<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended January 31, 1994
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to ___________
Commission file number 1-4288
NORTHWESTERN STEEL AND WIRE COMPANY
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Illinois 36-1562920
- - --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
121 Wallace Street, Sterling, Illinois 61081
- - --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 815/625-2500
------------
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.
Yes X No
------ ------
Number of shares of common stock outstanding as of March 2, 1994:
Common Stock 24,708,508 shares
(includes 420,014 treasury shares)
Page 1 of 17
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHWESTERN STEEL AND WIRE COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 31, July 31,
1994 1993
----------- -----------
(In Thousands of Dollars)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash items $ 1,397 $ 1,773
Receivables, less allowance of $1,000 50,854 54,029
Deferred income taxes 7,602 7,602
Other assets 5,791 5,121
----------- -----------
65,644 68,525
----------- -----------
Inventories, at lower of cost or market:
Finished products 42,220 38,992
Semi-finished products 25,479 19,828
Raw materials and supplies 14,401 16,902
----------- -----------
82,100 75,722
----------- -----------
Total current assets 147,744 144,247
----------- -----------
PLANT AND EQUIPMENT, at cost 322,789 312,632
Accumulated depreciation 106,892 96,117
----------- -----------
Net plant and equipment 215,897 216,515
----------- -----------
DEFERRED FINANCING COSTS 7,892 8,652
ORGANIZATIONAL AND PRE-OPERATING COSTS 1,683 2,244
----------- -----------
Total assets $ 373,216 $ 371,658
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 49,575 $ 53,857
Accrued expenses 24,148 26,945
Current portion of long term debt 87 87
----------- -----------
Total current liabilities 73,810 80,889
LONG TERM DEBT 166,646 164,234
DEFERRED EMPLOYEE BENEFIT OBLIGATIONS 80,389 64,043
DEFERRED INCOME TAXES 7,602 7,602
----------- -----------
Total liabilities 328,447 316,768
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY
Common stock, par value $.01 per share;
outstanding 24,687,932 and 24,631,955
shares, respectively 123,002 122,942
Retained earnings (deficit) (57,796) (62,709)
Minimum pension liability (15,114) -
Treasury shares, at cost; 420,014 shares
of Common Stock (5,323) (5,343)
Total shareholders' equity ----------- -----------
44,769 54,890
----------- -----------
Total liabilities and shareholders' equity $ 373,216 $ 371,658
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
-2-
<PAGE>
NORTHWESTERN STEEL AND WIRE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
---------------------- ---------------------
1994 1993 1994 1993
<S> <C> <C> <C> <C>
(In thousands of dollars except
per share data and tonnage data)
Net sales $140,247 $115,829 $296,290 $246,489
-------- -------- -------- --------
Cost and operating expenses:
Cost of goods sold (excluding depreciation) 125,406 102,768 264,604 219,569
Depreciation 5,404 5,432 10,775 10,861
Selling and administrative 2,478 2,356 5,095 5,390
-------- -------- -------- --------
Total cost and operating expenses 133,288 110,556 280,474 235,820
-------- -------- -------- --------
Operating profit 6,959 5,273 15,816 10,669
-------- -------- -------- --------
Other income and expenses:
Interest expense 4,795 5,765 9,489 11,664
Interest and other income (28) (11) (120) (21)
-------- -------- -------- --------
Total other income and expenses 4,767 5,754 9,369 11,643
-------- -------- -------- --------
Income (loss) before income taxes
and cumulative effect of accounting change 2,192 (481) 6,447 (974)
Provision for income taxes 521 -- 1,534 --
-------- -------- -------- --------
Income (loss) before cumulative effect of
accounting change 1,671 (481) 4,913 (974)
Cumulative effect of accounting change (Note 7) -- -- -- (39,778)
-------- -------- -------- --------
Net income (loss) $ 1,671 $ (481) $ 4,913 $ (40,752)
======== ========= ======== =========
Income (loss) before cumulative effect
of accounting change per share $ 0.07 $ (0.03) $ 0.20 $ (0.05)
Cumulative effect of accounting change
per share -- -- -- (2.19)
-------- -------- -------- --------
Net income (loss) per share $ 0.07 $ (0.03) $ 0.20 $ (2.24)
======== ======== ======== ========
Net tons shipped 383,346 345,695 826,295 732,963
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
-3-
<PAGE>
NORTHWESTERN STEEL AND WIRE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months Ended
January 31,
---------------------------
1994 1993
-------- --------
<S> <C> <C>
(In thousands of dollars)
Cash Flow From Operations:
Net income (loss) $ 4,913 $(40,752)
Cumulative effect of accounting change - 39,778
Depreciation 10,775 10,861
Amortization of deferred financing costs and debt discount 1,019 914
Amortization of organizational and pre-operating costs 561 562
(Increase) decrease in receivables 3,175 (111)
(Increase) in inventories (6,378) (15,062)
(Increase) decrease in other current assets (670) 1,722
Increase in deferred employee benefits 1,232 3,572
Decrease in accounts payable and accrued expenses (7,079) (9,838)
Deferred interest due at maturity 1,157 1,347
Unearned ESOP compensation - 1,923
-------- --------
Net cash provided by (used in) operations 8,705 (5,084)
-------- --------
Cash Flows Used in Investing Activities:
Capital expenditures (10,157) (3,351)
-------- --------
Net cash used in investing activities (10,157) (3,351)
-------- --------
Cash Flows From Financing Activities:
Payment of long term debt (29,350) (22,155)
Purchase of treasury shares (669)
Issuance of long term debt 30,346 -
Proceeds from issuance of Common Stock 224 35,804
Costs related to the issuance of Common Stock (144) (3,691)
Payment of deferred financing costs - (87)
-------- --------
Net cash provided by financing activities 1,076 9,202
-------- --------
(Decrease) increase in cash and cash items (376) 767
Cash and Cash Items:
Beginning of period 1,773 800
-------- --------
End of period $ 1,397 $ 1,567
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period For:
Interest $ 9,489 $ 10,254
Income taxes paid $ 217 $ 65
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
-4-
<PAGE>
NORTHWESTERN STEEL AND WIRE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(1) COMPANY STRUCTURE
The consolidated financial statements include accounts of the Company
and its wholly-owned subsidiaries. The Company has two wholly-owned
subsidiaries: (i) Northwestern Steel and Wire Company, a Texas corporation
("NSW - Texas"), which operates the Company's Houston rolling and finishing
mill; and (ii) Northwestern Steel and Wire Company, a Delaware corporation
("NSW - Delaware"), which provides administrative services to the Company and
NSW - Texas for which it receives payment from the Company. All significant
intercompany accounts and transactions have been eliminated. The Company
operates in one business segment, producing steel and steel products.
(2) INTERIM ACCOUNTING POLICIES
The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations; however, the Company believes that the
disclosures are adequate to make the information included herein not misleading.
The consolidated financial statements included herein should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1993.
In the opinion of management, the unaudited consolidated financial
statements of the Company included herein contain all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the financial position
of the Company as of January 31, 1994, the results of operations for the three
month and six month periods ended January 31, 1994 and 1993 and cash flows for
the six months ended January 31, 1994 and 1993. The results of operations for
such interim periods are not necessarily indicative of the results for the full
year. The balance sheet as of July 31, 1993 has been derived from the Company's
audited historical financial statements.
(3) EMPLOYEE BENEFITS
As a result of the trend of declining long-term interest rates, the
Company has decided to remeasure its pension and postretirement benefits
obligations as of January 31, 1994.
The requirements of SFAS No. 87 and SFAS No. 106 to adjust the
discount rate in line with current and expected to be available interest rates
on high quality fixed-income instruments have resulted in a decision by the
Company to reduce its assumed discount rate from 9% to 7.46%. In addition, the
Company has also reduced its expected
5
<PAGE>
rate of increase in future compensation levels from 5% to 3.5% effective January
31, 1994 for its pension plans and reduced its ultimate trend rate for
postretirement benefits from 5.1% to 3.6%.
The effect of the pension plan changes was a non-cash charge to
shareholders' equity of $15,114,000 at January 31, 1994. The impact of the
change in assumptions under both SFAS No. 87 and SFAS No. 106 will not have a
material effect on the results of operations for the balance of the year.
Unlike SFAS No. 87, the changes described under SFAS No. 106 do not
result in a charge to shareholders' equity at January 31, 1994.
The following table presents a reconciliation of the funded status of
the pension plans to the amounts included as accrued expenses and deferred
employee benefit obligations in the accompanying balance sheets at January 31,
1994 and July 31, 1993.
<TABLE>
<CAPTION>
January 31, 1994 July 31, 1993
----------------- -------------------
Hourly Salaried Hourly Salaried
Plan Plan Plan Plan
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Accumulated benefit
obligations (including
vested benefits of
$151,550 at January 31,
1994 and $131,924 for
1993 for the Hourly
Plan and $50,390 at
January 31, 1994 and
$44,279 for 1993 for
the Salaried Plan) $162,782 $53,098 $141,720 $46,707
Effect of increase in
compensation 10,910 4,281 13,703 4,759
-------- ------- -------- -------
Projected benefit
obligation 173,692 57,379 155,423 51,466
Plan assets at fair value 148,278 55,222 142,616 53,640
-------- ------- -------- -------
Plan assets (less than) in
excess of projected
benefit obligation (25,414) (2,157) (12,807) 2,174
Unrecognized net loss 26,024 8,596 12,405 4,419
Adjustment required to
recognize minimum
liability (15,114) - - -
-------- ------- -------- -------
Pension (liability) asset $(14,504) $ 6,439 $ ( 402) $ 6,593
======== ======= ========= =======
</TABLE>
The provisions of SFAS No. 106, "Employers' Accounting for Post-
retirement Benefits Other Than Pensions," were adopted by the Company effective
August 1, 1992. This pronouncement requires accrual accounting for these
benefits rather than the general practice of cash-basis accounting. Upon
adoption, the Company elected to record the transition obligation as a one-time
charge against earnings,
6
<PAGE>
rather than amortize it over a number of years. This charge was $39.8 million or
$2.19 per share and represents the actuarially computed present value of
estimated future benefits to current retirees plus that portion of benefits
earned to date by active employees.
Because the decision to adopt the new rules was not made until the
fourth quarter of fiscal 1993, it was necessary to restate previously reported
financial information for the first three quarters of the fiscal year. The
adoption of this pronouncement resulted in no tax effect. The first quarter was
also adjusted to reflect the cumulative effect of the accounting change as
discussed above.
Summary information on the Company's postretirement plan is as
follows:
<TABLE>
<CAPTION>
January 31, 1994 July 31, 1993
---------------- -------------
(In thousands)
<S> <C> <C>
Financial Status of Plan:
Accumulated post-retirement
benefit obligation (APBO) as of:
Retirees $(39,322) $(35,274)
Fully eligible active plan
participants (11,781) (10,487)
Other active plan participants (22,284) (19,135)
-------- --------
(73,387) (64,896)
Less plan assets at fair value 0 0
-------- --------
Funded status (73,387) (64,896)
Unrecognized net loss 7,395 254
-------- --------
Unfunded accrued cost $(65,992) $(64,642)
======== ========
</TABLE>
The assumed healthcare cost trend rate used in measuring the
accumulated post-retirement benefit obligation was 8.6% in 1994 for pre-65
retirees and 7.7% for post-65 retirees declining to an ultimate rate of 3.6%
over a 9-year period for both populations. The assumed healthcare cost trend
rate used in measuring the accumulated post-retirement benefit obligation was 9%
in 1993 for pre-65 retirees and 8% for post-65 retirees declining to an ultimate
rate of 5.1% over a 10-year period for both populations.
If the healthcare cost trend rate assumptions were increased by 1%
each year, the APBO as of January 31, 1994, would be increased by $9,390,000 and
the aggregate of the service and interest cost components of net periodic post-
retirement benefit cost for the year then ended increased by $904,000.
(4) SHAREHOLDERS' EQUITY
The Company's authorized shares are as follows:
Common Stock 75,000,000
Preferred Stock 1,000,000
7
<PAGE>
During fiscal 1993 the Company established a Management Stock Option
Plan and reserved 900,000 shares of Common Stock for future grants at fair
market value at the date of grant to certain members of management. Options to
purchase an aggregate of 775,000 shares of Common Stock at an exercise price of
$4.00 per share and 37,500 shares of Common Stock at an exercise price of $9.88
per share are outstanding. The Company also approved the establishment of an
Employee Stock Purchase and Option Plan, subject to applicable securities law
requirements, for certain salaried and hourly employees during fiscal 1993. The
plan granted options to purchase a total of 300,000 shares of Common Stock at an
exercise price of $4.00 per share, plus, subject to certain restrictions, those
remaining shares not purchased at the time of the one-time purchase opportunity
to purchase a total of 200,000 shares.
As of January 31, 1994 certain salaried and hourly employees purchased
87,755 shares of Common Stock pursuant to the exercise of options granted under
the Employee Stock Purchase and Option Plan at an exercise price of $4.00 per
share. Options to purchase 212,493 shares of Common Stock at an exercise price
of $4.00 per share remain outstanding under the Employee Stock Purchase and
Option Plan.
At the Annual Meeting of Shareholders on January 20, 1994, the Company
established the 1994 Long-Term Incentive Plan (the "1994 Plan") and reserved
1,250,000 shares of Common Stock for issuance under the 1994 Plan. The 1994
Plan provides for the granting to key employees and other key individuals who
perform services for the Company stock options, stock appreciation rights and
restricted stock that the Board of Directors or a duly appointed committee
thereof deems to be consistent with the purposes of the 1994 Plan. No grants to
purchase stock under the 1994 Plan are outstanding.
The Company also approved the establishment of the 1994 Director Stock
Option Plan (the "1994 Director Plan") and reserved 50,000 shares of Common
Stock for issuance under the 1994 Director Plan. The 1994 Director Plan
provides solely for the award of non-qualified stock options to Directors who
are not employees of the Company or affiliates of Kohlberg & Co., L.P. Each
eligible director will be awarded 2,500 stock options upon such director's
election or reelection to the Board of Directors. Each such award will be at
fair market value on the date of the grant. Options become exercisable six
months after the date of the grant and generally expire five years following the
date of the grant. Options to purchase an aggregate of 7,500 shares of Common
Stock at an exercise price of $11.25 per share are outstanding.
There are no shares of Preferred Stock outstanding.
(5) NET INCOME PER SHARE
Per share amounts, as presented on the Consolidated Statements of
Income, are based on the average shares outstanding of 25,282,604 for the three
and six months ended January 31, 1994 and 18,170,143 for the three and six
months ended January 31, 1993, respectively. The average shares outstanding for
each period include the dilutive impact
8
<PAGE>
of shares issuable pursuant to the Company's Management Stock Option Plan, the
Employee Stock Purchase and Option Plan and the 1994 Director Plan. Options
under the 1994 Director Plan are not currently exercisable.
(6) DEBT AND CREDIT ARRANGEMENTS
Long-term debt at January 31, 1994, consisted of the following:
<TABLE>
<CAPTION>
Principal Interest
Amount Rate
--------- --------
(In Thousands)
<S> <C> <C>
Amended and Restated Credit Agreement
Rollover Term Loan $ 43,512 13.1%
Revolver Loan 900 7.5%
Deferred Financing Fee 6,608 7.1%
9.5% Senior Notes due 2001,
Net of Discount 114,271 9.5%
Other notes payable 1,442 3.0%
--------
166,733
Less current portion (87)
--------
$166,646
========
</TABLE>
Pursuant to the Senior Credit Facility, Chemical Bank and certain
other lenders provided financing to the Company in the form of two remaining
facilities: (i) a rollover term loan in the amount of $50 million; and (ii) a
revolving credit loan providing available borrowings up to $65 million. The
revolving credit loan has a final maturity on May 9, 1997, but may be renewed on
an annual basis thereafter with the unanimous approval of Chemical Bank and any
other participating lenders. The interest rates indicated above are as of
January 31, 1994.
The Senior Credit Facility contains various covenants, including
covenants prohibiting or limiting the incurrence of additional indebtedness, the
granting of liens or guarantees, sales of assets, and capital expenditures, as
well as financial covenants requiring maintenance of a specified current ratio,
a consolidated interest expense coverage ratio, a fixed charge coverage ratio
and a leverage ratio.
The rollover term loan is required to be repaid in quarterly
installments beginning October 31, 1995, with final maturity on April 30, 1999.
The Senior Credit Facility provides that the rollover term loan bears interest
at a fixed annual rate of 13.07%, provided that, through July 31, 1994, interest
on the term loan is required to be paid at a floating annual rate equal to the
Alternate Base Rate (as defined in the Senior Credit Facility) plus 1.5% and,
provided further, that the difference between interest accrued at the fixed
annual rate of 13.07% and interest paid as described above will be deferred
monthly in arrears and added to the principal of the rollover term loan. Such
deferred interest bears interest which is required to be paid monthly in arrears
at a floating rate equal to the Alternate Base Rate plus 1.5%, and the deferred
interest added to principal is
9
<PAGE>
required to be paid in full on the date of the final installment of principal of
the rollover term loan. The Company is also required to prepay the rollover term
loan to the extent of excess cash flow (as defined in the Senior Credit
Facility).
The loans under the Senior Credit Facility are collateralized by a
lien on substantially all of the Company's and its subsidiaries assets and all
loans are cross-collateralized. The revolving credit loan under the Senior
Credit Facility will be available to the extent that the Company satisfies
certain borrowing base criteria. At January 31, 1994 additional borrowings of
approximately $64,100,000 under the revolving credit facility were available to
the Company.
In connection with the Senior Credit Facility, the Company had
previously agreed to pay Chemical Bank a fee of $5 million, which was to be
deferred until the Houston Facility began to earn revenue (as described) and
which would be payable thereafter in accordance with a formula. As a result of
an amendment to the Senior Credit Facility in September 1991, the terms of the
$5 million fee were modified to provide that the entire fee became due and
payable immediately, but that Chemical Bank would defer payment until the
principal amount of all loans under the Senior Credit Facility has been paid in
full. The deferred fee bears interest at the adjusted LIBO Rate for the
interest period then in effect plus 4% compounded monthly, with the payment of
interest also being deferred until such principal amount has been paid in full.
Pursuant to the Senior Credit Facility, Chemical Bank receives a
$200,000 annual administration fee and the lenders receive a quarterly
commitment fee of 1/2% per annum based on the average unused amount of the
commitment of the lenders under the Senior Credit Facility.
In consideration for the September 1991 amendment to the Senior Credit
Facility, the Company agreed to pay Chemical Bank approximately $238,000 which
is deferred until the principal amount of all loans under the Senior Credit
Facility has been paid in full.
At January 31, 1994, $114,271,000 (net of unamortized discount of
$729,000) of Senior Notes were outstanding. The Senior Notes earn interest at
the rate of 9.5% per annum, payable semi-annually on June 15 and December 15.
The Company will be required to redeem on June 15, 2001, the aggregate principal
amount of the Senior Notes plus accrued and unpaid interest. The Senior Notes
may not be redeemed prior to June 15, 1997. On or after June 15, 1997, the
Company may, at its option, redeem the Senior Notes in whole or in part at a
premium plus accrued and unpaid interest. On or after June 15, 1999, the
Company may redeem in whole or in part the Senior Notes at the aggregate
principal amount plus accrued and unpaid interest.
The Senior Notes are unsecured obligations of the Company. They will
be senior to all subordinated indebtedness of the Company and rank pari passu
with all other existing and future senior indebtedness of the Company. Upon the
occurrence of a change in control (as defined), the holders will have the option
to cause the Company to
10
<PAGE>
repurchase all or a portion of the outstanding Senior Notes at 101% of the
principal amount.
The Senior Notes contain certain restrictive covenants that, among
other things, will limit the ability of the Company to incur additional
indebtedness, create liens, issue preferred stock of subsidiaries, pay
dividends, repurchase capital stock, make certain other restricted payments,
engage in transactions with affiliates, sell assets, engage in sale and
leaseback transactions and engage in mergers and consolidation.
(7) BENEFITS FOR RETIRED EMPLOYEES
The provisions of SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," were adopted by the Company
effective August 1, 1992. This pronouncement requires accrual accounting for
these benefits rather than the general practice of cash-basis accounting. Upon
adoption, the Company elected to record the transition obligation as a one-time
charge against earnings, rather than amortize it over a number of years. This
charge was $39.8 million or $2.19 per share and represents the actuarially
computed present value of estimated future benefits to current retirees plus
that portion of benefits earned to date by active employees. The estimated
costs of postretirement benefits are recognized based on an annual cost
determination performed by the Company's independent actuarial firm.
(8) INCOME TAX
The Company estimates that annual income taxes will be incurred, thus
the allocation of income tax to interim periods is required. The Company
recorded an income tax provision by estimating the annual effective income tax
rate and applied that rate to pretax income.
The effective income tax rate for the Company varies from the Federal
statutory tax rate due to state income taxes and the utilization of net
operating loss carryforwards.
(9) COMMITMENTS AND CONTINGENCIES
At January 31, 1994, the Company had commitments for capital
expenditures of approximately $9,100,000.
There are various claims and legal proceedings arising in the normal
course of business pending against or involving the Company wherein monetary
damages are sought. These claims and proceedings are generally covered by
insurance and it is management's opinion that the Company's liability, if any,
under such claims or proceedings would not materially affect its financial
position or results of operations.
The Company is subject to a broad range of federal, state and local
environmental requirements, including those governing discharges to the air and
water, the handling and disposal of solid and/or hazardous wastes and the
remediation of contamination associated with releases of hazardous substances.
11
<PAGE>
Primarily because the melting process at the Company's Sterling
facility produces dust that contains lead and cadmium, the Company is
classified, in the same manner as other similar steel mills in its industry, as
a generator of hazardous waste.
The Company believes that it is currently in substantial compliance
with applicable environmental requirements and does not anticipate the need to
make substantial expenditures for environmental control measures during fiscal
1994. Nevertheless, as is the case with steel producers in general, if a
release of hazardous substances located on the Company's property or used in
general in the conduct of the Company's business occurs, the Company may be held
liable and may be required to pay the cost of remedying the condition. The
amount of any such liability and remedial cost could be material.
The Company has been sued in a wrongful death action stemming from the
death of an employee who sustained an injury at the Houston facility. The
Company has insurance for claims of this type, however the amount of the loss
cannot be presently determined.
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
The following discussion should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included as Item 7 of Part II of the Company's Annual Report on Form
10-K for the year ended July 31, 1993.
Results of Operations
- - ---------------------
Net sales for the Company were $296.3 million on shipments of 826,295
net tons for the six months ended January 31, 1994, compared to $246.5 million
on shipments of 732,963 net tons for the six months ended January 31, 1993.
Steel shipments (tons) increased 13% in the six-month period ended
January 31, 1994 compared to the same period in the prior year. Volume (tons)
for structural products increased 10% in the current year period compared to the
same period in the prior year due to modest improvements in the Company's
principal market, steel construction, together with continuing gains in market
share resulting from ongoing improvements in shipping, and on-time delivery.
Shipments of rod and wire products increased 4% for the six months ended January
31, 1994 compared to the same period in the prior year. The increase in
shipments of rod and wire products resulted from expanded marketing programs
and continued improvements in shipping and on-time delivery. Due to increases
in steelmaking for the six months ended January 31, 1994, the Company was able
to increase the shipments of semi-finished steel 67% for the six months ended
January 31, 1994, compared to the six months ended January 31, 1993.
Pricing on the Company's principal raw material, steel scrap,
continued to escalate to record levels. These escalating costs have led to
several price increases to the Company's customers. Due to
12
<PAGE>
these price increases, together with the steel shipment increase, the Company's
net sales increased $49.8 million or 20% for the six-month period ended January
31, 1994 compared to the same period in the prior year.
Net sales for the second fiscal quarter ended January 31, 1994
amounted to $140.2 million, an increase of 21% from the comparable quarter when
net sales were $115.8 million. Despite severe winter weather conditions during
the quarter which restricted shipments and production, volume (tons) for the
quarter ended January 31, 1994 was 383,346 net tons, an increase of 11% from the
comparative quarter in the prior year. The increase in volume shipped is
directly attributable to the Company's efforts to expand market share through
improvements in customer service and capacity utilization.
Cost of goods sold, excluding depreciation, as a percentage of net
sales for the three and six-month periods ended January 31, 1994, remain
unchanged at 89% compared to the same periods in the prior year. This was
achieved despite the fact that scrap cost in the six months ended January 31,
1994 increased 34% compared to the same period ended January 31, 1993. This
resulted from a combination of improved operating efficiencies and increased
selling prices.
Selling and administrative expense was $5.1 million for the six months
ended January 31, 1994 compared to $5.4 million for the six months ended January
31, 1993. The reduction in selling and administrative expense is primarily due
to decreased expenditures for professional fees. For the quarter ended January
31, 1994, selling and administrative expense remained relatively unchanged at
$2.5 million compared to $2.4 million for the prior year quarter.
Interest expense decreased $2.2 million from $11.7 million for the
six-month period ended January 31, 1993 to $9.5 million for the comparable
quarter in the current year. For the quarter ended January 31, 1994, interest
expense declined $1.0 million to $4.8 million compared to $5.8 million for the
quarter ended January 31, 1993. The reduction in interest expense is
principally the result of reduced levels of borrowings.
The provision for income tax increased to $.5 million and $1.5 million
for the three and six-month periods ended January 31, 1994, respectively. The
increase in the provision for income tax is due to the anticipated increased
levels of taxable earnings compared to the same periods in the prior year.
The cumulative effect of accounting change significantly increased the
net loss for the six months ended January 31, 1993. The cumulative effect of
the accounting change was the result of adopting SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." Upon adoption, the
Company elected to record the transition obligation as a one-time charge against
earnings, rather than amortize it over a number of years. This charge was $39.8
million or $2.19 per share.
13
<PAGE>
For the foregoing reasons, the net income for the six months ended
January 31, 1994 was $4.9 million or $0.20 per share, compared with a net loss
of $40.8 million or $2.24 per share. For the quarter ended January 31, 1994,
net income was $1.7 million or $0.07 per share, compared with a net loss of $.5
million or $0.03 per share for the quarter ended January 31, 1993.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Funds for the Company's operational needs have been provided
from internally generated cash and through utilization of the Senior Credit
Facility. As of January 31, 1994, the Company's consolidated total debt
aggregated approximately $166.7 million (net of unamortized discount on the
Senior Notes), of which approximately $166.6 million was classified as long term
debt. The consolidated debt-to-equity ratio increased to 4:1 at January 31, 1994
compared to 3:1 at July 31, 1993 after giving effect to the $15.1 million non-
cash charge to equity for the minimum pension liability as described in Footnote
3. As of January 31, 1994, the Company had cash on hand of approximately $1.4
million and approximately $64.1 million available for borrowing under its
existing revolving credit facility. The Company's current ratio continues to
improve, increasing to 2.0:1 at January 31, 1994 compared to 1.8:1 at July 31,
1993. This increased financial and operating flexibility has enabled the Company
to better manage inventory levels which, when combined with the Company's
enhanced product line, have enabled it to better serve its customers needs.
On a longer term basis, the Company has significant future debt
service obligations. The Company's ability to satisfy these obligations and to
secure adequate capital resources in the future will be dependent on its ability
to generate adequate operating cash flow. The Company expects that its cash
flow from operations and available borrowings will be sufficient to fund the
repayment of the Senior Notes, other investing activities and other required
debt amortization through the maturity of the Senior Notes. This will be
dependent on its overall operating performance and be subject to general
business, financial and other factors affecting the Company and the domestic
steel industry, as well as prevailing economic conditions, certain of which are
beyond the control of the Company.
As reported in the Company's Annual Report on Form 10-K for the fiscal
year ended July 31, 1993 in "Item 3, Legal Proceedings," the Company is seeking
a declaratory judgment in the Circuit Court of Cook County, Illinois that
certain provisions of the state's revised workers' compensation regulations are
unconstitutional. The effect of the revised regulations is to require the
Company to increase the amount of security posted by the Company from $200,000
to $8.8 million to maintain the Company's self-insurance workers' compensation
privilege. Upon the posting of a $400,000 bond, the Company obtained a
temporary restraining order which effectively restrains the imposition of this
increased security requirement and the ability of the Illinois Industrial
Commission (the "Industrial Commission") to terminate the Company's self-insurer
status, pending further order of
14
<PAGE>
The Circuit Court of Cook County. If the Company is unsuccessful in its
challenge to the Industrial Commission's actions or regulations and is unable to
post the required bond, the Company would be required under the Illinois law to
obtain insurance for its workers' compensation claims. Insurance would likely be
much more expensive than the Company's self-insurance plan or may be unavailable
and obtaining a letter of credit under the Senior Credit Facility would reduce
the Company's borrowing capacity.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of the Shareholders of the Company was held on
January 20, 1994 for the purpose of electing nine Directors, to approve the 1994
Long-Term Incentive Plan, to approve the 1994 Director Stock Option Plan and to
elect an Auditor for the Company for the coming year. There were a total of
18,451,131 shares of Common Stock cast.
The nine Directors elected, which constitutes the entire Board of
Directors, and the votes cast for each Director were:
<TABLE>
<CAPTION>
Votes For
----------
<S> <C>
William F. Andrews 17,989,221
Kim G. Davis 17,999,574
Darius W. Gaskins, Jr. 17,999,794
Robert N. Gurnitz 17,475,321
James A. Kohlberg 17,973,785
Jerome Kohlberg Jr. 17,989,287
Christopher Lacovara 17,975,752
George W. Peck, IV 17,995,086
Richard F. Williams 17,965,959
</TABLE>
There were 13,925,339 shares cast for the 1994 Plan, which was approved. There
were a total of 13,801,297 shares cast for the 1994 Director Stock Option Plan
which was also approved and there were 17,955,003 votes for the election of
Coopers & Lybrand as auditors for the Company for the ensuing year.
15
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 11 - Computation of Income Per Share
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the quarter ended January 31, 1994.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHWESTERN STEEL AND WIRE COMPANY
By /s/ E. G. Maris
-----------------------------------
E. G. Maris, Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
Date: March 4, 1994
17
<PAGE>
Exhibit 11
NORTHWESTERN STEEL AND WIRE COMPANY
Computation of Income Per Share
<TABLE>
Three Months ended Six Months Ended
January 31, January 31,
--------------------------- ----------------------------
1994 1993 1994 1993
----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Income (loss) before cumulative effect
of accounting change $ 1,671,000 $ (481,000) $ 4,913,000 $ (974,000)
Cumulative effect of accounting change - - - (39,778,000)
----------- ----------- ----------- ------------
Net income (loss) $ 1,671,000 $ (481,000) $ 4,913,000 $(40,752,000)
=========== =========== =========== ============
Weighted average shares outstanding 24,656,023 17,564,000 24,656,023 17,564,000
Dilutive impact of shares issuable pursuant
to the Management Stock Option Plan
and Employee Purchase and Option
Plan, such shares being issued or
issuable and such options granted
within one year of the initial
public offering - 535,000 - 535,000
Net additional shares outstanding assuming
dilutive stock options exercised and
proceeds used to purchase treasury stock at
average market price 626,581 71,143 626,581 71,143
----------- ----------- ----------- ------------
Shares outstanding for net income (loss)
per share calculation 25,282,604 18,170,143 25,282,604 18,170,143
=========== =========== =========== ============
Income (loss) before cumulative
effect of accounting change per share $ 0.07 $ (0.03) $ 0.20 $ (0.05)
Cumulative effect of accounting change
per share - - - (2.19)
----------- ---------- ----------- ------------
Net income (loss) per share $ 0.07 $ (0.03) $ 0.20 $ (2.24)
=========== ========== =========== ============
</TABLE>
