10-Q 1 l89633ae10-q.txt REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS 10-Q 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 three and six month periods Commission File Number: 333-90709-04 ended June 30, 2001 REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC ------------------------------------------------- (DEBTOR-IN-POSSESSION AS OF APRIL 2, 2001) (Exact name of registrant as specified in its charter) DELAWARE 34-1902647 ---------------------------- --------------------------------- (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 3770 EMBASSY PARKWAY AKRON, OHIO 44333-8367 (330) 670-3000 ----------------------- -------------- (Address of principal executive offices) (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. __X__ Yes _____ No Number of shares outstanding of common stock as of July 31, 2001: AS OF JULY 31, 2001, THERE WERE 740 CLASS A UNITS OF MEMBERS' INTEREST, 1,000 CLASS B UNITS OF MEMBERS' INTEREST AND 30,000 CLASS C UNITS OF MEMBERS' INTEREST OUTSTANDING. 2 REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) TABLE OF CONTENTS

2 3 PART I - FINANCIAL INFORMATION ITEM 1 - UNAUDITED FINANCIAL STATEMENTS REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE, 2001 AND 2000 (IN THOUSANDS OF DOLLARS) (UNAUDITED)

The accompanying notes are an integral part of these statements. 3 4 REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS JUNE 30, 2000 AND DECEMBER 31, 1999 (IN THOUSANDS OF DOLLARS) (UNAUDITED)

The accompanying notes are an integral part of these statements. 4 5 REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS JUNE 30, 2000 AND DECEMBER 31, 1999 (IN THOUSANDS OF DOLLARS) (UNAUDITED)

The accompanying notes are an integral part of these statements. 5 6 REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF MEMBERS' INTEREST FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND THE YEAR ENDED DECEMBER 31, 2000 (IN THOUSANDS OF DOLLARS) (UNAUDITED)

The accompanying notes are an integral part of these statements. 6 7 REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (IN THOUSANDS OF DOLLARS) (UNAUDITED)

The accompanying notes are an integral part of these statements. 7 8 REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS) (UNAUDITED) 1. NATURE OF OPERATIONS, ORGANIZATION AND OTHER RELATED INFORMATION Republic Technologies International Holdings, LLC and subsidiaries (the "Company") manufactures and markets special bar quality ("SBQ") steel bar products. SBQ steel bar products are high quality hot-rolled and cold-finished carbon and alloy steel bars and rods used primarily in critical applications in automotive and industrial equipment industries. The Company produces a wide range of SBQ steel products and supplies a diverse customer base that includes leading automobile and industrial equipment manufacturers and their first tier suppliers. The Company was formed in a combination completed on August 13, 1999 (the "Combination"). The Combination was completed through a series of mergers, asset transfers, and related steps as set forth in a Master Restructuring Agreement among Bar Technologies Inc. ("BarTech"), Republic Engineered Steels, Inc. ("Republic"), USS/Kobe Steel Company and various of their affiliates. Following the Combination, Republic Technologies International, LLC ("Republic Technologies"), a newly formed legal entity and wholly owned subsidiary of the Company, directly or indirectly owns and operates all of the assets of BarTech, Republic and USS/Kobe Steel Company's SBQ steel products business ("USS/Kobe"). On April 2, 2001 ("Petition Date"), Republic Technologies International, LLC and its immediate parent, Republic Technologies International Holdings, LLC, and its subsidiaries, Bliss & Laughlin LLC, and RTI Capital Corp. (collectively, "Debtors"), filed voluntary petitions for reorganization under Chapter 11 ("Chapter 11") of the Federal Bankruptcy Code ("Bankruptcy Code") in the United States Bankruptcy Court in the Northern District of Ohio, Eastern Division ("Court"). The Company is managing its business subsequent to the Petition Date as debtor-in-possession. The Debtors attributed the need to reorganize to extremely difficult market conditions that have made it impossible for them to meet their financial obligations. The industry-wide market conditions, the Company's high level of indebtedness following the Combination, and an overall softening of the U. S. economy had substantially diminished the Company's liquidity, adversely impacted operations and undermined its ability to implement strategic business initiatives in the short term. Under Chapter 11 proceedings, actions by creditors to collect claims in existence at the filing date ("prepetition") are stayed ("deferred"), absent specific Court authorization to pay such claims, while the Company continues to manage the business as debtor-in-possession. The Company received approval from the Court to pay or otherwise honor certain of its prepetition obligations, including employee wages, salaries, benefits, and certain other employee obligations. The amount of the claims to be filed by the creditors could be significantly different than the amount of the liabilities recorded by the Company. The Company has many executory contracts and other agreements that could be rejected during the Chapter 11 proceedings. Under Chapter 11, the rights of and ultimate payments by the Company to prepetition creditors and to equity investors may be substantially altered. This could result in claims being liquidated in the Chapter 11 proceedings at less (and possibly substantially less) than 100% of their face value and the equity of the Company's equity investors being diluted or cancelled. The Company's prepetition creditors and its equity investors will each have votes in the plan of reorganization. The Company has not yet proposed a plan of reorganization. Due to material uncertainties, it is not possible to determine the additional amount of claims that may arise or ultimately be filed, or to predict the length of time the Company will operate under the protection of Chapter 11, the outcome of the Chapter 11 proceedings in general, whether the Company will continue to operate under its current organizational structure, or the effect of the proceedings on the business of the Company or its subsidiaries or on the interests of the various creditors and security holders. As a result of the Chapter 11 filings, Events of Default, as defined in the related debt agreements, have occurred with respect to all of the Company's secured and unsecured debt. As of the Petition Date, the secured debt has been classified as a current liability and the undersecured and unsecured debt has been classified as liabilities subject to compromise. On April 3, 2001, the Company entered into a Debtor-in-Possession Revolving Credit Agreement ("DIP Credit Agreement") with Fleet Capital Corporation ("Fleet Capital") and other lenders who are parties thereto to provide secured debtor-in-possession financing to the Company. The maximum borrowings under the DIP Credit Agreement are $420 million in the aggregate and include a sub-facility of $50 million for the issuance of letters of credit. The proceeds of the DIP Credit Agreement were used to repay the amounts outstanding under the senior revolving credit facility entered into on August 13, 1999 and restructured on July 17, 2000. Advances under the DIP Credit Agreement bear interest at a base rate used by Fleet 8 9 Capital, plus the applicable margin; or a Eurodollar rate on deposits for a given period, plus the applicable margin. The applicable margin on base rate loans is 1.5% and on Eurodollar loans is 3.5%. The applicable margin on base rate and Eurodollar loans may be increased by 2% under specified circumstances. A borrowing base limits the amount available at any time. The Company's net availability on its revolving credit facility at August 4, 2001 was approximately $14.7 million. The DIP Credit Agreement grants a security interest in accounts receivable, inventory, intellectual property and related assets of the Company, and the real estate and fixed assets comprising the Canton Ohio Caster and Continuing Rolling Facility, including the related melt shop. The DIP Credit Agreement also contains certain restrictive covenants which, among other things, restrict the Company's ability to incur additional indebtedness or guarantee the obligations of others, change its line of business, merge, consolidate and acquire or sell assets or stock, pay dividends, or prepay or amend the notes or any of its subordinated indebtedness. The Company is also required to maintain minimum cumulative EBITDA as defined in the DIP Credit Agreement and limit its net capital expenditures. Although the Company has entered into the DIP Credit Agreement, the Company may need to obtain additional financing to meet its cash flow requirements. Restrictive covenants included in the debtor-in-possession credit facility and oversight by the Bankruptcy Court limit the Company's ability to incur additional indebtedness, or sell assets (most of which are pledged), and may otherwise limit the operational and financial flexibility of the Company. The Company's recurring losses and negative cash flows from operations, current liabilities in excess of current assets, and the Chapter 11 cases raise substantial doubt about the Company's ability to continue as a going concern. As discussed above, management intends to submit a plan for reorganization to the Bankruptcy Court. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, (i) the Company's ability to comply with its debtor-in-possession financing agreement, (ii) submission and confirmation of a plan of reorganization under the Bankruptcy Code, (iii) the Company's ability to achieve profitable operations after such confirmation, and (iv) the Company's ability to generate sufficient cash from operations to meet its obligations. The consolidated financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements for the periods after the Petition Date have been prepared in accordance with the AICPA's Statement of Position 90-7, "Financial Reporting by Entities In Reorganization Under the Bankruptcy Code" ("SOP 90-7"). The consolidated financial statements are prepared on a going concern basis of accounting and do not reflect any adjustments that might result if the Company is unable to continue as a going concern. Accordingly, the consolidated financial statements do not reflect adjustments or provide for the potential consequences of the bankruptcy proceedings on the Company. In particular, the consolidated financial statements do not purport to show (i) the realizable value of assets on a liquidation basis or their availability to satisfy liabilities; (ii) prepetition liability amounts that may be allowed for claims or contingencies or the status and priority thereof; (iii) the effect of any changes that may be made to the capitalization of the Company; or (iv) the effect of any changes that may be made in the Company's business operations. The outcome of these matters is not presently determinable. On confirmation of a plan of reorganization, the Company will apply "Fresh Start Accounting" in accordance with the guidelines for accounting for emergence from bankruptcy. Under Fresh Start Accounting, a revaluation of Company assets to reflect current values can be expected. The accompanying consolidated financial statements contain results for Republic Technologies International Holdings, LLC and its subsidiaries for the three and six months ended June 30, 2001 and 2000. These consolidated statements are unaudited. Certain information and footnote disclosures normally prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Although management believes that all adjustments, including normal recurring adjustments necessary for a fair presentation, have been made, interim periods are not necessarily indicative of the results of operations for a full year. As such, these financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2000 included in the Company's Form 10-K, filed with the Securities and Exchange Commission. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances have been eliminated in consolidation. Certain reclassifications have been made to prior period financial statements to conform to current period presentation. 9 10 The Company operates in three separate segments: hot-rolled, cold-finished, and specialty steels. In connection with the acquisition of Republic, the Company determined its intent to sell the specialty steels segment of the business ("Specialty Steel Division"). The Company manages the reportable segments as separate strategic business units. Differences between the segments include manufacturing techniques and equipment, competition, and end-users. The Company sold certain assets from its Baltimore specialty steel plant in January 2001 and is currently in the process of selling the remaining real estate and assets of the Specialty Steel Division. The accompanying consolidated financial statements reflect the Specialty Steel Division as a discontinued business in accordance with Accounting Principles Board Opinion No. 30. See Note 9 for further information related to discontinued operations. In July 2001 the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangibles." SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and broadens the criteria for recording intangibles separate from goodwill. The Company's recorded intangible assets will have to be evaluated against this new criteria an my result in certain intangible assets being reclassified into goodwill. SFAS No. 142 eliminates the amortization of goodwill and certain intangible assets upon adoption and also requires an initial goodwill impairment assessment in the year of adoption and annual impairment test thereafter. The provisions of each statement that apply to goodwill and intangible assets acquired prior to July 1, 2001 will be adopted by the Company on January 1, 2002. Management expects the adoption of these accounting standards will result in certain intangible assets being reclassified to goodwill and nonamortizing intangible asset categories, which will have the impact of reducing amortization expense by an amount that has not yet been determined commencing January 1, 2002; however, impairment review may result in future write-downs. 3. INVENTORIES

At June 30, 2001 and December 31, 2000, inventories are net of market reserves and obsolescence reserves aggregating $9.6 million and $6.7 million, respectively. 4. LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS The accompanying consolidated balance sheet as of June 30, 2001 segregates liabilities subject to compromise, such as unsecured claims, in the amount of $1,156.2 million, from liabilities not subject to compromise and liabilities arising subsequent to the Petition Date. These amounts represent the Company's best estimate of known or potential claims to be resolved in connection with the Chapter 11 cases. Such claims remain subject to future adjustments based on negotiations, actions of the Bankruptcy Court, further development with respect to disputed claims, future rejection of additional executory contracts or unexpired leases, and determination as to the value of any collateral securing claims or other events. Payment terms for these amounts, which are considered long-term liabilities at this time, will be established in connection with the Chapter 11 cases. The Company has received approval from the Bankruptcy Court to pay pre-petition and post-petition employee wages, salaries, benefits and certain other employee obligations. Liabilities subject to compromise at June 30, 2001 were as follows (in thousands): JUNE 30, 2001 ------------- Accounts payable $ 223,478 Accrued interest 20,378 Other postretirement benefits 234,306 Defined benefit pension obligations 98,773 Other accrued expenses 30,752 Long term deferred payables 36,424 Long term debt 512,108 ---------- Total (a) $1,156,219 ========== (a) Excludes a net intercompany payable in the amount of $5,890 to the Company's subsidiary, Nimishillen & Tuscarawas LLC, which is not included in the bankruptcy proceedings. 10 11 Reorganization items consist of expenses directly incurred or realized as a result of the Chapter 11 cases and have been segregated from normal operations. Reorganization expense included in the consolidated statement of operations for the three and six months ended June 30, 2001 include the following: Write-down of deferred financing costs related to the revolving credit facility $4,247 Professional fees and administrative items 2,239 ------ Total $6,486 ====== 5. WORKFORCE REDUCTION CHARGES In connection with the Republic acquisition in September 1998, a new Master Collective Bargaining Agreement and settlement agreement (collectively, the "Master CBA") covering all of the former Republic and BarTech facilities with employees represented by the United Steel Workers of America ("USWA") were entered into with the USWA. The Master CBA replaced the existing collective bargaining agreements with the USWA, other than selected plant-specific agreements. In connection with the Combination, the scope of the Master CBA was extended to cover the former USS/Kobe Lorain, Ohio facility. The Master CBA expires on October 31, 2003. The Master CBA provides for improvements in the existing defined benefit pension plans covering employees at former Republic facilities, former USS/Kobe facilities, and the former Bliss & Laughlin Harvey, Illinois facility. The agreement also provides for the creation of a defined benefit pension plan obligation covering employees at former BarTech facilities. The Master CBA requires Republic Technologies International, LLC 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 by a net reduction of over 1,900 hourly employees over four years. These programs are substantially voluntary in nature. Accordingly, the costs associated with these workforce reductions are being recognized as the offers are accepted by the employees and intend to be awarded by the Company. Through June 30, 2001, 845 voluntary ERB packages were accepted. As such, the Company has recorded $110.7 million of workforce reduction charges to date for early retirement benefits and special termination payments. Under the terms of Master CBA, if the ERBs and VSPs do not achieve targeted headcount reductions, Republic Technologies International, LLC 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. 6. RESTRUCTURING CHARGES AND RESERVES The Company continues to execute its consolidation plan developed at the time of the Combination. Through the consolidation plan, the Company expects to create a more efficient, higher quality network of production facilities operated by a smaller more flexible workforce and to rationalize the corporate overhead structure of the combined companies. During the year ended December 31, 2000, the Company shutdown two of its production facilities: the Johnstown, Pennsylvania melt shop facility and the Canton, Ohio 12" rolling mill facility, announced the shutdown of its Willimantic, Connecticut cold-finishing facility, which occurred in March of 2001, and continued to rationalize the corporate overhead structure of the combined companies. As a result of these actions, the Company recorded restructuring charges of $74.7 million during the year ended December 31, 2000 and $1.2 million during the six months ended June 30, 2001. The charges recorded during the year ended December 31, 2000 were for the write-down of property, plant, and equipment for certain affected facilities and to establish reserves for labor and severance costs, other than ERBs and VSPs discussed in Note 5, and facility closure costs. The $1.2 million charge recorded in 2001 includes $0.9 for severance costs relating to additional administrative staff reductions and $.3 million in additional environmental remediation required as a result of the Willimantic facility closure. During the year ended December 31, 2000, the Company recorded restructuring charges of $66.5 million related to the closing of the Johnstown facility. These charges consisted of a $40.6 million write-down of property, plant, and equipment, $6.0 million of facility closure costs, and $3.2 million in additional environmental remediation required as a result of the closure. The restructuring charges also included hourly employee separation costs of $16.0 million for hourly workers and $.7 million for non-hourly severance. The hourly employee separation charge was based on estimates of the cost of an agreement reached with the USWA. 11 12 Restructuring charges of $3.5 million were also recorded during 2000 related to the announced closing of the Willimantic facility. These charges consisted of a $3.2 million write-down of property, plant, and equipment and $.3 million in additional environmental remediation required as a result of the closure. Unlike the closure of the Johnstown facility, the closure of the Canton 12" rolling facility was part of the Company's original consolidation plan contemplated at the time of the Republic acquisition. Fair value adjustments to the fixed assets and shutdown reserves related to the Canton 12" facility were recorded at the date of the Republic acquisition. Charges for hourly labor of $1.4 million were recorded during the year ended December 31, 2000 related to employment security provisions in the labor agreement with the USWA. The Company has not recorded a provision for hourly employee separation costs in view of the fact that all affected employees were offered and have accepted suitable alternative employment at other Company facilities. The Company had previously recorded a reserve for the reduction of non-union labor and other shutdown reserves at the date of the Republic acquisition related to the manufacturing locations selected for closure (the Canton 12" rolling facility and the Chicago 11" rolling facility) amounting to $4.4 million and $1.9 million, respectively. Adjustments reducing these previously recorded reserves due to changes in estimates were recorded during the year ended December 31, 2000 amounting to $1.4 million. Additionally, a reserve for the reduction of administrative labor amounting to $4.6 million during 2000, including $3.7 million for the six months ended June 30, 2000 was recorded as a restructuring charge in the consolidated statement of operations. The activity impacting the accruals for restructuring during the six months ended June 30, 2001, is summarized in the table below: Labor & Facility Closure Severance Costs Total --------- ----- ----- December 31, 2000 $18,568 $ 6,385 $24,953 Provision 858 300 1,158 Amount utilized (2,523) (1,701) (4,224) Adjustments -- 1,544 (a) 1,544 ------- ------- ------- June 30, 2001 $16,903 $ 6,528 $23,431 ======= ======= ======= (a) The adjustment of $1.5 million represents a change in estimate in the reserve for facility closure costs provided from recoveries on dispositions of property, plant, and equipment previously written down in restructuring charges. 7. CONDENSED COMBINED FINANCIAL STATEMENTS The following condensed combined financial statements of the Debtors were prepared on the same basis as the consolidated financial statements and are presented below in accordance with SOP 90-7 (in thousands): STATEMENT OF OPERATIONS FOR THE PERIOD APRIL 2, 2001 TO JUNE 30, 2001 Net sales $241,690 Cost of goods sold 221,218 -------- Gross profit (loss) 20,472 Selling, general and administrative expense 10,583 Depreciation and amortization expense 13,816 Special charges: Workforce reduction charges 3,898 Restructuring charges 300 Loss (gain) on sale of assets 671 Other expense, net 355 -------- Operating loss (9,151) Interest expense, net 9,521 Reorganization items 6,486 -------- Loss before income taxes (25,158) Provision for income taxes 46 -------- Net loss $(25,204) ======== 12 13 BALANCE SHEET JUNE 30, 2001 ASSETS Current assets: Cash and cash equivalents $ 4,111 Accounts receivable, less allowances of $14,706 133,671 Accounts receivable with affiliates 14,183 Inventories 239,261 Assets held for sale 8,687 Prepaid expenses and other current assets 3,506 ---------- Total current assets 403,419 Property, plant and equipment: Land and improvements 13,757 Buildings and improvements 32,846 Machinery and equipment 718,234 Construction-in-progress 4,128 ---------- Total property, plant and equipment 768,965 Accumulated depreciation (124,745) ---------- Net property, plant and equipment 644,220 Assets held for sale 2,538 Intangible assets, net of accumulated amortization 74,567 Investments in non-debtor subsidiaries 16,221 Other assets 7,994 ---------- Total assets $1,148,959 ========== LIABILITIES AND MEMBERS' INTEREST Liabilities not subject to compromise: Current liabilities: Revolving credit facility $ 352,455 Long-term secured debt in default 3,600 Accounts payable 40,309 Accounts payable with affiliates 13,013 Accrued interest 3,257 Accrued compensation and benefits 41,985 Accrued environmental liabilities 2,109 Other accrued liabilities 31,644 ---------- Total current liabilities 488,372 Accrued environmental liabilities 17,365 Other liabilities 6,022 ---------- Total liabilities not subject to compromise 511,759 Liabilities subject to compromise 1,156,219 ---------- Total liabilities 1,667,978 ---------- Members' interest (519,019) ---------- Total liabilities and members' interest $1,148,959 ========== 13 14 STATEMENT OF CASH FLOWS FOR THE PERIOD APRIL 2, 2001 TO JUNE 30, 2001 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(25,204) Adjustments to reconcile net cash used in operating activities: Restructuring charges 300 Loss on sale of fixed assets 671 Depreciation and amortization 13,816 Amortization of deferred financing cost 1,290 Reorganization items 6,486 Changes in operating assets and liabilities: Decrease in accounts receivable 21,417 Increase in inventory (34,791) Decrease in other current assets 3,401 Increase in accounts payable 1,323 Increase in accrued compensation and benefits 697 Increase in defined benefit pension obligations 4,185 Increase in other postretirement benefits 733 Decrease in accrued environmental liabilities (406) Increase in other current liabilities 1,278 Other (425) -------- NET CASH USED IN OPERATING ACTIVITIES BEFORE REORGANIZATION ITEMS (5,228) Payments for professional fees and other reorganization items (1,421) -------- NET CASH USED IN OPERATING ACTIVITIES (6,649) -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (535) Disposition of property, plant and equipment 59 -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (476) -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds under revolving credit facilities 9,661 Repayments of long-term debt (43) Deferred financing costs (1,300) -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 8,318 NET INCREASE IN CASH AND CASH EQUIVALENTS 1,193 Cash and cash equivalents - beginning of period 2,918 -------- Cash and cash equivalents - end of period $ 4,111 ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 50,401 ======== Cash paid for income taxes $ 168 ========

14 15 8. SEGMENT INFORMATION The Company operates in three reportable segments: hot-rolled, cold-finished and specialty steels. As discussed previously in Note 2, the Company intends to sell its specialty steel division and accordingly, the accompanying consolidated financial statements reflect that division as a discontinued operation in accordance with Accounting Principles Board Opinion No. 30. As such the following tables do not reflect specialty steels as a reportable segment. The Company manages the reportable segments as separate strategic business units. Differences between the segments include manufacturing techniques and equipment, competition, and end-users. The Company measures segment performance based on earnings before net interest expense, income taxes, depreciation and amortization expense, other postretirement benefit charges, workforce reduction charges and other (income) loss, net ("EBITDA, as defined"). HOT-ROLLED Hot-rolled bars and rods are processed from blooms and billets on rolling mills to change the internal physical properties, size or shape of the steel. Desirable characteristics of hot-rolled products include internal soundness, uniformity of chemical composition and freedom from surface imperfection. The Company's hot-rolled products include rounds, squares and hexagons, in both cut-lengths and coils. Customers for hot-rolled products include manufacturers of automotive parts, industrial equipment, independent forgers, steel service centers, and converters. The Company's hot-rolled products are used in the manufacture of end-use products such as automotive drive trains, engine and transmission parts, bearings and tractor components. COLD-FINISHED Cold-finishing is a value-added process which improves the physical properties of hot-rolled bars and rods. Cold-finished products are produced from hot-rolled bars by cold-drawing, turning, grinding, thermal treating or a combination of these processes. The manufacturing process allows for production of products with more precise size and straightness tolerances, as well as improved strength and surface finish, that provides customers with a more efficient means of producing a number of end products by often eliminating processing steps in the customers' use of the products. The Company's cold-finished products include rounds, squares, hexagons, and flats, all of which can be further processed by turning, grinding or polishing, or a combination thereof. Customers for cold-finished products include manufacturers of automotive parts, industrial equipment, steel service centers and distributors. The Company's cold-finished products are used in the manufacture of end-use products such as automotive steering assemblies, electrical motor shafts, ball and roller bearings, valves and hand tools. Intersegment sales are made at an agreed upon transfer cost which is adjusted quarterly and are eliminated in consolidation. Selling, general and administrative and other costs are allocated 80% to hot-rolled and 20% to cold-finished. Pension costs are allocated based on the amount of payroll incurred by each segment.

15 16

9. DISCONTINUED OPERATIONS In connection with its acquisition of Republic, the Company determined its intent to sell its Specialty Steels Division and accordingly, the accompanying consolidated financial statements reflect that division as a discontinued operation in accordance with Accounting Principles Board Opinion No. 30. An estimate of the operating results of the Specialty Steels Division during the phase-out period from the acquisition date to the estimated ultimate disposition date was made and included as a fair value adjustment as part of the allocation of the Republic purchase price. During the year ended December 31, 2000, an additional provision of $16.8 million was made for the estimated additional loss from disposition, including a charge of $7.0 million was taken for the permanent shutdown of the Baltimore Specialty facility. In the six months ended June 30, 2001, no additional provision was recorded related to the Specialty Steel Division. The Company sold certain assets from its Baltimore plant in January 2001 and is currently in the process of selling the remaining real estate and assets of the Specialty Steel Division. Management anticipates the disposition to be completed during the third quarter of 2001. Sales and related losses for the discontinued operations were as follows (net loss on discontinued operations has been reflected in the Company's financial statements as a reduction in the accrual for losses on the discontinued operations that was provided as part of the estimated loss on disposition):

16 17 The components of net assets of discontinued operations included in the Company's consolidated balance sheets as assets held for sale were as follows:

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is the largest producer of special bar quality steel products in the United States with a market share of approximately 23%, based on 2000 calendar year shipments. SBQ steel products are high quality hot-rolled and cold-finished carbon and alloy steel bar and rod used primarily in critical applications in automotive and industrial equipment. SBQ steel products are sold to customers who require precise metallurgical content and quality characteristics. SBQ steel products generally contain more alloys and sell for substantially higher prices than merchant and commodity steel bar and rod products. The Company produces the widest range of SBQ steel products in the United States and supplies a diverse customer base that includes leading automobile and industrial equipment manufacturers and their first tier suppliers. RESULTS OF OPERATIONS The following discussion relates to the Company's consolidated results of operations for the three and six months ended June 30, 2001 and 2000. The results for the three and six months ended June 30, 2001 are not necessarily indicative of the results to be expected for the full year ended December 31, 2001. THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2000 Net sales for the three months ended June 30, 2001 totaled $250.7 million on shipments of approximately 493,908 net tons compared with net sales of $352.9 million for the three months ended June 30, 2000 on shipments of approximately 719,700 net tons. The decrease in net sales and tons shipped reflects the weak demand in the automotive and service center markets that has negatively affected the results for the three months ended June 30, 2001. Net sales for the three months ended June 30, 2001 were comprised of $194.1 million of hot-rolled net sales and $56.6 million of cold-finished net sales, compared with hot-rolled net sales of $274.9 million and cold-finished net sales of $78.0 million for the three months ended June 30, 2000. Cost of sales totaled $229.2 million, or 91.4% of net sales, for the three months ended June 30, 2001 compared with cost of sales of $320.1 million, or 90.7% of net sales, for the similar period ended June 30, 2000. Cost of sales for the three months ended June 30, 2001 consisted of $176.0 million on hot-rolled products and $53.2 million on cold-finished products compared with $248.8 million on hot-rolled products and $71.3 million on cold-finished products for the three months ended June 30, 2000. The overall decrease in cost of sales from the three months ended June 30, 2000 to the three months ended June 30, 2001 was primarily due to the decrease in sales as the cost of sales as a percentage of net sales remained relatively constant. Selling, general and administrative expenses were $11.0 million, or 4.4% of net sales, for the three months ended June 30, 2001 compared with $12.8 million, or 3.6% of net sales, for the three months ended June 30, 2000. The overall decrease in selling, general and administrative expenses is due in part to the continuing benefits derived from combining selling, general and administrative functions following the Combination. Additionally there was a further reduction in selling, general and administrative headcount during the quarter. Depreciation and amortization expense was $14.1 million for the three months ended June 30, 2001, compared with $15.4 million for the three months ended June 30, 2000. The decrease in the current period was primarily related to the reduction of goodwill amortization following the impairment charge taken in the fourth quarter of 2000. Workforce reduction charges were $3.9 million for the three months ended June 30, 2001, compared with $0.4 million for the three months ended June 30, 2000. The increase was primarily due to 16 voluntary early retirement buyouts ("ERBs") and 11 voluntary severance packages ("VSPs") accepted during the second quarter of 2001 as compared to only 3 ERBs being accepted during the second quarter of 2000. 17 18 Restructuring charges of $0.3 million for the three months ended June 30, 2001, compared with $47.8 million for the three months ended June 30, 2000. The decrease was related to $45.8 million in shutdown costs recorded in connection with the shutdown of the Johnstown facility in 2000. These costs included $40.6 million related to a write down of the property, plant and equipment for the Johnstown facility, $3.2 million related to additional environmental remediation required as a result of the closure, and $2.0 million is for other shutdown costs related to the Johnstown facility. In addition, $2.0 million was recorded due to severance related costs for administrative staff reductions. The $0.3 million recorded in the three months ended June 30, 2001 related to additional environmental remediation required as a result of the Willimantic shutdown and closure. Net interest expense was $9.5 million for the three months ended June 30, 2001 compared with $27.1 million for the three months ended June 30, 2000. The decrease is primarily due to the Chapter 11 filings suspending the accrual of interest expense on all debt other than the DIP credit facility and the industrial revenue bond held with the Development Authority of Cartersville, Georgia. Reorganization items represent $6.5 million in costs relating to the current Chapter 11 proceedings. These costs include a $4.2 million write-down of deferred finance costs related to the revolving credit facility which has been converted into the new DIP credit facility due to the bankruptcy proceedings. The amount also includes $2.3 million of various consulting and legal fees that are also related to the bankruptcy proceedings. The provision for income taxes for the three month period ended June 30, 2000 consisted of currently payable foreign income taxes owed by Canadian Drawn Steel Company ("CDSC"). The Company recorded charges of $9.8 million related to the disposition of its Specialty Steels Division in the three months ended June 30, 2000. As a result of the above, the Company reported a net loss of $24.7 million for the three months ended June 30, 2001 compared with a net loss of $81.9 million for the three months ended June 30, 2000. SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000 Net sales for the six months ended June 30, 2001 totaled $517.3 million on shipments of approximately 1,030,899 net tons compared with net sales of $711.4 million for the six months ended June 30, 2000 on shipments of approximately 1,428,500 net tons. The decrease in net sales and tons shipped reflects the weak demand in the automotive and service center markets that has negatively affected the results for the six months ended June 30, 2001. Net sales for the six months ended June 30, 2001 were comprised of $401.3 million of hot-rolled net sales and $116.0 million of cold-finished net sales, compared with hot-rolled net sales of $551.0 million and cold-finished net sales of $160.4 million for the six months ended June 30, 2000. Cost of sales totaled $520.4 million, or 100.6% of net sales, for the six months ended June 30, 2001 compared with cost of sales of $654.3 million, or 92.0% of net sales, for the similar period ended June 30, 2000. Cost of sales for the six months ended June 30, 2001 consisted of $409.5 million on hot-rolled products and $110.9 million on cold-finished products compared with $506.7 million on hot-rolled products and $147.6 million on cold-finished products for the six months ended June 30, 2000. The overall increase in cost of sales as a percentage of net sales from the six months ended June 30, 2000 to the six months ended June 30, 2001 was primarily due to reduced units of production in the current year coupled with primarily fixed labor costs. Selling, general and administrative expenses were $23.4 million, or 4.5% of net sales, for the six months ended June 30, 2001 compared with $27.4 million, or 4.5% of net sales, for the six months ended June 30, 2000. The overall decrease in selling, general and administrative expenses is due in part to the continuing benefits derived from combining selling, general and administrative functions following the Combination. Additionally there was a further reduction in selling, general and administrative headcount during 2001. Depreciation and amortization expense was $28.6 million for the six months ended June 30, 2001, compared with $31.1 million for the six months ended June 30, 2000. The decrease in the current period was primarily related to the reduction of goodwill amortization following the impairment charge taken in the fourth quarter of 2000. Workforce reduction charges were $14.0 million for the six months ended June 30, 2001, compared with $1.5 million for the six months ended June 30, 2000. The increase was primarily due to 65 voluntary early retirement buyouts ("ERBs") being accepted during the first six months of 2001 as compared to only 9 ERBs accepted during the first six months of 2000. 18 19 Restructuring charges of $1.2 million were recorded during the six months ended June 30, 2001 as compared with $49.5 million during the same period in 2000. As discussed previously the decrease is primarily a result of the $45.8 million in shutdown costs recorded in connection with the shutdown of the Johnstown facility in the second quarter of 2000. In addition to the $0.3 million recorded in the second quarter of 2001 in connection with the shutdown of Willimantic discussed previously the restructuring charges for the six months ended June 30, 2001 also included $0.9 million of severance related costs for administrative staff reductions as compared to $3.6 million for the six months ended June 30, 2000. The decrease in the severance charges was due to fewer administrative staff reductions in the first six months of 2001 compared to the first six months of 2000. Net interest expense was $39.5 million for the six months ended June 30, 2001 compared with $53.8 million for the six months ended June 30, 2000. The decrease is primarily due to the Chapter 11 filings suspending the accrual of interest expense as of April 2, 2001 on all debt other than the DIP credit facility and the industrial revenue bond held with the Development Authority of Cartersville, Georgia. Reorganization items represent $6.5 million in costs relating to the current Chapter 11 proceedings. These costs include a $4.2 million write-down of deferred finance costs related to the revolving credit facility which has been converted into the new DIP credit facility due to the bankruptcy proceedings. The amount also includes $2.3 million of various consulting and legal fees that are also related to the bankruptcy proceedings. The provision for income taxes for the six month periods ended June 30, 2001 and 2000 consisted primarily of currently payable foreign income taxes owed by CDSC. The Company recorded charges of $9.8 million related to the disposition of its Specialty Steels Division in the six months ended June 30, 2000. As a result of the above, the Company reported a net loss of $116.3 million for the six months ended June 30, 2001 compared with a net loss of $119.4 million for the six months ended June 30, 2000. LIQUIDITY AND CAPITAL RESOURCES The Company's primary liquidity requirements consist of working capital needs, funding requirements relating to its agreement with the Pension Benefit Guaranty Corporation (the "PBGC"), capital expenditures and other costs relating to the Company's consolidation plan, debt service requirements, and Chapter 11 administrative expenses. The Company's current sources of liquidity include cash and cash equivalents, cash from operations, and amounts available under its debtor-in-possession facility. PBGC Obligations In connection with the Combination, Republic Technologies International, LLC agreed with the PBGC to fund $178 million into the Republic Engineered Steels, Inc. USWA Defined Benefit Plan, a defined benefit pension plan for employees represented by the USWA in connection with the headcount reduction and related early retirement benefits contemplated by the Company's consolidation plan. Of the $178 million, $66.5 million has been funded through June 30, 2001. Republic Technologies International, LLC, under the terms of the current amended PBGC agreement, was required to make quarterly contributions in accordance with the following schedule: $2.0 million per quarter for the next two payments, $14.8 million per quarter for the next three payments, and $14.2 million per quarter for the next four payments, and one final quarterly payment of $6.3 million. These funding levels are subject to the outcome of the Chapter 11 proceedings. In addition, pursuant to the Company's consolidation plan, Republic Technologies International, LLC was to offer a combination of early retirement buyout packages to its employees. The actual cost of the early retirement buyout packages and voluntary retirement plans will depend on the outcome of the Chapter 11 proceedings and the mix of such arrangements offered to and accepted by the hourly employees represented by the USWA. In addition, with respect to the USS/Kobe Union Eligible Pension Plan, a defined benefit plan for union employees, the Company agreed with the PBGC to maintain a specified level of funding based on statutory funding requirements. The contributions were to be made as follows: for the year 2001, an amount necessary to avoid an accumulated funding deficiency plus $6 million, an amount so that the December 31, 2001 credit balance equals that of December 31, 2000 with interest plus $2 million; for 2002, an amount so that the December 31, 2002 credit balance equals that of December 2001 with interest plus $2 million; for 2003, an amount so that the December 31, 2003 credit balance equals that of December 31, 2002 with interest plus $2 million. Beginning with 2004, the Company was to make contributions to maintain the December 31, 2003 credit balance 19 20 with interest. As security for such obligation, the Company has provided the PBGC with a $5 million letter of credit, which the PBGC has called in total during July 2001. The Company currently is not making payments to the PBGC and future funding levels are also subject to the outcome of the Chapter 11 proceedings. Capital Expenditures The Company invested $1.3 million in capital expenditures during the six months ended June 30, 2001. The Company's debtor-in-possession facility limits capital expenditures to $29.0 million in 2001 and $30.2 million in 2002. The Company's four-year consolidation plan originally contemplated construction of a new large bar mill which management estimates would cost approximately $90 million. The plan to construct this facility is currently under review and subject to the outcome of the Chapter 11 proceedings. Debt Service Requirements On April 3, 2001, the Company entered into a Debtor-in-Possession Revolving Credit Agreement ("DIP Credit Agreement") with Fleet Capital Corporation ("Fleet Capital") and other lenders who are parties thereto to provide secured debtor-in-possession financing to the Company. The maximum borrowings under the DIP Credit Agreement are $420 million in the aggregate and include a sub-facility of $50 million for the issuance of letters of credit. Advances under the DIP Credit Agreement bear interest at a base rate used by Fleet Capital, plus the applicable margin; or a Eurodollar rate on deposits for a given period, plus the applicable margin. The applicable margin on base rate loans is 1.5% and on Eurodollar loans is 3.5%. The applicable margin on base rate and Eurodollar loans may be increased by 2% under specified circumstances. A borrowing base limits the amount available at any time. The Company's net availability on its revolving credit facility at August 4, 2001 was approximately $14.7 million. Under the terms of the bankruptcy cases, liabilities in the amount of approximately $1,156 million at June 30, 2001, are subject to compromise under the Chapter 11 proceedings. Included in the liabilities subject to compromise, is approximately $512.1 million of long-term debt. The accrual and payment of interest on debt facilities, other than the debtor-in-possession facility and the Development Authority of Cartersville, Georgia industrial revenue bond, has been suspended subsequent to the Petition Date. All such debt service requirements are subject to the outcome of the Chapter 11 proceedings. The contractual amount of the interest not accrued as of June 30, 2001 was $17.3 million. Although the Company has obtained a debtor-in-possession credit facility, liquidity will be impacted by the uncertainty of the bankruptcy proceedings, including restructuring and settlement of prepetition obligations, the terms of the debtor-in-possession credit facility and the ability to obtain other financing. As a result of these uncertainties, there can be no assurance existing or future sources of liquidity will be adequate. Liquidity Sources and Other Factors Affecting Liquidity The Company's lower than expected sales in the first and second quarters of 2001 caused its liquidity to be negatively affected. The Company's liquidity position has also been negatively impacted by the implementation of its consolidation plan as a result of the time lag between incurring certain costs and the receipt of the expected cash flow benefits, such as in the case of headcount reductions requiring lump sum payouts. Management has sought to improve the Company's liquidity position by taking a number of actions including increasing spot prices, reducing administrative staff, implementing cost cutting programs, and closing operations. The Company closed its Baltimore, Maryland Specialty Steel facility and its Willimantic cold-finishing plant in the first quarter of 2001. In addition, the Company reduced its planned capital expenditures from $48.0 to $13.1 million for the year 2001, and obtained deferrals of approximately $46.0 million of certain quarterly 2000 and 2001 Pension Benefit Guaranty Corporation ("PBGC") funding requirements until 2002 and 2003. The Company is also in the process of selling its remaining specialty steels division assets and expects to complete the sale in the third quarter of this year. The Company is also in the process of selling certain real estate from facilities closed as part of the consolidation plan. Notwithstanding these actions, on April 2, 2001, the Company and the majority of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court (see Note 1 to the consolidated financial statements). Although the Company has obtained a debtor-in-possession credit facility, the Company may need to obtain additional financing to meet its cash flow requirements. Restrictive covenants included in the debtor-in-possession credit facility and oversight by 20 21 the Bankruptcy Court limit the Company's ability to incur additional indebtedness, or sell assets (most of which are pledged), and may otherwise limit the operational and financial flexibility of the Company. FORWARD LOOKING STATEMENTS Statements included in this filing with the SEC (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: o the Company's ability to develop and obtain approval of a plan of reorganization during its Chapter 11 proceedings; o the Company's ability to increase sales to existing and new customers, particularly sales to automotive and industrial equipment manufacturers; o the Company's ability to implement its consolidation plan and to realize the expected benefits of the Combination in the time frame and at the costs currently contemplated; o market conditions and general risks associated with the steel industry; and o matters discussed under the caption "Risk Factors" in the Company's Registration Statement on Form S-4. The reader should not place undue reliance on the forward-looking statements contained in this report. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has a cold-finished facility in Canada and is, therefore, subject to foreign currency exchange rate exposure. Historically, the exchange rate volatility and related exposure to the Company has been minimal. At the present time, the Company does not hedge foreign currency risks. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Bankruptcy Filings. On April 2, 2001, Republic Technologies International, LLC and its immediate parent, Republic Technologies International Holdings, LLC, and its subsidiaries, Bliss & Laughlin, LLC and RTI Capital Corp., filed voluntary petitions for reorganization under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court in the Northern District of Ohio, Eastern Division. The Chapter 11 cases have been assigned to Judge Marilyn Shea-Stonum and designated as case Numbers 01-51117 (Republic Technologies International, LLC), 01-51118 (Republic Technologies International Holdings, LLC), 01-51119 (Bliss & Laughlin, LLC), and 01-51120 (RTI Capital Corp.). The Chapter 11 cases will be jointly administered for procedural purposes, only, under case Number 01-51117. Each of these entities will continue to operate its business and manage its property as a debtor in possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. As a result of the Chapter 11 filings, litigation relating to prepetition claims against the Debtors is stayed; however, certain prepetition claims by the government or governmental agencies seeking equitable or other non-monetary relief against the Debtors are not subject to the automatic stay. Other. The Company and its subsidiaries are involved in various legal proceedings occurring in the ordinary course of business. It is the opinion of management, after consultation with legal counsel, that except for certain environmental proceedings (which is discussed in detail in the Company's Annual Report filed on Form 10-K), these matters will not materially affect the Company's consolidated financial position, results of operations or cash flows. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES As a result of the Chapter 11 filings, Events of Default, as defined in the related debt agreements, have occurred with respect to $515.7 million of the Company's secured and unsecured debt. 21 22 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.) Reports on Form 8-K (10.51) Form 8-K dated April 9, 2001 related to Republic Technologies International, LLC and its immediate parent, Republic Technologies International Holdings, LLC, and its subsidiaries, Bliss & Laughlin LLC, and RTI Capital Corp. filing voluntary petitions for reorganization under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court in the Northern District of Ohio, Eastern Division. 22 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC Date: August 10, 2001 By: /s/Joseph F. Lapinsky --------------------------- Joseph F. Lapinsky Chief Executive Officer, President and Chief Operating Officer Date: August 10, 2001 By: /s/Stephen Graham ---------------------------- Stephen Graham Executive Vice President and Chief Financial Officer Date: August 10, 2001 By: /s/ Joseph A. Kaczka ---------------------------- Joseph A. Kaczka Vice President of Finance, Controller and Chief Accounting Officer 23

REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS LLC 10-Q