10-Q 1 l02031ae10vq.txt REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC 10-Q 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 six month period ended June 30, 2003 Commission File Number: 333-100581-04 REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC ------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 35-2194249 ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) 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 Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements Republic Engineered Products Holdings LLC and Subsidiaries Unaudited Consolidated Statement of Operations (Going Concern Basis) for the Three and Six Months Ended June 30, 2003 and Republic Technologies International Holdings, LLC and Subsidiaries (Debtor-in-Possession) Unaudited Consolidated Statements of Changes in Net Liabilities in Liquidation (Liquidation Basis) for the Three and Six Months Ended June 30, 2002 3 Republic Engineered Products Holdings LLC and Subsidiaries Consolidated Balance Sheets (Going Concern Basis) June 30, 2003 (Unaudited) and December 31, 2002 4-5 Republic Engineered Products Holdings LLC and Subsidiaries Unaudited Consolidated Statement of Cash Flows (Going Concern Basis) for the Six Months Ended June 30, 2003 and Republic Technologies International Holdings, LLC and Subsidiaries (Debtor-in-Possession) Unaudited Consolidated Statement of Cash Flows (Liquidation Basis) for the Six Months Ended June 30, 2002 6 Republic Engineered Products Holdings LLC and Subsidiaries and Republic Technologies International Holdings, LLC and Subsidiaries (Debtor-in-Possession) Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 3. Quantitative and Qualitative Disclosures About Market Risk 33 Item 4. Controls and Procedures 34 PART II - OTHER INFORMATION Item 1. Legal Proceedings 34 Item 2. Changes in Securities and Use of Proceeds 35 Item 3. Defaults Upon Senior Securities 35 Item 4. Submission of Matters to a Vote of Security Holders 35 Item 5. Other Information 35 Item 6. Exhibits and Reports on Form 8-K 35 Signatures 37

2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (GOING CONCERN BASIS) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENT OF CHANGES IN NET LIABILITIES IN LIQUIDATION (UNAUDITED) (LIQUIDATION BASIS) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 (IN THOUSANDS OF DOLLARS)

The accompanying notes are an integral part of these statements. 3 REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (GOING CONCERN BASIS) JUNE 30, 2003 AND DECEMBER 31, 2002 (IN THOUSANDS OF DOLLARS)

The accompanying notes are an integral part of these statements. 4 REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (GOING CONCERN BASIS) JUNE 30, 2003 AND DECEMBER 31, 2002 (IN THOUSANDS OF DOLLARS)

The accompanying notes are an integral part of these statements. 5 REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (GOING CONCERN BASIS) FOR THE SIX MONTHS ENDED JUNE 30, 2003 REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (LIQUIDATION BASIS) FOR THE SIX MONTHS ENDED JUNE 30, 2002 (IN THOUSANDS OF DOLLARS)

The accompanying notes are an integral part of these statements. 6 REPUBLIC ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES AND REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS, EXCEPT AS OTHERWISE NOTED) (UNAUDITED) NOTE 1. NATURE OF OPERATIONS, ORGANIZATION AND OTHER RELATED INFORMATION Republic Engineered Products Holdings LLC, a Delaware limited liability company ("Republic Holdings", and together with its subsidiaries, the "Company") produces special bar quality steel products. Special bar quality steel 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. Special bar quality steel products are sold to customers who require precise metallurgical content and quality characteristics. Special bar quality steel products generally contain more alloys, and sell for substantially higher prices, than merchant and commodity steel bar and rod products. The Company produces a wide range of special bar quality steel products and supplies a diverse customer base that includes leading automobile and industrial equipment manufacturers and their first tier suppliers. Republic Holdings holds all of the outstanding membership interests of Republic Engineered Products LLC ("Republic"). Blue Steel Capital Corp., N&T Railway Company LLC and 2011448 Ontario Limited are wholly owned subsidiaries of Republic. Blue Steel Capital Corp. is a Delaware corporation formed for the sole purpose of issuing notes and holds no assets. N&T Railway Company LLC ("N&T") is a Delaware limited liability company and operates the railroad assets located at the Canton and Lorain, Ohio facilities. 2011448 Ontario Limited is an Ontario corporation and its sole asset is an option to acquire the assets and properties associated with Republic Technologies International, LLC's Hamilton, Ontario cold-finishing facility. KPS Special Situations Fund, L.P., a Delaware limited partnership ("KPS"), together with certain of its affiliates, may be deemed to beneficially own the membership interests in Republic held of record by Republic Holdings. Blue Steel Corporation, a Delaware corporation controlled by KPS, is the sole general partner and a limited partner of Blue Bar Holdings, L.P., a Delaware limited partnership and the sole member of Republic Holdings ("Blue Bar Holdings"), and holds an 80.8% economic interest in such partnership. Hunt Investment Group. L.P., a Delaware limited partnership ("Hunt"), together with certain of its affiliates, may be deemed to beneficially own the membership interests held of record by Republic Holdings. HIG-Steel Investors, L.P., a Delaware limited partnership, is a limited partner of Blue Bar Holdings and holds a 19.2% economic interest in such partnership. The Company commenced operations on August 16, 2002 after it acquired a substantial portion of the operating assets of Republic Technologies International, LLC and its subsidiaries ("Republic Technologies" or "the Predecessor") in a sale of assets under Section 363 of the United States Bankruptcy Code. The acquired operating assets accounted for all of Republic Technologies' steel melting capacity, over one-half of its hot-rolling capacity and approximately two-thirds of its cold-finishing production capacity. Management has created a more efficient, higher quality network of production facilities operated by a smaller and more flexible workforce. The transaction eliminated significant liabilities that had been associated with the business acquired from Republic Technologies. The Company also acquired an option to purchase the 7 assets associated with Republic Technologies' cold-finishing plant located in Hamilton, Ontario on or prior to August 16, 2003 for nominal consideration and the assumption of certain liabilities. The Company incurred significant indebtedness in connection with the consummation of the acquisition, including $80.0 million aggregate principal amount of senior secured notes and borrowings of $301.9 million under a credit facility. The Company hired approximately 2,350 of the approximately 3,700 employees of Republic Technologies and entered into a new labor agreement with the United Steelworkers of America ("USWA"), which covers most of the hourly employees and expires on August 16, 2007. In comparison to the labor agreement between Republic Technologies and the USWA, the new labor agreement reduces the number of employees and employment costs and provides increased staffing flexibility. In order to facilitate the orderly transfer of the special bar quality steel product business from Republic Technologies to the Company, Republic Technologies entered into a transition services agreement with the Company (the "Transition Services Agreement") which expires on August 16, 2003. Under the Transition Services Agreement, Republic Technologies provided the Company with the ability to maintain an interim supply of certain inventory to sell to customers while the Company modernized its Lorain facility. Specifically, Republic Technologies continued to operate certain facilities that the Company did not acquire. These facilities included the 12"mill at Lorain until September 2002, the finishing operation at Canton until October 2002 and the Massillon 18" mill until December 2002. Republic Technologies' railroad company, Nimishillen & Tuscarawas, LLC, operated until December 31, 2002, at which time its operations were acquired by Republic. Canadian Drawn Steel Company, Inc., a subsidiary of Republic Technologies, continues to operate under the Transition Services Agreement. In addition, the parties supplied other services to each other to ensure the smooth transition of Republic Technologies' business to the Company and the wind down of the Republic Technologies bankruptcy estate. The Company was also obligated to pay $5.0 million to Republic Technologies for its operation of assets it retained. This fee was paid in five $1.0 million monthly installments which commenced on September 15, 2002. The final payment was paid on January 16, 2003. Under the terms of the Transition Services Agreement, the Company paid these fees to The Bank of New York for the benefit of the holders of Republic Technologies 13 3/4 % senior secured notes. The accompanying consolidated financial statements have been prepared on a going concern basis of accounting and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or to amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern. The Company's liquidity position has been negatively impacted by greater than expected increases in the cost of natural gas and by unplanned outages during January and June 2003 at the Lorain #3 blast furnace, which resulted in property damage. The Company's performance improved in the second quarter, as compared to the first quarter of 2003 despite sustaining the unplanned Lorain #3 blast furnace outage in June 2003. The Company's net availability on its revolving credit facility at August 8, 2003 was $17.0 million. These factors raise substantial doubt about the Company's ability to continue as a going concern and, therefore, the Company may be unable to realize its assets and discharge its liabilities in the normal course of business. Management has sought to improve the Company's liquidity position by taking a number of actions. The Company has reduced its planned capital expenditures from $20 million to $6 million for 2003. Additional financing of $5.0 million was obtained from the State of Ohio (Note 5). The Company sought reimbursement from business interruption and property insurance due 8 to damage incurred to the #3 blast furnace at the Lorain facility. In July 2003, the insurance company issued a partial payment of $5.0 million against this claim. Accordingly, the Company included a receivable of $5.0 million and a corresponding reduction to operating costs in its June 30, 2003 financial statements. Also, on May 15, 2003, the Company obtained an extension of the contractual reductions in borrowing capacity under its senior revolving credit facility (See Note 5). Notwithstanding these efforts, the Company may need to obtain additional financing to meet its cash flow requirements, including financing through the sale of additional debt or equity securities. In light of the Company's liquidity, its ability to raise additional capital is negatively impacted. Restrictive covenants included in the revolving credit facility and senior secured notes limit the Company's ability to incur additional indebtedness or sell assets (all of which are pledged), and may otherwise limit the operational and financial flexibility of the Company. NOTE 2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements contain results for Republic Holdings and Republic Technologies for the three and six months ended June 30, 2003 and 2002, respectively. Republic Holdings' consolidated statements have been prepared on a going concern basis of accounting. Republic Technologies' statements were prepared on a liquidation basis of accounting. These consolidated statements are unaudited and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or to amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern. 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 period ended December 31, 2002 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. The U.S. Bankruptcy Court approved the sale of substantially all the assets of Republic Technologies to the Company on July 11, 2002 in a transaction that closed on August 16, 2002 (Note 1). Republic Technologies' intent was to sell and liquidate its remaining assets, therefore, the accompanying 2002 consolidated financial statements were prepared on the liquidation basis of accounting. Under this basis of accounting, assets and liabilities are stated at their net realizable value, and estimated costs through the liquidation date are provided to the extent reasonably determinable. The liquidation basis of accounting requires significant estimates and judgments. Republic Technologies' adjustments required to convert from the going concern (historical cost) basis to the liquidation basis of accounting includes: Decrease to reflect net realizable value of property, plant and equipment $ 433,748 Write-off of deferred financing costs........................................... 22,192 Decrease to reflect the net realizable value of goodwill........................ 2,431 --------- Net decrease in carrying value.................................................. $ 458,371 =========

9 NOTE 3. ACQUISITION On August 16, 2002, Republic acquired a substantial portion of the operating assets of Republic Technologies and its subsidiaries. The total purchase price was $410.9 million, which consisted of $10.0 million paid to Republic Technologies, $14.0 million in acquisition fees and expenses, and indebtedness totaling $386.9 million, which included $301.9 million under a senior revolving credit facility, the issuance of $80.0 million in senior secured notes, and $5.0 million under a transition services agreement between the Company and Republic Technologies. The total purchase price was allocated to the assets acquired and liabilities assumed, based on a preliminary estimate of their respective fair values. As a result of the acquisition of a substantial portion of the operating assets from Republic Technologies, the Company has become the largest domestic producer of special bar quality steel products. In connection with the acquisition, the Company was able to select the assets and properties of Republic Technologies and negotiate a modified successor labor contract that it expects will enable it to create a more efficient, higher quality network of production facilities operated by a smaller and more flexible workforce. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at August 16, 2002, as determined based on independent appraisals, and also reflects any subsequent adjustments to the estimated fair values. Current assets $ 300,205 Property, plant and equipment 129,298 Goodwill 61,215 Other assets 376 ---------- Total assets 491,094 Current liabilities 74,901 Long-term liabilities 5,622 ---------- Total liabilities 80,523 ---------- Net assets acquired $ 410,571 ==========

As discussed in Note 1, the Company also acquired an option to purchase the assets associated with Republic Technologies' cold-finishing plant located in Hamilton, Ontario on or prior to August 16, 2003 for nominal consideration and the assumption of certain liabilities. If the Company decides to purchase the cold-finishing plant, the purchase price allocation will be adjusted accordingly. NOTE 4. INVENTORIES The Company values its inventory at the lower of cost or market applied on a first-in, first-out (FIFO) method for finished and semi-finished goods, and a weighted-average method for raw materials. Inventory standards have been set based on this methodology and periodically reviewed to verify that the standards approximate actual costs. During the second quarter, the Company determined that its standards did not properly reflect actual costs. Thus, the standards were adjusted to reflect the Company's current cost structure, resulting in a $6.0 million increase in inventory, and a corresponding decrease in cost of goods sold. Due to the unusual manufacturing 10 activity in the first quarter caused by the outage of the #3 blast furnace at the Lorain facility, the Company was unable to determine the amount of the adjustment, if any, which should be applied to the first quarter of 2003. The components of inventories are as follows:

Inventories are reduced by $7.0 million and $5.6 million at June 30, 2003 and December 31, 2002, respectively due to obsolescence. NOTE 5. REVOLVING CREDIT FACILITIES AND LONG-TERM DEBT On August 16, 2002, Republic entered into a credit facility, which matures on June 30, 2007, with Fleet Capital Corporation, as administrative agent, and other lenders. The credit facility was amended on May 15, 2003. REVOLVING CREDIT FACILITY Prior to the amendment discussed below, the credit facility consisted of a senior revolving credit facility with a total commitment of up to $336.0 million. This total commitment will automatically reduce by $5.0 million on the first day of each quarter commencing the fiscal quarter that begins on July 1, 2003 until such time as the total commitment is reduced to $275.0 million. Availability under the credit facility was limited to a borrowing base as defined in the credit facility as the sum of 85% of eligible accounts receivable plus 70% of the net book value of eligible inventory plus the eligible fixed asset component which is currently $100.0 million. Under the terms of the senior revolving credit facility prior to the amendment discussed below, the borrowing base, effective June 30, 2003, was to be reduced to 85% of eligible accounts receivable, plus 60% of eligible inventory, plus the eligible fixed asset component, which would have been $92.0 million. The Company borrowed an aggregate of $301.9 million in connection with the closing of the acquisition of assets of Republic Technologies, and the Company is entitled to draw amounts under the new credit facility to finance working capital and capital expenditures, and for other general corporate purposes. The borrowings under the credit facility are secured by a first priority perfected security interest in the capital stock and other equity interests of each direct and indirect subsidiary of Republic Holdings, other than 2011448 Ontario Limited, which collateral also secures the senior secured notes in an equal and ratable basis, and all of the Company's presently owned and subsequently acquired inventory, accounts receivable, intellectual property and related assets (other than those of Republic Holdings) and the real estate and fixed assets comprising, and the intellectual property relating to, the Canton, Ohio Caster and Continuing Rolling Facility, or Canton CR(TM). The obligations under the credit facility are secured and are unconditionally and irrevocably guaranteed jointly and severally by Republic Holdings and each of Republic's subsidiaries other than 2011448 Ontario Limited. Republic Holdings' guarantee is limited in recourse to all of Republic's membership interests owned by Republic Holdings, which have been pledged to secure the guarantee. 11 Borrowings under the credit facility bear interest, at the Company's option, at either a base rate equal to the higher of the "prime rate" by Fleet National Bank, the weighted average of rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, plus the applicable margin, or a Eurodollar rate on deposits for one, two, three or six month periods, plus the applicable margin. The applicable margin on base rate loans initially is 1.25% and on Eurodollar loans is 3.00%. The amendment to our credit facility discussed below increased these applicable margins by 1.0% each. The applicable margin on base rate and Eurodollar loans may be reduced to as low as 0.25% and 2.00%, respectively, if we achieve specified reduced leverage ratios. The Company's credit facility balance as of June 30, 2003 was $282.8 million and the average interest rate for the Company's credit facility for the six months ended June 30, 2003 was approximately 5.75% per year for base rate loans and 4.67% per year for Eurodollar loans. As of June 30, 2003, borrowings under the credit facility are accruing interest at the rate of 6.25% per year for base rate loans and 5.21% per year for Eurodollar loans. The credit facility contains negative covenants and provisions that restrict, among other things, the ability to incur additional indebtedness or guarantee the obligations of others, grant liens, make investments, pay dividends, repurchase stock or make other forms of restricted payments, merge, consolidate and acquire assets or stock, engage in sale and leaseback transactions or dispose of assets, make capital expenditures in excess of specified annual amounts, engage in transactions with the affiliates, and prepay or amend the senior secured notes. The credit facility also requires the Company to meet financial covenants and ratios, particularly a minimum fixed charge coverage ratio based on operating cash flow to total debt service to be tested quarterly commencing on March 31, 2004. AMENDMENT TO REVOLVING CREDIT FACILITY On May 15, 2003, the Company's credit facility was amended. Under the terms of the amendment, the maturity date was accelerated to June 30, 2006 and the total commitment was reduced to $315.0 million with the total commitment being reduced by $5.0 million on the first day of each fiscal quarter, commencing with the fiscal quarter beginning January 1, 2004 until the total commitment is reduced to $275.0 million. Consistent with the original credit facility, availability under the amended credit facility is limited to a borrowing base, however, the components of the borrowing base have been amended to delay the June 30, 2003 reduction of the advance rate for eligible inventory from 70% of the net book value to 60% until January 1, 2004. In addition, the reduction in the eligible fixed asset component of the borrowing base originally scheduled to occur on July 1, 2003 was restructured so that the reduction occurs ratably over a twelve-month period ending June 29, 2004. The availability under the credit facility as amended at August 8, 2003 was $17.0 million. Finally, the amendment requires the Company to maintain minimum cumulative EBITDA (as defined in the amendment) levels and limits the amount of annual capital expenditures the Company may incur to $9.0 million in 2003 and $20.0 million thereafter. The credit facility amendment required the Company to pay a $1.6 million restructuring fee to the lenders with $1.1 million of the fee was paid upon execution of the amendment and the remaining $0.5 million is due on January 31, 2004. In addition, the amendment increases the applicable margin on base rate and Eurodollar loans by 1.0%. Finally, the amendment provides for the issuance of warrants representing five percent of the fully diluted equity of the Company to the lenders upon the occurrence of certain events as defined in the amendment. 12 LONG-TERM DEBT The outstanding notes are senior secured obligations of the issuers, aggregating $80.0 million of principal amount, and will mature on August 16, 2009. Interest on the notes accrues at the rate of 10% per annum and is payable quarterly in cash on each March 31, June 30, September 30 and December 31, commencing September 30, 2002. The notes were issued under an indenture dated as of August 16, 2002 among Republic and Blue Steel Capital Corp., as issuers, N&T Railway Company LLC and Blue Bar, L.P., as guarantors, and LaSalle Bank National Association, as trustee. As described in Note 12, the indenture was amended pursuant to the First Supplemental Indenture among Republic, Blue Steel Capital Corp., N&T Railway Company LLC, Republic Holdings and LaSalle Bank National Association. The indenture governing the notes requires the Company to redeem the notes with certain proceeds from asset sales of any collateral that secures the notes and contains significant affirmative and negative covenants including separate provisions imposing restrictions on additional borrowings, certain investments, certain payments, sale or disposal of assets, payment of dividends and change of control provisions, in each case, subject to certain exceptions. The notes are secured, subject to exceptions and limitations, by (1) a first priority lien on, and security interest in, substantially all of the existing assets of the Company and its subsidiaries, other than the Canton CR(TM), inventory, accounts receivable and intellectual property and related assets, and (2) a first priority interest in the capital stock and other equity interests of each direct and indirect subsidiary of Republic Holdings, other than 2011448 Ontario Limited. Each of Republic Holdings and N&T Railway Company LLC has jointly and severally guaranteed the notes on a senior secured basis, and each guarantee is full and unconditional. 2011448 Ontario Limited does not currently guarantee the notes, but it must become a guarantor of the notes in order to exercise its option to acquire the assets and properties associated with the Hamilton, Ontario cold-finishing plant owned by Canadian Drawn Steel Company, Inc., a subsidiary of Republic Technologies. Any domestic subsidiary that Republic may form or acquire in the future will guarantee the notes on a joint and several and full and unconditional basis. On June 6, 2003, the Company obtained a $5.0 million loan from the Ohio Department of Development. This loan is secured by the 20" mill at the Lorain facility and accrues interest at the rate of 3% per annum payable on the first day of each calendar month until the loan matures in July 2008. NOTE 6. PREDECESSOR'S SPECIAL CHARGES The Predecessor maintained a Master Collective Bargaining Agreement and settlement agreement (collectively, the "Master CBA") with employees represented by the United Steel Workers of America which required Republic Technologies to offer Early Retirement Buyouts ("ERBs") to at least 1,000 employees and permitted Republic Technologies International, LLC to offer a Voluntary Severance Plan ("VSP"). The purpose of these programs was to reduce the hourly workforce by a net reduction of over 1,900 hourly employees over four years. These programs were substantially voluntary in nature. Accordingly, the costs associated with these workforce reductions were being recognized as the offers were accepted by the employees and intended to be awarded by the Predecessor. During the six months ended June 30, 2002, there were 43 ERB's accepted amounting to $8.8 million. As an outcome of restructuring activities, Republic Technologies took several actions resulting in the need to record certain asset impairments and restructuring reserves, including shutting down the Johnstown, Pennsylvania melt shop facility, the Canton, Ohio 12" rolling mill 13 facility, and the Willimantic, Connecticut cold-finishing facility. As a result of these actions, the Predecessor recorded restructuring charges of $0.7 million during the six months ended June 30, 2002. These charges related to supplemental unemployment benefits payments, salary terminations, and the related health insurance costs. NOTE 7. SEGMENT INFORMATION The Company operates in two reportable segments: hot-rolled and cold-finished. The Predecessor operated its Specialty Steel division as a third segment, however, as discussed in Note 8, the Specialty Steel division was accounted for as a discontinued operation. As such the following information related to the Predecessor does not reflect the Specialty Steel division 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, and depreciation and amortization expense ("EBITDA"). The Predecessor measured segment performance based on earnings before interest, taxes, depreciation and amortization, other postretirement benefits ("OPEB"), workforce reduction charges, restructuring charges, monitoring fees, gain or loss from the sale of fixed assets, and reorganization items ("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 drivetrains, 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. Inter-segment 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 90% to hot-rolled and 10% to cold-finished for the Company and 80% to hot-rolled and 20% to cold-finished for the Predecessor. Pension costs are allocated by the Predecessor based on the amount of payroll incurred by each segment. 14

A reconciliation of EBITDA of the Company and EBITDA, as defined for the Predecessor, to loss before income taxes is as follows: 15

NOTE 8. PREDECESSOR'S DISCONTINUED OPERATIONS The Predecessor historically reported its Specialty Steel division as a discontinued operation. Certain assets of the Baltimore plant were sold in January 2001. The assets of the Canton plant, representing a substantial portion of the remaining assets, were sold on September 5, 2002. A reserve for the estimated operating losses of the Specialty Steel division was made as part of the accounting for the discontinued operations and periodically revised as part of the periodic reassessment of the carrying values of the net assets relating to the discontinued operations. In the six months ended June 30, 2002, no provision was recorded for any gain or loss from the disposition of the discontinued operations. Sales and related losses for the discontinued operations were as follows (net loss on discontinued operations were reflected in the Predecessor'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):

NOTE 9. RELATED PARTY TRANSACTIONS A Management Services Agreement dated as of August 16, 2002 between Blue Bar, L.P. and Republic provides that Blue Bar, L.P. will provide certain ongoing advisory and management services to Republic as requested by Republic from time to time. Republic pays Blue Bar, L.P. a 16 quarterly fee of $250,000 for such services and reimburses Blue Bar, L.P. and its affiliates for all reasonable costs and expenses incurred by them in providing such advisory and management services. Republic's obligation to make such payments will terminate upon the first to occur of (i) August 16, 2012, or (ii) the end of the fiscal year in which Blue Bar, L.P., or any of its affiliates, directly or indirectly, ceases to own any membership interests in Republic. As part of the restructuring described in Note 12, Blue Bar, L.P. assigned to Blue Bar Holdings its interests and obligations under the Management Services Agreement. The credit facility amendment discussed in Note 5 restricts the payment of management fees if certain liquidity-related benchmarks are not satisfied. NOTE 10. CONTINGENCIES The Company, in the ordinary course of business, is the subject of or party to various pending or threatened legal and environmental actions. The Company provides for the costs related to these matters when a loss is probable and the amount is reasonably estimable. Based on information presently known to the Company, management believes that any ultimate liability resulting from these actions will not have a material adverse affect on its consolidated financial position, results of operations or cash flows. In connection with the closing of the asset purchase transaction with Republic Technologies, the USWA took the position that the Company's new labor agreement did not apply to the unionized employees of Canadian Drawn Steel Company, Inc., a Canadian subsidiary of Republic Technologies. In light of the USWA's position and rather than delay consummation of the entire transaction, the parties negotiated the first amendment to the Asset Purchase Agreement, which among various other matters included the inventory and receivables of Canadian Drawn Steel in the assets the Company acquired and gave the Company a one-year option to purchase the other assets of Canadian Drawn Steel for nominal additional consideration, without adjustment to the overall purchase price. Under the option, if the business of Canadian Drawn Steel is sold to a third party, Republic Technologies will pay the net proceeds of that sale to the Company. On August 30, 2002, the USWA filed a motion with the Bankruptcy Court seeking to compel the sale to the Company of substantially all of the assets of Canadian Drawn Steel. On September 17, 2002, the Company and Republic Technologies filed separate objections to the USWA's motion, asserting among other things that the USWA had breached the agreement with Republic Technologies with respect to the unionized employees of Canadian Drawn Steel and was attempting to force the Company to assume additional liabilities for legacy costs which the Company did not agree to assume under the Asset Purchase Agreement. In addition, Republic Technologies asserted various procedural defenses against the USWA and the Company objected to several of the factual assumptions underlying the USWA's proposed orders. The USWA withdrew its motion described above and on October 21, 2002 filed a complaint with the Bankruptcy Court seeking similar relief as in the motion. The complaint alleged, among other things, that because the Company did not purchase substantially all of the assets of Canadian Drawn Steel, (i) Republic Technologies breached a shutdown agreement with the USWA, (ii) the Company breached a letter agreement with the USWA, (iii) the Company breached the Asset Purchase Agreement and (iv) the Company and Republic Technologies violated an order of the Bankruptcy Court which approved the sale of assets by Republic Technologies to the Company. In the complaint, the USWA requested the Bankruptcy Court to compel the sale to the Company of substantially all of the assets of Canadian Drawn Steel. On December 4, 2002, the Company and Republic Technologies filed separate answers to the 17 USWA's complaint in which the Company and Republic Technologies denied the principal allegations of the USWA and asserted various defenses and counterclaims. The Company expects to vigorously pursue this litigation. An evidentiary hearing is scheduled for August 29, 2003, to determine whether or not the Company's new labor agreement applies to the unionized employees of Canadian Drawn Steel. NOTE 11. ENVIRONMENTAL MATTERS As is the case with most steel producers, the Company could incur significant costs related to environmental issues in the future. The Company's operations are subject to federal, state and local environmental laws and regulations that in the event of environmental contamination could result in the Company incurring significant liabilities. The Company continuously monitors its compliance with applicable environmental laws and regulations and believes that it currently is in substantial compliance with them. The Company anticipates that its expenditures for environmental control measures during the next 12-month period will be approximately $0.3 million. The Company currently believes that estimated aggregate costs to resolve environmental contingencies are likely to be in the range of $3.9 million to $8.4 million over the lives of its facilities. The Company's reserve to cover probable environmental liabilities was approximately $5.1 million as of June 30, 2003. To the extent the Company incurs any such remediation costs, these costs will most likely be incurred over a number of years; however, future regulatory action regarding historical disposal practices at the Company's facilities, as well as continued compliance with environmental requirements, may require it to incur significant costs that may have a material adverse effect on its future financial performance. NOTE 12. RESTRUCTURING Republic effected a restructuring so that the presentation of the consolidated financial statements of Republic Holdings will satisfy the financial reporting obligations of each of the issuers and guarantors of the notes. As part of the restructuring, Blue Bar, L.P., a Delaware limited partnership and the present parent company of Republic, merged with and into Republic Holdings. In addition, the indenture governing the Company's notes was amended so that the guarantee of Republic Holdings, as successor by merger of Blue Bar, L.P., is full and unconditional. The indenture was also amended to permit Republic Holdings to satisfy Republic's reporting obligations under the indenture so long as Republic Holdings holds 100% of Republic's membership interests and has no material business operations, assets or liabilities of its own. Republic Holdings was formed on January 28, 2003. The consolidated financial statements presented give effect to the common control merger of Blue Bar, L.P. with Republic Holdings (successor to Blue Bar L.P.) that was completed on February 10, 2003 as part of the restructuring. NOTE 13. CONDENSED CONSOLIDATING SUPPLEMENTAL INFORMATION Republic and Blue Steel Capital Corp. have issued $80.0 million aggregate principal amount of 10% senior secured notes due 2009. Each of Republic Holdings and N&T Railway Company LLC has jointly and severally guaranteed the notes on a senior secured basis, and each guarantee is full and unconditional. 2011448 Ontario Limited does not currently guarantee the notes, but it must become a guarantor of the notes in order to exercise its option to acquire the assets and properties associated with the Hamilton, Ontario cold-finishing plant owned by Canadian Drawn Steel Company, Inc., a subsidiary of Republic Technologies. Any domestic subsidiary that Republic may form or acquire in the future will guarantee the notes on a joint and several and full and unconditional basis. 18 The following presents supplemental financial information with respect to Republic Holdings, Republic and Blue Steel Capital Corp. on a consolidating basis, the guarantor subsidiaries on a combined consolidating basis and the non-guarantor subsidiaries on a combined consolidating basis at June 30, 2003 and for the six months ended June 30, 2003. STATEMENT OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2003 (IN THOUSANDS OF DOLLARS)

STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2003 (IN THOUSANDS OF DOLLARS)

19 BALANCE SHEET JUNE 30, 2003 (IN THOUSANDS OF DOLLARS)

20 STATEMENT OF CASH FLOWS SIX MONTH PERIOD ENDED JUNE 30, 2003 (IN THOUSANDS OF DOLLARS)

NOTE 14. NEW ACCOUNTING PRONOUNCEMENTS In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities. The scope of SFAS No. 146 includes (1) costs to terminate contracts that are not capital leases; (2) costs to consolidate facilities or relocate employees; and (3) termination benefits provided to employees who are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. The provisions of this Statement were effective for exit or disposal activities initiated after December 31, 2002. There was no financial statement implication related to the adoption of this statement by the Company effective January 1, 2003. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others, which addresses disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year end. The disclosure requirements are effective for financial statements for periods ending after December 15, 2002. Refer to Note 13 for discussion of the Company's guarantees. 21 In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. For public companies with a variable interest in a variable interest entity created before February 1, 2003, the Interpretation applies to that company no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. The application of this Interpretation does not have an effect on the company's consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies accounting for derivative instruments and hedging activities under SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 provides guidance relating to decisions made (a) as part of the Derivatives Implementation Group process, (b) in connection with other FASB projects dealing with financial instruments and (c) regarding implementation issues raised in the application of the definition of a derivative and the characteristics of a derivative that contains financing components. SFAS No. 149 is effective for contracts entered into or modified and for hedging relationships designated after June 30, 2003. The application of this Statement is not expected to have a material impact on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments and Characteristics of both Liabilities and Equity, which requires freestanding financial instruments such as mandatory redeemable shares, forward purchase contracts and written put options to be reported as liabilities by their issuers, as well as imposing related new disclosure requirements. The provisions of SFAS No. 150 are effective for instruments entered into or modified after May 31, 2003 and pre-existing instruments as of the beginning of the first interim period that commences after June 15, 2003. The application of this Statement is not expected to have a material effect on the Company's consolidated financial statements. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL We are the largest domestic producer of special bar quality steel products. Special bar quality steel 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. Special bar quality steel products are sold to customers who require precise metallurgical content and quality characteristics. Special bar quality steel products generally contain more alloys, and sell for substantially higher prices, than merchant and commodity steel bar and rod products. We produce a wide range of special bar quality steel products and supply a diverse customer base that includes leading automobile and industrial equipment manufacturers and their first tier suppliers. 22 Our company commenced operations in August 2002 after it acquired a substantial portion of the operating assets of Republic Technologies in a sale of assets under Section 363 of the United States Bankruptcy Code. We selected the assets and properties of Republic Technologies according to our management team's plan to create a more efficient, higher quality network of production facilities operated by a smaller and more flexible workforce. The assets and properties we acquired represent the core operating assets associated with Republic Technologies' steel melting and hot-rolled and cold-finishing production. The acquired operating assets accounted for all of Republic Technologies' steel melting capacity, over one-half of its hot-rolling capacity and approximately two-thirds of its cold-finishing production capacity. Specifically, we acquired Republic Technologies' melt shops at Canton and Lorain, Ohio, its hot-rolling and processing mills at Canton and Lorain, Ohio and Lackawanna, New York, its cold-finishing facilities at Massillon, Ohio and Gary, Indiana (Dunes Highway) and certain assets at the machine shop in Massillon, Ohio. We did not acquire Republic Technologies' idled melt shop at Johnstown, Pennsylvania; its hot-rolling and processing mills at Massillon, Ohio and Chicago, Illinois; or its cold-finishing facilities at Harvey, Illinois; Gary, Indiana (Seventh Avenue); Beaver Falls, Pennsylvania; Willimantic, Connecticut (idled); and Cartersville, Georgia. Republic Technologies' Willimantic and Cartersville facilities previously had been sold to third parties at the time we acquired the assets from Republic Technologies. We believe the assets we acquired will enable us to better align our rolling capabilities with our steel producing ability as compared to Republic Technologies. We also acquired the following property: assets located on the premises of Republic Technologies' corporate headquarters located in Akron, Ohio; all permits used in the business in conjunction with the purchased assets; all intellectual property used in connection with the business; certain contracts; books, files and records used in the business; all inventory wherever located; all accounts receivable; and an option to purchase the assets associated with Republic Technologies' cold-finishing plant located in Hamilton, Ontario on or prior to August 16, 2003 for nominal consideration and the assumption of certain liabilities. Our company hired approximately 2,350 of the approximately 3,700 employees of Republic Technologies. Of the approximately 2,350 employees we hired, approximately 1,900 are hourly employees and approximately 450 are salaried employees. We hired substantially all of the employees that had previously been employed by Republic Technologies at the facilities that we acquired. At these acquired facilities, we did not hire approximately 100 employees as a result of revised staffing levels, work eliminations and other factors. We purchased a substantial part, but not all, of Republic Technologies' facilities in Canton and Lorain, Ohio. Employees previously engaged by Republic Technologies at the parts of the Canton and Lorain facilities that we did not purchase were not hired. We entered into a new labor agreement with the USWA, which covers most of our hourly employees and has a five-year term. Compared to the labor agreement between Republic Technologies and the USWA, our new labor agreement reduces the number of employees and employment costs and provides us with increased staffing flexibility to match our changing operating requirements. It removes several significant items of fixed cost, which will permit improved scheduling flexibility and eliminate legacy costs. Legacy costs that have been eliminated consist of costs associated with non-employees, including retirees and future retirees, under defined benefit retirement plans and retiree medical and life insurance plans to which Republic Technologies contributed. These plans, which had burdened the cash flow and balance sheet of Republic Technologies, are not a part of the new labor agreement. We also expect the new labor agreement to provide a better connection between the business plan performance and variable compensation through the profit sharing plan and the performance based incentive plan for unionized employees that are contemplated under the new labor agreement. In addition, the 23 new labor agreement will simplify labor administration, which we expect to contribute to the success of our business. The transaction eliminated significant liabilities that had been associated with the business acquired from Republic Technologies, including $425 million in principal amount of Republic Technologies' 13 3/4% senior secured notes, approximately $219.6 million of trade accounts payable, approximately $134.7 million in revenue bonds and loans from governmental entities and approximately $453.4 million of retiree pension and health benefits costs. We purchased the assets free and clear of any liabilities pursuant to the order of the Bankruptcy Court, except for those liabilities that we explicitly assumed pursuant to the terms of the Asset Purchase Agreement. These assumed liabilities include obligations under the contracts that we purchased from Republic Technologies; up to $32.0 million of trade payables incurred by Republic Technologies after it filed for bankruptcy protection; up to $2.6 million of accrued freight, utilities and other miscellaneous current liabilities of Republic Technologies; up to $3.6 million of taxes incurred by Republic Technologies in the ordinary course of business after it filed for bankruptcy protection; all liabilities arising after the closing of the acquisition from or under the purchased assets; and certain environmental clean-up obligations of Republic Technologies under a U.S. Environmental Protection Agency corrective action order that may arise after the closing of the acquisition relating to real property that we purchased at the Canton, Ohio facility. In addition, we agreed to reimburse Republic Technologies for up to $29.5 million of wages, withholding taxes, vacation benefits, management performance incentives, and health insurance benefits incurred but not reported to the extent that these liabilities had been accrued by Republic Technologies prior to the closing of the transaction and are not otherwise covered by any insurance or welfare benefit fund maintained by Republic Technologies. We incurred significant indebtedness in connection with the consummation of the acquisition, including $80.0 million aggregate principal amount of the notes and borrowings of $301.9 million under our credit facility. We also agreed to pay $5.0 million to the holders of Republic Technologies' 13 3/4 % senior notes under the terms of a transition service agreement with Republic Technologies. RESULTS OF OPERATIONS OF OUR COMPANY AND OUR PREDECESSOR The historical consolidated financial information of Republic Technologies and Republic Holdings may not be entirely comparable and may be of limited value in evaluating our financial and operating results. The consolidated results of operations for the three and six months ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year ended December 31, 2003. Three Months ended June 30, 2003 compared with Three Months ended June 30, 2002 The following discussion provides a comparison of the results of operations of our company and Republic Technologies for the three months ended June 30, 2003 and 2002, respectively. The discussion is provided for comparative purposes only, but the value of such a comparison may be limited. Net sales for the three months ended June 30, 2003 totaled $194.5 million on shipments of approximately 376,790 net tons compared with net sales of $252.6 million for the three months ended June 30, 2002 on shipments of approximately 509,262 tons. Net sales for the three months ended June 30, 2003 were comprised of $160.9 million for hot-rolled and $33.6 million for cold-finished, compared with hot-rolled net sales of $204.4 million and cold-finished net sales of $48.2 24 million for the three months ended June 30, 2002. The decrease in net sales and tons shipped reflects the elimination of hot-rolled bar and cold-finished bar capacity resulting from the idling or sale of two rolling mills and four cold-finished bar facilities. Weak service center market demand also contributed to the decrease in shipments for the three months ended June 30, 2003. Cost of sales totaled $177.5 million, or 91.3% of net sales, for the three months ended June 30, 2003 compared with cost of sales of $240.0 million, or 95.0% of net sales, for the similar period ended June 30, 2002. Cost of sales for the three months ended June 30, 2003 consisted of $147.0 million on hot-rolled products and $30.5 million on cold-finished products compared with $190.0 million on hot-rolled products and $50.0 million on cold-finished products for the three months ended June 30, 2002. The overall decrease in cost of sales as a percentage of net sales for the three months ended June 30, 2003 compared to the three months ended June 30, 2002 was primarily due to the increased utilization of production facilities and reduced labor costs associated to our new labor contract implemented in August 2002. During the three months ended June 30, 2003, the Company recorded a $5.0 million reduction to cost of goods sold as a result of the partial reimbursement from a business interruption and property insurance claim. This claim was filed due to the unplanned outage and damage to the #3 blast furnace at the Lorain facility during the first quarter of 2003. This damage also caused the Company to experience an additional outage at the #3 blast furnace in June 2003. The estimated costs related to the June outage which have been included in the Company's cost of goods sold for the three months ended June 30, 2003 are approximately $5.8 million. The Company's inventory standards were also updated to reflect the current cost structure resulting in a $6.0 million increase in inventory and a corresponding decrease in cost of goods sold. Due to the unusual manufacturing activity in the first quarter caused by the outage of the #3 blast furnace at the Lorain facility, the Company was unable to determine the amount of the adjustment, if any, which should be applied to the first quarter of 2003. Selling, general and administrative expenses were $10.0 million, or 5.1% of net sales, for the three months ended June 30, 2003 compared with $8.9 million, or 3.5% of net sales, for the three months ended June 30, 2002. The selling, general and administrative expenses increased as a percentage of sales due to a $1.1 million increase in insurance premium costs in the three months ended June 30, 2003 as compared to the three months ended June 30, 2002. Depreciation and amortization expenses were $2.4 million for the three months ended June 30, 2003, compared with $14.2 million for the three months ended June 30, 2002. The reduction in depreciation and amortization expense in the current period is primarily a result of the change in basis of fixed assets and intangible assets of Republic Technologies to the fair market value of fixed assets acquired by Republic Holdings. There were no special charges for the three months ended June 30, 2003, compared with $4.8 million for the three months ended June 30, 2002. The charges during the three months ended June 30, 2002 included $4.9 million in voluntary early retirement buyouts. These charges also included $0.7 million in supplemental unemployment benefits payments, salary terminations, and the health insurance costs related to the shutdown of Republic Technologies' Johnstown, Pennsylvania melt shop facility, Canton 12" rolling mill facility, and Willimantic, Connecticut cold-finishing facility. A gain of $0.8 million as a result of Republic Technologies' Willimantic plant sale and the reversal of a substantial portion of Republic Technologies' related shutdown reserve offset these charges. Net interest expense was $6.0 million for the three months ended June 30, 2003 compared with $7.1 million for the three months ended June 30, 2002. The decrease in net interest expense was primarily a result of the Company maintaining a lower average balance in its revolving credit facility, as well as lower interest rates in the three months ended June 30, 2003 as compared to the Predecessor in the three months ended June 30, 2002. 25 As a result of the above, the Company reported a net loss of $1.6 million for the three months ended June 30, 2003 compared with the Predecessor's net loss of $20.1 million for the three months ended June 30, 2002. Six Months ended June 30, 2003 compared with Six Months ended June 30, 2002 The following discussion provides a comparison of the results of operations of our company and Republic Technologies for the six months ended June 30, 2003 and 2002, respectively. The discussion is provided for comparative purposes only, but the value of such a comparison may be limited. Net sales for the six months ended June 30, 2003 totaled $396.0 million on shipments of approximately 767,847 net tons compared with net sales of $508.8 million for the six months ended June 30, 2002 on shipments of approximately 1,317,927 tons. Net sales for the six months ended June 30, 2003 were comprised of $329.6 million for hot-rolled and $66.4 million for cold-finished, compared with hot-rolled net sales of $409.7 million and cold-finished net sales of $99.1 million for the six months ended June 30, 2002. The decrease in net sales and tons shipped reflects the elimination of hot-rolled bar and cold-finished bar capacity resulting from the idling or sale of two rolling mills and four cold-finished bar facilities. Weak service center market demand also contributed to the decrease in shipments for the six months ended June 30, 2003. Cost of sales totaled $376.6 million, or 95.1% of net sales, for the six months ended June 30, 2003 compared with cost of sales of $484.3 million, or 95.2% of net sales, for the similar period ended June 30, 2002. Cost of sales for the six months ended June 30, 2003 consisted of $313.7 million on hot-rolled products and $62.9 million on cold-finished products compared with $382.6 million on hot-rolled products and $101.7 million on cold-finished products for the six months ended June 30, 2002. Cost of sales as a percentage of net sales from the six months ended June 30, 2003 to the six months ended June 30, 2002 remained essentially unchanged. Increased natural gas and scrap prices and unplanned outages at a Lorain, Ohio blast furnace resulting from property damage offset the benefits of increased utilization of production facilities and reduced labor costs associated to our new labor contract implemented in August 2002. During the six months ended June 30, 2003, the Company recorded a $5.0 million reduction to cost of goods sold as a result of the partial reimbursement from a business interruption and property insurance claim. This claim was filed due to the unplanned outage and damage to the #3 blast furnace at the Lorain facility during the first quarter of 2003. This damage also caused the Company to experience an additional outage at the #3 blast furnace in June 2003. The estimated costs related to the June outage which have been included in the Company's cost of goods sold for the six months ended June 30, 2003 are approximately $5.8 million. The Company's inventory standards also were updated to reflect the current cost structure resulting in a $6.0 million increase in inventory and a corresponding decrease in cost of goods sold. Due to the unusual manufacturing activity in the first quarter caused by the outage of the #3 blast furnace at the Lorain facility, the Company was unable to determine the amount of the adjustment, if any, which should be applied to the first quarter of 2003. Selling, general and administrative expenses were $19.9 million, or 5.0% of net sales, for the six months ended June 30, 2003 compared with $18.9 million, or 3.7% of net sales, for the six months ended June 30, 2002. The selling, general and administrative expenses increased as a percentage of sales primarily due to a $2.5 million increase in insurance premium costs in the six months ended June 30, 2003 as compared to the six months ended June 30, 2002 offset by a reduction of salary wage costs of $1.9 million. Depreciation and amortization expenses were $4.7 million for the six months ended June 30, 2003, compared with $28.3 million for the six months ended June 30, 2002. The reduction in 26 depreciation and amortization expense in the current period is primarily a result of the change in basis of fixed assets and intangible assets of Republic Technologies to the fair market value of fixed assets acquired by Republic Holdings. There were no special charges for the six months ended June 30, 2003, compared with $9.5 million for the six months ended June 30, 2002. The charges during the six months ended June 30, 2002 included $8.8 million in voluntary early retirement buyouts. These charges also included $1.5 million in supplemental unemployment benefits payments, salary terminations, and the health insurance costs related to the shutdown of Republic Technologies' Johnstown, Pennsylvania melt shop facility, Canton 12" rolling mill facility, and Willimantic, Connecticut cold-finishing facility. A gain of $0.8 million as a result of Republic Technologies' Willimantic plant sale and the reversal of a substantial portion of Republic Technologies' related shutdown reserve offset these charges. Net interest expense was $11.4 million for the six months ended June 30, 2003 compared with $14.9 million for the six months ended June 30, 2002. The decrease in net interest expense was primarily a result of the Company maintaining a lower average balance in its revolving credit facility, as well as lower interest rates in the six months ended June 30, 2003 as compared to the Predecessor in the six months ended June 30, 2002. As a result of the above, the Company reported a net loss of $18.0 million for the six months ended June 30, 2003 compared with the Predecessor's net loss of $44.7 million for the six months ended June 30, 2002. OUR LIQUIDITY AND CAPITAL RESOURCES Going Concern Matters The accompanying consolidated financial statements have been prepared on a going concern basis of accounting and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or to amounts and classification of liabilities that may be necessary should the Company be unable to continue as a going concern. The Company's liquidity position has been negatively impacted by unplanned outages during January and June of 2003 at the Lorain #3 blast furnace resulting from property damage, as well as greater than expected increases in the cost of natural gas. The Company's performance improved in the second quarter as compared to the first quarter of 2003 despite sustaining the additional unplanned #3 blast furnace outage in June 2003. However, the Company's overall performance for the first half of 2003 was below expectations, negatively affecting liquidity. The Company's net availability on its revolving credit facility at August 8, 2003 was $17.0 million. These factors raise substantial doubt about the Company's ability to continue as a going concern and, therefore, the Company may be unable to realize its assets and discharge its liabilities in the normal course of business. Management has sought to improve the Company's liquidity position by taking a number of actions. The Company has reduced its planned capital expenditures from $20 million to $6 million for 2003. Additional financing of $5.0 million was obtained from the State of Ohio (Note 5). The Company sought reimbursement from business interruption and property insurance due to damage incurred to the #3 blast furnace at the Lorain facility. In July 2003, the insurance company issued a partial payment of $5.0 million against this claim. Accordingly, the Company included a receivable of $5.0 million and a corresponding reduction to operating costs in its June 27 30, 2003 financial statements. Also, on May 15, 2003, the Company obtained an extension of the contractual reductions in borrowing capacity under its senior revolving credit facility (See Note 5). Notwithstanding these efforts, the Company may need to obtain additional financing to meet its cash flow requirements, including financing through the sale of additional debt or equity securities. In light of the Company's liquidity, its ability to raise additional capital is negatively impacted. Restrictive covenants included in the revolving credit facility and senior secured notes limit the Company's ability to incur additional indebtedness or sell assets (all of which are pledged), and may otherwise limit the operational and financial flexibility of the Company. Liquidity Our company's sources of liquidity include cash and cash equivalents, cash from operations and amounts available under our credit facility. Our primary liquidity needs relate to working capital and capital expenditures. Capital Expenditures Republic invested $1.8 million in capital expenditures during the six months ended June 30, 2003 and Republic Technologies invested $4.1 million in capital expenditures during the six months ended June 30, 2002. The Company's current planned capital expenditures for 2003 are $6.0 million, and are expected to be funded using cash from operations, borrowings under the credit facility, and borrowing under loans from the State of Ohio. Capital expenditures are limited under our credit facility to $9.0 million in 2003 and $20.0 million thereafter. Debt Service Requirements We incurred an aggregate of $381.9 million of debt obligations in connection with the acquisition of the assets of Republic Technologies, including $301.9 million of borrowings under our credit facility and the issuance of $80.0 million of notes. We have significant debt repayment obligations under our credit facility and our notes. We entered into a credit facility with Fleet Capital Corporation and other lenders on August 16, 2002. Prior to the amendment discussed below, our credit facility consisted of a senior revolving credit facility with a commitment of up to $336.0 million. We borrowed a total of $301.9 million upon the closing of the acquisition transaction and immediately paid down the outstanding amount to $269.7 million. At June 30, 2003, we had $282.8 million outstanding under the credit facility. Under the original facility, the total commitment of $336.0 million was to automatically reduce by $5.0 million on the first day of each quarter commencing the fiscal quarter that begins on July 1, 2003 until such time as the total commitment was reduced to $275.0 million. We are entitled to draw amounts under the credit facility to finance working capital and capital expenditures and for other general corporate purposes. Our borrowings under our credit facility are secured by a first priority perfected security interest in the capital stock and other equity interests of each direct and indirect subsidiary of Republic Holdings, other than 2011448 Ontario Limited, which collateral also secures our senior secured notes on an equal and ratable basis, and all presently owned and subsequently acquired inventory, accounts, intellectual property and related assets of Republic and the guarantors (other than Republic Holdings) and the real estate and fixed assets comprising, and the intellectual property relating to, our Canton, Ohio Caster and Continuing Rolling Facility ("Canton CR(TM)"). The obligations under the credit facility are secured and are unconditionally and irrevocably guaranteed jointly and severally by Republic Holdings and each of Republic's subsidiaries other 28 than 2011448 Ontario Limited. Republic Holdings' guarantee is limited in recourse to all of Republic's membership interests owned by Republic Holdings, which have been pledged to secure the guarantee. Borrowings under the credit facility bear interest, at our option, at either a base rate equal to the higher of the "prime rate" announced from time to time by Fleet National Bank at its office in Boston, Massachusetts or the weighted average of rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, plus the applicable margin; or a Eurodollar rate on deposits for one, two, three or six month periods, plus the applicable margin. The applicable margin on base rate loans initially is 1.25% and on Eurodollar loans is 3.00%. The amendment to our credit facility discussed below increased these applicable margins by 1.0% each. The applicable margin on base rate and Eurodollar loans may be reduced to as low as 0.25% and 2.00%, respectively, if we achieve specified reduced leverage ratios. As of June 30, 2003, borrowings under the credit facility are accruing interest at the rate of 6.25% per year for base rate loans and 5.21% per year for Eurodollar loans. Our credit facility contains negative covenants and provisions that restrict, among other things, our ability to incur additional indebtedness or guarantee the obligations of others, grant liens, make investments, pay dividends, repurchase stock or make other forms of restricted payments, merge, consolidate and acquire assets or stock, engage in sale and leaseback transactions or dispose of assets, make capital expenditures in excess of specified annual amounts, engage in transactions with our affiliates, and prepay or amend our senior secured notes. The credit facility also requires us and our subsidiaries to meet financial covenants and ratios, particularly a minimum fixed charge coverage ratio based on operating cash flow to total debt service to be tested quarterly commencing on March 31, 2004. On May 15, 2003, our credit facility was amended. Under the terms of the amendment, the maturity date was accelerated to June 30, 2006 and the total commitment was reduced to $315.0 million with the total commitment being reduced by $5.0 million on the first day of each fiscal quarter, commencing with the fiscal quarter beginning January 1, 2004 until the total commitment is reduced to $275.0 million. Consistent with the original credit facility, availability under the amended credit facility is limited to a borrowing base, however, the components of the borrowing base have been amended to delay the June 30, 2003 reduction of the advance rate for eligible inventory from 70% of the net book value to 60% until January 1, 2004. In addition, the reduction in the eligible fixed asset component of the borrowing base originally scheduled to occur on July 1, 2003 has been restructured so that the reduction occurs ratably over a twelve-month period ending June 29, 2004. The amount available under the credit facility was approximately $17.0 million on August 8, 2003. Finally, the amendment requires us to maintain minimum cumulative EBITDA (as defined in the amendment) levels and limits the amount of capital expenditures the Company may incur to $9 million in 2003 and $20 million thereafter. We issued $80.0 million aggregate principal amount of our notes to Republic Technologies as partial consideration for the assets acquired. Republic Technologies directed our company to issue the notes to the Republic Liquidating Trust, a trust established by Republic Technologies for the benefit of the holders of Republic Technologies' 13 3/4% senior secured notes. Interest on the notes accrues at the rate of 10% per annum and is payable quarterly in cash on each March 31, June 30, September 30, and December 31, commencing September 30, 2002. Our notes were issued under an indenture dated as of August 16, 2002 among Republic and Blue Steel Capital Corp., as issuers, N&T Railway Company LLC and Blue Bar, L.P., as guarantors, and LaSalle Bank National Association, as trustee. As described in Note 12, the 29 indenture was amended pursuant to the First Supplemental Indenture among Republic, Blue Steel Capital Corp., N&T Railway Company LLC, Republic Holdings and LaSalle Bank National Association. The indenture governing the notes requires us to redeem the notes with certain proceeds from asset sales of any collateral that secures the notes and contains significant affirmative and negative covenants including separate provisions imposing restrictions on additional borrowings, certain investments, certain payments, sale or disposal of assets, payment of dividends and change of control provisions, in each case, subject to certain exceptions. The notes are secured, subject to exceptions and limitations, by (1) a first priority lien on, and security interest in, substantially all of the existing assets of Republic and its subsidiaries other than the Canton CR(TM) facility, inventory, accounts receivable and intellectual property and related assets, and (2) a first priority interest in the capital stock and other equity interests of each direct and indirect subsidiary of Republic Holdings, other than 2011448 Ontario Limited. Each of Republic Holdings and N&T Railway Company LLC has jointly and severally guaranteed the notes on a senior secured basis, and each guarantee is full and unconditional. 2011448 Ontario Limited does not currently guarantee the notes, but it must become a guarantor of the notes in order to exercise its option to acquire the assets and properties associated with the Hamilton, Ontario cold-finishing plant owned by Canadian Drawn Steel Company, Inc., a subsidiary of Republic Technologies. Any domestic subsidiary that Republic may form or acquire in the future will guarantee the notes on a joint and several and full and unconditional basis. On June 6, 2003, the Company obtained a $5.0 million loan from the Ohio Department of Development. This loan is secured by the 20" mill at the Lorain facility and accrues interest at the rate of 3% per annum payable on the first day of each calendar month until the loan matures in July 2008. Tax Distributions Republic is a limited liability company treated as a partnership for income tax purposes and, accordingly, is not an income tax-paying entity. Republic Holdings is also a limited liability company and therefore is also not an income tax-paying entity. Pursuant to the amended and restated limited liability company agreement of Republic Holdings, we are required to make cash distributions to our members to the extent necessary to satisfy tax obligations regarding their investment in our company. To the extent that Republic Holdings is required to make tax distributions to its members, Republic will be required to make equivalent cash distributions to its parent company, Republic Holdings. CRITICAL ACCOUNTING POLICIES The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, 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. Accounting estimates are an integral part of the financial statements prepared by management and are based on management's current judgments. Those judgments are based on knowledge and experience about past and current events and on assumptions about future events. We believe the following to be our critical accounting policies because they are both important to the portrayal of our financial condition and results of operations and they require critical management judgments and estimates about matters that are uncertain. If actual results or events differ materially from those contemplated by us in making these estimates, our report of operations for future periods could be materially affected. 30 Acquisition We are required to allocate the purchase price of the acquisition of assets from Republic Technologies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. We engaged a third-party appraisal firm to assist us in determining the fair values of the property, plant and equipment acquired. Such valuations and the determination of the fair values of other tangible and intangible assets acquired and liabilities assumed require management to make significant estimates and assumptions. Our assessment of the purchased intangible assets, including the option to purchase the assets and properties associated with Republic Technologies' Hamilton, Ontario cold-finishing facility as well as patented and unpatented technology, customer contracts and trademarks, is that they have no fair value separate from goodwill. If the option to acquire the Canadian Drawn Steel Company is exercised, goodwill will be adjusted based on the fair market value of the assets acquired. Revenue Recognition Sales are recognized upon shipment where there is a contract or purchase order, the sales price is fixed or determinable and collectability of the resulting receivable is reasonably assured. Sales are made with no rights to return product, other than for defective materials. Reserves for rebates, relating to marketing programs entered into with our customers, are recorded as direct reductions of revenue and accounts receivable based on the terms of the customer contracts. A claims reserve is also established for returns of defective materials. This reserve is recorded as a percentage of sales based on historical experience. The adequacy of reserve estimates are periodically reviewed by comparison to actual experience. Rebates, claims and other sales allowances in any future period could differ from our estimates, which would impact the net revenue we report. Allowances for Doubtful Accounts We evaluate the collectability of our receivables based on a combination of factors. We regularly analyze our significant customer accounts, and, when we become aware of a specific customer's inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position, we record a specific reserve for bad debts to reduce the related receivable to the amount we reasonably believe is collectible. We also record reserves for bad debts for all other customers based on a variety of factors including the length of time the receivables are past due, the financial health of the customer and historical experience. If circumstances related to specific customers change, our estimates of the recoverability of receivables could be further adjusted. Inventories Our company establishes obsolescence reserves for slow-moving and inactive inventories. Obsolescence reserves reduce the carrying value of slow-moving and inactive inventories to their estimated net realizable value, which generally approximates the recoverable scrap value. Our company also periodically evaluates its inventory carrying value to ensure that the amounts are stated at the lower of cost or market. Our company values its inventory at the lower of cost or market applied on a first-in, first-out (FIFO) method for finished and semi-finished goods, and a weighted-average method for raw materials. Inventory standards are set based on this methodology and periodically reviewed to verify that the standards approximate actual costs. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. 31 Goodwill Goodwill has arisen from the acquisition of a substantial portion of the operating assets of Republic Technologies. Goodwill is not amortized, but is periodically reviewed for impairment. Our company is required to test goodwill for impairment on an annual basis and whenever changes in circumstances indicate that the carrying amount of goodwill may be impaired. Impairment charges are recorded, if necessary, based on management's review and analysis of the estimated fair value as compared to the carrying amount of goodwill. The Company intends to use July 1 (first day of the third quarter) as its annual measurement date. If our company's anticipated operating results or economic outlook declines, our assessment of the carrying amount of goodwill may change. Impairment of Long-Lived Assets We evaluate long-lived assets used in operations, consisting of property, plant and equipment and intangible assets, when indicators of impairment, such as reductions in demand or significant economic factors are present. A review is performed to determine whether the carrying value of an asset is impaired based on a comparison to the undiscounted estimated future cash flows from the asset. If the comparison indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using estimated future cash flows and a discount rate based upon our weighted average cost of capital. Impairment is based on the excess of the carrying amount over the fair value of those assets. Significant management judgment is required in the forecast of future operating results that is used in the preparation of discounted estimated future cash flows. It is reasonably foreseeable that actual future net revenues and the remaining estimated economic life of the assets could differ from the estimates used to assess the recoverability of these assets. In that event, additional impairment charges or shortened useful lives of certain long-lived assets could be required. Environmental Costs Our company and other steel companies have in recent years become subject to increasingly stringent environmental laws and regulations. It is the policy of our company to endeavor to comply with applicable environmental laws and regulations. Our company established a liability for an amount which management 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. The recorded amounts represent an estimate of the environmental remediation costs associated with future events triggering or confirming the costs that, in management's judgment, are likely to occur. This estimate is based on currently available facts, existing technology, and presently enacted laws and regulations, and it takes into consideration the likely effects of inflation and other societal and economic factors. The precise timing of such events cannot be reliably determined at this time due to the absence of any deadlines for remediation under the applicable environmental laws and regulations pursuant to which such remediation costs will be expended. No claims for recovery are netted against the stated amount. It is reasonably possible that actual future environmental costs could differ from the estimates used to establish our recorded liability. Additional liabilities may be recorded if this situation arises. 32 FORWARD LOOKING STATEMENTS All statements other than statements of historical fact included in this report, including statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures About Market Risk," regarding our future financial position, results of operations, business strategy, budgets, projected costs and plans and objectives for future operations, are forward-looking statements. In addition, these forward-looking statements generally can be identified by the use of forward-looking terms such as "may," "will," "expect," "intend," "estimate," "anticipate," "foresee," "project," "plan" or "believe" or the negative of these words or variations on these words or similar phrases. We have based these forward-looking statements on our current assumptions, expectations and projections about future events, which are subject to risks and uncertainties. We caution you that a variety of factors could cause business conditions and results to differ materially from what is contained in the forward-looking statements, including the following: - We are a new enterprise, and the financial information regarding our predecessor's business may be limited and may not be fully comparable. - Delays and disruptions in the implementation of our business plan will reduce cash flow and may harm customer relationships. - If we are unable to obtain or maintain quality certifications for our facilities, we may lose existing customers and be hampered in our efforts to attract new customers. - We operate only in the steel industry, and we are substantially dependent upon the automotive industry; both these industries are cyclical in nature, and continue to be adversely affected by general economic conditions, weak demand, foreign competition, lack of consumer confidence and other factors beyond our control. - The continued operation of our Lackawanna, New York facility depends upon our ability to finalize an agreement continuing a complex interrelationship of shared systems, equipment and rights. - Our environmental compliance costs could be greater than presently anticipated. - Raw materials and energy costs continue to be volatile, and higher costs often cannot be recaptured through price surcharges to our customers. - Our credit facility and indenture impose significant operating and financial restrictions. Ownership of our notes is subject to risks relating to our ability to service our debt, possibly inadequate collateral and priority in any bankruptcy, lack of liquidity and other risks. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our interest expense is sensitive to changes in the general level of interest rates in the United States. At June 30, 2003, we had $80.0 million aggregate principal amount of the notes outstanding, $5.0 million outstanding principal to the Ohio Department of Development, and $282.8 million outstanding under our credit facility. Our notes bear interest at a fixed rate of 10% 33 per year, our loan from the Ohio Department of Development bears interest at a fixed rate of 3% per year, and the interest rate on borrowings under our credit facility may vary. As a result, our primary exposure to market risks for changes in interest rates relates to our credit facility. Borrowings under the credit facility bear interest, at our option, at either (1) a base rate equal to the higher of the "prime rate" announced from time to time by Fleet National Bank at its office in Boston, Massachusetts or the weighted average of rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, plus the applicable margin; or (2) a Eurodollar rate on deposits for one, two, three or six month periods, plus the applicable margin, as discussed in Note 5. As of June 30, 2003, borrowings under the credit facility are accruing interest at the rate of 6.25% per year for base rate loans and 5.21% per year for Eurodollar loans. Almost all of our transactions are denominated in U.S. dollars, and, as a result, we do not have material exposure to currency exchange-rate risks. We do not currently engage in any interest rate, foreign currency exchange rate or commodity price-hedging transactions, although we may do so in the future. ITEM 4. CONTROLS AND PROCEDURES Based on their most recent evaluation, which was completed within 90 days of the filing of this Form 10-Q, the Company's President and Chief Executive Officer and Chief Financial Officer believe the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are effective in timely alerting the Company's management to material information required to be included in this Form 10-Q and other filings under the Securities Exchange Act of 1934. There were no significant changes in the Company's internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation and there were no significant deficiencies or material weaknesses that required corrective actions. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We 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 these matters will not materially affect our consolidated financial position, results of operations or cash flows. In connection with the closing of the asset purchase transaction with Republic Technologies, the USWA took the position that our new labor agreement did not apply to the unionized employees employed by Canadian Drawn Steel Company, Inc., a Canadian subsidiary of Republic Technologies. In light of the USWA's position and rather than delay consummation of the entire transaction, the parties negotiated the first amendment to the Asset Purchase Agreement, which, among various other matters, included the inventory and receivables of Canadian Drawn Steel in the assets we acquired and gave us a one-year option to purchase the other assets of Canadian Drawn Steel for nominal additional consideration, without adjustment to the overall purchase price. Under the option, if the business of Canadian Drawn Steel is sold to a third party, Republic Technologies will pay the net proceeds of that sale to us. 34 On August 30, 2002, the USWA filed a motion with the Bankruptcy Court seeking to compel the sale to our company of substantially all of the assets of Canadian Drawn Steel. On September 17, 2002, we and Republic Technologies filed separate objections to the USWA's motion, asserting, among other things, that the USWA had breached the agreement with Republic Technologies with respect to the unionized employees of Canadian Drawn Steel and was attempting to force our company to assume additional liabilities for legacy costs which we did not agree to assume under the Asset Purchase Agreement. In addition, Republic Technologies asserted various procedural defenses against the USWA and we objected to several of the factual assumptions underlying the USWA's proposed orders. The USWA withdrew its motion described above and on October 21, 2002 filed a complaint with the Bankruptcy Court seeking similar relief as in the motion. The complaint alleged, among other things, that by our company not purchasing substantially all of the assets of Canadian Drawn Steel, (i) Republic Technologies breached a shutdown agreement with the USWA, (ii) our company breached a letter agreement with the USWA, (iii) our company breached the Asset Purchase Agreement and (iv) our company and Republic Technologies violated an order of the Bankruptcy Court which approved the sale of assets by Republic Technologies to our company. In the complaint, the USWA requests the Bankruptcy Court to compel the sale to our company of substantially all of the assets of Canadian Drawn Steel. On December 4, 2002, we and Republic Technologies filed separate answers to the USWA's complaint in which we and Republic Technologies denied the principal allegations of the USWA and asserted various defenses and counterclaims. Our company expects to vigorously pursue this litigation. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. 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) Reports on Form 8 - K A report on Form 8-K was filed on July 14, 2003 by the Company announcing the appointment of the accounting firm of KPMG LLP as independent accountants to audit its fiscal 2003 financial statements and the dismissal of Deloitte & Touche LLP, its previous accountants. 35 (b) Exhibits 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Joseph F. Lapinsky, Chief Executive Officer and Managing Director of Republic Engineered Products Holdings LLC 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Joseph A. Kaczka, Chief Financial Officer, Vice President, Finance and Controller and Treasurer of Republic Engineered Products Holdings LLC 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Joseph F. Lapinsky, Chief Executive Officer and Managing Director of Republic Engineered Products Holdings LLC 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Joseph A. Kaczka, Chief Financial Officer, Vice President, Finance and Controller and Treasurer of Republic Engineered Products Holdings LLC 10.15 Loan agreement between the Director of Development of the State of Ohio and Republic Engineered Products LLC dated as of March 20, 2003 10.16 Amendment and Limited Waiver to Revolving Credit Agreement, dated as of May 15, 2003, by and among (a) Republic Engineered Products LLC, a Delaware limited liability company, (b) Republic Engineered Products Holdings LLC (as successor in interest to Blue Bar, L.P.), a Delaware limited liability company, (c) Blue Steel Capital Corp., a Delaware corporation, and N&T Railway Company LLC, a Delaware limited liability company, (d) Fleet Capital Corporation ("Fleet"), Bank of America, N.A. ("BofA"), JP Morgan Chase Bank ("Chase"), Foothill Capital Corporation ("Foothill"), GE Capital CFE, Inc. ("GE") and the other lending institutions (the "Lenders"), (e) Fleet as Administrative Agent for itself and the Lenders, and (f) Fleet, BofA, Chase, Foothill and GE as Co-Agents for the Lenders. 36 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 ENGINEERED PRODUCTS HOLDINGS LLC AND SUBSIDIARIES Date: August 12, 2003 By: /s/Joseph F. Lapinsky -------------------------------------------- Joseph F. Lapinsky President, Chief Executive Officer and Managing Director Date: August 12, 2003 By: /s/Joseph A. Kaczka -------------------------------------------- Joseph A. Kaczka Chief Financial Officer, Vice President, Finance and Controller, Treasurer and Secretary 37