<PAGE> 1
FORM 10-Q
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 March 31, 1999 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
incorporation or organization) Identification No.)
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
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements Page No.
Condensed Consolidated Statements of Operations for the
Quarters Ended March 31, 1999 and 1998 3
Condensed Consolidated Statements of Operations for the
Period from September 8, 1998 to March 31, 1999, the Period
from July 1, 1998 to September 7, 1998 and the Nine Month
Period Ended March 31, 1998 4
Condensed Consolidated Balance Sheets as of March 31, 1999
and June 30, 1998 5 - 6
Condensed Consolidated Statements of Cash Flows for the
Period from September 8, 1998 to March 31, 1999, the Period
from July 1, 1998 to September 7, 1998 and the Nine Month
Period ended March 31, 1998 7
Notes to Condensed Consolidated Financial Statements 8 - 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16 - 21
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21-22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submissions of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22-23
Signatures 24
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED MARCH 31, 1999 AND 1998
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
Note 1 (c)
--------------
Quarter Ended Quarter Ended
March 31, 1999 March 31, 1998
------------- -------------
<S> <C> <C>
Net sales $ 160,631 $ 188,350
Cost of products sold (including depreciation of $5,366
and $6,161, respectively) 155,799 165,457
--------- ---------
Gross profit 4,832 22,893
Selling expenses 2,128 1,719
General and administrative expenses 10,134 9,112
Postretirement benefits charges 1,911 3,426
Non-cash ESOP charges -- 2,027
Other charges (credits), net:
Interest expense 13,406 6,951
Interest income (206) (86)
Miscellaneous, net (175) (137)
--------- ---------
Loss from continuing operations
before income taxes (22,366) (119)
Income tax benefit -- 24
--------- ---------
Loss from continuing operations (22,366) (95)
Income from discontinued operations, net of
income tax expense of $291 (Note 4) -- 1,165
--------- ---------
Net (loss) income $ (22,366) $ 1,070
========= =========
</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 MARCH 31, 1999, THE PERIOD FROM
JULY 1, 1998 TO SEPTEMBER 7, 1998 AND THE NINE MONTH PERIOD ENDED MARCH 31, 1998
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY (Note 1(c))
-------------------------------
Period from
September 8, Period from
1998 to July 1, 1998 to Nine Month
March 31, September 7, Period Ended
1999 1998 March 31, 1998
------------ --------------- --------------
<S> <C> <C> <C>
Net sales $ 361,350 $ 102,955 $ 511,381
Cost of products sold (including depreciation of
$12,870, $4,178 and $18,470, respectively) 346,178 97,883 455,706
--------- --------- ---------
Gross profit 15,172 5,072 55,675
Selling expenses 5,214 1,216 5,102
General and administrative expenses 27,560 17,023 24,210
Postretirement benefits charges 4,300 2,082 10,279
Non-cash ESOP charges -- -- 15,596
Other charges (credits), net:
Interest expense 29,877 4,588 20,732
Interest income (414) (236) (364)
Miscellaneous, net (415) (153) (306)
--------- --------- ---------
Loss from continuing operations
before income taxes (50,950) (19,448) (19,574)
Income tax benefit -- -- 3,920
--------- --------- ---------
Loss from continuing operations (50,950) (19,448) (15,654)
Income (loss) from discontinued operations, net
of income tax expense of $0 and $803,
respectively (Note 4) -- (298) 3,188
--------- --------- ---------
Net loss $ (50,950) $ (19,746) $ (12,466)
========= ========= =========
</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 MARCH 31,1999 AND JUNE 30, 1998
(In thousands of dollars)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
----------
March 31, June 30,
1999 1998
-------- --------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,835 $ 22,675
Receivables, less allowance for doubtful accounts of
$1,614 and $1,575, respectively 64,942 61,038
Receivables due from affiliate (Note 5) 41,689 --
Inventories (Note 2) 154,726 124,955
Prepaid expenses 8,123 2,844
Deferred income taxes -- 7,902
Assets held for sale (Note 4) 31,830 42,440
Other current assets 3,622 404
-------- --------
Total current assets 307,767 262,258
-------- --------
Property, plant and equipment, net 262,560 290,721
Intangibles and other assets, net 8,152 24,471
Restricted cash 341 715
Deferred income taxes -- 46,927
Receivables due from affiliate, non-current (Note 5) 531 --
Assets held for sale (Note 4) 11,687 11,903
Excess purchase price over net assets acquired (Note 1(b)) 164,005 --
-------- --------
TOTAL ASSETS $755,043 $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 MARCH 31,1999 AND JUNE 30, 1998
(In thousands of dollars)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
---------
March 31, June 30,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 67,206 $ --
Defined benefit pension obligation (Note 9) 36,893 --
Amounts due to affiliates 6,645 --
Other current liabilities 125,031 103,121
--------- ---------
Total current liabilities 235,775 103,121
Long-term debt (Note 3) 357,339 273,922
Other postretirement benefits 97,108 131,256
Defined benefit pension obligation (Note 9) 4,848 12,178
Accrued environmental costs (Note 7) 14,434 13,746
Other liabilities 1,035 1,301
--------- ---------
Total liabilities 710,539 535,524
Commitments and contingencies (Notes 3,7,8 and 9) -- --
Stockholders' equity:
Special preferred stock, $.01 par value; one share
authorized, no share issued and outstanding at March
31, 1999, one share issued and outstanding at June
30, 1998, liquidation value of $1,500 -- 2
Common stock, $0.01 par value; authorized 27,000,000
shares: 19,706,578 shares issued and outstanding at
March 31, 1999 and 19,707,923 shares issued
at June 30, 1998 197 197
Additional paid-in-capital 95,257 275,270
Accumulated deficit (50,950) (173,990)
--------- ---------
44,504 101,479
Less treasury stock, at cost, no shares at March 31, 1999
and 1,345 shares at June 30, 1998 -- 8
--------- ---------
Total stockholders' equity 44,504 101,471
--------- ---------
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 755,043 $ 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 MARCH 31, 1999, THE PERIOD FROM
JULY 1, 1998 TO SEPTEMBER 7, 1998 AND THE NINE MONTH PERIOD ENDED MARCH 31, 1998
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------------------------
Period from
Period from July 1, 1998 to Nine Month
September 8, 1998 September 7, Period Ended
to March 31, 1999 1998 March 31, 1998
--------------------- -------------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (50,950) $ (19,746) $ (12,466)
Adjustments to reconcile net cash provided by
(used in) operating activities:
Depreciation and amortization 22,271 4,934 21,856
Accretion of call premium 4,038 -- --
Non-cash ESOP charges -- -- 16,919
Deferred income tax benefit -- -- (3,117)
Change in operating assets and liabilities:
(Increase) decrease in working capital (34,990) 1,897 (14,270)
(Increase) decrease in other operating assets
and liabilities (9,855) 732 1,699
--------- --------- ---------
Total adjustments (18,536) 7,563 23,087
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (69,486) (12,183) 10,621
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (11,742) (6,139) (9,757)
Acquisition, net of cash acquired (156,458) -- --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (168,200) (6,139) (9,757)
--------- --------- ---------
Cash flows from financing activities:
Net borrowings under revolving credit facility 75,100 -- --
Proceeds from environmental financing -- -- 477
Proceeds from bridge loan 65,045 -- --
Capital contribution 95,455 -- --
Other financing activities, net 4,921 (312) 683
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 240,521 (312) 1,160
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,835 (18,634) 2,024
Cash and cash equivalents-beginning of period -- 22,675 6,412
--------- --------- ---------
Cash and cash equivalents-end of period $ 2,835 $ 4,041 $ 8,436
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 20,409 $ 4 $ 13,218
========= ========= =========
Cash paid for income taxes $ -- $ -- $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
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 its acquisition, as more fully described below, the Company
intends to sell its specialty steels division, and accordingly, the accompanying
condensed consolidated financial statements reflect that division as
discontinued operations in accordance with Accounting Principles Board Opinion
No. 30. Pursuant thereto, all revenues and expenses related to the specialty
steels division have been segregated from continuing operations of Republic for
all periods presented. In April 1999, the Company announced that Haynes
International ("Haynes"), a leading manufacturer of nickel and cobalt based
alloys, will manage its specialty steels division according to the terms of an
agreement between the respective companies. The Company and Haynes are
associated by common ownership.
The Company's principal customers are manufacturers in the automotive,
machinery, industrial equipment, machine and hand tools and aviation and
aerospace industries, as well as independent forgers who supply finished parts
to the aforementioned industries. The Company also has significant sales to
steel service centers.
(b) Organization
On September 8, 1998, Blackstone Management Associates II L.L.C. ("Blackstone")
and Veritas Capital Management, L.L.C. ("Veritas"), serving as general partners
for limited partnerships, acquired Republic in a cash tender offer of $7.25 for
each Republic common share (the "Acquisition"). RES Holding Corporation ("RES
Holding") and its wholly owned subsidiary, RES Acquisition Corporation ("RES
Acquisition") were formed for the purpose of acquiring Republic. The cash price
paid totaled approximately $160.5 million, including transaction related
expenses. The sources of funds contributed to RES Acquisition consisted of i.)
$95.5 million in a capital contribution by RES Holding from the issuance of its
common stock to Blackstone and its affiliates, Veritas and HVR Holdings, L.L.C.
and ii.) borrowings of approximately $65.0 million under a short term bridge
loan credit facility dated September 8, 1998 between RES Holding and Chase
Manhattan Bank, as Administrative Agent. Republic was acquired by RES
Acquisition on September 8, 1998 and subsequently, RES Acquisition was merged
with and into Republic on September 21, 1998. Blackstone and Veritas intend to
combine ("Combination") the Company and Bar Technologies Inc. ("Bar Tech"), a
producer of special bar quality steel, also owned by Blackstone and Veritas,
during 1999, subject to refinancing a significant portion of the combined
companies' debt.
The Acquisition has been accounted for as a purchase and, pursuant to the
provisions of SEC Staff Accounting Bulletin No. 54 ("SAB No. 54") and the rules
of pushdown accounting, the Acquisition gave rise to a new basis of accounting.
Given the timing of the Acquisition, fair value analysis of the net assets
acquired, including appraisals of property and equipment, are not yet completed.
Based upon preliminary assessments through March 31, 1999, the purchase price
and related acquisition expenses exceeded net assets acquired by approximately
$169 million.
8
<PAGE> 9
Fair value adjustments, once finalized, may materially increase or
decrease this amount. Pending completion of the fair value analysis,
the preliminary excess purchase price over the estimated value of the
net assets acquired is being amortized over 20 years. Upon completion
of the fair value analysis, adjustments will be made to depreciate the
fair value of acquired property, plant and equipment over their
estimated useful lives and to amortize goodwill over 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 9, the Company plans to reduce the hourly workforce through
retirement and severance programs. Subsequent to September 7, 1998, the Company
recorded an increase of $16.6 million to its pension and other postretirement
benefit liabilities based upon available actuarial information with a
corresponding increase to the excess purchase price over net assets acquired.
(c) Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements for the period from
September 8, 1998 to March 31, 1999 and as of March 31, 1999, reflect the new
basis of accounting of the Acquisition. Periods prior to September 8, 1998
(Predecessor Company) have been presented under the historical cost basis of
Republic.
The condensed consolidated financial statement includes the accounts of Republic
Engineered Steels, Inc. and its wholly owned subsidiaries, Nimishillen &
Tuscarawas Railway Company and The Oberlin Insurance Company. All significant
intercompany balances have been eliminated.
(d) Cash Equivalents
The Company considers all short-term investments with maturities at date of
purchase of three months or less to be cash equivalents.
(e) Inventories
Inventories are carried at the lower of cost or market with cost determined
using the last-in, first-out (LIFO) method. Inventories are stated net of assets
held for sale.
(f) Long-Lived Assets
Property, plant and equipment are recorded at cost less depreciation accumulated
to date. Depreciation is computed on the straight-line method over the estimated
useful lives of the assets; the range of useful lives is 39 years for buildings
and 3-30 years for machinery and equipment. Accelerated methods are used for
income tax purposes.
(g) Intangibles and Other Assets
Intangible assets consist primarily of deferred loan and bond fees, and in the
case of the Predecessor Company, an intangible asset related to the Company's
pension plan. The deferred loan and bond fees are being amortized on a
straight-line basis over the lives of the related debt instruments.
(h) Income Taxes
The Company accounts for income taxes pursuant to the asset and liability
method. Under that method, deferred tax assets and liabilities are recognized
for the future consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled, and the
effect on deferred tax assets and liabilities of
9
<PAGE> 10
a change in tax rates is recognized in income in the period that includes the
enactment date. Income taxes for the period subsequent to the Acquisition
reflect the pushdown impact on the consolidated tax position resulting from a
change of control. No cash payments of income taxes were made during any of the
periods presented.
(i) Environmental Costs
The Company and other steel companies have in recent years become subject to
increasingly demanding environmental laws and regulations. It is the policy of
the Company to endeavor to comply with applicable environmental laws and
regulations. The Company established a liability for an amount which the Company
believes is adequate, based on information currently available, to cover costs
of remedial actions it will likely be required to take to comply with existing
environmental laws and regulations.
(j) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
In preparation of the condensed consolidated financial statements included
herein, the Company uses estimates for, among others, deferred income tax
benefits, defined benefit pension obligations, other postretirement benefit
obligations, environmental remediation and fair value adjustments related to the
Acquisition, all of which are significant to the condensed consolidated
financial statements taken as a whole. Changes in circumstances in the near term
could have an impact on these estimates, and the change in estimate could have a
material effect on the consolidated financial statements.
(k) Reclassifications
Certain previously reported amounts have been reclassified to conform to the
current presentation.
2. INVENTORIES
In connection with the Acquisition, inventories at March 31, 1999 reflect a new
LIFO base cost as of September 8, 1998. Inventory amounts at June 30, 1998 are
net of a $1.5 million LIFO reserve and a $2.2 million reserve to value
inventories at the lower of cost or market. As a result of the new LIFO base,
these reserves were $0 million at March 31, 1999. Inventories at March 31, 1999
and June 30, 1998 were as follows:
<TABLE>
<CAPTION>
(in thousands)
Predecessor
Company
--------------
March 31, 1999 June 30, 1998
-------------- -------------
<S> <C> <C>
Raw materials $ 12,530 $ 12,157
Finished and semi-finished product 140,383 111,093
Supplies, molds and stools 1,813 1,705
-------- --------
$154,726 $124,955
======== ========
</TABLE>
10
<PAGE> 11
3. DEBT
Long-term debt of the Company consisted of the following:
<TABLE>
<CAPTION>
(in thousands)
Predecessor
Company
-------------
March 31, 1999 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 206,038 200,000
Revolving Credit Agreement 75,100 --
Other 2,301 22
-------- --------
357,339 273,922
Less current maturities of long-term debt -- --
-------- --------
Total long term debt $357,339 $273,922
======== ========
</TABLE>
The amended and restated Revolving Credit Agreement ("Revolving Credit
Agreement"), which expires April 25, 2000, permits borrowings up to $115.0
million and is secured by the Company's receivables, inventories, stock of a
subsidiary, short-term investments and certain intangible assets. As of March
31, 1999 and June 30, 1998, amounts outstanding under the Revolving Credit
Agreement were $75.1 million and $0, respectively. The Acquisition has not
adversely affected the Company's ability to borrow under its Revolving Credit
Agreement.
At March 31, 1999, the Company had letters of credit drawn under its Revolving
Credit Agreement of approximately $20.0 million, which served as collateral for
future funding obligations to the Pension Benefit Guarantee Corporation.
Borrowings under the Revolving Credit Agreement bear interest at a per annum
rate equal to, at the Company's option, (i) the higher of the base rate of
BankBoston or 1/2 percent above the Federal funds effective rate, plus 1/2
percent; or (ii) LIBOR plus 2 1/2 percent. The borrowing base under the
Revolving Credit Agreement is the sum of 55 percent of "Eligible Inventory" up
to a maximum of $75 million and 85 percent of "Eligible Accounts Receivable"
less approximately $25.0 million of reserves. Amounts available at March 31,
1999 under the Revolving Credit Agreement were $15.4 million. Fees of 2 1/2
percent per annum on the maximum drawing amount of each standby or documentary
letter of credit are payable on the date of issuance of such letter of credit. A
commitment fee of 3/8 percent per annum on the average unused portion of the
facility is payable quarterly. The Revolving Credit Agreement contains certain
limited negative and affirmative covenants, including failure to pay interest or
principal when due, inaccurate or false representations or warranties and
limitations on restricted payments.
On May 6, 1999, the Revolving Credit Agreement was amended (the "Amended
Agreement") to reflect the formation of Republic Technologies International
Marketing LLC ("Marketing JV"), a marketing joint venture owned in equal
proportions by the Company and Bar Tech (see Note 5 for further discussion.)
Under the Amended Agreement the Marketing JV becomes a co-borrower and all
borrowings are secured additionally by the receivables of the Marketing JV.
Under the terms of the Marketing JV agreement, the Company purchases all the
receivables of the Marketing JV on a discounted basis as sales are made to
customers. The Amended Agreement provides a temporary increase to permitted
borrowings from $115.0 million to $135.0 million until December 31, 1999.
Interest rates on borrowings under the Amended Agreement have been increased
for base loans to base rate plus 3/4 percent and for LIBOR loans to LIBOR rate
plus 2 3/4 percent. Fees for standby or documentary letters of credit were
increased to 2 3/4 percent.
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-ROLL(TM) facility. Additionally, on June 1, 1996, the
Authority issued $53.7 million of 9.0% Solid Waste Revenue Bonds due June 1,
2021 in connection with the solid waste recycling facilities installed at the
CAST-ROLL(TM) facility. The proceeds of the 1996 Bonds were used to reduce
outstanding borrowings under the Revolving Credit Facility. As of March 31, 1999
the Company had available approximately $0.3 million from the 1996 Bonds which
is classified as restricted cash in the accompanying condensed consolidated
balance sheet, and zero from the 1994 Bonds.
The Company's $200 million 9 7/8% First Mortgage Notes ("Notes") mature on
December 15, 2001. As a result of the Acquisition, the Company was required by
the terms of the indenture to offer to purchase any and all of the Notes at a
purchase price of $1,010 per $1,000 principal amount, plus accrued and unpaid
interest (the "Change of Control Offer"). Such premium has been recorded as a
fair value adjustment to the liabilities assumed in the Acquisition with a
corresponding increase to the excess purchase price over net assets acquired.
11
<PAGE> 12
On September 8, 1998, the Acquisition by RES Acquisition of Republic was
partially funded with borrowings of approximately $65.0 million (the "RES
Holding Facility") under the Credit Agreement, dated September 8, 1998 between
RES Holding and The Chase Manhattan Bank ("Chase"), as Administrative Agent. The
maturity of the RES Holding Facility is currently June 8, 1999, however, the
Company is negotiating with its lenders to extend the maturity.
On October 5, 1998, the Company commenced the Change of Control Offer which
expired on November 5, 1998. Approximately $28.1 million principal amount of
Notes was tendered in accordance with the Change of Control Offer. The purchase
of the tendered Notes was assigned to affiliates of the Lenders (as defined
below).
On October 29, 1998, the Company commenced a new offer to purchase any and all
of the outstanding Notes at a purchase price of $1,042.30 per $1,000 principal
amount plus accrued and unpaid interest (the "Offer"). The Offer is scheduled to
expire on June 30, 1999. The Company is accruing the Offer premium over the
period of the Offer.
For the purpose of funding the Change of Control Offer and the Offer, the
Company entered into an additional senior credit facility (the "Bridge
Facility") with Chase, DLJ Bridge Finance, Inc. and BankBoston N. A. (the
"Lenders") which provides for up to $208.5 million of borrowings. In November
1999, any outstanding loans under the Bridge Facility convert into long-term
loans and accordingly, the Notes remain classified as long-term in the
accompanying condensed consolidated balance sheet as of March 31, 1999.
The interest rate on borrowings under the Bridge Facility will be LIBOR
(adjusted to include statutory reserves) plus a margin, increased by 0.5% every
three months, subject to a maximum rate of 15.5% per annum. In the event of any
borrowings under the Bridge Facility, the Company will pay certain fees and RES
Holding will make available warrants to purchase a portion of the common equity
of RES Holding. Such fees are subject to partial refund if the Company
refinances the Bridge Facility. Any warrants will be initially held under
certain circumstances in escrow and all or a portion of such warrants may be
subsequently released to the Lenders or to the holders of the loans, or if the
loans are refinanced, returned to RES Holding. Through March 31, 1999, no
amounts have been borrowed under the Bridge Facility.
4. DISCONTINUED OPERATIONS
In connection with the Acquisition, the Company intends to sell its specialty
steels division, and accordingly, the accompanying consolidated financial
statements reflect that division as discontinued operations in accordance with
Accounting Principles Board Opinion No. 30. All revenues and expenses related to
the specialty steels division since the Acquisition date have been reported as
adjustments to the purchase price of the Acquisition.
In April 1999, the Company announced that Haynes International ("Haynes"), a
leading manufacturer of nickel and cobalt based alloys, will manage its
specialty steels division according to the terms of an agreement between the
respective companies. The Company will pay Haynes a management fee based upon
the allocable portion of total costs incurred by Haynes attributable to
management activities of the combined operaions. The Company and Haynes are
associated by common ownership.
Summarized results of discontinued operations for the specialty steels division
were as follows:
<TABLE>
<CAPTION>
(in thousands)
PREDECESSOR COMPANY
---------------------------
Period From Nine Month
Quarters Ended Period From July 1, 1998 Period Ended
March 31, September 8, 1998 to to September March 31,
1999 1998 March 31, 1999 7, 1998 1998
---------------------- -------------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 13,059 $ 28,011 $ 34,228 $ 14,533 $ 82,479
Gross profit (1,304) 2,784 (2,212) 410 8,655
Income (loss) before income taxes (2,072) 1,456 (4,353) 298 3,991
Provision for income taxes -- 291 -- -- 803
-------- -------- -------- -------- --------
Net income (loss) $ (2,072) $ 1,165 $ (4,353) $ (298) $ 3,188
======== ======== ======== ======== ========
</TABLE>
12
<PAGE> 13
The components of net assets of discontinued operations included in the
Company's balance sheet as assets held for sale were as follows:
<TABLE>
<CAPTION>
(in thousands)
PREDECESSOR
COMPANY
-------------
March 31, 1999 June 30, 1998
-------------- -------------
<S> <C> <C>
Receivables $ 9,195 $11,595
Inventory 22,635 30,845
------- -------
Assets held for sale - current $31,830 $42,440
======= =======
Property, plant and equipment, net $11,687 $11,903
------- -------
Assets held for sale - non-current $11,687 $11,903
======= =======
</TABLE>
5. RELATED PARTY TRANSACTIONS
Affiliates of Blackstone and Veritas currently provide certain management and
financial monitoring services to the Company pursuant to an agreement between
the respective parties for which the Company pays an annual advisory fee plus
reimbursement of certain out-of-pocket expenses.
The Company and Bar Tech share common management and have begun to perform
certain sales, marketing and administrative functions on a combined basis. This
includes marketing both companies' steel products jointly under the combined
brand name "Republic Technologies International" using a single sales force. The
costs of joint functions have been borne ratably by the Company and Bar Tech
based upon relative sales volumes achieved.
The Company also participates in an inventory purchasing arrangement with Bar
Tech. Under the terms of this arrangement, the Company purchases materials on
behalf of both companies and bills Bar Tech for its respective purchases, plus
an administrative fee. During the quarter ended March 31, 1999 and the period
September 8, 1998 through March 31, 1999, the Company purchased materials for
Bar Tech and its subsidiary, Bliss & Laughlin Steel Company, totaling
approximately $24.4 million and $33.4 million, respectively. A similar
arrangement is in place with regard to insurance. The Company purchased
insurance coverage for the combined company for which the costs are borne
ratably by the Company and Bar Tech based on their respective share of coverage.
The Company also purchased $8.7 million and $11.7 million of billet and bar
products, at market prices, from Bar Tech during the quarter ended March 31,
1999 and the period September 8, 1998 through March 31, 1999, respectively.
At January 1, 1999, certain salaried employees of Bar Tech became employees of
the Company. Under the terms of an employee leasing and overhead allocation
agreement, the Company and Bar Tech share the costs of common expenses
including, but not limited to sales and marketing services, administrative
services, plant overhead and costs for certain common facilities.
As of January 4, 1999, Republic Technologies International Marketing, LLC
("Marketing JV") was formed to formalize prior efforts of the Company and Bar
Tech to jointly market, advertise, promote and sell both companies' steel
products to each company's existing and potential customers. The Marketing JV is
owned by the Company and Bar Tech in equal proportions and will fill purchase
orders for steel products by purchasing such steel products from the Company
and/or Bar Tech, as appropriate for a particular order, and allocating such
purchase orders to the Company or Bar Tech and receiving a sales commission
designed to cover the marketing JV's operating expenses. Under the terms of the
agreement, the Company purchases all the receivables of the Marketing JV on a
discounted basis as sales are made to customers.
13
<PAGE> 14
The following information is a result of the Company's transactions with its
affiliates as described above. The following information is as of and for the
periods described below:
<TABLE>
<CAPTION>
(in thousands)
AS OF: March 31, 1999 June 30, 1998
-------------- -------------
<S> <C> <C>
Accounts receivable due from affiliates:
Bar Technologies Inc. $41,689 $ --
======= ========
Accounts receivable due from affiliates, long-term:
Bar Technologies Inc. $ 531 $ --
======= ========
Amounts due to affiliates:
Bar Technologies Inc. $ 1,524 $ --
Blackstone Capital Partners II 1,125 --
Republic Technologies International Marketing, LLC 3,996 --
------- --------
$ 6,645 $ --
======= ========
<CAPTION>
FOR THE QUARTERS ENDED: March 31, 1999 March 31, 1998
-------------- -------------
<S> <C> <C>
Net sales to affiliates:
Bar Technologies Inc. $ 1,794 $ --
Republic Technologies International Marketing, LLC 4,712 --
------- --------
$ 6,506 $ --
======= ========
FOR THE NINE MONTH PERIOD ENDED:
Net sales to affiliates:
Bar Technologies Inc. $ 2,570 $ --
Republic Technologies International Marketing, LLC 4,712 --
------- --------
$ 7,282 $ --
======= ========
</TABLE>
6. SUBSEQUENT EVENT
In April 1999, the Company's principal owners, Blackstone and Veritas entered
into a letter of intent with U.S. Steel Group of USX Corporation ("USX") and
Kobe Steel, Ltd. ("Kobe") concerning the combination of USS/Kobe Steel Company's
steelmaking and bar producing assets with those of the Company and Bar Tech. USX
and Kobe would jointly own 30% of the combined operations. The combination is
subject to numerous conditions including approval by the board of directors of
USX and Kobe, negotiation and execution of definitive agreements, receipt of
necessary government approvals, including antitrust, negotiation of a new labor
agreement with the United Steel Workers of America and the refinancing of a
significant portion of the combined companies' debt.
7. ENVIRONMENTAL COMPLIANCE
The Company is subject to a broad range of federal, state and local
environmental laws and regulations, including those governing discharges into
the air and water, the handling and disposal of solid and hazardous wastes, and
the remediation of contamination associated with the disposal of waste. The
Company continuously monitors its compliance with such environmental laws and
regulations, and accordingly, believes that it is currently in substantial
compliance with such laws and regulations. As is the case with most steel
producers, the Company could incur significant costs related to environmental
compliance, in particular those arising from remediation costs for historical
waste disposal practices at certain of the Company's facilities. The Company
anticipates making expenditures of approximately $0.1 million, which are covered
by the Company's current reserve for environmental investigatory and control
measures during the next 12 months. The reserve to cover potential current and
non-current environmental liabilities was approximately $14.4 million at March
31, 1999 and June 30, 1998, substantially all of which is classified as a
long-term obligation in the accompanying consolidated balance sheets (except for
anticipated expenditures during the next twelve months).
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<PAGE> 15
The reserve has been established and is monitored based on continuing reviews of
the reserve, each matter comprising the reserve, and whether any new matters
should be included in the reserve, using currently available information
relative to enacted laws and regulations and existing technology. These reviews
are performed periodically by an in-house committee comprised of representatives
experienced in environmental matters from the environmental, operating and
accounting departments in consultation with outside legal and technical experts,
as necessary.
8. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings, including environmental
proceedings with governmental authorities, product liability litigation, and
claims by present and former employees under federal and counterpart state
anti-discrimination and other laws relating to employment. The Company does not
believe that any of these proceedings, either individually or in the aggregate,
will have a material adverse effect on the consolidated financial condition,
results of operations or cash flows of the Company.
9. EMPLOYMENT AND RETIREMENT AGREEMENTS
Effective September 8, 1998, the Company entered into a five-year master
collective bargaining agreement (the "Master CBA") and related settlement
agreement (the "Settlement Agreement") with the United Steelworkers of America
(the "USWA"). Management believes that the Master CBA will offer the Company the
flexibility to rationalize its cost structure so that it may continue to invest
in the business to maintain a position as a low-cost supplier. The Master CBA
allows the Company to reduce the number of job classifications at all
USWA-covered facilities to five from over 34 at certain facilities thereby
permitting employees to be assigned a wider range of responsibilities.
The Settlement Agreement requires the Company to offer Early Retirement Buyouts
("ERBs") to at least 1,000 employees and permits the Company to offer a
Voluntary Severance Plan ("VSP"). The purpose of these programs is to reduce the
hourly workforce at Republic and Bar Tech facilities by a net reduction of over
1,400 hourly employees over four years. Subsequent to September 7, 1998, 259
ERBs were accepted. Under the terms of the Settlement Agreement, if the ERBs and
VSP do not achieve targeted headcount reductions, the Company will have the
flexibility to reduce the hourly workforce by approximately 300 employees in
addition to the number of accepted ERBs and VSPs. Pursuant to the Master CBA,
USWA represented employees will be eligible for Supplemental Unemployment
Benefits (SUB) and the continuation of certain health insurance benefits.
The Company has entered into a memorandum of understanding with the Pension
Benefit Guarantee Corporation (the "PBGC") pursuant to which (1) the PBGC agreed
to forebear from instituting proceedings to terminate the USWA Defined Benefit
Plan as a result of the Acquisition or the prospective combination with Bar
Tech, (2) in January 1999, the Company funded the pension plan with an
approximate $27 million initial contribution and (3) the Company will make an
additional contribution to such pension plan in the amount of $20 million on or
before July 1, 1999 (which is supported by a letter of credit). Additional
quarterly contributions will be made by the Company commencing October 1, 1999
in accordance with the following schedule: $7.5 million per quarter for the
first four payments, $7.6 million per quarter for the next four payments, $9.1
million per quarter for the next four payments and $8.5 million per quarter for
the final four payments. Of the Company's aggregate pension obligation, $36.9
million was classified as a current liability and $4.8 million was classified as
a long-term liability in the accompanying condensed consolidated balance sheet
as of March 31, 1999.
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 nine month periods ended March 31, 1999
with the three and nine month periods ended March 31, 1998. 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.
15
<PAGE> 16
QUARTER ENDED MARCH 31, 1999 COMPARED WITH THE QUARTER ENDED MARCH 31, 1998
Net sales from continuing operations for the quarter ended March 31, 1999
totaled $160.6 million on 268,100 net tons of steel shipments compared to net
sales from continuing operations of $188.4 million and shipments of 283,400 net
tons for the similar quarter in the prior year, or a 14.8 % decrease in net
sales. The 5.4% decrease in shipping volume from the prior year reflected the
general weakening in demand within the domestic steel industry. In addition, the
average selling value per ton decreased 9.9% to $599 per ton for the quarter
ended March 31, 1999 compared with approximately $665 per ton for the similar
quarter in the prior year. The decrease in average selling values per ton was
the result of lower pricing agreements effective within the current quarter as
material costs declined from the prior year and a decrease in average selling
prices per ton as a reaction to the competitive environment. In addition,
pricing agreements in effect during the year ago quarter included surcharges to
provide for the increase of higher material costs during that period.
Cost of products sold in continuing operations for the quarter ended March 31,
1999 was $155.8 million or $581 per ton shipped compared with $165.5 million or
$584 per ton shipped for the similar quarter in the prior year. Cost of products
sold in continuing operations was 97.0% of net sales for the quarter ended March
31, 1999 as compared with 87.8% for the similar period in the prior year as a
result of the reduction in average selling prices and manufacturing
inefficiencies experienced due to lower volumes.
Selling, general and administrative expenses totaled approximately $12.3 million
for the quarter ended March 31, 1999 compared with $10.8 million during the
similar quarter in the prior year and represent approximately 7.7% and 5.7% of
net sales, respectively. The increase in selling, general and administrative
expenses was partially due to amortization of the excess purchase price over net
assets acquired resulting from the Acquisition totaling $2.1 million for the
quarter ended March 31, 1999 compared to $0 in the prior year period and
advisory fees of $.5 million related to the Company's management and financial
monitoring agreement with Blackstone and Veritas.
Also affecting selling, general and administrative expenses for the quarter
ended March 31, 1999 were certain cost sharing arrangements in effect between
the Company and Bar Tech. Under the terms of an employee leasing and overhead
allocation agreement, the Company and Bar Tech share the costs of common
expenses of the combined company including, but not limited to sales and
marketing services, administrative services, plant overhead and costs for
certain common facilities. These costs are allocated according to each company's
approximate share of combined trade volumes.
Net periodic postretirement benefit charges totaled approximately $1.9 million
for the quarter ended March 31, 1999, or a decrease of $1.5 million, as compared
with the $3.4 million in the similar period in 1998. 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.
There were no non-cash ESOP charges in the quarter ended March 31, 1999 as
compared with a charge of $2.0 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. The ESOP was eliminated in the Acquisition.
Interest expense totaled approximately $13.4 million for the quarter ended March
31, 1999 as compared with $7.0 million for the similar period in 1998. The
increase in interest expense is the result of additional borrowings associated
with the Acquisition and other operating requirements and the amortization of
costs related to these borrowings.
NINE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THE NINE MONTHS ENDED MARCH 31,
1998
Net sales from continuing operations for the nine month period ended March 31,
1999 totaled $464.3 million on 728,700 net tons of steel shipments compared to
net sales from continuing operations of $511.4 million and shipments of 778,500
net tons for the similar nine month period in the prior year, or a 9.2% decrease
in net sales. Shipping volume for the nine month period ended March 31, 1999
decreased 6.4% from the prior year level reflecting a general weakness in demand
within the domestic steel industry. In addition, the average selling price per
ton decreased 3.0% to approximately $637 per ton for the nine month period ended
March 31, 1999 compared with approximately $657 per ton for the similar nine
month period in the prior year. The decrease in average selling
16
<PAGE> 17
values per ton was the result of lower pricing agreements effective as material
costs declined from the prior year and a decrease in average selling prices per
ton as a reaction to the competitive environment. In addition, pricing
agreements in effect during the year ago quarter included surcharges to provide
for the increases in higher material costs during that period.
Cost of products sold in continuing operations decreased $11.6 million for the
nine month period ended March 31, 1999 to $444.1 million from $455.7 million for
the similar period in the prior year principally due to the lower volumes as
discussed above. The cost per ton was $609 per ton shipped for the nine month
period ended March 31, 1999 compared with $585 per ton shipped for the similar
nine month period in the prior year. Manufacturing costs for the nine months
ended March 31, 1999 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 nine month period ended March 31, 1999
were adversely affected by an increase in vacation costs resulting from the new
labor agreement. The manufacturing costs for the similar nine 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 95.6% of net sales for the nine months ended
March 31, 1999 as compared with 89.1% for the similar period in the prior year.
Selling, general and administrative expenses totaled approximately $51.0 million
for the nine month period ended March 31, 1999 compared with $29.3 million
during the similar nine month period in the prior year and represent
approximately 11.0% 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 $4.6 million for the nine month
period ended March 31, 1999. Also contributing to the increase in selling,
general and administrative expenses for the nine month period ended March 31,
1999 were one-time costs relating to the Acquisition of $12.9 million and
advisory fees of $1.1 million related to the Company's management and financial
monitoring agreement with Blackstone and Veritas.
Also affecting selling, general and administrative expenses during the nine
months ended March 31, 1999 were certain cost sharing arrangements in effect
between the Company and Bar Tech since October 1998. Under the terms of an
employee leasing and overhead allocation agreement, the Company and Bar Tech
share the costs of common expenses of the combined company including, but not
limited to sales and marketing services, administrative services, plant overhead
and costs for certain common facilities. These costs are allocated according to
each company's approximate share of combined trade volumes.
Net periodic postretirement benefit charges totaled approximately $6.4 million
for the nine month period ended March 31, 1999, or a decrease of $3.9 million,
as compared with the $10.3 million in the similar period in 1998. 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.
There were no non-cash ESOP charges in the nine month period ended March 31,
1999 as compared with a charge of $15.6 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. The ESOP was eliminated in the Acquisition.
Interest expense totaled approximately $34.5 million for the nine month period
ended March 31, 1999 as compared with $20.7 million in the similar nine month
period of the prior year. The increase in interest expense is the result of
additional borrowings associated with the Acquisition and other operating
requirements and the amortization of costs related to these borrowings.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments as of March 31, 1999 totaled $2.8 million
compared to $22.7 million as of June 30, 1998.
As of March 31, 1999 and June 30, 1998, amounts outstanding under the Revolving
Credit Agreement were $75.1 million and $0, respectively. At March 31, 1999, the
Company had letters of credit drawn under its Revolving Credit Agreement of
approximately $20.0 million, which serves as collateral for a contribution to be
made on or
17
<PAGE> 18
before July 1, 1999, in connection with its obligations to the Pension Benefit
Guarantee Corporation. Amounts available under the Revolving Credit Agreement at
March 31, 1999 were $15.4 million.
On May 6, 1999, the Revolving Credit Agreement was amended (the "Amended
Agreement") to reflect the formation of Republic Technologies International
Marketing LLC ("Marketing JV"), a marketing joint venture owned in equal
proportions by the Company and Bar Tech (see Note 5 for further discussion.)
Under the Amended Agreement the Marketing JV becomes a co-borrower and all
borrowings are secured additionally by the receivables of the Marketing JV.
Under the terms of the Marketing JV agreement, the Company purchases all the
receivables of the Marketing JV on a discounted basis as sales are made to
customers. The Amended Agreement provides a temporary increase to permitted
borrowings from $115.0 million to $135.0 million until December 31, 1999.
Interest rates on borrowings under the Amended Agreement have been increased
for base loans to base rate plus 3/4 percent and for LIBOR loans to LIBOR rate
plus 2 3/4 percent. Fees for standby or documentary letters of credit were
increased to 2 3/4 percent.
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 Blackstone and
its affiliates, Veritas and HVR Holdings, L.L.C. ("HVR"), and ii.) borrowings of
approximately $65.0 million (the "RES Holding Facility") under the Credit
Agreement, dated September 8, 1998 between RES Holding and Chase Manhattan Bank
("Chase"), as Administrative Agent. The maturity of the RES Holding Facility is
currently June 8, 1999, however, the Company is negotiating with its lenders to
extend the maturity.
On October 5, 1998, the Company commenced an offer (the "Change of Control
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 (see Note 3). 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 Chase, 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 Tech, which is 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) In January 1999, 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 March 31, 1999, the
Company had letters of credit drawn under its Revolving Credit Agreement in an
aggregate amount of approximately $20.0 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.
In April 1999, the Company's principal owners, Blackstone and Veritas entered
into a letter of intent with U.S. Steel Group of USX Corporation ("USX") and
Kobe Steel, Ltd. ("Kobe") concerning the combination of USS/Kobe Steel Company's
steelmaking and bar producing assets with those of the Company and Bar Tech. USX
and Kobe would jointly own 30% of the combined operations. The combination is
subject to numerous conditions including
18
<PAGE> 19
approval by the board of directors of USX and Kobe, negotiation and execution of
definitive agreements, receipt of necessary government approvals, including
antitrust, negotiation of a new labor agreement with the United Steel Workers of
America and the refinancing of a significant portion of the combined companies'
debt.
Pending the completion of the Combination of the Company and Bar Tech, the
companies are combining their sales efforts and commencing marketing their
respective steel products jointly under the combined brand name "Republic
Technologies International". As of January 4, 1999, Republic Technologies
International Marketing, LLC ("Marketing JV") was formed. The Marketing JV is
owned by the Company and Bar Tech in equal proportions and will fill purchase
orders for steel products by purchasing such steel products from the Company
and/or Bar Tech, as appropriate for a particular order, and allocating such
purchase orders to the Company or Bar Tech and receiving a sales commission
designed to cover the Marketing JV's operating expenses. Under the terms of the
agreement, the Company purchases all the receivables of the Marketing JV on a
discounted basis as sales are made to customers.
The Company participates in an inventory purchasing arrangement with Bar Tech.
Under the terms of this arrangement, the Company purchases materials on behalf
of the combined company and bills Bar Tech for their respective share plus an
administrative fee. A similar arrangement is in place with regards to insurance.
The Company purchases insurance coverage for the combined companies for which
the costs are borne ratably by the Company and Bar Tech based on their
respective share.
At January 1, 1999, certain salaried employees of Bar Tech became employees of
the Company. Under the terms of an employee leasing and overhead allocation
agreement, the Company and Bar Tech share the costs of common expenses
including, but not limited to sales and marketing services, administrative
services, plant overhead and costs for certain common facilities. The Company's
allocation of these net costs are based on approximate share of combined trade
volumes.
The Company and Bar Tech presently perform the above mentioned functions on a
combined basis and intend to further integrate operations in 1999 through the
Marketing JV. As a consequence, management believes that capital resources and
liquidity of the Company and Bar Tech can and will be managed on a combined
basis prior to consummation of the Combination. Management has prepared fiscal
1999 financial and operational plans on a combined basis for the Company and Bar
Tech. Based on these plans, even if the Combination is not consummated during
1999, management believes that the aggregate of cash flows from combined
operations, available funds under existing credit agreements and funds expected
to be available to refinance certain acquisition-related debt of the Company,
will be sufficient in 1999 to enable both the Company and Bar Tech to meet their
debt service requirements when due and to fund their capital expenditures,
working capital and general corporate requirements, although there can be no
assurances with respect thereto.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Year 2000
The Year 2000 issue ("Year 2000") is the result of computer programs being
written using two digits rather than four digits to define the applicable year.
Computer equipment, software and other devices with embedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to receive orders or manufacture product, ship inventory, process transactions,
send invoices, deposit cash, or engage in other normal business activities. The
inability of business processes to function properly in year 2000 could have
adverse effects on companies and entities throughout the world.
The Company and Bar Tech have developed integrated plans to address issues
related to the impact of Year 2000 in both companies in four major areas:
infrastructure, business applications, plant applications and suppliers.
The infrastructure portion of the program addresses wide and local area
networks, servers, personal computing, telecommunications systems and software,
fax and facility security systems. Each location's equipment has been
inventoried and assessed for Year 2000 problems. Some facilities have completed
the remediation process through replacement or upgrade, and have been tested. As
of March 31, 1999, this portion of the program is approximately 75% complete.
The remaining facilities are scheduled to be completed by September 1999.
19
<PAGE> 20
The Company is currently assessing the impact of the Year 2000 issue as it
relates to its suppliers and customers to identify the extent to which the
Company may be vulnerable in the event those parties fail to properly resolve
their own Year 2000 issues. Readiness questionnaires were sent to the Company's
supplier base. Less than 25% of the suppliers surveyed responded.
As part of the Year 2000 readiness plan, the Company is continuing to assess the
risks associated with the potential system failures of its suppliers, banks,
utilities and internal systems. The Company is developing contingency plans for
these failures, which may include, but are not limited to the use of alternative
suppliers and developing alternative manual systems.
The cost of the Year 2000 project is estimated at $10.0 million and is being
funded through operating cash flows. The Company has to date incurred $9.7
million of costs and expects to incur the remaining amounts through year 2000.
Costs incurred to date include a $7.1 million investment in a project to install
a new manufacturing and financial system that was terminated with the
Acquisition. The cost of the abandoned project was written off in the Company's
purchase accounting adjustments, which resulted in a corresponding increase in
the excess purchase price over net assets acquired. The cost of replacement
hardware and software will be capitalized as appropriate according to the
Company's capital policies and amortized over the applicable useful lives.
The Company presently believes that it has effective plans in place to
anticipate and resolve the potential Year 2000 issues. In the event, however,
that the Company does not properly and fully anticipate and resolve all Year
2000 issues, there can be no assurance that Year 2000 issues will not materially
impact and adversely effect the Company's results of operations or its
relationships with third parties.
The estimated costs and dates by which the Company believes it will have
completed its objectives are based on management's best estimates, which rely on
numerous assumptions regarding future events, including the availability of
certain key resources, third-party remediation plans, and other factors. These
estimates, however, may prove to be inaccurate, and actual results could differ
materially from those anticipated. Factors that could result in material
differences include, without limitation, the availability and cost of personnel
with the appropriate training and experience, the ability to accurately
identify, assess, remediate and test all relevant computer codes and embedded
technology, and similar uncertainties. In addition, Year 2000 issues may lead to
possible third-party claims, the impact of which cannot be estimated at this
time. No assurances can be given that the aggregate cost of defending and
resolving such claims, if any, would not have a material adverse effect on the
Company.
The Company currently believes that the most reasonably likely worst case
scenario for its operations with respect to the Year 2000 issue would be the
inability to sustain its current level of shipments, inability to bill or
invoice and a decrease in operational efficiency as a result of the increase in
manual processing efforts. This could result in potential lost sales and
profits. The Company is continuing to develop its contingency plans to address
these potential disruptions to its business.
Forward Looking Statements
Statements included in this filing with the Securities and Exchange Commission
(including those portions of Management's Discussion and Analysis that refer to
the future) may contain forward-looking statements that are not historical facts
but refer to management's intentions, beliefs, or expectations for the future.
It is important to note that the Company's actual results could differ
materially from those projected in such forward-looking statements. Certain
factors that could cause actual results to differ from those in such
forward-looking statements include, but are not limited to, the following: 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. and USX/Kobe; 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 ability of the
Company and its major suppliers to remedy its Year 2000 issues timely and in a
cost-effective manner. 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.
20
<PAGE> 21
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.
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.
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
21
<PAGE> 22
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
- -------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
a.) Exhibits
(10.1)(f) Amendment No. 3 to Second Amended and Restated
Revolving Credit Agreement dated May 6, 1999 between
the Company, Republic Technologies International
Marketing LLC and a group of banks with BankBoston,
N. A., as agent, filed herewith.
(10.34) Agreement between the Company and Bar Technologies
Inc. in connection with the formation of Republic
Technologies International Marketing, LLC, dated
March 1, 1999 and filed herewith.
(27) Financial Data Schedule
b.) Reports on Form 8-K
None.
22
<PAGE> 23
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
23
<PAGE> 1
Exhibit 10.1(f)
AMENDMENT NO. 3
TO
SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
This Amendment (this "AMENDMENT") dated as of May 6, 1999, among
Republic Engineered Steels, Inc., a Delaware corporation (the "BORROWER"),
Republic Technologies International Marketing, LLC, a Delaware limited liability
company ("RTI"), BankBoston, N.A. ("BKB"), Bank of America National Trust and
Savings Association (successor to BankAmerica Business Credit, Inc. and referred
to herein as "B of A"), Congress Financial Corporation ("CONGRESS" and, together
with BKB and B of A, the "Banks") and BKB as agent (the "AGENT") for the Banks
amends the Second Amended and Restated Revolving Credit Agreement dated as of
April 25, 1997, as amended by Amendment No. 1 dated as of August 20, 1997 and by
Amendment No. 2 dated as of July 31, 1998 (as so amended, the "CREDIT
AGREEMENT"), among the Borrower, the Banks and the Agent. Terms not otherwise
defined herein which are defined in the Credit Agreement shall have the
respective meanings herein assigned to such terms in the Credit Agreement. Terms
not otherwise defined herein or in the Credit Agreement but which are defined in
section 1 of this Amendment shall have the respective meanings in this Amendment
assigned to such terms in section 1.
WHEREAS, the Borrower has requested that the Agent and the Banks agree
to amend the terms of the Credit Agreement in certain respects, and to waive
certain terms of the Credit Agreement, in order to permit the Borrower to enter
into a joint venture with Bar Technologies Inc., a Delaware corporation
("BARTECH") by forming RTI; and
WHEREAS, the Agent and the Banks are willing to so amend and, where
applicable, grant a waiver of, the terms of the Credit Agreement in such
respects as hereinafter more fully set forth, upon the terms and subject to the
conditions contained herein;
NOW, THEREFORE, in consideration of the mutual agreements contained in
the Credit Agreement, herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
SECTION 1. AMENDMENT TO SECTION 1 OF THE CREDIT AGREEMENT.
SECTION 1.1. NEW DEFINITIONS. Section 1 of the Credit Agreement is
hereby amended by inserting the following new definitions in proper alphabetical
order:
"ACKNOWLEDGMENT AND CONSENT REGARDING MEMBERSHIP PLEDGE
AGREEMENT. That Acknowledgment and Consent regarding Membership Pledge
Agreement, dated on or prior to the Third Amendment Effective Date,
among the Borrower, RTI, BarTech and the Agent, in form and substance
satisfactory to the Banks and the Agent."
"ASSIGNED RTI ACCOUNT RECEIVABLE. Any Account Receivable of
the Borrower that has been assigned or otherwise transferred to it by
RTI."
"BARTECH. Bar Technologies Inc., a Delaware corporation."
"BARTECH LENDERS. The financial institutions from time party
to the Credit Agreement, dated as of April 2, 1996, amended and
restated as of April 25, 1996, and further amended and
<PAGE> 2
2
restated as of September 5, 1997, among BarTech, B&L, The Chase
Manhattan Bank as agent and as collateral agent, Chase Manhattan Bank
Delaware as fronting bank and such financial institutions."
"BKB ACCOUNT. Account No. 53132381 maintained by the
Borrower with BKB."
"B&L. Bliss & Laughlin Steel Company, an Illinois corporation
and Subsidiary of BarTech."
"MEMBERSHIP PLEDGE AGREEMENT. That Membership Pledge
Agreement, dated on or prior to the Third Amendment Effective Date, by
the Borrower in favor of the Agent, in form and substance satisfactory
to the Banks and the Agent, pursuant to which the Borrower pledges its
membership interests in RTI to the Agent for the benefit of the Banks
and the Agent."
"PETTY CASH ACCOUNTS. Account # 185010138286 with NBD Bank
Indiana, Account # 183-8306-2 with National Bank of Maryland, Account #
0311008032 with First Savings Bank of Hegewisch, Account # 550-79213
with BankBoston, N.A. Connecticut, and any other depository bank
account of the Borrower or RTI designated as such by the Agent."
"RTI. Republic Technologies International Marketing, LLC, a
Delaware limited liability company formed pursuant to the RTI
Agreement."
"RTI AGREEMENT The Limited Liability Company Agreement of
Republic Technologies International Marketing, LLC, dated as of March
1, 1999, between BarTech and the Borrower, in the form delivered to the
Banks and the Agent on or before the Third Amendment Effective Date."
"RTI GUARANTY. The Guaranty, dated on or prior to the Third
Amendment Effective Date, made by RTI in favor of the Banks and the
Agent pursuant to which RTI guaranties to the Banks and the Agent the
payment and performance of the Obligations and in form and substance
satisfactory to the Banks and the Agent."
"RTI SECURITY AGREEMENT. The Security Agreement dated on or
prior to the Third Amendment Effective Date, between RTI and the Agent
and in form and substance satisfactory to the Agent."
"SWEPT LOCKBOXES. Lockbox nos. 642462 and 641398 with PNC
Bank, 78162, 77250 and 78147 with NBD Bank, N.A. and 21384 and 73673
with First Chicago NBD Bank, or any other lockboxes designated as such
by the Agent and with respect to which lockbox agreements have been
established in form and substance satisfactory to the Banks and the
Agent."
"SWEPT ACCOUNTS. Those Blocked Accounts numbered #100183416
with Bank One, Akron, N.A., #02442953 with PNC Bank, #03572-93 with NBD
Bank, N.A. and #54-90030 with First Chicago NBD Bank, or any other
Blocked Accounts designated as such by the Agent and with respect to
which Agency Agreements have been established in form and substance
satisfactory to the Banks and the Agent."
"THIRD AMENDMENT. Amendment No. 3 hereto dated as of May 6,
1999, among the Borrower, RTI, the Agent and the Banks."
<PAGE> 3
3
"THIRD AMENDMENT EFFECTIVE DATE. The date on which the
conditions to the effectiveness of the Third Amendment (such conditions
being set forth in Section 12 thereof) shall have been satisfied."
SECTION 1.2. AMENDMENTS TO EXISTING DEFINITIONS. The following
definitions are hereby amended as follows:
(a) The definition of "Applicable Margin" in the Credit Agreement is
hereby amended and restated as follows:
"APPLICABLE MARGIN. The Applicable Margin for Base Rate Loans
shall be 0.75%. The Applicable Margin for Eurodollar Rate Loans shall
be 2.75%. The Applicable Margin for the Letter of Credit Fee shall be
2.75%."
(b) The definition of "Collateral" is hereby amended by adding after
the words "rights and interests of the Borrower" and "Investments of the
Borrower" the words "and RTI". The definition of "Collateral" is hereby further
amended by adding after the words "machinery and equipment" the words "of the
Borrower".
(c) The definition of "Eligible Accounts Receivable" is hereby amended
as follows:
(i) The definition of "Eligible Accounts Receivable" is hereby amended
by inserting before the final comma at the end of clause (ii)(A) the following
proviso:
", PROVIDED that, for the purposes of this definition, American Axle
and Manufacturing, Inc. ("AMERICAN AXLE") shall not be considered an Affiliate
of the Borrower during the period of twenty eight days following the Third
Amendment Effective Date, nor shall it be considered an Affiliate of the
Borrower at any time thereafter if an agreement is in effect at such time
respecting the arms-length nature of the Borrower's Accounts Receivable with
American Axle and respecting such other matters related to the Borrower's
Accounts Receivable with American Axle as the Banks and the Agent shall
reasonably require, such agreement to be in form and substance satisfactory to
the Banks and the Agent"
(ii) The definition of "Eligible Accounts Receivable" is hereby amended
by adding to the end of clause (iii) thereof (but before the semi-colon at the
end of such clause) the following text:
"and, if such Account Receivable is an Assigned RTI Account Receivable,
none of RTI, BarTech, or any of BarTech's Subsidiaries has reimbursed
the Borrower for such Assigned RTI Account Receivable pursuant to the
RTI Agreement".
(iii) The definition of "Eligible Accounts Receivable" is hereby
amended by adding the following text immediately before the final period of such
definition:
"PROVIDED that no Assigned RTI Account Receivable shall be an Eligible
Account Receivable (A) unless the Agent shall have received a
commercial finance examination satisfactory to the Agent with respect
to RTI, BarTech and B&L (the Agent reserving the right to cause its
examiners to conduct additional commercial finance examinations of RTI,
BarTech or any of BarTech's Subsidiaries at any time and from time to
time, and, if the Agent's examiners cannot complete such examination
promptly or if the results of any such examination are in any respect
unsatisfactory to the Agent, the Agent shall have the right to
determine immediately that any Assigned RTI Accounts Receivable are not
Eligible Accounts Receivable) and (B) until evidence
<PAGE> 4
4
satisfactory to the Agent of the assignment of such Account Receivable
to the Borrower has been provided to the Agent in the applicable
Borrowing Base Report".
(d) The definition of "Security Documents" is hereby amended by
inserting the words "the RTI Security Agreement, the RTI Guaranty, the
Membership Pledge Agreement, the Acknowledgement and Consent regarding
Membership Pledge Agreement" after the words "The Security Agreement," therein.
SECTION 2. AMENDMENT TO SECTION 3 OF THE CREDIT AGREEMENT. Section 3 of
the Credit Agreement is hereby amended by adding the following new Sections 3.4
and 3.5 to the end thereof:
"3.4 AUTOMATIC REPAYMENTS OF REVOLVING CREDIT LOANS PRIOR TO
EVENT OF DEFAULT.
"3.4.1 CREDIT FOR FUNDS TRANSFERRED FROM SWEPT
ACCOUNTS. Prior to the occurrence of an Event of Default as to
which the account officers of the Agent active upon the
Borrower's account have actual knowledge, (i) all funds and
cash proceeds in the form of a wire transfer transferred to
the Agent from the Swept Accounts as contemplated by section
8.13.2(c) shall be credited on the same Business Day as the
Agent's receipt of such amounts (or up to such later date as
the Agent determines that good collected funds have been
received), and applied as contemplated by section 3.4.2, and
(ii) all funds and cash proceeds in the form of an automated
clearing house transfer transferred to the Agent from the
Swept Accounts as contemplated by section 8.13.2(c) shall be
credited, on the next Business Day following the Agent's
receipt of such amounts (or up to such later date as the Agent
determines that good collected funds have been received), and
applied as contemplated by section 3.4.2. For purposes of the
foregoing provisions of this section 3.4, the Agent shall not
be deemed to have received any such funds or cash proceeds on
any day unless received by the Agent before 2:30 p.m. (Boston
time) on such day. The Borrower further acknowledges and
agrees that any such provisional credits or credits in respect
of wire or automatic clearing house funds transfers shall be
subject to reversal if final collection in good funds of the
related item is not received by, or final settlement of the
funds transfer is not made in favor of, the Agent in
accordance with the Agent's customary procedures and practices
for collecting provisional items or receiving settlement of
funds transfers.
3.4.2 APPLICATION OF AUTOMATIC PAYMENTS PRIOR TO
EVENT OF DEFAULT.
(a) Prior to the occurrence of an Event of Default of
which the account officers of the Agent active on the
Borrower's account have knowledge, all funds transferred to
the Agent for application against the Obligations and for
which the Borrower has received credits shall be applied to
the Obligations as follows:
(i) first, to pay amounts then due and
payable under this Credit Agreement, the Revolving
Credit Notes and the other Loan Documents;
(ii) second, to reduce Revolving Credit
Loans made by the Agent pursuant to section 2.8.2 and
for which Settlement has not then been made;
(iii) third, to reduce other Revolving
Credit Loans which are Base Rate Loans;
<PAGE> 5
5
(iv) fourth, to reduce Revolving Credit
Loans which are Eurodollar Rate Loans; and
(v) fifth, except as otherwise required by
section 4.2(b) and (c), to the BKB Account.
(b) All prepayments of Eurodollar Rate Loans prior to
the end of an Interest Period shall obligate the Borrower to
pay any breakage costs associated with such Eurodollar Rate
Loans in accordance with section 5.9.
(c) All prepayments of the Revolving Credit Loans
pursuant to this section 3.4.2 shall be allocated among the
Banks making such Revolving Credit Loans, in proportion, as
nearly as practicable, to the respective unpaid principal
amount of such Revolving Credit Loans outstanding, with
adjustments to the extent practicable to equalize any prior
payments or repayments not exactly in proportion. Prior to any
Settlement Date, however, all prepayments of the Revolving
Credit Loans shall be applied in accordance with this section
3.4.2, first to outstanding Revolving Credit Loans of the
Agent.
3.5 AUTOMATIC REPAYMENTS OF REVOLVING CREDIT LOANS AFTER EVENT
OF DEFAULT. Following the occurrence and during the continuance of an
Event of Default of which the account officers of the Agent active on
the Borrower's account have knowledge, all funds transferred to the
Agent from the Swept Accounts for which the Borrower has received
credits shall be applied to the Obligations in accordance with
section 13.4."
SECTION 3. AMENDMENT TO SECTION 6 OF THE CREDIT AGREEMENT. Section 6
of the Credit Agreement is hereby amended by adding the following sentence to
the end thereof:
"The Obligations shall also be guaranteed pursuant to the terms of the
RTI Guaranty. The obligations of RTI under the RTI Guaranty shall be in
turn secured by a perfected first priority security interest (subject
only to Permitted Liens entitled to priority under applicable law) in
all of the assets of RTI, whether now owned or hereafter acquired,
pursuant to the terms of the Security Documents to which RTI is a
party."
SECTION 4. AMENDMENTS TO SECTION 8 OF THE CREDIT AGREEMENT.
(a) Section 8.2 of the Credit Agreement is hereby amended by adding the
following sentence to the end thereof: "RTI will maintain its chief executive
office in Akron, Ohio, or at such other place in the United States of America as
the Borrower shall designate upon written notice to the Agent, where notices,
presentations and demands to or upon RTI in respect of the Loan Documents to
which RTI is a party may be given or made."
(b) Section 8.4(i) of the Credit Agreement is hereby amended by
inserting after the text "(B) so long as the Excess Availability is less than
$35,000,000 or if an Event of Default shall have occurred and be continuing" the
text "or upon the Agent's request".
(c) Section 8.13.1 is hereby amended and restated as follows:
"SECTION 8.13.1. BANK ACCOUNTS. Each of the Borrower and RTI
shall, and shall cause each of its Subsidiaries to, require all account
debtors (including, without limitation, account debtors with respect to
all Assigned RTI Accounts Receivable) to make payments to the Swept
Lockboxes or Swept Accounts. The Borrower and RTI, as applicable, shall
maintain lockbox
<PAGE> 6
6
agreements with the Blocked Account Banks which maintain Swept
Lockboxes, pursuant to which lockbox agreements all checks, drafts or
other items or amounts in such Swept Lockboxes shall be deposited by
such Blocked Account Bank in the Swept Accounts maintained by such
Blocked Account Bank. Each of Borrower and RTI shall, and shall cause
each of its Subsidiaries to, together with the employees, agents and
other Persons acting on behalf of the Borrower, RTI or any such
Subsidiary, receive and hold in trust for the Agent and the Banks all
payments constituting proceeds of Accounts Receivable (including,
without limitation, Assigned RTI Accounts Receivable) or other
Collateral which, not withstanding the foregoing, come into their
possession or under their control and, immediately upon receipt
thereof, deposit such payments in the form received, with any
appropriate endorsements, in one of the Swept Accounts."
(d) Section 8.13.2(b) is hereby amended and restated as follows:
(b) The Borrower and RTI each expressly agrees that (i)
following notice to the Blocked Account Banks (A) of the existence and
continuance of a Default or an Event of Default (B) or that the Excess
Availability is less than $35,000,000 the Agent may at anytime require
that, from and after the date specified in such notice, all monies
deposited in the Blocked Accounts be transferred on a daily basis to a
cash concentration account with the Agent, which monies shall be
credited against Obligations (or such monies shall be applied directly
to pay down the Obligations without such monies being transferred first
to such a cash concentration account) and (ii) in the event such
transfer is required, upon the request of the Agent, the Borrower and
RTI will take any steps necessary, to effect such transfer, including,
without limitation, the execution and delivery of amendments to each of
the Agency Agreements. From time to time, upon the Agent's reasonable
request, the Borrower shall furnish to the Agent copies of all bank
statements and other notices received by it with respect to the Blocked
Accounts.
(e) The following new section 8.13.2(c) is hereby added to the Credit
Agreement :
"(c) The Borrower and RTI each expressly agree that, as of the
Third Amendment Effective Date, all monies deposited in the Swept
Accounts shall be applied on a daily basis to the Obligations, and the
Borrower and RTI each shall take any steps reasonably deemed by the
Agent to be necessary or advisable to effect such application,
including, without limitation, the execution and delivery of lockbox
agreements and amendments to each of the Agency Agreements. The
Borrower and RTI further agree that, as of Third Amendment Effective
Date and thereafter, (i) the Petty Cash Accounts shall contain,
considered together and in the aggregate, no more than $20,000, (ii)
there shall be no deposits into the Borrower's Account No. 361161864
with NBD Bank, N.A. other than from the BKB Account and (iii) there
shall be no deposits into the Borrower's Account Nos. 00255666 and
00415896 with National Bank of Detroit - Dearborn other than from the
Borrower's Account No. 361161864 with NBD Bank, N.A. The Banks and the
Agent hereby agree that at such time the arrangements specified in this
clause (c) are established to their satisfaction, all requirements in
the Credit Agreement requiring any repayment of the Revolving Credit
Loans pursuant to section 3.4 or section 3.5 or any request for a
Revolving Credit Loan to be greater than a minimum amount or to be a
multiple of any amount shall be waived."
SECTION 5. AMENDMENT TO SECTION 9 OF CREDIT AGREEMENT.
(a) section 9.2 of the Credit Agreement is hereby amended by deleting
the word "and" at the end of clause (xiii), inserting "; and" and deleting the
period at the end of clause (xiv) and inserting the following new subsection:
<PAGE> 7
7
(xv) any liens consisting of the sale or transfer of Assigned
RTI Accounts Receivable to BarTech or B&L pursuant to the terms of the
RTI Agreement after the applicable account debtor to whom steel
products were shipped by BarTech or B&L (such shipment having given
rise to such Assigned RTI Account Receivable) refused to accept
delivery of such steel products or otherwise later rejected such steel
products on the basis of the quality of such steel products or their
failure otherwise to conform to such Person's purchase order, PROVIDED
that BarTech or B&L, as applicable, has reimbursed the Borrower for
such Assigned RTI Accounts Receivable in an amount equal to 99% of the
principal amount of such Assigned RTI Accounts Receivable (together
with interest thereon at the rate paid by the Borrower hereunder).
(b) section 9.3 of the Credit Agreement is hereby amended by deleting
the word "and" at the end of subsection (n), replacing the period at the end of
subsection (o) with the text "; and" and inserting the following new subsection
(p):
"(p) Investments consisting of the purchase of Assigned RTI
Accounts Receivable from RTI pursuant to the RTI Agreement and not
otherwise prohibited by the Credit Agreement or any of the other Loan
Documents and Investments consisting of the Borrower's ownership of
Membership Interests in RTI, PROVIDED that nothing in this clause (p)
shall be deemed to permit any other contribution, capital call or other
payment to RTI made as a consequence of or in connection with the
Borrower's ownership of such Membership Interests or otherwise."
(c) Section 9.6 of the Credit Agreement is hereby amended by inserting
the following at the end of such Section:
"This Section 9.6 shall not be deemed to prohibit the sale or
transfer of Assigned RTI Accounts Receivable to BarTech or B&L pursuant
to the terms of the RTI Agreement after the applicable account debtor
to whom steel products were shipped by BarTech or B&L (such shipment
having given rise to such Assigned RTI Account Receivable) refused to
accept delivery of such steel products or otherwise later rejected such
steel products on the basis of the quality of such steel products or
their failure otherwise to conform to such Person's purchase order,
PROVIDED that BarTech or B&L, as applicable, has reimbursed the
Borrower for such Assigned RTI Accounts Receivable in an amount equal
to 99% of the principal amount of such Assigned RTI Accounts Receivable
(together with interest thereon at the rate paid by the Borrower
hereunder).
(d) Section 9 of the Credit Agreement is hereby amended by adding the
following new section 9.16 and section 9.17 thereto:
"SECTION 9.16 RTI AGREEMENT. The Borrower shall not amend,
restate or otherwise modify or waive any provisions of the RTI
Agreement without the prior written consent of the Majority Banks and
the Agent."
"SECTION 9.17 RTI SUBSIDIARIES AND EMPLOYEES. RTI shall have
no Subsidiaries or employees."
SECTION 6. AMENDMENT TO SECTION 13 OF THE CREDIT AGREEMENT. Section
13.1 of the Credit Agreement is hereby amended as follows:
(a) by amending each of Sections 13.1(c), (d), (e), (k), (l), (n), or
(p) to include "or RTI" immediately after each reference to "the Borrower", "the
Borrower or any Subsidiary", or "the Borrower or any of its Subsidiaries";
<PAGE> 8
8
(b) by amending each of Sections 13.1(f), (g), (h), and (i) to include
"or RTI" immediately after each reference to "the Borrower or any of its
Subsidiaries or Holdings" or "the Borrower or any Subsidiary of the Borrower or
Holdings";
(c) by amending Sections 13.1(r) and (s) by adding the words "or RTI"
after the words "the Borrower or any of its Subsidiaries" and by replacing the
text "the Borrower or such Subsidiary" with the text "the Borrower, such
Subsidiary or RTI".
SECTION 7. AMENDMENT TO SECTION 15.5.3 OF THE CREDIT AGREEMENT. The
text "the provisions of section 14" in Section 15.5.3 of the Credit Agreement is
hereby replaced with the text "the provisions of section 14 of the Credit
Agreement or section 7 of the Guaranty".
SECTION 8. AMENDMENT TO SECTION 20 OF THE CREDIT AGREEMENT. The word
"and" at the end of clause (b) of the first sentence of Section 20 of the Credit
Agreement is hereby deleted. The period at the end of clause (c) of the first
sentence of Section 20 of the Credit Agreement is hereby replaced with a
semicolon. The following new clause (d) is added to the Credit Agreement:
"(d) if to RTI, at 3770 Embassy Parkway, Akron, OH 44333, or such other
address for notice as RTI shall last have furnished in writing to the Person
giving notice."
SECTION 9. AMENDMENTS TO SECTION SECTION 7, 8, 9, 17, 18, 21, 25, AND
26 TO THE CREDIT AGREEMENT FOR THE PURPOSE OF INCLUDING RTI.
It is hereby agreed that the preambles to Sections 7, 8 and 9 of the
Credit Agreement are each amended by adding after the word "Borrower" in each
place where such word appears in such preambles the words "and, where
applicable, RTI".
It is hereby further agreed that (A) when the term "Subsidiary" or
"Subsidiaries" is used to refer to the Subsidiaries of the Borrower in Sections
7.1.1, 7.6, 7.7, 7.8, 7.9, 7.10, 7.12, 7.15, 7.18, 7.19, 7.20, 8.5.1, 8.5.2,
8.5.4, 15.4, 16, 17, 18, 19.2 or 26 of the Credit Agreement, such term in such
Sections of the Credit Agreement shall also refer to and include RTI and (B) the
term "Borrower" in Sections 7.1.2, 7.1.3, 7.2, 7.4.1, 7.13, 7.22, 8.3, 8.4(a),
(b), (c), (f), (g), (j), 8.6, 8.7, 8.8, 8.9, 8.10, 8.11, 8.13.1, 8.13.2(a),
8.14(d), 8.15, 9.5, 9.6, 9.7, 9.9, 9.10, 9.13, 9.14, 21 or 25 of the Credit
Agreement shall refer to each of Republic Engineered Steels, Inc. and RTI such
that each such representation, covenant and term applies with equal force to and
is made by each of Republic Engineered Steels, Inc. and RTI, provided that
(i) any reference to the Borrower or a Subsidiary as a
"corporation," as "being incorporated," as having
stockholders, or as having any other characteristic particular
to corporations, shall, insofar as such reference includes
RTI, be deemed to be a reference to RTI as a "limited
liability company," "being organized," as having "members" or
as having the equivalent characteristic particular to limited
liability companies, as applicable;
(ii) any representation that any action, event or fact does not
have a material adverse effect on the Borrower and its
Subsidiaries, taken as a whole, shall be deemed to be a
representation that such action, event or fact does not have a
material adverse effect on either (i) the Borrower and its
Subsidiaries (not including RTI), taken as a whole or (ii) the
Borrower and its Subsidiaries and RTI, taken as a whole;
(iii) any covenant that is conditioned upon any action, event or
fact having or not having material adverse effect on the
Borrower and its Subsidiaries, taken as a whole, shall be
<PAGE> 9
9
deemed to be a covenant that is conditioned upon such action,
event or fact having or not having a material adverse effect
on either (i) the Borrower and its Subsidiaries (not including
RTI), taken as a whole or (ii) the Borrower and its
Subsidiaries and RTI, taken as a whole;
(iv) any reference to the "Balance Sheet Date" shall be, insofar as
such reference relates to RTI, be a reference to the Third
Amendment Effective Date;
(v) Section 7.15 shall not be deemed to prohibit the transactions
entered into in connection with the RTI Agreement;
(vi) notwithstanding the first sentence of section 8.6, RTI may be
a limited liability company; and
(vii) notwithstanding anything to the contrary in section 8.7(a),
all proceeds of business interruption insurance of RTI shall
be paid to the Agent.
SECTION 10. AMENDMENT TO SCHEDULES TO CREDIT AGREEMENT.
(a) SCHEDULE 1 to the Credit Agreement is hereby replaced with SCHEDULE
1 attached hereto. Each Bank's Commitment is hereby and thereby increased PRO
RATA to the amounts set forth in SCHEDULE 1 attached hereto, and the Total
Commitment is hereby and thereby increased from $115,000,000 to $135,000,000.
(b) On December 31, 1999, if the Total Commitment is not less than or
equal to $115,000,000 on such date, the Total Commitment shall be automatically
reduced to $115,000,000. Simultaneously with such reduction of the Total
Commitment, each Bank's Commitment shall be accordingly reduced on a PRO RATA
basis and SCHEDULE 1 to the Credit Agreement shall be replaced with a new
SCHEDULE 1 reflecting such reductions.
(c) SCHEDULES 7.19 and 7.20 to the Credit Agreement are hereby replaced
with SCHEDULES 7.19 and 7.20 attached hereto.
SECTION 11. REPRESENTATIONS, WARRANTIES AND COVENANTS; NO DEFAULT;
AUTHORIZATION. Each of the Borrower and RTI hereby represents, warrants and
covenants to the Agent and the Banks as follows:
(a) Each of the representations and warranties of each of the Borrower
and RTI contained in the Credit Agreement was true as of the date as of which it
was made and is true as and at the date of this Amendment, and no Default or
Event of Default has occurred and is continuing as of the date of this
Amendment;
(b) This Amendment has been duly authorized, executed and delivered by
each of the Borrower and RTI and is in full force and effect; and
(c) Upon the execution and delivery of this Amendment by the respective
parties hereto, this Amendment shall constitute the legal, valid and binding
obligation of each of the Borrower and RTI, enforceable in accordance with its
terms, except that the enforceability thereof may be subject to any applicable
bankruptcy, reorganization, insolvency or other laws affecting creditors' rights
generally.
SECTION 12. CONDITIONS TO EFFECTIVENESS. The effectiveness of this
Amendment, including the amendments and limited waivers and consents contained
herein, shall be subject to the satisfaction of the following conditions:
<PAGE> 10
10
(a) This Amendment, the Membership Pledge Agreement, the RTI Agreement,
the RTI Guaranty, the Acknowledgment and Consent regarding Membership Pledge
Agreement and the RTI Security Agreement shall have been duly executed and
delivered by the respective parties hereto and thereto and shall be in full
force and effect.
(b) The Banks and the Agent shall have reviewed the final terms of the
RTI Agreement, and the RTI Agreement and all related documentation shall be in
form and substance satisfactory to the Banks and the Agent.
(c) The Agent shall have received from RTI a copy, certified by a duly
authorized officer of RTI to be true and complete on the Third Amendment
Effective Date, of each of (a) its certificate of formation as in effect on such
date of certification, and (b) its limited liability company agreement as in
effect on such date.
(d) The Agent shall have received from RTI a certificate from the
Secretary of State, or other appropriate authority of the jurisdiction of its
organization, evidencing its good standing in such jurisdiction and in each
other jurisdiction in which a failure to so qualify could have a material
adverse effect on the business or financial condition of RTI.
(e) All company and corporate action necessary for the valid execution,
delivery and performance by the Borrower and/or RTI, as applicable, of the
Amendment, the RTI Agreement and the other Loan Documents executed on the Third
Amendment Effective Date to which such Person is a party shall have been duly
and effectively taken, and evidence thereof satisfactory to the Banks shall have
been provided to the Agent.
(f) The Agent shall have received from RTI an incumbency certificate,
dated as of the Third Amendment Effective Date, signed by a duly authorized
officer of RTI, and giving the name and bearing a specimen signature of each
individual who shall be authorized: (a) to sign, in the name and on behalf of
RTI, each of the Loan Documents to which it is a party and (b) to give notices
and to take other action on its behalf under the Loan Documents.
(g) The Security Documents shall be effective to create in favor of the
Agent a legal, valid and enforceable first (except for Permitted Liens entitled
to priority under applicable law) security interest in and lien upon the
Collateral (including the Collateral owned by RTI). All filings, recordings,
deliveries of instruments and other actions necessary or desirable in the
opinion of the Agent to protect and preserve such security interests shall have
been duly effected. The Agent shall have received evidence thereof in form and
substance satisfactory to the Agent.
(h) The Agent shall have received from RTI a completed and fully
executed Perfection Certificate and the results of UCC searches with respect to
RTI, indicating no liens other than Permitted Liens and otherwise in form and
substance satisfactory to the Agent.
(i) The Agent shall have received a certificate of insurance from an
independent insurance broker dated as of the Third Amendment Effective Date,
identifying insurers, types of insurance, insurance limits, and policy terms,
and otherwise describing the insurance obtained with respect to RTI in
accordance with the Security Documents.
(j) The Agent shall have received from the Borrower a Borrowing Base
Report dated as of the Third Amendment Effective Date or such other date prior
thereto reasonably near to the Third Amendment Effective Date satisfactory to
the Banks and the Agent.
<PAGE> 11
11
(k) Each of the Banks and the Agent shall have received a favorable
legal opinions addressed to the Banks and the Agent, dated as of the Third
Amendment Effective Date.
(l) There shall be no Default or Event of Default after giving effect
to the RTI Agreement, this Amendment or any of the other Loan Documents executed
and delivered simultaneously herewith.
(m) The Borrower shall have paid to the Agent, for the PRO RATA benefit
of the Banks, the "Amendment Fee" referred to in the Fee Letter, of even date
herewith, among the Borrower, the Banks and the Agent.
(n) The Agent shall have received a consolidated balance sheet of
BarTech and each of BarTech's Subsidiaries as at December 31, 1998, and a
consolidated statement of income of BarTech and each of BarTech's Subsidiaries
for the fiscal year then ended, certified by the independent certified public
accountants of BarTech. Such balance sheet and statement of income have been
prepared in accordance with generally accepted accounting principles and fairly
present the financial condition of BarTech and each of BarTech's Subsidiaries as
at the close of business on the date thereof and the results of operations for
the fiscal year then ended.
(o) The Agent shall have received evidence of the consent by BarTech,
B&L and the BarTech Lenders of the assignment of the Assigned RTI Account
Receivables to the Borrower and the security interest of the Agent in favor of
the Banks and the Agent therein.
(p) The Agent and the Majority Banks shall have received an executed
Agency Agreements, substantially in the form of EXHIBIT I attached hereto, with
each of the Blocked Account Banks that maintain Swept Accounts, and the Agent
and the Majority Banks shall otherwise be satisfied with the cash management
system of RTI and the Borrower.
SECTION 13. RATIFICATION, ETC. Except as expressly amended hereby, the
Credit Agreement, the other Loan Documents and all documents, instruments and
agreements related thereto are hereby ratified and confirmed in all respects.
All references in the Credit Agreement, any other Loan Document or any related
agreement or instrument to the Credit Agreement shall hereafter refer to the
Credit Agreement as amended hereby.
SECTION 14. NO IMPLIED WAIVER. Except as expressly provided herein,
nothing contained herein shall constitute a waiver of, impair or otherwise
affect any Obligations, any other obligations of the Borrower or any right of
the Agent or any Bank consequent thereon.
SECTION 15. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but which together shall
constitute one and the same instrument.
SECTION 16. GOVERNING LAW. THIS AMENDMENT SHALL FOR ALL PURPOSES BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS (WITHOUT REFERENCE TO CONFLICTS OF LAW).
SECTION 17. EXPENSES. The Borrower hereby agrees to pay to the Agent,
on demand, all reasonable out of pocket expenses incurred or sustained by the
Agent in connection with this Amendment (including reasonable legal fees and
disbursements).
<PAGE> 12
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment
as a sealed instrument as of the date first above written.
REPUBLIC ENGINEERED
STEELS, INC.
By: /s/ John B. George
-------------------
Name: John B. George
Title: Vice President of Finance and Treasurer
REPUBLIC TECHNOLOGIES
INTERNATIONAL MARKETING, LCC
By: /s/ Thomas N. Tyrrell
REPUBLIC ENGINEERED
STEELS, INC., as Member
By: /s/ Joseph F. Lapinsky
-----------------------
Name: Joseph F. Lapinsky
Title: President and Chief Operating Officer
and
BAR TECHNOLOGIES INC., as Member
By: /s/ Thomas N. Tyrrell
----------------------
Name: Thomas N. Tyrrell
Title: Chief Executive Officer
BANKBOSTON, N.A.,
individually and as Agent
By: /s/ M. Isbaih
--------------
Name: Marwah Isbaih
Title:VP
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION (successor to
BANKAMERICA BUSINESS CREDIT, INC.)
By:____________________________
Name:
Title:
<PAGE> 13
2
CONGRESS FINANCIAL
CORPORATION
By: /s/ Edward I. Shifman, Jr.
---------------------------
Name: Edward I. Shifman, Jr.
Title: Sr. Vice Pres.
<PAGE> 1
Exhibit 10.34
LIMITED LIABILITY COMPANY AGREEMENT
OF
REPUBLIC TECHNOLOGIES INTERNATIONAL MARKETING, LLC
BAR TECHNOLOGIES INC. ("BARTECH") and REPUBLIC ENGINEERED
STEELS, INC. ("RESI") are entering into this Limited Liability Company Agreement
(the "AGREEMENT") in connection with the formation of a limited liability
company (the "COMPANY").
WHEREAS, the Company has been formed pursuant to the
provisions of the Delaware Limited Liability Company Act, 6 DEL. C. section
18-101 ET SEQ., as it may be amended from time to time and any successor to such
Act (the "ACT"), by filing a Certificate of Formation of the Company with the
office of the Secretary of State of the State of Delaware on January 4, 1999;
WHEREAS, BarTech and RESI have endeavored to coordinate their
sales and marketing efforts to realize efficiencies through the sharing of their
sales and marketing personnel so that the sales and marketing expenses each
shall bear through the Company will be less than such expenses would be on a
stand-alone basis;
WHEREAS, the Boards of Directors of BarTech and RESI have
determined that engaging in the joint marketing, advertising, promotion and
sales activities described herein will be advantageous to, and in the best
interests of, BarTech and RESI, and their respective shareholders and have
approved the formation of the Company in connection therewith;
WHEREAS, the Boards of Directors of BarTech and RESI
(including in each case a majority of the disinterested directors on such
Boards) have determined that the terms contained herein are fair and reasonable
to their respective companies and are no less favorable to their respective
companies than those terms which could have been obtained in a comparable
marketing joint venture with a joint venture partner not affiliated with such
company.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, and in consideration of
the mutual covenants hereinafter set forth, the parties hereto agree as follows:
ARTICLE I
General Provisions
------------------
I.1 NAME. The name of the Company shall be Republic
Technologies International Marketing, LLC, or such other name as the Members,
acting jointly, may from time to time hereafter designate.
I.2 DEFINITIONS. Capitalized terms not otherwise defined
herein shall have the meanings set forth therefor in Section 18-101 of the Act.
<PAGE> 2
I.3 PURPOSE. The Company is formed for the purpose of engaging
in the marketing, advertising, promotion and sales activities described herein.
The Company shall have the power to engage in all activities and transactions
which the Members, acting jointly, deem necessary or advisable in connection
with the foregoing; PROVIDED, HOWEVER, that the Company shall not (a) incur,
create, assume or permit to exist any indebtedness (except for indebtedness owed
to RESI, BarTech or any of their respective subsidiaries under the terms of this
Agreement, and except for the Company's guaranty obligations and grant of
security interests in favor of certain of RESI's lenders pursuant to that
certain Amendment No. 3 to Second Amended and Restated Revolving Credit
Agreement to be entered into among RESI, the Company, BankBoston, N.A. ("BKB"),
Bank of America National Trust and Savings Association, Congress Financial
Corporation and BKB as agent for the banks thereunder (as so amended and as
further amended, restated, modified and in effect from time to time, the RESI
Credit Agreement, the lenders party thereto being the "RESI Lenders" and the
"RESI Lenders" agent thereunder being the "RESI Agent")), (b) create, incur,
assume or permit to exist any lien on any property or assets now owned or
hereinafter acquired by it (except for liens created to secure indebtedness owed
under, or otherwise created pursuant to the terms of, this Agreement, and except
for liens securing its guaranty obligations in favor of the RESI Lenders and the
RESI Agent or otherwise created pursuant to the RESI Credit Agreement), or (c)
purchase, hold or acquire any capital stock, evidences of indebtedness or other
securities of, or make or permit to exist any investment or any other interest
in, any other person (except for indebtedness of RESI, BarTech or any of their
respective subsidiaries arising under the terms of this Agreement and
investments consisting of its guaranty obligations in favor of the RESI Lenders
and the RESI Agent).
I.4 OFFICES.
(a) The principal place of business and office of the Company
shall be located at, and the Company's business shall be conducted from, such
place or places as the Members, acting jointly, may designate from time to time.
(b) The registered office of the Company in the State of
Delaware shall be located at c/o The Corporation Trust Company, Corporation
Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. The name and
address of the registered agent of the Company for service of process on the
Company in the State of Delaware shall be The Corporation Trust Company,
Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. The
Members, acting jointly, may from time to time change the registered agent or
office by an amendment to the certificate of formation of the Company.
I.5 TERM. The term of the Company shall commence on the date
of filing of the certificate of formation of the Company in accordance with the
Act and shall continue until the Company is dissolved and its affairs are wound
up in accordance with Article VIII of this Agreement and a certificate of
cancellation is filed in accordance with the Act.
ARTICLE II
Members and Transfer Restrictions
---------------------------------
<PAGE> 3
II.1 MEMBERS. The name and business or residence address of
each Member of the Company are as set forth on Schedule A attached hereto.
Subject to Sections 1.3 and 6.1 hereof, the business and affairs of the Company
shall be managed by the Members, and each Member shall have the power to do any
and all acts necessary or convenient to or for the furtherance of the purposes
described herein, including all powers, statutory or otherwise, possessed by
members under the laws of the State of Delaware. Each Member is hereby
designated as an authorized person, within the meaning of the Act, to execute,
deliver and file the certificate of formation of the Company (and any amendments
and/or restatements thereof) and any other certificates (and any amendments
and/or restatements thereof) necessary for the Company to qualify to do business
in a jurisdiction in which the Company may wish to conduct business.
II.2 ASSIGNMENTS OF MEMBERSHIP INTEREST. A Member may not
sell, assign or otherwise transfer (collectively, a "TRANSFER") any of its
Membership Interest or Voting Interest in the Company or its Economic Allocation
to any Person without the written consent of the other Member, which consent may
be granted or withheld in its sole and absolute discretion; PROVIDED, HOWEVER,
that a Member may pledge its Membership Interest, Voting Interest or Economic
Allocation pursuant to any collateral requirements of its lenders (and such
lenders may realize upon such pledged Membership Interest, Voting Interest or
Economic Allocation) without the consent of the other Member.
II.3 RESIGNATION. No Member shall have the right to resign
from the Company except with the consent of the other Member and upon such terms
and conditions as may be specifically agreed upon between the resigning Member
and the other Member. The provisions hereof with respect to distributions upon
resignation are exclusive and no Member shall be entitled to claim any further
or different distribution upon resignation under Section 18-604 of the Act or
otherwise.
ARTICLE III
Joint Marketing
---------------
III.1 JOINT MARKETING PLAN. Subject to Section 3.6 hereof,
during the term hereof, BarTech (on behalf of itself and Bliss & Laughlin Steel
Company ("B&L"), but not Canadian Drawn Steel Company Inc.) and RESI (each, a
"STEEL PRODUCING MEMBER") agree to (a) market, advertise and promote their
respective steel products (collectively, the "STEEL PRODUCTS") to existing and
potential customers of the Steel Producing Members (collectively, "PURCHASERS")
exclusively through the Company, and (b) sell their respective Steel Products
exclusively through the Company (the "JOINT MARKETING PLAN").
III.2 ALLOCATION OF PRODUCTION OF STEEL PRODUCTS; PURCHASE
ORDERS.(a) During the term hereof, all sales of Steel Products to Purchasers
shall be booked at the Company ("COMPANY PURCHASE ORDERS"), and the Company
shall allocate the manufacture of Steel Products for delivery to each such
Purchaser between BarTech (including B&L) and RESI in accordance with the
Allocation Procedures described in Section 3.2(b) hereof. The applicable
<PAGE> 4
Steel Producing Member with respect to each Steel Product delivered to a
Purchaser pursuant to a Company Purchase Order shall pay the Company a
commission equal to 1.1% of the purchase price paid by such Purchaser for such
Steel Product (subject to adjustment downward from time to time to reflect the
Company's obligations pursuant to Section 3.4 hereto as agreed by the Company
and the Steel Producing Members and approved by the respective Boards of
Directors of the Steel Producing Members (including at least a majority of the
disinterested directors of each such Board)), such amount to be payable by the
applicable Steel Producing Member within one business day after the later of (i)
receipt by such Steel Producing Member of notice that payment of the purchase
price has been received by RESI from such Purchaser and (ii) if such Steel
Producing Member is BarTech (including with respect to shipments made by B&L),
such Steel Producing Member (or B&L, as applicable) having received payment in
full from RESI as and when required by Section 3.2(d).
(b) The production of Steel Products sold under Company
Purchase Orders shall be allocated between the Steel Producing Members (the
"PRODUCTION ALLOCATION") in accordance with written allocation procedures
approved by the respective Boards of Directors of the Steel Producing Members
(including at least a majority of the disinterested directors of each such
Board), such procedures to be attached hereto as ANNEX I and subject to
adjustment from time to time as agreed by the Steel Producing Members and
approved by their respective Boards of Directors (including at least a majority
of the disinterested directors of each such Board) (the "ALLOCATION
PROCEDURES"). All allocations of production of Steel Products sold by the
Company shall be submitted to the respective Boards of Directors of the Steel
Producing Members for their review on a quarterly basis.
(c) Each Steel Producing Member shall notify the Company and
the other Steel Producing Member at least one business day prior to shipping
Steel Products (including, in the case of BarTech, shipments made by B&L) to a
Purchaser pursuant to a Company Purchase Order. Immediately upon the shipping by
a Steel Producing Member (including in the case of BarTech, shipments made by
B&L) of Steel Products to a Purchaser, the account receivable from such
Purchaser relating to such Company Purchase Order shall be automatically
assigned and transferred by the Company to RESI, and such assignment and
transfer shall be deemed to occur without any action by either the Company or
RESI and thereafter such account receivable shall be a direct obligation of such
Purchaser to RESI (and the Company and, if such shipping Steel Producing Member
was BarTech or B&L, BarTech and B&L within one business day following receipt
thereof shall remit to RESI all payments received with respect thereto as agent
for RESI). In connection with the foregoing, the Company, B&L or BarTech, as
applicable, shall immediately (A) forward all wire or other electronic means of
payment received from a Purchaser with respect to a receivable that has been
assigned and transferred to RESI to the bank account designated by RESI and (B)
indorse over to the order of RESI any check or other instruments by their terms
payable to the Company, B&L or BarTech, as applicable, received by the Company,
B&L or BarTech with respect to a receivable that has been assigned and
transferred to RESI and, in the case of a receivable that relates to Steel
Products shipped by BarTech or B&L, that has not subsequently been assigned back
to BarTech or B&L pursuant to paragraph (e) below. In addition, (i) the Company
shall maintain such "lock-box arrangements," and take all other actions
necessary and appropriate, to enable RESI to comply with the collateral
<PAGE> 5
and bank account requirements of its lenders and (ii) RESI shall cause the
issuance of one or more irrevocable standby letters of credit for the benefit of
the lenders under Bar Tech's credit agreement to support the obligations of RESI
to make payments to BarTech and B&L, to enable BarTech to comply with the
requirements of its lenders.
(d) Immediately upon the shipping by BarTech or B&L of Steel
Products to a Purchaser, within one business day after the date of shipment,
RESI shall pay to BarTech or B&L, as applicable, as payment in full for
BarTech's or B&L's work performed with respect to the manufacture and delivery
of Steel Products pursuant to such Company Purchase Order, an amount equal to
99% of the principal amount of the account receivable arising from such shipped
Steel Products.
(e) In the event that a Purchaser to whom BarTech or B&L has
shipped Steel Products pursuant to a Company Purchase Order refuses to accept
delivery of such Steel Products or otherwise later rejects such Steel Products
on the basis of the quality of such Steel Products or their failure otherwise to
conform to the Purchaser's purchase order, and as a result of such refusal or
rejection, such Purchaser does not make payment in full for such refused or
rejected Steel Products within three business days after BarTech receives notice
from RESI or any other person of such refusal or rejection by such Purchaser,
then (A) BarTech or B&L, as applicable, at the end of such three business day
period shall reimburse to RESI an amount equal to 99% of the principal amount of
such receivable (together with interest thereon at the rate paid by RESI under
its bank credit facility), and (B) upon such reimbursement by BarTech or B&L, as
applicable, such receivable of RESI shall be automatically assigned and
transferred by RESI to BarTech or B&L, as applicable, and such assignment and
transfer shall be deemed to occur without any action by BarTech, B&L, the
Company or RESI and thereafter such receivable shall be a direct obligation of
such Purchaser to BarTech or B&L, as applicable; PROVIDED, HOWEVER, that such
reimbursement obligation shall be subject to the offset provisions set forth in
the final sentence of Section 3.6 hereof.
III.3 MARKETING STAFF. During the term hereof, the Company
shall maintain a sales force and administrative staff (collectively, the
"MARKETING STAFF") and otherwise use its commercially reasonable efforts to
market, advertise, promote and sell Steel Products. The Marketing Staff shall be
comprised of employees of each Steel Producing Member designated by such Steel
Producing Member and agreed to by the other Steel Producing Member and the
Company, and each such employee shall be made available to the Company to
provide sales, marketing and/or administrative functions for the Company
(provided that any such person also may continue to serve as an active employee
of such Steel Producing Member). Each member of the Marketing Staff shall remain
on the payroll of, and be compensated in all respects solely by, the respective
Steel Producing Member who has made such member of the Marketing Staff available
to the Company, and in no event shall the Company directly provide any
employment compensation to such members of the Marketing Staff. Notwithstanding
the foregoing, (i) this Agreement shall in no way affect the employment status
of any member of the Marketing Staff or otherwise obligate either of the Steel
Producing Members to continue to employ any member of the Marketing Staff on
such Steel Producing Member's payroll (whether currently or at any future time)
and (ii) in no event shall members of the Marketing Staff be deemed to be
<PAGE> 6
employees or independent contractors of the Company or any Steel Producing
Member other than the Steel Producing Member employing such person directly.
III.4 EXPENSE REIMBURSEMENT. To the extent a Steel Producing
Member during the term in which the Joint Marketing Plan remains in effect
incurs out-of-pocket expenses on behalf of the Company or otherwise in
connection with the joint marketing, advertising, promotion or sales activities
contemplated hereby (including cash compensation and other employee benefits of
the Marketing Staff attributable to each Marketing Staff member's efforts on
behalf of the Company), the Company or the other Steel Producing Member, as the
Steel Producing Members shall agree, shall reimburse such Steel Producing Member
for all such reasonable expenses promptly following written notice from such
Steel Producing Member to the Company of such expenses (including reasonable
written documentation of such expenses).
III.5 INDEMNIFICATION. The Company shall indemnify, defend and
hold harmless each Steel Producing Member and its affiliates (other than the
Company) and their respective partners (both general and limited), members (both
managing and otherwise), officers, directors, employees, agents and
representatives (each such person being an "INDEMNIFIED PARTY") from and against
any and all losses, claims, damages and liabilities, whether joint or several
(the "LIABILITIES"), related to, arising out of or in connection with an action,
claim, suit, investigation or proceeding (each of the foregoing, an "ACTION")
arising out of or otherwise related to the Company or the marketing,
advertising, promotional or sales activities contemplated hereby, whether or not
pending or threatened, whether or not an Indemnified Party is a party, whether
or not resulting in any liability and whether or not such Action is initiated or
brought by such Steel Producing Member or its affiliates. The Company shall
reimburse any Indemnified Party for all reasonable out-of-pocket costs and
expenses (including reasonable attorneys' fees and expenses) ("COSTS") as they
are incurred in connection with investigating, preparing, pursuing, defending or
assisting in the defense of any Action for which the Indemnified Party would be
entitled to indemnification under the terms of the previous sentence, or any
Action arising therefrom, whether or not such Indemnified Party is a party
thereto. The Company shall not be liable under the foregoing indemnification
provisions with respect to any Indemnified Party to the extent that any
Liabilities or Costs are determined by a court, in a final judgment from which
no further appeal may be taken, to have resulted primarily from the gross
negligence or willful misconduct of such Indemnified Party or its affiliates
(other than the Company or the other Indemnified Party or its affiliates). If an
Indemnified Party is reimbursed hereunder for any expenses, such reimbursement
of expenses shall be refunded to the extent it is finally judicially determined
that the Liabilities in question resulted primarily from the gross negligence or
willful misconduct of such Indemnified Party or its affiliates (other than the
Company or the other Indemnified Party or its affiliates). Notwithstanding
anything to the contrary herein, all indemnification obligations of the Company
shall survive the termination of the Joint Marketing Plan or of the Company.
III.6 SUSPENSION; TERMINATION. Upon written notice to the
other Steel Producing Member, either Steel Producing Member (and, in the case of
BarTech, the agent for BarTech's lenders, and, in the case of RESI, the RESI
Agent) may suspend for a period set forth in such notice (which may be until a
further notice revoking such suspension is given) or may terminate the Joint
Marketing Plan, in each case at will without penalty (provided that, except as
<PAGE> 7
otherwise provided herein, the terms of the Joint Marketing Plan shall remain in
effect with respect to purchase orders booked prior to delivery of such notice).
When a suspension of this Agreement remains in effect or following any
termination of this Agreement, in each case pursuant to this Section 3.6, (a)
BarTech and B&L shall have the right to offset all amounts then due and payable
by RESI to BarTech or B&L under this Agreement against any amounts then due and
payable by BarTech or B&L to RESI under this Agreement and (b) RESI shall have
the right to offset all amounts then due and payable by BarTech or B&L to RESI
under this Agreement against any amounts then due and payable by RESI to BarTech
or B&L under this Agreement.
ARTICLE IV
Capital Contributions, Withdrawals and Capital Accounts
-------------------------------------------------------
IV.1 CAPITAL CONTRIBUTIONS. Members shall make capital
contributions to the Company in such amounts and at such times as they shall
mutually agree. No Member shall be required to make any capital contributions
except as set forth in this Agreement.
IV.2 WITHDRAWALS OF CAPITAL ACCOUNTS.
(a) No Member shall be entitled to withdraw any amount from
its Capital Account (as defined in Section 4.3 hereof) without the consent of
the other Member. In the event of the withdrawal of any Member, the withdrawing
Member shall not otherwise share in the income, gains and losses of the
Membership from and after the valuation date of its Membership Interest and
shall not have any other rights under this Agreement other than payment of its
Capital Account.
(b) The right of any withdrawn Member or its legal
representatives to have distributed the Capital Account of such Member is
subject to the provision for all Company liabilities in accordance with section
18-607 of the Act, and for estimates for contingencies and expenses. The unused
portion of any such estimates shall be distributed after the need therefor shall
have ceased.
IV.3 CAPITAL ACCOUNTS.
(a) The Company shall maintain for each Member a separate
capital account (a "CAPITAL ACCOUNT") in accordance with the capital accounting
rules of section 704(b) of the Internal Revenue Code of 1986, (the "CODE"), and
the Income Tax Regulations thereunder (including particularly section
1.704-l(b)(2)(iv) of the Income Tax Regulations).
(b) Pursuant to such capital accounting rules, a Member's
Capital Account shall be (i) increased by the amount of money and the fair
market value (as determined by the mutual agreement of the Members) of other
property (net of liabilities secured by such contributed property that the
Company is considered to take subject to or assume under section 752 of the
<PAGE> 8
Code) contributed by the Member to the Company and allocations to the Member of
Company Profit pursuant to Section 5.1 hereof and any items of income and gain
and (ii) decreased by the amount of money and the fair market value (as
determined by the mutual agreement of the Members) of other property distributed
(net of liabilities secured by such distributed property that the Member is
considered to take subject to or assume under section 752 of the Code) to the
Member by the Company and allocations to the Member of Company Loss pursuant to
Section 5.1 hereof and any items of loss or deduction.
(c) The Members shall direct the Company's accountant to make
all necessary adjustments in each Member's Capital Account as required by the
rules of section 704(b) of the Code and the Income Tax Regulations thereunder.
(d) The following definitions shall apply for purposes of this
Section 4.3:
"CARRYING VALUE" shall mean, with respect to any Company
asset, the asset's adjusted basis for federal income tax purposes, except that
the Carrying Values of all Company assets shall be adjusted to equal their
respective fair market values, in accordance with the rules set forth in section
1.704-1(b)(2)(iv)(f) of the Income Tax Regulations, except as otherwise provided
herein, as of: (i) the date of the acquisition of any interest by any new or
existing Member in exchange for more than a DE MINIMIS capital contribution; and
(ii) the date of the distribution of more than a DE MINIMIS amount of Company
property to a Member in respect of its Membership Interest. The Carrying Value
of any Company asset distributed to any Member shall be adjusted immediately
prior to such distribution to equal its fair market value and depreciation shall
be calculated by reference to Carrying Value, instead of tax basin once Carrying
Value differs from tax basis. The Carrying Value of any asset contributed by a
Member to the Company will be the fair market value of the asset at the date of
its contribution thereto, as determined by the mutual agreement of the Members.
"PROFIT AND LOSS" shall mean for each fiscal year or other
period, the taxable income or loss of the Company, or particular items thereof,
determined in accordance with the accounting method used by the Company for
federal income tax purposes with the following adjustments: (i) all items of
income, gain, loss or deduction allocated pursuant to Section 5.1 shall not be
taken into account in computing such taxable income or loss; (ii) any income of
the Company that is exempt from federal income taxation and not otherwise taken
into account in computing Profit and Loss shall be added to such taxable income
or loss; (iii) if the Carrying Value of any asset differs from its adjusted tax
basis for federal income tax purposes, any depreciation, amortization or gain
resulting from a disposition of such asset shall be calculated with reference to
such Carrying Value; (iv) upon an adjustment to the Carrying Value of any asset
pursuant to the definition of Carrying Value, the amount of the adjustment shall
be included as gain or loss in computing such taxable income or loss; and (v)
except for items in (i) above, any expenditures of the Company not deductible in
computing taxable income or loss, not properly capitalizable and not otherwise
taken into account in computing Profit and Loss pursuant to this definition
shall be treated as deductible items.
<PAGE> 9
IV.4 INTEREST ON CAPITAL ACCOUNTS. No interest shall be paid
on or with respect to the capital contributions or Capital Account of any of the
Members, except as otherwise provided herein.
ARTICLE V
PROFITS AND LOSSES AND DISTRIBUTIONS
V.1 ALLOCATION OF PROFITS AND LOSSES BETWEEN THE PARTNERS. The
Company's total income, gain, loss, deduction or credit (or items thereof) which
total shall be as shown on the annual federal income tax return prepared by the
Company's accountants or as finally determined by the Internal Revenue Service
or the courts, and as modified by the capital accounting rules of section 704(b)
of the Code and the Income Tax Regulations thereunder as implemented by Section
4.3 hereof, as applicable, shall be allocated among the Members in proportion to
their total Production Allocations to such date (the "ECONOMIC ALLOCATIONS").
The initial Economic Allocations of the Members are as set forth on SCHEDULE A
hereof. The Economic Allocations shall be adjusted to account for all Production
Allocations to date at the end of each quarter or any such other period or date
as the Members shall decide.
V.2 DISTRIBUTIONS. Distributions shall be made to the Members
at the times and in the aggregate amounts determined by the mutual agreement of
the Members and such distributions shall be made to the Members solely in
proportion to their Economic Allocations. Any other provision of this Agreement
to the contrary notwithstanding, no distribution shall be made which would
render the Company insolvent or which is prohibited by the terms of any Company
or Member indebtedness or by the Act.
ARTICLE VI
Management
----------
VI.1 MANAGEMENT OF THE COMPANY. Any action to be taken by the
Company shall require the affirmative consent of at least fifty-one percent
(51.0%) of the Voting Interests of the Members as set forth on SCHEDULE A
hereof. Any action so approved may be taken by either Member on behalf of the
Company and any action so taken shall bind the Company.
VI.2 OFFICERS. The Company may employ and retain persons as
may be necessary or appropriate for the conduct of the Company's business
(subject to the supervision and control of the Members), including employees and
agents who may be designated as officers with titles, including, but not limited
to, "chairman," "chief executive officer," "president," "vice president,"
"treasurer," "secretary," "managing director," "chief financial officer,"
"assistant treasurer" and "assistant secretary" as and to the extent authorized
by the Members, acting jointly.
<PAGE> 10
ARTICLE VII
Tax and Accounting Matters
--------------------------
VII.1 FILING OF TAX RETURNS. A Member (as determined by the
mutual agreement of the Members), at the expense of the Company, shall prepare
and file, or cause the accountants of the Company to prepare, submit to the
Members for joint approval and thereafter file, all required tax returns
including a federal information tax return in compliance with section 6031 of
the Code and any required state and local tax and information returns for each
tax year of the Company.
VII.2 TAX REPORTS TO CURRENT AND FORMER MEMBERS. The Members
will receive unaudited quarterly progress reports on the Company within sixty
(60) days of the end of the first three fiscal quarters. Within ninety (90) days
of the end of each fiscal year, the Company shall prepare and mail, or cause its
accountants to prepare and mail, to each Member and, to the extent necessary, to
each former Member (or its legal representatives), a report setting forth in
sufficient detail such information as is required to be furnished to partners by
law (e.g., section 6031(b) of the Code and the regulations thereunder) and as
shall enable such Member or former Member (or its legal representatives) to
prepare their respective federal and state income tax or informational returns
in accordance with the laws, rules and regulations then prevailing and any
information necessary for such Member to calculate the fair market value of its
Membership Interest (as determined by the mutual agreement of the Members).
VII.3 BOOKS AND RECORDS; INDEPENDENT AUDIT; PROGRESS REPORTS.
Complete books and records accurately reflecting the accounts, business and
transactions of the Company and Members of the Company shall be maintained and
kept by a Member (as determined by the mutual agreement of the Members) at the
Company's principal place of business. The books and records of the Company
shall be open at reasonable business hours on prior appointment for inspection
and copying by the Members.
VII.4 FISCAL YEAR. Except as may otherwise be required by the
federal tax laws or jointly agreed by the Members, the fiscal year of the
Company for both financial and tax reporting purposes shall end on December 31.
VII.5 METHOD OF ACCOUNTING. The books and accounts of the
Company shall be maintained using the accrual method of accounting for financial
reporting purposes and for tax purposes. Those documents relating to allocation
of items of Company income, gain, loss, deduction or credit and Capital Accounts
shall be kept under federal income tax accounting principles as provided herein.
VII.6 TAX MATTERS MEMBER. The Members, by mutual agreement
shall designate a Member to duly discharge the duties of, the Tax Matters
Partner of the Company, as that term is defined in section 6231(a)(7) of the
Code (such Member, the "TAX MATTERS MEMBER"). The Tax Matters Member shall at
all times assure that each Member is a Notice Partner (as defined in section
6231(a)(8) of the Code) with respect to the Company. The Tax Matters Member
shall
<PAGE> 11
promptly (immediately by telephone and then by personal delivery within two (2)
business days of notification or receipt of notice) (a) notify the Members of
any audit or other tax matter which is brought to the attention of the Tax
Matters Member, by notice from the Internal Revenue Service, and (b) forward to
all Members copies of any notices, correspondence, reports or other instruments,
communications or documents received by the Tax Matters Member in connection
therewith. The Tax Matters Member shall not perform any nonministerial act
pursuant to this provision unless such act has been approved in writing by the
Members. Without limitation of the preceding sentence, the Tax Matters Member,
unless so approved by the Members, shall not have the right (i) to extend any
statute of limitations or any period of limitations with respect to the Company
or any Member in any matter; (ii) to agree on behalf of itself or others to any
settlement of any alleged tax deficiency or other tax matter, or to any
adjustment of taxable income or loss or any item included therein, affecting the
Company or any Member; (iii) to file any petition for judicial review, or any
other judicial proceeding, with respect to the Company or any Member in any tax
matter; or (iv) to file any requests for administrative review of adjustment, or
other administrative relief, on behalf of the Company or any Member in any tax
matter.
ARTICLE VIII
Dissolution of Company
----------------------
VIII.1 DISSOLUTION. The Company shall be dissolved and its
affairs wound up upon the first to occur of the following:
(a) December 31, 2020;
(b) Upon a determination in writing by either Member,
with the approval of its Board of Directors
(including at least a majority of the disinterested
directors), to dissolve the Company (provided that
the Company shall survive until the final disposition
of all purchase orders booked prior to the Company's
receipt of such determination); or
(c) Upon the occurrence of an event causing a dissolution
of the Company under Section 18-801 of the Act,
except the Company shall not be dissolved upon the
occurrence of an event that terminates the continued
membership of a Member if (i) at the time of the
occurrence of such event there are at least two
Members of the Company, or (ii) within ninety (90)
days after the occurrence of such event, all
remaining Members agrees in writing to continue the
business of the Company and to the appointment,
effective as of the date of such event, of one or
more additional Members.
VIII.2 DISTRIBUTION OF ASSETS UPON DISSOLUTION. Upon the
dissolution and winding up of the affairs of the Company, the assets of the
Company shall be distributed as provided in Section 18-804 of the Act.
<PAGE> 12
ARTICLE IX
Miscellaneous
-------------
IX.1 RESOLUTION OF DISPUTES. In the event of any dispute
between the Members hereunder, including, without limitation, disputes as to
allocation of production of Steel Products pursuant to Section 3.2(c) or
reimbursement of reasonable expenses pursuant to Section 3.4, the disputing
Members shall negotiate in good faith a resolution to the dispute for a period
of no less than 30 days after delivery of a written notice of dispute by a
Member to another Member (such notice to include a summary description of the
dispute and a proposed resolution). In the event that the Members are unable to
resolve such dispute within the 30 day negotiation period, a disputing Member
may submit the dispute to binding arbitration in accordance with the Commercial
Rules of the American Arbitration Association ("AAA") then in effect. Unless
otherwise agreed by the disputing Members, the dispute shall be resolved by the
AAA within thirty (30) days of submission, and the AAA shall be informed of the
thirty (30) day resolution requirement when the initial submission is made to
the AAA. Judgment on the award may be entered in any court having jurisdiction.
The location of the arbitration proceeding shall be in the greater metropolitan
area of New York, New York.
IX.2 AMENDMENTS. This Agreement may be amended only upon the
written consent of both Members.
IX.3 NO THIRD PARTY BENEFICIARIES. This Agreement does not
create, and shall not be construed as creating, any rights in favor of any
person not a party to this Agreement.
IX.4 FURTHER ASSURANCES. Each of the Members, B&L and the
Company shall execute any and all further documents, financing statements,
agreements and instruments, and take all further action (including filing
Uniform Commercial Code and other financing statements) that may be required
under applicable law, or that any agent for the lenders of BarTech or RESI may
reasonably request, in order to grant, preserve, protect and perfect the
validity and first priority of the security interests under the respective
credit agreements of BarTech and RESI or to perfect any transfer or assignment
of accounts receivable under this Agreement (including, without limitation, the
rights of (a) RESI and the RESI Lenders and/or the RESI Agent in any accounts
receivable assigned and transferred by BarTech, B&L or the Company to RESI and
(b) BarTech, B&L and BarTech's lenders in any accounts receivable assigned and
transferred by RESI to BarTech or B&L). Each of the Members and the Company
agrees to provide such evidence as any lender of BarTech, agent of the lenders
of BarTech, RESI Lenders and/or the RESI Agent shall reasonably request as to
the perfection and priority status of any such security interests.
IX.5 MISCELLANEOUS. The Members shall not have any liability
for the debts, obligations or liabilities of the Company except to the extent
provided by the Act. This Agreement shall be governed by, and construed under,
the laws of the State of Delaware, provided that the enforceability and
effectiveness of the assignment and transfer of receivables
<PAGE> 13
pursuant to the second sentence of Section 3.2(c) and pursuant to Section 3.2(e)
shall be governed by the laws of the State of Ohio.
<PAGE> 14
IN WITNESS WHEREOF, the undersigned has duly executed this
Agreement as of March 1, 1999.
BAR TECHNOLOGIES INC.
By: /s/ Thomas N. Tyrrell
----------------------
Name: Thomas N. Tyrrell
Title: Chief Executive Officer
REPUBLIC ENGINEERED STEELS, INC.
By: /s/ Thomas N. Tyrrell
----------------------
Name: Thomas N. Tyrrell
Title: Chief Executive Officer
<PAGE> 15
SCHEDULE A
<TABLE>
<CAPTION>
Name and Address of Members Membership/Voting Interests Initial Economic Allocations
- --------------------------- --------------------------- ----------------------------
<S> <C> <C>
BAR TECHNOLOGIES INC. 50% 33_%
3770 Embassy Parkway
Akron, Ohio 44333-8367
REPUBLIC ENGINEERED STEELS, INC. 50% 66_%
3770 Embassy Parkway
Akron, Ohio 44333-8367
</TABLE>
<PAGE> 16
ANNEX I
ALLOCATION PROCEDURES
Attached hereto.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000913883
<NAME> REPUBLIC ENGINEERED STEELS, INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,835
<SECURITIES> 0
<RECEIVABLES> 108,245
<ALLOWANCES> 1,614
<INVENTORY> 154,726
<CURRENT-ASSETS> 307,767
<PP&E> 262,560
<DEPRECIATION> 0
<TOTAL-ASSETS> 755,043
<CURRENT-LIABILITIES> 235,775
<BONDS> 357,339
0
0
<COMMON> 197
<OTHER-SE> 44,307
<TOTAL-LIABILITY-AND-EQUITY> 755,043
<SALES> 464,305
<TOTAL-REVENUES> 465,523
<CGS> 444,061
<TOTAL-COSTS> 444,061
<OTHER-EXPENSES> 57,395
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,465
<INCOME-PRETAX> (70,398)
<INCOME-TAX> 0
<INCOME-CONTINUING> (70,398)
<DISCONTINUED> (298)
<EXTRAORDINARY> (70,696)
<CHANGES> 0
<NET-INCOME> (70,696)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
