and Chase Manhattan Bank ("Chase"), as
Administrative Agent.
On October 5, 1998, the Company commenced an offer to purchase any and all of
the 9 7/8% First Mortgage Notes due 2001 (the "Notes") at a purchase price of
$1,010 per $1,000 principal amount, plus accrued and unpaid interest, which
offer expired on November 5, 1998. The Change of Control Offer was made by the
Company in order to comply with the terms of the Indenture dated as of December
15, 1993 (the "Indenture"), between the Company and Bankers Trust Company, as
trustee, governing the Notes. Approximately $28.1 million principal amount of
Notes was tendered in accordance with the Change of Control Offer. The purchase
of the tendered Notes was assigned to affiliates of the Lenders.
On October 29, 1998 the Company commenced a new offer to purchase any and all of
the outstanding Notes at a purchase price of $1,042.30 per $1,000 principal
amount plus accrued and unpaid interest (the "Offer"). The offer is scheduled to
expire on June 30, 1999. The Offer is irrevocable and, while subject to certain
conditions, is not subject to a financing condition. Borrowings under the Bridge
Facility are subject to certain conditions. The inability on the part of the
Company to borrow under the Bridge Facility to fund the Offer would likely have
a material adverse affect on the financial condition, results of operations and
business of the Company.
For the purpose of funding the Change of Control Offer and the Offer, the
Company entered into an additional senior credit facility (the "Bridge
Facility") with The Chase Manhattan Bank, DLJ Bridge Finance, Inc. and
BankBoston N.A. (the "Lenders") which provides up to $208.5 million of
borrowings. In connection with the Bridge Agreement, the Company granted the
Lenders a lien on the CAST-ROLL TM facility, which lien is shared on an equal
and ratable basis with holders of the Notes. In November 1999, outstanding
borrowings under the Bridge Facility convert into long-term loans.
It is anticipated that the Company will refinance any remaining Notes and
additional indebtedness incurred in connection with the Acquisition, in order to
facilitate a business combination with Bar Technologies Inc. ("Bar Tech"), a
Delaware corporation also controlled by Blackstone and Veritas. Bar Tech
produces and markets hot rolled engineered and cold finished steel bar products
directly to the automotive, machinery, industrial equipment and tool industries,
and to cold finished bar producers, independent forgers and steel service
centers.
The Company has entered into a memorandum of understanding with the Pension
Benefit Guarantee Corporation (the "PBGC") pursuant to which (1) the PBGC agreed
to forebear from instituting proceedings to terminate the USWA Defined Benefit
Plan as a result of the Acquisition or the prospective combination with Bar
Technologies Inc., (2) subsequent to December 31, 1998, the Company funded the
pension plan with a $27 million initial contribution and (3) the Company will
make an additional contribution to such pension plan in the amount of $20
million on or before July 1, 1999 (which is supported by a letter of credit). As
of December 31, 1998, the Company had letters of credit drawn under its
Revolving Credit Agreement in an aggregate amount of approximately $47.0 million
in relation to its remaining obligations. Additional quarterly contributions
will be made by the Company commencing October 1, 1999 in accordance with the
following schedule: $7.5 million per quarter for the first four payments, $7.6
million per quarter for the next four payments, $9.1 million per quarter for the
next four payments and $8.5 million per quarter for the final four payments.
The Company believes that its cash on hand, cash flows provided from operations
and borrowings available under its current financing arrangements will be
sufficient to meet its liquidity needs until payments become due under the
Bridge Facility, prior to which the Company intends to refinance substantially
all of its long and short term credit facilities. However, there can be no
assurance that the Company will successfully refinance its credit facilities at
that time.
17
<PAGE> 18
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Many computer systems will experience problems handling dates beyond the year
1999. Certain of the Company's computer systems will be affected by the Year
2000 issue. The Company is currently in the process of replacing existing
computer systems in an effort to improve its processes relating to financial and
operational information. These initiatives include technology that will be Year
2000 compliant when implemented. Although the Acquisition has modified the
Company's Year 2000 compliance strategy, the Company is anticipating it will be
Year 2000 compliant in mid 1999, but the Company cautions that it might
encounter unexpected delays which could delay full compliance beyond that date.
Year 2000 contingency plans are currently being formulated by management.
Maintenance or modification costs will be expensed as incurred, while the cost
of new software will be capitalized and amortized over the software's useful
life. The cost of the systems upgrade is estimated at $10.0 million, of which
$8.0 million has been spent to date. The project is being funded through
operating cash flows.
The Company is currently assessing the impact of the Year 2000 issue as it
relates to its suppliers and customers. There can be no assurance that the
systems of other companies on which the Company's business relies will be
converted timely and as a result, the Company's business and operations could be
materially adversely affected. The amount of any potential liability and/or lost
revenue to the Company cannot be reasonably estimated at this time.
Statements included in this filing with the Securities and Exchange Commission
(including those portions of Management's Discussion and Analysis that refer to
the future) may contain forward-looking statements that are not historical facts
but refer to management's intentions, beliefs, or expectations for the future.
It is important to note that the Company's actual results could differ
materially from those projected in such forward-looking statements. Certain
factors that could cause actual results to differ from those in such
forward-looking statements include, but are not limited to, the following: i.)
any substantial delay in the implementation of the Company's plans or
substantial unanticipated costs associated with its plans for the combination of
the Company with Bar Technologies Inc.; ii.) the ability of the Company to sell
its products in its targeted markets at gross margins necessary to produce and
maintain positive operating income. The Company's success is dependent on its
ability to increase sales, maintain high product quality and provide for
customer service programs; iii.) the Company's ability to obtain favorable
financing for the combined company; and iv.) the Company is subject to a variety
of competitive factors such as international competition, the financial strength
of its competitors and the Company's ability to establish a favorable position
in the steel making and bar rolling industry. The Company's competitive position
could also be adversely affected by any consolidation of its competition in the
steel making industry.
In the event of a substantial delay in the implementation of its plans or
substantial unanticipated costs associated with the implementation of its plans,
the Company may need to borrow funds under its Revolving Credit Agreement or, to
the extent funds are not available thereunder, to obtain additional financing to
meet its cash flow requirements. The Company is already highly leveraged.
Restrictive covenants included in the indenture and other debt obligations may
have the effect of limiting the Company's ability to incur additional
indebtedness, sell assets, or acquire other entities and may otherwise limit the
operational and financial flexibility of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 market indexed raw material price fluctuations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are occasionally involved in various legal
proceedings occurring in the ordinary course of business. It is the opinion of
management, after consultation with legal counsel, that these matters are not
expected to materially affect the Company's consolidated financial position or
results of operations.
18
<PAGE> 19
ITEM 2. CHANGES IN SECURITIES
The Company and Bankers Trust Company, as Trustee have entered into a
Supplemental Indenture dated as of November 4, 1998 (the "Supplemental
Indenture") amending and supplementing certain terms of the Indenture dated
December 15, 1993 between the Company and the Trustee (the "Original Indenture")
relating to the 9 7/8% First Mortgage Notes Due 2001 (the "Notes").
The changes made by the Supplemental Indenture are summarized below. Capitalized
terms used herein but not otherwise defined have meanings ascribed thereto in
the Original Indenture.
1. The covenant regarding Change of Control Offers was revised to
expressly permit the Company to assign its rights under such covenant as they
may relate to all or any portion of the Notes tendered in a Change of Control
Offer. Pursuant to the terms of the Supplemental Indenture, to the extent of any
such assignment, the Company's obligations under the covenant to purchase Notes
shall be discharged if an assignee shall (i) purchase such Notes or portions
thereof validly tendered and not properly withdrawn pursuant to the Change of
Control offer as to which the assignment is made and (ii) deposit with the
Paying Agent money sufficient to pay the purchase price of all Notes or portions
thereof so tendered in connection with the assignment, whereupon such assignee
shall be entitled to have delivered to it or to its nominee the Notes so
purchased. Notwithstanding the foregoing, no such assignment shall relieve the
Company of its obligations under the Change of Control Offer covenant in the
event that an assignee shall fail to deposit with the Paying Agent money
sufficient to pay the purchase price in respect of Notes or portions thereof as
to which an assignment has been made. The Supplemental Indenture also indicates
that nothing contained in the covenant as amended shall imply or create any
liability by the assignee to any Holder should the assignee fail to make such
deposit and purchase the assigned Notes nor shall any assignee have any
liability in respect of the Change of Control Offer. The Supplemental Indenture
also requires any Notes acquired by an assignee pursuant to an assignment by the
Company or acquired by the Company and held for the account of the Company shall
take the form of certificated securities and that such certificated securities
bear a legend specifying certain applicable transfer restrictions.
2. The Supplemental Indenture also corrected a defect in the Original
Indenture by providing that the Company shall (i) accept for payment Notes or
portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit
with the paying Agent money sufficient to pay the purchase price of all Notes or
portions thereof so tendered and accepted, on the Business Day immediately
following the Change of Control Payment Date (but in no event later than 60 days
following the Change of Control Date), provided that the payment for such Notes
shall include accrued and unpaid interest, if any, to such Business Day
immediately following the Change of Control Payment Date on which such purchase
price is paid. This provision corrects a defect in the Original Indenture which
called for the Change of Control Offer to remain open until 5:00 p.m. on the
Change of Control Payment Date, and thus requiring that payment be made after
the close of business and making it impossible to pay in immediately available
funds.
3. Finally, the Supplemental Indenture expanded the scope of one of the
Events of Default to provide that it shall be an Event of Default if the Company
defaults in performance of any tender offer made by the Company for the Notes
and such default or breach continues for a period of 30 days after written
notice to the Company by the Trustee or to the Company and the Trustee by the
holders of at least 25% in aggregate principal amount of the outstanding Notes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In anticipation of the completion of the combination (the "Combination") of the
Company and Bar Technologies Inc. ("Bar Tech"), a consolidation plan (the
"Consolidation Plan") has been developed which will build on
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<PAGE> 20
initiatives already under way at Bar Tech and Republic. The Consolidation Plan
is expected to create a more efficient, higher quality base of production
facilities operated by a smaller and more flexible labor force under new labor
agreements. The Consolidation Plan will focus on reducing operating costs
primarily through headcount reductions and a multi-year capital investment
program expected to exceed $300 million with the objective of rationalizing and
modernizing the production facilities of the combined entity. To the extent that
the Combination is delayed, the timing for full implementation of the
Consolidation Plan may be extended and its cost may increase. There are several
initiatives which the Company expects to pursue regardless of the timing of the
Combination and the implementation of the Consolidation Plan. Depending on when
the Combination is completed, measures which the Company may take prior to the
Combination may include the closure of the Company's high-cost low productivity
ingot route at Canton, Ohio, the expansion of the capacity of the CAST-ROLLTM
facility and the closure of one hot rolling mill and one cold finishing mill,
which closures may be coupled with capital investments in new facilities and/or
equipment.
In addition, in order to reduce overhead and improve customer service, the
Company and Bar Tech are combining their sales efforts and commencing marketing
their respective steel products jointly under the combined brand name "Republic
Technologies International" using a single sales force (however, each customer
purchase order for steel products continues to be entered into directly with
either the Company or Bar Tech, as appropriate). The costs of such joint
marketing efforts are borne ratably by the Company and Bar Tech based upon their
respective sales volumes achieved through such joint marketing.
The Company and Bar Tech anticipate forming a joint venture (the "Marketing JV")
in the near future to further formalize the foregoing arrangements and continue
to jointly market, advertise, promote and sell both companies' steel products to
each company's existing and potential customers. It is anticipated that the
Marketing JV will be named "Republic Technologies International Marketing, LLC",
will be owned by the Company and Bar Tech in proportions expected to be
determined based upon the companies' respective sales and will fill purchase
orders for steel products either by purchasing such steel products from the
Company and/or Bar Tech, as appropriate for a particular order (at a price based
upon the price paid for such steel products by the underlying customer, less a
specified "markup" designed to cover the Marketing JV's operating expenses), or
by in certain cases allocating such purchase orders to the Company or Bar Tech
and receiving a sales commission designed to cover the marketing JV's operating
expenses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits
(27) Financial Data Schedule
b.) Reports on Form 8-K
A report on Form 8-K was filed on December 30, 1998 by the Company to
file as exhibits credit agreements and relating documents pursuant to
its recent bridge financing.
A report on Form 8-K was filed on December 29, 1998 by the Company
announcing the appointment of the accounting firm of Deloitte & Touche
LLP as independent accountants to audit its fiscal 1999 financial
statements and the dismissal of KPMG LLP, its previous accountants.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REPUBLIC ENGINEERED STEELS, INC.
By: /s/ Thomas N. Tyrrell
----------------------------------------
Thomas N. Tyrrell
Date: May 21, 1999 Chief Executive Officer
By: /s/ Brenda K. Brown
----------------------------------------
Date: May 21, 1999 Vice President of Finance and Controller
21
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<S> <C>
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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
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0
0
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