NORTHWESTERN STEEL & WIRE CO, 10-K405, 2000-11-14

NORTHWESTERN STEEL & WIRE CO
10-K405, 2000-11-14
STEEL WORKS, BLAST FURNACES & ROLLING MILLS (COKE OVENS)

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934

FOR THE FISCAL YEAR ENDED JULY 31, 2000

[ ] TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934

FOR TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-21556

NORTHWESTERN STEEL AND WIRE COMPANY
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
ILLINOIS 36-1562920
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>

121 WALLACE STREET

<TABLE>
<S> <C>
STERLING, ILLINOIS 61081
(Address of principal executive offices) (Zip Code)
</TABLE>

Registrant's telephone number, including area code 815/625-2500

Securities registered pursuant to Section 12(b) of the Act:

NAME OF EACH EXCHANGE

<TABLE>
<S> <C>
TITLE OF EACH CLASS ON WHICH REGISTERED
None None
</TABLE>

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $.01 PAR VALUE
9 1/2% SENIOR NOTES DUE 2001

-------------------------

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 and 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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K of any amendment to this Form 10-K. [X]

On October 16, 2000 the aggregate market value of the Registrant's voting
stock held by non-affiliates of the Registrant: $1.7 million

On October 16, 2000 a total of 24,484,823 Common Stock, par value $0.01 per
share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated herein by reference in the
respective Parts hereof indicated:

None

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PART I

ITEM 1. BUSINESS

GENERAL

Founded in 1879, the Company is a major mini-mill producer of steel
products including structurals, bars and rod. In contrast to integrated mills
which produce steel from coke and iron ore through the use of blast furnaces and
basic oxygen furnaces, mini-mills use electric arc furnaces to melt steel scrap
and cast the resulting molten steel into long strands of various shapes in a
continuous casting process.

The Company pioneered the use of electric arc furnaces for steelmaking,
installing its first electric arc furnace in 1936.

The Company's operations are located in Sterling, Illinois (the "Sterling
Operations"). The Sterling Operations consist primarily of a melt shop with one
new Eccentric Bottom Tapping 400-ton electric arc furnace with an anticipated
annual scrap melting capacity in excess of 1.65 million tons. Additionally, the
Company recently refurbished an existing 400-ton electric arc furnace with an
annual scrap melting capacity in excess of .80 million tons. It is anticipated
that this furnace will supplement the new furnace during fiscal 2001 and
eventually serve as back up production capabilities. The Company also has two
ladle metallurgical furnaces, two continuous casters, three rolling and
finishing mills and the Company's remaining wire operations. The Company's
continuous casters have sufficient capacity to cast semi-finished steel for all
of the Company's rolling and finishing mills. The Company is in the process of
refurbishing its continuous casters during fiscal 2001 which will match the
throughput speed of the new furnace.

In July 1997, the Company closed a rolling mill in Houston, Texas which
produced wide flange beams. On June 21, 1999, the Company sold the Houston real
estate (land and buildings only) for cash. Subsequently, on October 5, 1999 the
Company sold the equipment at scrap value for cash. By the end of calendar 1998,
the Company announced that it would exit from the majority of its wire products
business. The remaining rod and wire products include clean and coat rod,
manufacturer's wire and cut rod products. On April 30, 1999, the Company sold
its concrete reinforcing mesh facility located in Hickman, Kentucky.

STRATEGIC PLAN

In order to become more competitive with foreign manufacturers and
increasingly efficient domestic competitors, the Company is in the process of
implementing a strategic plan to modernize its facilities and operations. The
key theme of the strategic plan is to be a low-cost producer in the Company's
core and chosen markets by modernizing facilities and improving operating
efficiency. The strategic plan does not rely on capacity increases or
incremental sales to achieve its goals. The elements of the strategic plan are
as follows:

- Construct a new, more efficient, low cost mill (the "New Mill") to
replace the Company's existing 14" and 24" rolling mill capacity at its
Sterling, Illinois facility.

- Implement a new collective bargaining agreement with the Company's union.

- Modernize the Company's existing melting capabilities with the
construction of a new furnace.

- Implement a maintenance program to rationalize the Company's existing
maintenance operations.

- Implement a total quality management program.

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Results of Operations -- Cost of Goods Sold -- Fiscal 2000" and "Management's
Discussion and Analysis of Financial Conditions and Results of
Operations -- First Quarter Fiscal 2001 -- Operations." The Company also
expended considerable effort and $20.3 million in preparing to construct the new
mill, including equipment and construction engineering, purchase of equipment,
and site preparation. The Company, however, cannot commence construction of the
New Mill until construction financing is in place. See "Management's Discussion
and Analysis of Financial Conditions and Operating Results -- Liquidity, Capital
Resources and Outlook."

The Company, to begin construction of the New Mill, must arrange for
additional capital financing which will in turn require the restructuring of the
$115 million of outstanding 9 1/2% senior notes due June 2001 (the "Senior
Notes"). The Company, as a result of discussions with an informal committee of
the holders of the Senior Notes, made an offer to the holders of the senior
notes to exchange the Senior Notes for $52.5 million in cash and shares of the
Company's common stock equal to 70% of the common stock outstanding immediately
after the consummation of the exchange offer. As of October 25, 2000,
approximately $91.7 million in aggregated principal amount, or approximately
79.7% of the outstanding Senior Notes, had been tendered pursuant to the
exchange offer.

To effectuate the exchange offer, shareholder approval was obtained on
March 21, 2000, for the issuance of the common shares in connection with the
exchange offer and for a one-for-ten reverse stock split. See "Submission of
Matters to a Vote of the Security Holders." Even with shareholder approval, the
exchange offer remains subject to several conditions, including that the Company
secure the financing necessary to complete the construction of the New Mill and
95% of the holders of the Senior Notes tender their notes in the exchange offer.

Motivated by concerns that the U.S. steel industry had been unfairly harmed
by a flood of imports, the United States government enacted the Emergency Steel
Loan Guarantee Act of 1999 (the "Guarantee Act") which provides that a qualified
steel company can apply to the Loan Guarantee Board for a guarantee of up to 85%
of the principal amount of a loan made to a steel company by a private bank or
investment company. The Company applied to the Loan Guarantee Board in February
2000, and in August 2000, received formal written notification from the Loan
Guarantee Board that a guarantee had been granted under the Guarantee Act for
85% of a $170 million loan. The guarantee is subject to satisfying certain
conditions and is terminable by the Loan Guarantee Board upon notice to the
Company.

Because of the level of steel imports and poor steel industry performance,
access to the capital markets for steel companies has become severely
constrained. As a result of these conditions and the Company's performance,
Northwestern has been unable as yet to obtain the financing necessary to
construct the New Mill despite the approval of the loan guarantee. Northwestern
has been informed that the Loan Guarantee Board is considering modifying the
form of guarantee as well as other changes in the regulations which should
improve the Company's ability to access the capital markets. Northwestern is
continuing to diligently pursue the financing necessary to complete the
construction of the New Mill, although there is no assurance the Company will be
successful.

Because of the factors described above, and the length of time required to
obtain the approval of the guarantee was considerably longer than anticipated,
the Company will have to renegotiate new terms for the exchange offer with the
holders of the Senior Notes. Northwestern anticipates that the amount of cash to
be paid the Senior Note holders will probably have to be eliminated and
correspondingly the percentage of common shares to be issued to the holders of
the Senior Notes will have to be substantially increased. See "Management's
Discussion and Analysis of Financial Conditions and Operating Results --
Liquidity, Capital Resources and Outlook."

These factors have also combined to substantially reduce the Company's
liquidity. The Company is at or near its maximum draw, which fluctuates, under
its revolving credit facility which was entered into on October 5, 1999 with
Fleet Capital Corporation (the "Credit Facility"). Although the Company is
current with its payables, recently some vendors have expressed concern in
supplying future needs on credit terms. The Company expects that without relief
it will experience a severe liquidity shortage in the near future. The Company
in order to avoid such shortage is still vigorously pursuing the financing to
construct the New Mill
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and is also at the same time in discussions with (i) critical vendors to ensure
continued supply and obtain relief, (ii) the unofficial committee of the holders
of the Senior Notes and (iii) potential lenders to provide additional loans.
There is no assurance any or all of these efforts will be successful. See
"Management's Discussion and Analysis of Financial Conditions and Operating
Results -- Liquidity, Capital Resources and Outlook."

RISK FACTORS

Implementation of the strategic plan is subject to serious constraints.
Central to these constraints is receiving the financing necessary to complete
the modernization of the New Mill. See "Management's Discussion and Analysis of
Financial Conditions and Operating Results -- Liquidity, Capital Resources and
Outlook."

The Company is facing increasing competition from both domestic and foreign
competitors and has significant future debt service obligations. See
"Business -- Competition" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity, Capital Resources and
Outlook."

The Company, though current with its payables, expects that without relief
from its vendors and additional financing that it will experience a severe
liquidity shortage in the near future. See "Management's Discussion and Analysis
of Financial Conditions and Operating Results -- Liquidity, Capital Resources
and Outlook."

OPERATIONS

The Company's operations constitute one line of business with several
classes of products, including wide flange beams, channels, angles, merchant
bars and rod.

Raw steel is produced using the electric arc furnace process. Semi-finished
steel is made by continuous casting into billets and blooms. In February 11,
2000 the Company completed the construction of a new furnace to replace two of
the existing furnaces at a cost of $16.5 million.

Finished products are rolled from the semi-finished steel through a series
of reduction mill processes. These products include wide flange beams, channel
and angle products and merchant bars and bar shapes, which are sold nationally
to steel fabricators, distributors and original equipment manufacturers,
including industrial and agricultural machinery manufacturers. The Company sells
its output principally through Company personnel and independent sales agents to
customers located throughout the United States. In addition, semi-finished
products are sold to other steel producers when production capabilities and
market conditions exist.

Rods are produced for use in drawing to various wire gauges and other
fabricated wire products for shipments to the construction industry. In
addition, rods are sold to other wire manufacturers.

CUSTOMERS AND MARKETS

Structural steel products are used in a variety of commercial, industrial
and residential construction applications, as well as infrastructure projects,
such as roads and bridges, and public sector construction, such as schools and
hospitals. In construction applications, structural steel products are used as
beams, columns and girders which form the support structure of a building. In
infrastructure construction, structural forms are combined to form bridge
trusses and vertical highway supports. Original equipment manufacturers use
light structural shapes in the fabrication of heavy equipment.

In past years, 40%-50% of the Company's steel rod production has been
utilized in the manufacture of the Company's rod and wire products, while the
remaining rod production was sold to other manufacturers of wire products. With
the Company's exit from the fabricated wire products business in the first
quarter of fiscal 1999, the Company now consumes approximately 10% of its rod
production. The Company sells its rod products largely to the construction
industry in the upper Midwest region of the United States. Manufacturers'

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wire is sold directly to manufacturers of a variety of products, such as fan
guards, automotive door rods, shopping carts and dishwasher baskets.

The Company addresses the needs of its markets through enhanced customer
focus achieved through a variety of initiatives. These initiatives include
dedicated market sector sales groups, customer-direct computer access, on-time
delivery improvement programs and customer-friendly production cycles.

RAW MATERIALS

The Company's major raw material is steel scrap, which is generated
principally from industrial, automotive, demolition and railroad sources and is
purchased by the Company in the open market through a number of scrap brokers
and dealers or by direct purchase. The cost of scrap is subject to market forces
including demand by other steel producers for comparable grades of scrap. The
cost of scrap to the Company can vary significantly, and product prices
generally cannot be adjusted in the short-term to recover large increases in
steel scrap costs. Over longer periods of time, however, product prices and
scrap prices have tended to move in the same direction.

The long term demand for ferrous scrap and its importance to the domestic
steel industry can be expected to increase as steelmakers continue to expand
scrap-based electric furnace capacity. For the foreseeable future, however, the
Company believes that supplies of scrap grades used in its operations will
continue to be available in sufficient quantities.

ENERGY

Steelmaking is an electricity-intensive industry. Historically, the Company
has been adequately supplied with electricity and does not anticipate any
curtailment in its operations resulting from energy shortages. The Company's
second largest source of energy is natural gas. Historically, the Company has
been adequately supplied with natural gas and an adequate supply is expected to
be available in the future.

COMPETITION

The Company competes with a number of domestic minimills and steel imports.
The Company does not compete against any integrated steel producers, nor does it
participate in the flat rolled steel market. In the Company's medium and heavy
structural product range, the Company believes its principal competitors are
Nucor-Yamato Steel Company and Chaparral Steel Company. In the light structural
shape market, a number of domestic minimills compete with the Company, including
Bayou Steel Corp., Birmingham Steel, Chaparral Steel, North Star Steel Co. and
Nucor Corporation. With the strength of the U. S. dollar and a relatively strong
U. S. economy compared to other countries, foreign exports of structural steel
into the United States increased dramatically during calendar 1998 and into
early calendar 1999. During fiscal 1999, the Company experienced significant
declines in shipments of structurals as the lower priced imports captured market
share from domestic producers. During fiscal 1999, structurals pricing fell
approximately 25% from the near record highs experienced in fiscal 1998.

On July 7, 1999 the domestic structurals producers filed an anti-dumping
suit with the Federal Trade Commission (the "Commission"). The Commission ruled
on August 23, 1999, finding in favor of the domestic industry and sending the
case into an injury investigation phase. The Commission, in a 6-0 vote, found
injury or threat of injury to the U. S. industry by Japan and Korea. The
Department of Commerce imposed duties of 32-65%, and 15-45% applied to imports
from Japan and Korea, respectively. As a result, imports from these countries
have declined dramatically. Overall, imports have been increasing at an
accelerating rate since the second quarter 2000 as a result of the decline in
the value of the Euro and prices in the U. S. markets.

During calendar 1999, competitors of the Company completed construction of
three new structural steel mills located in South Carolina, Virginia and
Georgia. These mills are expected to add up to as much as 1.9 million tons of
capacity by calendar year 2001 across a broad range of structural products, many
of which are currently produced by the Company. Additionally, a potential new
competitor to the Company,

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Steel Dynamics Inc., announced its intention to build a new structural rolling
mill in Indiana which, if built, would add an additional 900,000 tons of new
capacity. As of November 2000, construction of this rolling mill had not begun.
In contrast to the Company's mills which were installed 20 or more years ago,
these new mills will be modern, state-of-the-art operations with lower costs
than the Company's (including lower overall labor costs from reduced man-hour
inputs resulting from more efficient manufacturing equipment). Moreover, if the
Steel Dynamics mill is built, it will erode the freight advantage the Company
presently enjoys with its Midwest customers. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- First Quarter
Fiscal 2001" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity, Capital Resources and Outlook."

The market for rod products in which the Company competes is generally
concentrated in the Midwest region of the United States in which the Sterling
Operations are located. This concentration results from significant foreign
exports of rod into the other regions of the United States and the relatively
high freight costs as compared to product values on wire products. The Company's
domestic competitors in the rod market include G.S.T., Rocky Mountain Steel
L.P., Keystone Steel & Wire Co. ("Keystone") and North Star Steel Co. During
calendar 1999 and into calendar 2000, imports of rods into the Unites States
have increased dramatically. On December 29, 1998 domestic steel producers,
including the Company, filed a trade case with the Commission. On May 12, 1999
the Commission ruled favorably for the domestic industry and sent the case into
an injury investigation phase. On May 12, 1999 the investigations were completed
and recommendations were sent to the President and his final decision was due on
September 27, 1999. On February 11, 2000, the President made his final decision
and imposed a tariff on imports in excess of 1.58 million tons per year. The
President's decision appears to have had minimal effect on imports and pricing.
In fact for the first eight months of calendar 2000 rod imports exceeded the
levels in 1998 and 1999 for the same period resulting in further price
deterioration. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- First Quarter Fiscal 2001."

BACKLOG

As of September 30, 2000, order backlog, all of which is expected to be
filled in fiscal 2001, totaled approximately $56 million compared with
approximately $69 million as of September 30, 1999.

SALES BY PRODUCT TYPE

In fiscal 2000, sales to one rod customer accounted for 10.1% of total
dollar net sales. During the fiscal years ended July 31, 1999 and 1998, no
single customer accounted for more than 10% of total dollar net sales. Sales to
the Company's ten largest customers accounted for approximately 43% of total net
dollar sales in fiscal 2000. Total foreign sales accounted for approximately 2%
of total net sales in fiscal 2000.

For the fiscal years indicated below, the approximate percentage of net
sales contributed by each class of similar products is as follows:

<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Product Group
Structural........................................... 53.8% 46.4% 42.5%
Merchant bar......................................... 14.5 15.8 13.0
Semi-finished........................................ -- 3.7 12.1
Wire Products........................................ 4.1 12.3 17.9
Rod.................................................. 27.6 21.8 14.5
----- ----- -----
Total........................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>

EMPLOYEES

As of July 31, 2000, there were approximately 1,500 active employees of the
Company, approximately 1,250 of which are members of three collective bargaining
units. The majority are members affiliated with the

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United Steelworkers of America ("USWA"), and the remainder are represented by
one local union affiliated with the United Plant Guard Workers of America and
one local union affiliated with the International Brotherhood of Teamsters.
Currently, the Company is party to a collective bargaining agreement with the
USWA for employees in Sterling and Rock Falls, Illinois. This agreement expired
on August 1, 2000, but has been extended to November 29, 2000 pending completion
of financing for the Company's Strategic Plan. The USWA is strongly supportive
of the Company's new strategic plan. With the union and the Company working
together to implement the new strategic plan, the Company and the USWA entered
into a new collective bargaining agreement that is subject to the Company
obtaining financing for the construction of the New Mill in Sterling, Illinois.
As a result, the Company has enjoyed improved relationships with both the union
and its employees. If the financing is obtained and the new agreement becomes
effective, it will extend to October 31, 2003 with a no-strike, no lockout
provision for an extension, with interest arbitration, to October 31, 2006. The
two remaining bargaining units are party to collective bargaining agreements
with the Company, of which the United Plant Guard expires in fiscal 2003 and the
Teamsters expires in fiscal 2001.

The Company exited a majority of its wire products business in the first
quarter of fiscal 1999 affecting approximately 300 employees. In the third
quarter of fiscal 1999, the Company sold the Hickman facility, resulting in a
reduction of approximately 50 employees.

ENVIRONMENTAL COMPLIANCE

Based on continuing review of applicable regulatory requirements by the
Company's internal environmental compliance officer and advice from independent
consultants, the Company believes that it is currently in substantial compliance
with applicable environmental requirements, except as described below.
Nevertheless, as is the case with steel producers in general, if a release of
hazardous substances located on the Company's property 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 possesses air emission permits for all major operations. New
rules to be adopted under amendments to the 1990 Clean Air Act ("CAA") may
impose significantly stricter air emissions standards on the Company. The
Company has applied for an air permit under Title V of the CAA. Because
regulations applicable to the Company's operations have not yet been promulgated
under the CAA, the Company cannot at this time determine the cost to comply with
the new regulations. Because these standards will also apply to the Company's
domestic competitors, they should not materially affect the Company's
competitive position.

The Company has also been cited by the USEPA for alleged violations of
clean air standards under the 1990 Clean Air Act ("CAA") and other requirements
at its Sterling furnace operations. On October 22, 1997, the Company was
notified by the U. S. Department of Justice ("DOJ") that it intended to file
suit against the Company for alleged violations of the CAA. The Company and the
DOJ have agreed to settle this claim and are scheduled to present the agreement
in court on November 16, 2000. The agreement requires the Company to pay a civil
penalty of approximately $.6 million, which has been fully accrued as of July
31, 2000, and achieve and maintain compliance with the CAA through capital
expenditures that the Company has incurred at July 31, 2000, for $12.3 million.
The Company would also undertake several Supplemental Environmental Projects
that could total $1.0 million in capital expenditures. In compliance with the
consent decree, on October 8, 2000 the Company removed from operations the #6
furnace which was originally cited for the violations discussed.

The Resource Conservation and Recovery Act ("RCRA") regulates the disposal
of emission control sludge/dust from electric arc furnaces ("K061"), a waste
stream generated in significant quantities at the Sterling Operations. The
Company is complying with RCRA with respect to K061 by using a third party to
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chemically stabilize this waste before its disposal. Fiscal 2000 expenses in
connection with such services were approximately $3.0 million. This chemical
stabilization process allows the Company to use the fully permitted hazardous
waste landfill at the Sterling Operations for disposal of the stabilized K061.

In 1994, the Company received a modification to its Part B RCRA permit from
the Illinois EPA to allow an expansion to its hazardous waste landfill. The
Company currently estimates a cost of $3.1 million to close its hazardous waste
disposal site in 2008, of which $2.0 million has been accrued to date. The
Company also operates an on-site non-hazardous waste landfill which it expects
to operate for several years.

The Company has occasionally exceeded the limits of its wastewater
discharge permit at its Sterling Operations. The Company believes that modified
operating procedures and certain equipment upgrades have eliminated the waste
water discharge concerns of the State of Illinois and the EPA.

The Company has been identified by the Illinois Environmental Protection
Agency (IEPA) as one of the potentially responsible parties for costs associated
with a third party owned disposal site. The IEPA is likely to seek compensation
from the Company as an alleged waste generator for recovery of past costs and
future remediation of the waste site. Under Illinois law, the Company's share of
liability can be limited to its proportionate share based upon causation of the
total cost of the site. Based on data available, the Company believes its share
will be a smaller fraction of the total site clean up costs, however no
reasonable estimation of total cost for remediation can be made at this time.

PATENTS AND TRADEMARKS

The Company holds no patents, trademarks, licenses, franchises or
concessions of material importance to its business.

ENTERPRISE ZONE DESIGNATION

In 1988, the Company's property was designated to be within an Illinois
Enterprise Zone ("Enterprise Zone") by the Illinois Department of Commerce and
Community Affairs. The primary benefit to the Company of operating within an
Enterprise Zone is the receipt of a state utility tax exemption on gas and
electricity as well as an exemption on the Illinois Commerce Commission's
administrative charge on these utilities. The Company has been able to
demonstrate sufficient capital spending and thus is entitled to the utility tax
exemption through July 31, 2003. This utility tax exemption is expected to save
the Company approximately $2.0 million to $2.5 million per year through July 31,
2003.

ITEM 2. PROPERTIES

The executive offices of the Company and its steel producing facilities,
designated as Plants 1, 2, 3, 5, and 6, are located on approximately 596 acres
of land along the Rock River in Sterling, Illinois, and Plant 4 is on 8 acres of
land located directly across the river in Rock Falls, Illinois.

Plant 1, comprising 641,081 square feet of floor space, consists of a wire
mill with equipment for processing rod and drawing, galvanizing and annealing
wire. A significant portion of this facility was idled during fiscal 2000 due to
the Company's decision to exit the majority of its wire products business.

Located in Plant 2 are liquid metal producing facilities, with more than
2.4 million tons annual capacity, consisting of two 400-ton electric furnaces.
Also located at Plant 2 is a six-strand bloom continuous caster and an
eight-strand billet continuous caster, as well as the 12" rod mill. The
continuous casters have a combined capacity of approximately 1,900,000 tons and
the rod mill has a 440,000 ton capacity. Within this plant is the jumbo beam
caster which provided beam blanks to the Houston structural mill and is operated
periodically for one section size utilized on the 24" mill. It is anticipated
that the jumbo beam caster will not be required to supply beam blanks to the New
Mill and will be idled at that time. At present, this plant comprises 961,318
square feet of floor space.

Plant 3 consists of a 24" structural mill, with a total annual capacity of
440,000 tons. The plant comprises approximately 900,000 square feet of floor
space.

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Manufacturing facilities for the production of welded wire products are
located at the Rock Falls Plant 4, which consists of 397,880 square feet. This
facility was idled during fiscal 2000 due to the Company's decision to exit the
majority of its wire products business. Portions of this facility are currently
leased to another company.

The 14" merchant bar and light structural mill, comprising 434,740 square
feet and having an annual capacity of 400,000 tons, is located at Plant 5.

Plant 6 consists of 48,304 square feet of floor space and is currently
idle.

All buildings are owned by the Company and are of steel, brick or concrete
construction. The Company believes that its plants and equipment are in adequate
operating condition.

Pursuant to the Company's Credit Facility, the Company has granted
mortgages on all of the Company's real estate and security interests in its
other assets, including equipment and fixtures.

ITEM 3. LEGAL PROCEEDINGS

Information on legal proceedings is contained on page 37 in the
"Commitments and Contingent Liabilities" Note to the Consolidated Financial
Statements included in this Annual Report on Form 10-K.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On March 21, 2000 at the Annual Meeting, the shareholders approved (i) a
one-for-ten reverse stock split, (ii) issuance of common stock representing 70%
of the Company's outstanding common stock in connection with the exchange offer
made to the holder of the Senior Notes, (iii) a pre-packaged bankruptcy plan,
should the filing of such a plan be necessary to effectuate the exchange offer,
(iv) the adoption of the 2000 Stock Incentive Plan and (v) the election of six
directors. The implementation of the reverse stock split and the issuance of
common stock in exchange for the Senior Notes is subject to the Company's
ability to obtain financing for the construction of the New Mill.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

At October 15, 2000, 24,484,823 shares of common stock were issued and
outstanding and held by approximately 1,300 registered holders.

The Company does not expect to pay dividends on the common stock during the
foreseeable future. The Company's existing credit facility as of July 31, 2000
prohibits the payment of any dividends. The indenture relating to the 9 1/2%
Senior Notes due 2001 of the Company also restricts the payment of dividends.
Since the initial public offering of June 12, 1993, there have been no dividends
paid on the common stock.

The Company's common stock was traded on the NASDAQ stock market under the
ticker symbol NWSW until December 17, 1999. Since December 17, 1999 the
Company's common stock has been traded on the over-the-counter bulletin board
(sponsored by the Nasdaq National Market, Inc.), under the symbol NWSW. The
range of common stock sales prices for each of the quarters during the past two
fiscal years (as reported by NASDAQ) are set forth under the caption "Quarterly
Financial Data" included in this Annual Report on Form 10-K in the rows
captioned "Stock Price Range".

The Company currently does not meet the requirements for listing of its
common stock for trading on the Nasdaq National Market. The Nasdaq stock market
requires that the minimum bid price of the Company's common stock be equal to or
greater than $1.00 per share. In connection with the Company's strategic plan,
the Company has received approval from the shareholders for a reverse stock
split which is intended to bring the Company into compliance with the listing
requirements of the Nasdaq National Market. There can be no assurances, however,
that this will be sufficient to gain relisting with Nasdaq.

9
<PAGE> 11

ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FISCAL YEARS ENDED JULY 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $365,269 $349,345 $596,437 $640,980 $661,069
Cost of goods sold (excluding
depreciation).................... 359,275 339,527 496,906 587,245 588,774
Selling and administrative
expenses......................... 15,439 11,350 13,017 13,546 11,920
Non-recurring items................ -- 43,777(2) -- 92,943(4) --
Operating (loss) profit............ (23,648) (59,785)(2) 68,966 (78,581)(4) 35,587
Interest expense................... 13,477 12,846 16,372 20,031 18,583
(Loss) income before income
taxes............................ (35,672) (71,304) 68,918(3) (98,420) 17,167
Net (loss) income.................. $(83,257)(1) $(45,347)(2) $ 41,696 $(63,120)(4) $ 20,670(5)
Net (loss) income per common
share............................ (3.40)(1) (1.85)(2) 1.70 (2.54)(4) 0.83(5)
OTHER DATA:
Capital expenditures............... $ 48,188 $ 15,760 $ 12,069 $ 17,435 $ 36,269
EBITDA(6).......................... $ (9,445)(1) $(45,309)(2) $ 86,514 $(52,754)(4) $ 60,375
Total Tons Shipped (000's)......... 1,112 1,040 1,558 1,686 1,668
Active employees................... 1,469 1,613 1,945 2,100 2,339
</TABLE>

<TABLE>
<CAPTION>
AT JULY 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets..................... $ 83,123 $129,258 $190,121 $184,210 $190,279
Plant and equipment -- net......... 154,796 122,012 152,460 158,004 241,189
Other assets....................... 21,927 67,139 40,618 47,574 18,445
-------- -------- -------- -------- --------
Total assets....................... $259,846 $318,409 $383,199 $389,788 $449,913
======== ======== ======== ======== ========
Current liabilities................ $176,423 $ 64,755 $ 78,459 $ 93,015 $113,137
Long term debt..................... 34,236 115,628 116,141 163,450 153,646
Other long term liabilities........ 85,618 91,200 101,899 82,852 77,114
Deferred income taxes.............. -- -- -- -- --
Shareholders' (deficit) equity..... (36,431) 46,826 86,700 50,471 106,016
-------- -------- -------- -------- --------
Total liabilities and shareholders'
(deficit) equity................. $259,846 $318,409 $383,199 $389,788 $449,913
======== ======== ======== ======== ========
Working (deficit) capital.......... $(93,300) $ 64,503 $111,662 $ 91,195 $ 77,142
======== ======== ======== ======== ========
</TABLE>

NOTES FOR SUMMARY OF SELECTED FINANCIAL DATA

(1) Net income included a $47.6 million or $1.94 per share charge due to the
writeoff of deferred tax assets which are now more likely than not to expire
before realization.

(2) Reflects a pre-tax charge of $37.2 million ($23.7 million after-tax, or $.97
per share) related to the closure of a majority of the wire products
division, as well as a pre-tax charge of $8.2 million ($5.2 million
after-tax, or $.21 per share) for the sale of the Hickman facility.
Additionally, reflects a pre-tax charge of $.9 million ($.6 million
after-tax, or $.02 per share) for the sale of the Houston facility.

(3) Includes other income of $9.7 million and $5.2 million related to a
settlement with three of the Company's electrode suppliers and property tax
settlement paid in earlier years, respectively.

(4) Reflects a pre-tax charge of $92.9 million ($59.9 million after-tax, or
$2.40 per share) related to the closure of the Houston structural mill.

(5) Net income included a $10.4 million or $.42 per share tax benefit due to
recognition of certain deferred tax assets which were more likely than not
to be realized.

(6) EBITDA is defined as operating profit plus depreciation and amortization.
The Company believes EBITDA provides additional information for determining
its ability to meet debt service requirements. EBITDA does not represent net
income or cash flow from operations as determined by generally accepted
accounting principles, and is not necessarily an indication of whether cash
flow will be sufficient to fund cash requirements.

10
<PAGE> 12

FORWARD LOOKING STATEMENTS

Except for historical information matters discussed herein contain
forward-looking information and describe the Company's belief concerning future
performance, business conditions and outlook based on currently available
information. The Company has identified these "forward-looking" statements by
words such as "anticipates," "expects," "believes," "estimates" and "appears"
and similar expressions. Risk and uncertainties which could cause actual results
of performance to differ materially from those expressed herein include the
following: a significant downturn in the domestic steel industry generally;
unanticipated material problems directly affecting the Company; volumes of
product and product shipments; changes in product mix and pricing; costs of
scrap steel and other raw material inputs; changes in domestic manufacturing
capacity; the level of non-residential construction and overall economic growth
in the United States; the level of imported products in the Company's markets;
changes in legislative or regulatory requirements; the ability to have the
Company's new furnace become fully operational and to perform in accordance with
specifications; modernizing or replacing the Company's exiting rolling mills;
the need to obtain noteholder approval for a renegotiated exchange offer; the
need to obtain sufficient financing with acceptable terms so that the Company
can construct the new mill as part of its strategic plan and meet its other
financial obligations; and the Company's ability to improve its current
liquidity shortage. The Company assumes no obligation to update the information
contained herein.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

NET SALES

Fiscal 2000. Net sales for fiscal 2000 were $365.3 million, an increase of
$15.9 million or 5% from fiscal 1999. Revenues increased in fiscal 2000
primarily as a result of an increase in shipped tons of approximately 7%. Rod
and wire shipments increased 13% over 1999, as the Company began to ship more
rods in the aftermath of the closure of a major portion of the Wire Products
Division and the sale of the Hickman plant during fiscal 1999. Structural
shipments increased 17% over 1999, as imports declined due to the effects of the
trade cases filed in fiscal 1998. The fiscal 2000 gains may be short-lived as
imports of all steel products into the country increased 20% during the first
half of calendar 2000. All of these new tons, coupled with increased domestic
capacity have taken a toll on recent pricing. Pricing of the Company's rod
products were relatively stable during fiscal 2000, while wire pricing declined
20% due to the product mix after the discontinuance of some of the high end wire
products. Recent developments in the marketplace, however, have dropped the
pricing for rods by approximately 4% for October 2000 relative to the prices in
effect for fiscal 2000. Pricing for fiscal 2000 for bars declined 5% from fiscal
1999 levels while structurals improved by 3%. However, similar to pricing in
rods, recent activities in the market during the first quarter of fiscal 2001
have reduced bar and structural prices also. Prices for bars during October are
down another 6% from fiscal 2000 levels, while structurals are down 4% from
fiscal 2000 levels. With the increase in supply to the market, the Company can
make no assurances that pricing will stabilize at these levels and could decline
even more. The Company sold no semi-finished steel during the year in
preparation for an outage to install new equipment in the furnace shop during
fiscal 2000.

Fiscal 1999. Net sales for fiscal 1999 were $349.3 million, a decrease of
$247.1 million or 41% from fiscal 1998. Revenues decreased in fiscal 1999 as a
result of the closure of a significant portion of the wire products operations.
While the closure significantly reduced the Company's capacity to produce and
sell fabricated wire products, the balance of the rods usually consumed by the
wire products operations were available to be sold to rod consumers. Although
the rods were available by the end of the first fiscal quarter, the Company was
unable to sell the additional rods to the market until late in the third fiscal
quarter, resulting in a 17% decline in volume of the combination of rod and wire
products. Additionally, the Company experienced a 19% decline in rod pricing due
to increased competition from record breaking levels of foreign imports into the
United States. Revenues also declined because of the displacement of higher
priced wire products with lower priced rods. The Company experienced further
revenue declines in its structural and bar
11
<PAGE> 13

products as volume declined 25% and pricing declined 12% due to the record
levels of structural steel imports experienced during calendar 1998.
Semi-finished steel sales decreased 82% in 1999 compared to the prior year
period due to increased competition in the rod and structural steel markets,
which have historically been the end-users of the Company's semi-finished steel
products.

COST OF GOODS SOLD

Fiscal 2000. Cost of goods sold (excluding depreciation) as a percentage of
net sales increased slightly from approximately 97% in fiscal 1999 to
approximately 98% in fiscal 2000. This increase resulted primarily from a 1%
decrease in average selling prices for fiscal 2000. The Company installed a new
furnace ("New Furnace") in February 2000 and experienced multiple problems in
bringing the equipment up to operating levels necessary to idle two of its
older, higher operating cost furnaces. In May 2000, the New Furnace was involved
in a fire resulting in further delays to the operating schedule. As a result the
Company was forced to purchase semi-finished steel from other producers to
supply all of its rolling mills for May 2000 and part of June 2000. The
situation adversely affected cost of goods sold since the semi-finished steel
must be purchased at a higher cost than it cost the Company to produce its
semi-finished steel from raw materials. The Company has seen recent improvements
in the operating level of the new furnace. The furnace has achieved melting
times of less than two hours at times, and improvements in electricity
consumption and electrode usage compared to the older furnace. While the
Company's principal raw material, steel scrap, decreased in cost by
approximately 9% in 2000 compared to 1999, the sales price decreases that
occurred erased the benefit from scrap price declines.

Fiscal 1999. Cost of goods sold (excluding depreciation) as a percentage of
net sales increased from approximately 83% in fiscal 1998 to approximately 97%
in fiscal 1999. This increase resulted primarily from the loss of volume and
decrease in selling prices for fiscal 1999. Operating efficiencies achieved in
the production departments during the record levels of operations in 1998 eroded
in 1999. Cost of goods sold increased because the reduced operations were unable
to absorb fixed costs to the levels achieved in fiscal 1998. While the Company's
principal raw material, steel scrap, decreased approximately 20% in 1999
compared to 1998, sales price decreases exceeded the scrap price declines by
over 100%.

SELLING AND ADMINISTRATIVE EXPENSES

Selling and administrative expenses were $15.4 million in fiscal 2000
compared to $11.4 million in fiscal 1999. The increase resulted primarily from
higher professional fees in connection with the proposed exchange offer and the
Emergency Steel Loan Guarantee efforts.

Selling and administrative expenses were $11.4 million in fiscal 1999
compared to $13.0 million in fiscal 1998. The decrease resulted primarily from
the closure of a majority of the Wire Products operations.

NON-RECURRING ITEMS

During the first quarter of fiscal 1999, the Company announced the closure
of its unprofitable wire fabricating operation. As a result, the Company
recorded a one-time, non-recurring pre-tax charge of approximately $41.6
million. The charge was primarily non-cash and included the write-down to
estimated fair market value of the facility and equipment related to the wire
operations, closure costs, and employee termination expenses for approximately
300 employees as follows:

<TABLE>
<S> <C>
Asset Impairment............................................ $ 3,889
Inventory write-down........................................ 2,514
Employee termination expenses, including pension and
post-retirement impacts................................... 33,100
Other....................................................... 2,094
-------
$41,597
=======
</TABLE>

The last affected production departments ceased operations in November 1998
and shipments ceased in March 1999.

12
<PAGE> 14

As of the closure of the wire fabricating operations, approximately $9.9
million in related fixed assets were identified by the Company. A significant
amount of the identified fixed assets were reconfigured to be utilized in the
Company's on-going operations. The asset impairment charge for the wire
operations includes primarily machinery and equipment utilized in the wire
operations that cannot be utilized elsewhere in the Company's on-going
production process. The net book value of the impaired fixed assets was $4.1
million. Due to the age of these wire fabricating fixed assets, the Company did
not believe it was likely that they would recover a significant portion of the
remaining net book value. In the fourth quarter of 1999, the Company amended
their original asset impairment estimate based on actual proceeds received on
the sale of the wire operations fixed assets of $1.9 million. This reduced the
non-recurring charge by $1.7 million.

The Company attempted to utilize as much of the raw materials in the wire
facility as possible during the wind-down of operations as the materials are not
utilized elsewhere in the company's production process. As a result, a
significant amount of finished goods inventory beyond the normal capacity
requirements existed. The Company began to "fire sale" the finished goods
inventory to reduce the remaining balance and has estimated the write-down based
upon discussions with third parties regarding the current market price third
parties are willing to pay given the current situation.

The closure of the wire mill resulted in the termination or retirement of
employees, consisting primarily of hourly wire mill workers covered under the
Company's current collective bargaining agreement with the Company's union as
well as certain salary administrative personnel affiliated with the wire mill.
The employee termination charge consists of a pension curtailment charge, a
post-retirement curtailment charge, special termination benefits required
pursuant to the existing collective bargaining agreement, severance, vacation
pay and WARN pay. Approximately 100 hourly employees included in the original
estimate of terminations were able to find employment elsewhere within the
Company's steel operations, resulting in lower employee termination expense than
originally estimated (primarily WARN pay, severance and vacation pay).
Approximately 150 employees elected the retirement option (as opposed to
approximately 135 included in the original estimate) pursuant to the collective
bargaining agreement resulting in higher employee retirements than originally
estimated. The net impact of lower employee terminations and higher employee
retirements resulted in the Company reducing its employee termination charge by
approximately $2.7 million in the third quarter of fiscal 1999. As of July 31,
2000, the Company has remaining reserves of approximately $1 million for unpaid
employee termination expenses, which are expected to be spent during the next
two fiscal years. The number of employees terminated through July 31, 2000 was
226.

The "Other" charge associated with the closure of the wire fabricating
operation includes the write-off of wire mill deferred expenses as of the
closure date and an estimate of expenses related to the clean up of the
facility. As of July 31, 2000, substantially all of the "Other" charges have
been expended.

The estimated annual revenue and net operating losses related to the wire
operations that will not be continued are $72.6 million and $3.9 million,
respectively. These amounts have been estimated by utilizing the 1998 results
for the wire operations.

During the third quarter of fiscal 1999, the Company sold its Hickman
facility for cash. The sale included all of the assets at the facility including
the real estate, equipment, inventory and operating supplies on site as of April
30, 1999. The sale resulted in a one-time non-recurring charge of approximately
$8.2 million, which was primarily non-cash and included the write-down of the
land, buildings, equipment and inventory to the contract price.

During fiscal 1997 the Company closed its Houston rolling mill, incurring a
one-time, non-recurring charge of approximately $92.9 million. The charge was
primarily for the write-down of facilities and equipment to estimated fair
market value. The property has been marketed since that time and in the fourth
fiscal quarter of 1999, the facility was sold for cash. As a result of the sale
of the Houston facility in the fourth quarter of 1999, and the sale of remaining
equipment subsequent to year end, the Company recorded an additional
non-recurring charge of approximately $0.9 million in the fourth quarter of
fiscal 1999 to write-down these assets to their realized value.

13
<PAGE> 15

OPERATING PROFIT

Fiscal 2000. Operating profit decreased from a $13.5 million loss in
fiscal 1999 to a $23.6 million loss in fiscal 2000 excluding the one-time,
non-recurring charges of $46.3 million in fiscal 1999. The $4.0 million increase
in selling and administrative expenses and the average decline in selling prices
account for the change in operating profit.

Fiscal 1999. Operating profit decreased dramatically from a $69.0 million
profit in fiscal 1998 to a $13.5 million loss in fiscal 1999, excluding the
one-time, non-recurring charges of $46.3 million. The substantial increase in
imports contributed greatly to the significant year to year change in comparison
to the fiscal 1998 results, which were the highest profit levels in the
Company's history.

INTEREST EXPENSE

Fiscal 2000. Interest expense increased by $.7 million from $12.8 million
in fiscal 1999 to $13.5 million in fiscal 2000 due to increased borrowings
resulting from higher spending for capital additions for the new furnace and
pollution control equipment, as well as an overall decline in operating results.
Capitalized interest was $.9 million for fiscal 2000 in comparison to $.3
million for fiscal 1999.

Fiscal 1999. Interest expense was $12.8 million for fiscal 1999, a $3.6
million decrease compared to fiscal 1998. The decrease in interest expense is
primarily due to decreased borrowings resulting from improved working capital
management, asset sales and decreases in long-term debt for payments made in the
fourth quarter of fiscal 1998. Capitalized interest was $0.3 million for 1999.
No interest was capitalized during fiscal 1998.

INTEREST AND OTHER INCOME

Fiscal 2000. Interest and other income increased by $.1 million for fiscal
2000 in comparison to fiscal 1999.

Fiscal 1999. Interest and other income decreased by $15.0 million in
fiscal 1999 to more historical levels. Other income in fiscal 1998 was
significantly higher than is customary for the Company due to the settlement of
claims against electrode suppliers regarding prices paid for graphite electrodes
in fiscal 1998 and earlier years resulting in a $9.7 million benefit.
Additionally, the Company also recognized a $5.2 million benefit for recovery of
disputed property tax payments made in earlier years.

INCOME TAXES

Fiscal 2000. During fiscal 2000, the Company did not record any income tax
benefits relating to the current year's pretax losses as management believes
that the available objective evidence creates sufficient uncertainty regarding
the realizability of these benefits. Additionally, based on two consecutive
years of losses and the Company's liquidity shortage (See "Current
Developments" -- Note to Consolidated Financial Statement), the Company recorded
a valuation allowance of $47.6 million during the fourth quarter of fiscal 2000
which fully offsets the prior year net deferred tax asset balance.

Fiscal 1999. The pre-tax losses of $71.3 million in fiscal 1999 resulted
in a benefit from taxes of $26.0 million in comparison to $27.2 million in tax
provisions for the $68.9 million profit in fiscal 1998.

NET (LOSS) INCOME

Net loss of $83.3 million or $3.40 per share in fiscal 2000 compares to a
net loss of $45.3 million or $1.85 per share in fiscal 1999.

Net loss of $45.3 million or $1.85 per share in fiscal 1999 compares to net
income of $41.7 million or $1.70 per share in the prior year.

14
<PAGE> 16

ENVIRONMENTAL MATTERS

The Company is subject to various federal, state and local laws and
regulations. See "Commitments and Contingencies" Note to the Consolidated
Financial Statements and "Business -- Environmental Compliance."

YEAR 2000

The Year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. The Company
believes that its efforts to identify and resolve all significant Y2K issues was
successful. The total cost of these Y2K compliance activities, costing less than
$1.0 million, was not material to the Company's financial position or its
results of operations and have all been expensed as incurred.

FIRST QUARTER FISCAL 2001

GENERAL ECONOMIC ENVIRONMENT

In general, the entire domestic steel industry has been under siege from
imports. Without some political action, or change in the marketplace, it is
likely that the Company will continue to feel pricing pressure as the domestic
market feels the impact of an oversupply of steel products. Specifically, the
Company's structural and bar products are also under pressure from new domestic
supply created from the construction of several new plants. See
"Business -- Competition." Interest rates have increased and natural gas, one of
the Company's larger expenses, continues to increase in price. Not only has the
demand for steel not kept pace with the rapid growth in supply from domestic and
foreign producers, but the Company now believes that the demand will likely
soften in the near term.

BARS AND STRUCTURALS

During the fourth quarter of fiscal 1999, the Company and other domestic
competitors filed a trade case with the International Trade Commission ("the
Commission") against four foreign countries accused of illegal dumping of wide
flange beams in the United States. In the first quarter of fiscal 2000, the
Commission ruled in favor of the domestic suppliers against two of the countries
accused of illegal dumping, Japan and South Korea. On July 31, 2000, the
Commission levied duties of 65% and 25% against Japan and South Korea,
respectively. These actions improved the supply/demand equation in comparison to
fiscal 1999 and boosted wide flange beam selling prices back to approximately
90% to 95% of fiscal 1998 record levels. However, non-wide flange structural
steel imports have increased dramatically during the fourth quarter of fiscal
2000 and the first quarter of fiscal 2001. The increase in imports coupled with
added domestic supply from the addition of new capacity to the market have
dramatically reduced current pricing for the Company's bar and light structural
shapes by approximately 11% in comparison to fiscal 2000 pricing. Order backlog
has dropped substantially as the Company's customers have ample avenues of
supply with the current market.

RODS AND WIRE

In the second quarter of fiscal 1999, the Company and several other
domestic suppliers filed a trade case with the Commission against several
countries for illegal dumping of rods into the United States. The Commission
ruled in favor of the domestic industry and sent recommendations to the
President in February, 2000. The President imposed a tariff of $20/ton on
imports of rods in excess of 1.58 million tons per year for the next three
years. The President's actions resulted in a 6% price increase in the fourth
quarter of fiscal 2000. However, the tariffs decline each year for the next
three years, therefore, there can be no assurances that the recent increase in
price will last if the tariffs are not strong enough to deter future import
growth. Recent market activities have negatively impacted rod pricing with a
price decrease of approximately 5% as imports continue to flow.

15
<PAGE> 17

OPERATIONS

The Company has also experienced operating difficulties with the furnace.
In early September 2000, the transformer that powers the new furnace failed,
interrupting the production cycle. The Company was forced to purchase some
semi-finished steel to keep the rolling mills operating. However, before the
purchased steel could arrive, the Company experienced outages on each of the
three rolling mills for lack of semi-finished steel to operate. In mid-October
2000, the Company was able to restart the New Furnace with a spare transformer.
The spare transformer does not have all the technical advancements of the failed
transformer and may require the Company to operate one of the less efficient and
more costly furnaces intermittently for several months until the failed
transformer is repaired and re-installed. It is anticipated that the repaired
transformer will not be placed back into service until the third quarter of
fiscal 2001.

LIQUIDITY, CAPITAL RESOURCES AND OUTLOOK

LIQUIDITY AND CAPITAL RESOURCES

The operations of the Company used $6.8 million in fiscal 2000 in
comparison to fiscal 1999 when operations consumed $16.2 million. The decrease
in consumption of cash is substantially attributable to the effects of better
accounts payable and inventory management. The working capital ratio was 0.47 to
1 and 2.0 to 1 at July 31, 2000 and 1999, respectively.

Net cash used in investing activities amounted to $43.9 million in fiscal
2000 and $0.3 million in fiscal 1999. The Company increased spending on capital
programs in fiscal 2000 for significant capital commitments resulting from
studies the Company undertook in fiscal 1998 to replace its rolling mills in
Sterling, Illinois and construction of the New Furnace. These studies were in
response to announced competitor capacity increased in structural steel products
expected to be operational by the end of calendar 1999. This increase in cash
used consumed the cash reserves that the Company had at the end of fiscal 1999
and required new borrowings against the Company's revolving loan facility to
fund the balance of the capital expenditures.

Cash provided by financing activities in fiscal 2000 was $12.6 million
compared to net cash provided by financing activities of $19.0 million in fiscal
1999. With the significant level of cash generated from earnings in 1998, the
Company fully repaid its then existing Rollover Term Loan balance at July 31,
1998, without any prepayment penalties (see Notes to Consolidated Financial
Statements entitled "Debt and Credit Agreements"). On October 5, 1999 the
Company entered into a new revolving credit facility ("Credit Facility") for $65
million with Fleet Capital Corporation (see "Current Developments" Note to the
Consolidated Financial Statements). As of July 31, 2000, the Borrowing Base was
equal to $52.2 million, with borrowings of $33.5 million. The amount which the
Company could borrow was reduced by $10.4 million in letters of credit and a
$5.0 million hold-back, leaving $3.3 million available to borrow on July 31,
2000. At July 31, 2000, the Company was in compliance with its bank covenants.
The Company is required to submit weekly Borrowing Base Certificates when
availability falls below $20.0 million. Most recently, the weekly Borrowing Base
Certificates are adjusted on a daily basis to reflect the impact of prior day
collections and sales in order to determine borrowing capacity on a daily basis.
On November 7, 2000, the Borrowing Base was equal to $50.8 million with
borrowings of $34.4 million. The amount which the Company could borrow was
reduced by $10.2 million in letters of credit and $5.0 million hold-back,
leaving $1.2 million available to borrow as of November 7, 2000. At November 7,
2000, the Company was in compliance with its bank covenants. The Company is at
or near its maximum draw, which fluctuates, under the Credit Facility. Although
the Company is current with its payables, recently some vendors have expressed
concern in supplying future needs on credit terms. The Company expects that
without relief it will experience a severe liquidity shortage in the near
future. As of November 10, 2000, the Company was overdrawn on its revolving line
of credit by $0.8 million. As the Borrowing Base Certificates are adjusted on a
daily basis to reflect the impact of prior day collections and sales, the
availability on the revolving line of credit may change in the near term. As of
November 10, 2000, the Company was in compliance with its bank covenants.
Efforts are underway to relieve and resolve the liquidity problem and are
described below in "-- Outlook."

16
<PAGE> 18

OUTLOOK

The Company faces a number of serious challenges, including increased
competition, that have had a material adverse effect on its liquidity and
capital resources. During 1998, competitors of the Company began construction of
three new structural steel mills. These mills have already added 1.9 million
additional tons of capacity and are expected to be running at the 1.9 million
ton rate by mid calendar year 2000 across a broad range of structural products,
many of which are currently produced by the Company. Additionally, a potential
new competitor to the Company, Steel Dynamics, Inc., announced its intention to
build a new structural rolling mill in Indiana which if built, would add an
additional 900,000 tons of new capacity; as of November 2000, construction of
this rolling mill had not begun. See "Business -- Competition". In contrast to
the Company's mills which were installed 20 or more years ago, these new mills
are or will be modern, state-of-the-art operations with lower operating costs
than the Company's (including lower overall labor costs from reduced man-hour
input resulting from more efficient manufacturing equipment).

To become more competitive with foreign manufacturers and increasingly
efficient domestic competitors, the Company has implemented a strategic plan to
modernize its facilities and operations. The key theme of the strategic plan is
to be a low-cost producer in the Company's core and chosen markets by
modernizing facilities and improving operating efficiency. The strategic plan
does not rely on capacity increases or incremental sales to achieve its goals.
The elements of the strategic plan are as follows:

- Construct a new, more efficient, low cost mill to replace the Company's
existing 14" and 24" rolling mill capacity at its Sterling, Illinois
facility.

- Implement a new collective bargaining agreement with the Company's union.

- Modernize the Company's existing melting capabilities with the
construction of a new furnace.

- Implement a maintenance program to rationalize the Company's existing
maintenance operations.

- Implement a total quality management program.

The Company has achieved success in implementing a number of elements of
its strategic plan. The Company has entered into the new collective bargaining
agreement which is subject to the Company obtaining financing for the
construction of the New Mill, see "Business -- Employees". The Company is
implementing the total quality management and maintenance programs, and has
constructed the new furnace which replaced two of the existing furnaces, but has
experienced a number of difficulties with the ramp up of the new furnace,
including the supporting equipment, which has impacted the new furnace's
utilization and prevented operating the new furnace at its capacity. See
"-- Cost of Goods Sold -- Fiscal 2000" and "-- First Quarter Fiscal
2001 -- Operations." The Company also expended considerable effort and $20.3
million in preparing to construct the new mill, including equipment and
construction engineering, purchase of equipment and site preparation. The
Company, however, cannot commence construction of the New Mill until
construction financing is in place.

Since early calendar 1999, the Company has been attempting to finance the
modernization construction, but as yet has not been able to obtain the necessary
financing because of poor operating results caused largely by imports and
because of the severely constrained credit markets which traditionally provide
funding to steel companies. The Company received a guaranty under the Guarantee
Act for 85% of a $170 million loan. The Company has been informed that the
Guarantee Board as of early November 2000 is considering improving the form of
guarantee it will issue as well as other changes in the regulations that should
assist the Company in securing satisfactory financing. The Company has been and
is diligently pursuing the financing necessary to complete the modernization
program although there is no assurance it will be successful.

The Company also has significant future debt service obligations, primarily
consisting of $115.0 million of Senior Notes scheduled to be redeemed on June
15, 2001, and significant unfunded employee benefit obligations. In late 1999,
the Company reached an agreement in principle with the representatives of an
unofficial committee of holders of senior notes to exchange outstanding notes
for $52.5 million in cash and common stock of the Company representing 70% of
the issued and outstanding common stock of the Company after the issuance. The
Company extended a formal exchange offer on those terms in December 1999. This
offer is contingent upon, among other things, 95% acceptance by the Senior Note
17
<PAGE> 19

holders, shareholder approval which occurred on March 21, 2000 and the Company's
ability to obtain a guarantee under the Guarantee Act sufficient to finance the
modernization project. If the financing is approved but less than 95% of the
holders of the Senior Notes accept the exchange offer, the Company may implement
the exchange through a pre-packaged Chapter 11 bankruptcy, if the plan is
approved by one-half in number and two-thirds in value of the Senior Notes that
actually vote on the plan. As of October 25, 2000 approximately $91.7 million in
aggregated principal amount, or approximately 79.7% of the outstanding Senior
Notes, had been tendered pursuant to the exchange offer.

The Company recognizes that it will have to renegotiate the terms of the
exchange offer with the holders of the Senior Notes. Discussions are ongoing
with the unofficial committee, but no agreement has been reached as yet. The
Company anticipates that the amount of cash to be paid to note holders will
probably have to be eliminated and correspondingly the percentage of common
shares to be issued to the holders of the Senior Notes will have to be
substantially increased.

The Company is at or near its maximum draw, which fluctuates under the
Credit Facility. Although the Company is current with its payables, recently
some vendors have expressed concern in supplying future needs on credit terms.
The Company expects that without relief it will experience a severe liquidity
shortage in the near future.

To deal with these problems and to avoid a non-prepackaged bankruptcy
filing that the Company believes will be costly and damaging to all its
stakeholders, the Company is actively pursuing the following steps:

First, the Company believes that constructing the New Mill is necessary for
its long term viability. Accordingly, the Company continues to seek financing to
take advantage of the government guarantee. The Company also believes that
filing a non-prepackaged bankruptcy may seriously impede the Company's ability
to use the guarantee. Thus, the Company is attempting to seek relief from its
critical vendors to avoid a current liquidity shortage and is also in
discussions with the unofficial committee of holders of the Senior Notes to
restructure their obligations.

With respect to its current liquidity shortage, the Company is:

(i) asking critical vendors to ensure a continued supply of material. The
Company has proposed relief by delaying payments for current amounts due and to
commit to supplying future needs on normal trade terms which would be secured by
a junior lien. This proposal is subject to approval by the Company's lenders and
critical vendors.

(ii) seeking additional loans from the State of Illinois and a junior
secured lender in the combined amounts of $8 to $11 million. This proposal is
subject to approval by the Company's lenders.

With respect to its Senior Notes, the Company anticipates that it will have
to reach an agreement with the holders providing them with substantially all of
the common equity of the Company in exchange for their debt. The Company,
moreover, will be unable to make the interest payment of $5.5 million to the
holders of the senior note on December 15, 2000. The failure to pay interest
would cause a default under the Senior Notes indenture agreement unless the
Company and the holders of the Senior Notes agree upon terms to restructure the
outstanding debt. The granting of the junior lien to its critical suppliers and
the acceptance of any additional loans might also create a default under the
indenture unless waived by the holders of the Senior Notes.

If the Company is successful in these negotiations, it believes it will be
able to avoid a non-prepackaged bankruptcy filing through July 2001 assuming no
further significant deterioration in the domestic steel industry generally and
no unanticipated material problems directly affecting the Company. By July 2001,
the Company expects that it will know whether it can secure the loan necessary
to construct the New Mill and solve its current liquidity problems. If the
Company is unsuccessful in these efforts, it will most likely file for
bankruptcy in the near future.

the holders of its Senior Notes to exchange their debt for equity. It may also
be necessary to involve other creditors in some restructuring so that the
Company can continue operating. Most likely these restructurings will require a
prepackaged or pre-negotiated bankruptcy filing. This scenario also assumes no
further significant deterioration in the domestic steel industry generally and
no unanticipated material problems directly affecting the Company.

The Company is hopeful that some or all of these efforts will be successful
and create value for its stakeholders and preserve the jobs of its workers and
benefits for retired employees. There is no assurance, however, that these
efforts will be successful and the Company may be forced into a bankruptcy
filing that eventually leads to its liquidation.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT
SCHEDULES

<TABLE>
<S> <C>
Consolidated Balance Sheets as of July 31, 2000 and 1999.... 20
Consolidated Statements of Operations for the years ended
July 31, 2000, 1999 and 1998.............................. 21
Consolidated Statements of Shareholders' (Deficit) Equity
for the years ended July 31, 2000, 1999 and 1998.......... 22
Consolidated Statements of Cash Flows for the years ended
July 31, 2000, 1999 and 1998.............................. 23
Notes to Financial Statements............................... 24
Report of Independent Accountants........................... 42
Consolidated financial statement schedule for the years
ended July 31, 2000, 1999 and 1998:
II -- Valuation and qualifying accounts..................... 43
</TABLE>

19
<PAGE> 21

NORTHWESTERN STEEL AND WIRE COMPANY

CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
AS OF JULY 31,
--------------------
2000 1999
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,250 $ 39,415
Receivables, less allowances of $1,441 and $420,
respectively........................................... 33,245 29,585
Inventories............................................... 44,975 51,485
Income tax receivable..................................... 266 4,806
Other assets.............................................. 3,387 3,967
-------- --------
Total current assets................................. 83,123 129,258
PLANT AND EQUIPMENT, at cost, less accumulated depreciation
of $186,513 and $173,175 respectively..................... 154,796 122,012
RESTRICTED CASH............................................. -- 2,060
DEFERRED INCOME TAXES....................................... -- 47,585
DEFERRED FINANCING COSTS.................................... 1,049 869
OTHER ASSETS................................................ 20,878 16,625
-------- --------
Total assets......................................... $259,846 $318,409
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 33,368 $ 17,482
Accrued expenses.......................................... 28,043 27,064
Current portion of long term debt......................... 115,012 20,209
-------- --------
Total current liabilities............................ 176,423 64,755
LONG TERM DEBT.............................................. 34,236 115,628
OTHER LONG TERM LIABILITIES................................. 85,618 91,200
-------- --------
296,277 271,583
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, par value $1 per share:
-- Authorized -- 1,000,000 shares
-- Issued -- none...................................... -- --
Common stock, par value $.01 per share:
-- Authorized -- 75,000,000 shares
-- Issued -- 24,905,424 shares......................... 123,973 123,973
Retained (deficit)........................................ (155,079) (71,822)
Treasury shares, at cost; 420,601 shares.................. (5,325) (5,325)
-------- --------
Total shareholders' equity........................... (36,431) 46,826
-------- --------
Total liabilities and shareholders' equity........... $259,846 $318,409
======== ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements

20
<PAGE> 22

NORTHWESTERN STEEL AND WIRE COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA )

<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
--------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net sales................................................... $365,269 $349,345 $596,437
-------- -------- --------
Cost and operating expenses:
Cost of goods sold (excluding depreciation)............... 359,275 339,527 496,906
Depreciation.............................................. 14,203 14,476 17,548
Selling and administrative................................ 15,439 11,350 13,017
Non-recurring item........................................ -- 43,777 --
-------- -------- --------
Total cost and operating expenses...................... 388,917 409,130 527,471
-------- -------- --------
Operating (loss) profit..................................... (23,648) (59,785) 68,966
-------- -------- --------
Other income and expenses:
Interest expense.......................................... 13,477 12,846 16,372
Interest and other income................................. (1,453) (1,327) (16,324)
-------- -------- --------
Total other income and expenses........................ 12,024 11,519 48
-------- -------- --------
(Loss) income before income taxes........................... (35,672) (71,304) 68,918
Provision (benefit) for income taxes........................ 47,585 (25,957) 27,222
-------- -------- --------
Net (loss) income........................................... $(83,257) $(45,347) $ 41,696
======== ======== ========
Net (loss) income per share................................. $ (3.40) $ (1.85) $ 1.70
======== ======== ========
Net tons shipped............................................ 1,112 1,040 1,558
======== ======== ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements

21
<PAGE> 23

NORTHWESTERN STEEL AND WIRE COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED TOTAL
$.01 PAR VALUE COMPREHENSIVE OTHER TREASURY SHARES SHAREHOLDERS'
--------------------- (LOSS) RETAINED COMPREHENSIVE ----------------- EQUITY
SHARES AMOUNT INCOME DEFICIT LOSS SHARES AMOUNT (DEFICIT)
------ ------ ------------- -------- ------------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31,
1997.................... 24,903,424 $123,966 $ (68,171) $ -- 420,144 $(5,324) $ 50,471
Comprehensive Income
Net income.............. $ 41,696 41,696 41,696
Change in minimum
pension liability..... (5,473) (5,473) (5,473)
--------
Comprehensive Income...... $ 36,223
========
Treasury shares........... 457 (1) (1)
Options exercised......... 2,000 7 7
---------- -------- --------- ------- ------- ------- --------
Balance at July 31,
1998.................... 24,905,424 123,973 (26,475) (5,473) 420,601 (5,325) 86,700
Comprehensive Loss
Net loss................ $(45,347) (45,347) (45,347)
Change in minimum
pension liability..... 5,473 5,473 5,473
--------
Comprehensive Loss........ $(39,874)
---------- -------- ======== --------- ------- ------- ------- --------
Balance at July 31,
1999.................... 24,905,424 123,973 (71,822) $ -- 420,601 (5,325) 46,826
=======
Comprehensive Loss
Net loss................ (83,257) (83,257)
Treasury shares.........
---------- -------- --------- ------- ------- --------
Balance at July 31,
2000.................... 24,905,424 $123,973 $(155,079) 420,601 $(5,325) $(36,431)
========== ======== ========= ======= ======= ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

22
<PAGE> 24

NORTHWESTERN STEEL AND WIRE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
--------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash Flow From Operations:
Net (loss) income......................................... $(83,257) $(45,347) $ 41,696
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation........................................... 14,203 14,476 17,548
Non-recurring item..................................... -- 46,291 --
(Loss) gain on sale of plant and equipment............. (995) -- 42
Amortization of deferred financing costs and debt
discount............................................. 651 1,340 1,321
Deferred income tax expense (benefit).................. 47,585 (21,151) 18,894
Decrease (increase) in income tax receivable........... 4,540 (4,793) 8,145
(Increase) decrease in receivables..................... (3,660) 22,472 15,171
Decrease in inventories................................ 6,510 27,486 2,686
Decrease (increase) in other current assets............ 580 (238) 1,644
(Increase) in other assets............................. (13,493) (5,774) (13,865)
Increase (decrease) in accounts payable and accrued
expenses............................................. 16,865 (37,908) (7,147)
Increase (decrease) in other long term liabilities..... 3,659 (13,056) 13,573
-------- -------- --------
Net cash provided by (used in) operations......... (6,812) (16,202) 99,708
-------- -------- --------
Cash Flows From Investing Activities:
Capital expenditures...................................... (48,188) (15,760) (12,069)
Proceeds from sale of plant and equipment................. 2,195 17,519 23
Decrease (increase) in restricted cash.................... 2,060 (2,060) --
-------- -------- --------
Net cash used in investing activities............. (43,933) (301) (12,046)
-------- -------- --------
Cash Flows From Financing Activities:
Payments of long term debt................................ (92,130) (612) (89,817)
Payments for deferred financing fees...................... (732) -- --
Proceeds from issuance of long term debt.................. 105,442 19,600 35,000
Exercise of stock options................................. -- -- 7
-------- -------- --------
Net cash provided by (used in) financing
activities...................................... 12,580 18,988 (54,810)
-------- -------- --------
(Decrease) increase in cash and cash equivalents............ (38,165) 2,485 32,852
Cash and Cash Equivalents:
Beginning of period....................................... 39,415 36,930 4,078
-------- -------- --------
End of period............................................. $ 1,250 $ 39,415 $ 36,930
======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Cash Paid (Received) During the Period For:
Interest............................................... $ 13,022 $ 11,442 $ 15,439
Income taxes........................................... (4,540) 3,646 (8,702)
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements

23
<PAGE> 25

NORTHWESTERN STEEL AND WIRE COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)

CURRENT DEVELOPMENTS

The Company has implemented a strategic plan to modernize its facilities
and operations. The key theme of the strategic plan is to be a low-cost producer
in the Company's core and chosen markets by modernizing facilities and improving
operating efficiency. The strategic plan does not rely on capacity increases or
incremental sales to achieve its goals. The elements of the strategic plan are
as follows:

- Construction of a new, more efficient, low cost mill (the "New Mill") to
replace the Company's existing 14" and 24" rolling mill capacity at its
Sterling, Illinois facility.

- Implementation of a new collective bargaining agreement with the
Company's union.

- Modernization of the Company's existing melting capabilities with the
construction of a new furnace to replace the Company's existing two
furnaces.

- Implementation of a maintenance program to rationalize the Company's
existing maintenance operations.

- Implementation of a total quality management program.

The Company has achieved success in implementing a number of elements of
its strategic plan. The Company has entered into the new collective bargaining
agreement which is subject to the Company obtaining financing for the
construction of the New Mill. The Company is implementing the total quality
management and maintenance programs, and has constructed the new furnace which
replaced two of the existing furnaces, but has experienced a number of
difficulties with the ramp up of the new furnace, including the supporting
equipment, which has impacted the new furnace's utilization and prevented
operating the new furnace at its capacity. The Company also expended
considerable effort and $20,300 million in preparing to construct the new mill,
including equipment and construction engineering, purchase of equipment and site
preparation. The Company, however, cannot commence construction of the New Mill
until construction financing is in place.

Since early calendar 1999, the Company has been attempting to finance the
modernization construction, but as yet has not been able to obtain the necessary
financing because of the poor operating results caused largely by imports and
because of the deterioration in the credit markets which traditionally provide
funding to steel companies. Consequently, the Company applied in February 2000
for which a formal written notice was received in August, 2000 granting a
$170,000 guaranty under the Emergency Steel Loan Guarantee Act of 1999 (the
"Guarantee Act"). Under the Guarantee Act, domestic steel companies may apply
for a United States government guarantee of 85% of the principal amount of a
loan or loans of up to $250,000. If the Company is able to obtain a loan under
the Guarantee Act in an acceptable amount with acceptable terms, the Company
intends to use the proceeds of the guaranteed loan to complete the modernization
program.

The Company also has significant future debt service obligations, primarily
consisting of $115,000 of senior notes scheduled to be redeemed on June 15, 2001
(the "Senior Notes"), and significant unfunded employee benefit obligations. In
late 1999, the Company reached an agreement in principle with the
representatives of an unofficial committee of holders of Senior Notes to
exchange outstanding notes for $52,500 in cash and common stock of the Company
representing 70% of the issued and outstanding common stock of the Company after
the issuance. The Company extended a formal exchange offer on those terms in
December 1999. This offer is contingent upon, among other things, 95% acceptance
by the senior note holders, shareholder approval which occurred on March 21,
2000 and the Company's ability to obtain a guarantee under the Guarantee Act
sufficient to finance the modernization project. If the financing is approved
but less than 95% of the holders of the Senior Notes accept the exchange offer,
the Company may implement the exchange through a pre-packaged Chapter 11
bankruptcy, if the plan is approved by one-half in number and two-thirds in
value of the Senior Notes that actually vote on the plan. As of October 25, 2000
approximately $91,700 in aggregated principal amount, or approximately 79.7% of
the outstanding Senior Notes, had been tendered pursuant to the exchange offer.

24
<PAGE> 26
NORTHWESTERN STEEL AND WIRE COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Effective October 5, 1999 the Company entered into a new revolving credit
facility ("New Credit Facility") for $65,000 with Fleet Capital Corporation (see
"Current Developments" Note to the Consolidated Financial Statements). As of
July 31, 2000, the Borrowing Base was equal to $52,167, with borrowings of
$33,528. The amount which the Company could borrow was reduced by $10,338 in
letters of credit and a $5,000 hold-back, leaving $3,301 available to borrow on
July 31, 2000. At July 31, 2000, the Company was in compliance with its bank
covenants. The Company is required to submit weekly Borrowing Base Certificates
when availability falls below $20,000. Most recently, the weekly Borrowing Base
Certificates are adjusted on a daily basis to reflect the impact of prior day
collections and sales in order to determine borrowing capacity on a daily basis.
For November 7, 2000, the Borrowing Base was equal to $50,848 with borrowings of
$34,463. The amount which the Company could borrow was reduced by $10,188 in
letters of credit and $5,000 hold-back, leaving $1,197 available to borrow as of
November 7, 2000. At November 7, 2000, the Company was in compliance with its
bank covenants. The Company is at or near its maximum draw, which fluctuates,
under the New Credit Facility. Although the Company is current with its
payables, recently some vendors have expressed concern in supplying future needs
on credit terms. The Company expects that without relief it will experience a
severe liquidity shortage in the near future.

As of November 10, 2000, the Company was overdrawn on its revolving line of
credit by $800. As the Borrowing Base Certificates are adjusted on a daily basis
to reflect the impact of prior day collections and sales, the availability on
the revolving line of credit may change in the near term. As of November 10,
2000, the Company was in compliance with its bank covenants.

With respect to its current liquidity shortage, the Company is:

(ii) seeking additional loans from the State of Illinois and a junior
secured lender in the combined amounts of $8,000 to $11,000. This proposal is
subject to approval by the Company.

25
<PAGE> 27
NORTHWESTERN STEEL AND WIRE COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the outstanding debt. The granting of the junior lien to its critical suppliers
and the acceptance of any additional loans might also create a default under the
indenture unless waived by the holders of the Senior Notes.

Second, if the Company solves its current problems through July 2001 but is
unable to obtain financing to construct the New Mill, it believes it will be
able to continue operations for some undeterminable time until it can replace
its existing mills with modern facilities. To accomplish this, it will have to
reach agreement with the holders of its Senior Notes to exchange their debt for
equity. It may also be necessary to involve other creditors in some
restructuring so that the Company can continue operating. Most likely these
restructurings will require a prepackaged or pre-negotiated bankruptcy filing.
This scenario also assumes no further significant deterioration in the domestic
steel industry generally and no unanticipated material problems directly
affecting the Company.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Founded in 1879, the Company is a major mini-mill producer of structural
steel components which include wide flange beams, channels, angles, merchant
bars, rods and wire. The Company's products are used in a wide variety of
commercial, industrial and residential construction applications. The majority
of employees are covered by collective bargaining agreements.

CONSOLIDATION

The consolidated financial statements include accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Financial results for the year ended 1998
include full year operations for the wire mill and Hickman facilities.

RESTRICTED CASH

Restricted cash of $2,060 as of July 31, 1999 represents $2,000 being held
in escrow as required by the Illinois Industrial Commission for the Company's
self-insured worker's compensation policy. The balance of restricted cash
represents amounts held in escrow as required by the Illinois Environmental
Protection Agency for closure of the hazardous waste landfill. The remaining
funding requirements have been satisfied by letters of credit (see "Debt and
Credit Arrangements" Note to the Consolidated Financial Statements). During
fiscal 2000, the Company replaced the escrow with a letter of credit, reducing
the restricted cash balance to zero at July 31, 2000.

CONCENTRATION OF CREDIT RISK

The Company grants credit to its customers in the normal course of
business. Credit limits, on-going credit evaluation and account monitoring
procedures are utilized to minimize the risk of loss. Collateral is generally
not required.

26
<PAGE> 28
NORTHWESTERN STEEL AND WIRE COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INVENTORIES AND PRODUCTION COSTS

Inventories are valued at the lower of cost or market. Cost is determined
on a monthly moving average method and includes materials, labor and certain
components of conversion overhead.

PLANT AND EQUIPMENT

Plant and equipment is carried at cost and depreciated when placed in
service based on methods and rates designed to amortize the cost over the
estimated useful lives (generally 40 years for buildings, 12 and 18 years for
mill machinery and 3 to 20 years for all other equipment). Plant and equipment
to be disposed is carried at estimated fair market value. Depreciation is
computed principally on the straight-line method for financial reporting
purposes while accelerated methods and straight line methods are used for income
tax purposes. When properties are retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the respective accounts and
any profit or loss on disposition is reflected in the Consolidated Statements of
Operations.

DEFERRED FINANCING COSTS

The Company defers direct costs of debt financing and amortizes such costs
over the life of the loan arrangement to interest expense.

REVENUE RECOGNITION

The Company recognizes sales revenue as shipments are made.

NET (LOSS) INCOME PER SHARE

In acccordance with Statement of Financial Accounting Standards ("SFAS")
No.128, "Earnings per Share", the Company presents basic and diluted earnings
per share on the face of the statement of operations. Basic income (loss) per
share is based upon the average number of common shares outstanding. Diluted
income (loss) per share is based upon the average number of common shares
outstanding plus the potential dilution that would occur if options to purchase
common stock were exercised. For the years presented, the diluted per share
amounts equal the basic per share amounts reported.

BENEFITS FOR RETIRED EMPLOYEES

The Company provides pension benefits to substantially all hourly and
salaried employees under noncontributory plans. The pension costs are funded by
the Company in accordance with the requirements of the Employee Retirement
Income Security Act of 1974. The Company also provides post-retirement welfare
benefits (life insurance and medical) to substantially all its retired
employees. These benefits are accounted for in accordance with SFAS No. 87 and
SFAS No. 106, and have been presented in the Notes in compliance with SFAS No.
132, "Employers' Disclosures about Pension and Other Postretirement Benefits"
which was adopted in fiscal 1999.

CASH EQUIVALENTS

Cash and cash equivalents include cash on hand and other liquid instruments
purchased with an original maturity of three months or less.

USE OF ESTIMATES

Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at year

27
<PAGE> 29
NORTHWESTERN STEEL AND WIRE COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

end and the reported amounts of revenues and expenses during the year. Actual
results could differ from these estimates.

STOCK-BASED COMPENSATION

As provided by SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company has elected to continue to account for its stock-based compensation
programs according to the provisions of Accounting Principles Board Opinion
("APB Opinion") No. 25, "Accounting for Stock Issued to Employees." The Company
has adopted the disclosure provisions required by SFAS No. 123 (see "Stock
Option Plans" Note to the Consolidated Financial Statements).

LONG-LIVED ASSETS

The Company has adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which requires
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. In the event that facts and circumstances indicate that the cost of
any long-lived assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow value is
required.

COMPREHENSIVE INCOME

During fiscal 1999, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which established new standards for the presentation and
disclosure of other comprehensive income. Compliance with this standard is
reflected in the Consolidated Statements of Shareholders' Equity.

EMPLOYEE BENEFIT PLANS

Labor agreements effective August 1, 1996, covering the majority of the
Company's hourly employees, improved retirement benefits and lowered retirees'
postretirement healthcare costs. The improved pension benefits resulted in an
increase in unrecognized prior service cost. On February 17, 1999 the Company
negotiated a new labor agreement with its union that is contingent upon the
Company's ability to obtain financing for a new mill (see "Current Developments"
Note to the Consolidated Financial Statements), expiring on August 1, 2000. On
August 1, 2000, the labor agreement was extended to November 29, 2000, pending
completion of financing for the Company's strategic plan.

The Company also sponsors defined contribution savings plans that cover the
majority of employees. For salaried employees, the Company contributes up to 5%
of eligible compensation. Company contributions to the hourly employee plan are
not required.

The Company provides benefits for certain officers and key employees
through a Supplemental Executive Retirement Plan. The cost of the plan for the
years ended July 31, 2000, 1999 and 1998 was immaterial.

PENSION PLANS

The Company's noncontributory defined benefit plans cover the majority of
employees and provide pension benefits that are generally based on years of
credited service and employee compensation during the years preceding
retirement. Plan assets include primarily equity and fixed income securities.

A non-cash increase to shareholders' equity of $5,473 during fiscal year
1999 and a decrease of $5,473 during fiscal year 1998 resulted primarily from
pension plan asset changes due to investment experience and

28
<PAGE> 30
NORTHWESTERN STEEL AND WIRE COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

changes in interest rate assumptions. At July 31, 2000, the Company eliminated
the minimum pension liability and corresponding intangible asset. At July 31,
1999, the Company recorded a minimum pension liability of $6,027 and a
corresponding intangible pension asset of $6,027. At July 31, 1998, the Company
recorded a minimum pension liability of $20,501 and a corresponding intangible
pension asset of $15,028.

The following table presents the changes in the projected benefit
obligations for the plans years ended July 31:

<TABLE>
<CAPTION>
2000 1999 1998
-------------------- -------------------- --------------------
HOURLY SALARIED HOURLY SALARIED HOURLY SALARIED
PLAN PLAN PLAN PLAN PLAN PLAN
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Projected benefit obligation
beginning of the year............ $244,536 $68,030 $237,722 $66,240 $209,160 $60,956
Net increase (decrease) during the
year attributable to:
-- Service cost.................. 2,633 701 3,596 927 3,524 832
-- Interest cost................. 17,875 4,704 17,170 4,721 16,178 4,537
-- Actuarial losses/(gains)...... 9,849 (202) (1,648) (1,437) 26,277 4,844
-- Benefits paid................. (23,242) (6,140) (20,703) (5,734) (17,417) (4,929)
-- Plan amendments............... -- 536 -- -- -- --
-- Curtailment charge............ -- -- 8,399 3,313 -- --
-------- ------- -------- ------- -------- -------
Net increase/(decrease) for year... 7,115 (401) 6,814 1,790 28,562 5,284
-------- ------- -------- ------- -------- -------
Projected benefit obligation at end
of the year...................... $251,651 $67,629 $244,536 $68,030 $237,722 $66,240
======== ======= ======== ======= ======== =======
</TABLE>

The curtailment charge in fiscal 1999 relates to the early retirement of
affected wire operations and administrative employees due to the closure of the
wire operations (see "Non-Recurring Items" Note to the Consolidated Financial
Statements).

The following table presents the changes in the fair value of net assets
available for plan benefits for the plan years ended July 31:

<TABLE>
<CAPTION>
2000 1999 1998
-------------------- -------------------- --------------------
HOURLY SALARIED HOURLY SALARIED HOURLY SALARIED
PLAN PLAN PLAN PLAN PLAN PLAN
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Fair value of net assets available
for plan benefits at beginning of
year............................. $232,722 $76,434 $211,708 $75,145 $199,449 $70,739
Increase (decrease) during the year
attributable to:
-- Actual return on plan
assets........................ 28,189 9,270 25,297 6,899 23,046 8,472
-- Sponsor contributions......... 9,625 899 16,420 124 6,630 863
-- Benefits paid................. (23,242) (6,140) (20,703) (5,734) (17,417) (4,929)
-------- ------- -------- ------- -------- -------
Net increase for year.............. 14,572 4,029 21,014 1,289 12,259 4,406
-------- ------- -------- ------- -------- -------
Fair value of net assets available
for plan benefits at the end of
the year......................... $247,294 $80,463 $232,722 $76,434 $211,708 $75,145
======== ======= ======== ======= ======== =======
</TABLE>

29
<PAGE> 31
NORTHWESTERN STEEL AND WIRE COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following is a reconciliation of the funded status of the plan for the
plan years ended July 31:

<TABLE>
<CAPTION>
2000 1999 1998
-------------------- -------------------- --------------------
HOURLY SALARIED HOURLY SALARIED HOURLY SALARIED
PLAN PLAN PLAN PLAN PLAN PLAN
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Funded status...................... $ (4,357) $12,834 $(11,814) $ 8,404 $(26,014) $ 8,905
Prior service cost not yet
recognized in net period pension
cost............................. 9,157 518 10,201 34 15,028 58
Unrecognized net loss/(gain)....... 8,407 (5,709) 6,511 (2,857) 14,238 (1,025)
-------- ------- -------- ------- -------- -------
Net amount recognized in other
assets in the consolidated
balance sheets, before minimum
pension liability................ $ 13,207 $ 7,643 $ 4,898 $ 5,581 $ 3,252 $ 7,938
======== ======= ======== ======= ======== =======
</TABLE>

The following table presents the components of annual net periodic expense
for the defined benefit and contribution plans for years ended July 31:

<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Service cost.................................... $ 3,334 $ 4,523 $ 4,356
Interest cost................................... 22,579 21,891 20,715
Estimated return on assets...................... (26,858) (25,721) (23,608)
Recognized gain (loss).......................... -- -- --
Prior service cost recognized................... 1,098 4,849 1,402
Curtailment charge.............................. -- 11,712 --
-------- -------- --------
Net periodic pension expense.................... 153 17,254 2,865
Defined contribution expense.................... 881 1,021 965
-------- -------- --------
Total expense.............................. $ 1,034 $ 18,275 $ 3,830
======== ======== ========
</TABLE>

The projected pension obligation for the plans was determined using the
following weighted-average assumptions at July 31:

<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Settlement discount rates................................. 8.0% 7.5% 7.1%
Rates of compensation increase............................ 3.5% 3.5% 3.5%
Long-term rates of return on assets....................... 9.0% 9.0% 9.0%
</TABLE>

POSTRETIREMENT HEALTHCARE AND LIFE INSURANCE BENEFITS

The postretirement benefit expense includes the following components:

<TABLE>
<CAPTION>
2000 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service cost........................................ $ 911 $ 848 $1,061
Interest cost on accumulated benefit obligation..... 8,021 6,971 6,657
Net amortization and deferral....................... 1,432 1,057 792
------- ------- ------
10,364 8,876 8,510
Curtailment charge.................................. -- 7,857 --
------- ------- ------
$10,364 $16,733 $8,510
======= ======= ======
</TABLE>

30
<PAGE> 32
NORTHWESTERN STEEL AND WIRE COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company continues to fund benefit costs on a cash basis, with retirees
paying a portion of the costs. The amounts paid for such benefits were $9,282,
$7,716 and $7,109 for the fiscal years ended July 31, 2000, 1999 and 1998,
respectively. The status of the Company's postretirement benefit obligation at
July 31, 2000, 1999 and 1998 was:

<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Accumulated post-retirement benefit obligation at beginning
of the year............................................... $102,731 $ 97,173 $ 84,541
Net increase (decrease) during the year attributable to:
-- Service cost........................................... $ 911 $ 848 $ 1,061
-- Interest cost.......................................... 8,021 6,971 6,657
-- Actuarial losses/(gains)............................... 21,875 (2,402) 12,023
-- Net benefits paid...................................... (9,282) (7,716) (7,109)
-- Curtailment charge..................................... -- 7,857 --
-------- -------- --------
Net increase for year....................................... 21,525 5,558 12,632
-------- -------- --------
Accumulated post-retirement benefit obligation at the end of
the year.................................................. 124,256 102,731 97,173
Unrecognized net loss....................................... (43,689) (23,247) (26,706)
-------- -------- --------
Accrued benefit cost recognized in the consolidated balance
sheets.................................................... $ 80,567 $ 79,484 $ 70,467
======== ======== ========
</TABLE>

The actuarial assumptions used to determine 2000, 1999, and 1998 costs and
benefit obligations include a discount rate of 7.5%, 7.5%, and 7.1%,
respectively. The assumed health care cost trend rate used in 2000, 1999, and
1998 was 6.4%, 6.4%, and 6.8%, respectively, for pre-65 retirees and 6.0%, 6.0%,
and 6.3%, respectively, for post-65 retirees declining to an ultimate rate of
4.6% over a 4-year period for both populations.

If the health care cost trend rate assumptions were increased by 1% each
year, the accumulated postretirement benefit obligation as of July 31, 2000,
would be increased by $15,952 and the net periodic postretirement benefit cost
for the year then ended would be increased by $1,185.

INCOME TAXES

As of July 31, 2000, the Company has approximately $105,267 of net
operating loss carryforwards. As a result of an "ownership change" in fiscal
1993, as defined by Section 382 of the Internal Revenue Code of 1986, as
amended, $17,251 of the loss carryforwards are subject to an annual limitation
of approximately $2,000 and will expire in 2006, 2007 and 2008. The Company also
has alternative minimum tax credit carryforwards of approximately $6,052.

During fiscal 2000, the Company did not record any income tax benefits
relating to the current year's pretax losses as management believes that the
available objective evidence creates sufficient uncertainty regarding the
realizability of these benefits. Additionally, based on two consecutive years of
losses and the Company's liquidity shortage (See "Current Developments" -- Note
to Consolidated Financial Statement), the Company recorded a valuation allowance
of $47,585 during the fourth quarter of fiscal 2000 which fully offsets the
prior year net deferred tax asset balance.

31
<PAGE> 33
NORTHWESTERN STEEL AND WIRE COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The types of temporary differences resulting from the difference between
the tax bases of assets and liabilities and their financial reporting amounts
that give rise to the deferred tax liabilities and the deferred tax assets and
their approximate tax effects are as follows:

<TABLE>
<CAPTION>
2000 1999
---------------------- ---------------------
TEMPORARY TAX TEMPORARY TAX
DIFFERENCE EFFECT DIFFERENCE EFFECT
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Net operating loss.................................. $ 105,267 $ 36,844 $ 74,868 $26,204
Retirement costs.................................... 62,859 24,515 47,838 18,657
Employee compensation............................... 17,669 6,890 18,010 7,024
AMT carryforwards................................... 6,052 6,052 6,052 6,052
Other............................................... 10,009 3,904 14,162 5,522
--------- -------- -------- -------
Total deferred tax asset............................ $ 201,856 $ 78,205 $160,930 $63,459
========= ======== ======== =======
Property, plant and equipment....................... $ 45,789 $ 17,858 $ 40,704 $15,874
--------- -------- -------- -------
Total deferred tax liability........................ $ 45,789 $ 17,858 $ 40,704 $15,874
========= ======== ======== =======
Valuation Allowance................................. $(156,067) $(60,347)
========= ========
Net deferred tax asset.............................. $ -- $ -- $120,226 $47,585
========= ======== ======== =======
</TABLE>

The provision (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Current..................................................... $ -- $ (4,806) $ 8,328
Change in valuation allowance............................... 60,347 -- --
Deferred.................................................... (12,762) (21,151) 18,894
-------- -------- -------
Total income tax provision (benefit)........................ $ 47,585 $(25,957) $27,222
======== ======== =======
</TABLE>

The provision (benefit) for income taxes on income differs from the
expected tax provision (benefit) computed by applying the federal corporate rate
as follows:

<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Tax (benefit) provision computed at statutory rate.......... $(12,485) $(25,100) $24,121
Change in Valuation Allowance............................... 60,347 -- --
Other (benefit) provision , primarily state income taxes.... (277) (857) 3,101
-------- -------- -------
Total income tax provision (benefit)........................ $ 47,585 $(25,957) $27,222
======== ======== =======
</TABLE>

DEBT AND CREDIT ARRANGEMENTS

Long term debt consists of the following obligations at July 31, 2000 and
1999:

<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
New credit facility (average rate of 9.37%)................. $ 33,627 $ --
Revolving credit loans (average rate of 8.93%).............. -- 19,600
9.5% Senior Notes due 2001, net of discount................. 114,913 114,815
Other notes payable (average rates of 3.77% and 4.3%,
respectively)............................................. 708 1,422
-------- --------
149,248 135,837
Less current portion........................................ 115,012 20,209
-------- --------
$ 34,236 $115,628
======== ========
Market value of total debt.................................. $ 69,000 $ 99,222
======== ========
</TABLE>

32
<PAGE> 34
NORTHWESTERN STEEL AND WIRE COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company is in the process or trying to reduce its significant future
debt service obligations which primarily consists of $115,000 of senior notes
scheduled to be redeemed on June 15, 2001. The Company has reached an agreement
in principle with the representatives of an unofficial committee of the holders
of senior notes to exchange outstanding notes for $52,500 in cash and common
stock of the Company representing 70% of the issued and outstanding common stock
of the Company after the issuance, upon 95% acceptance by the Senior Note
holders, shareholder approval, and the Company's ability to obtain a loan under
the Guarantee Act sufficient to finance the modernization project. If the
financing is approved but less than 95% of the holders of the senior notes
accept the exchange offer, the Company may implement the exchange through a
prepackaged Chapter 11 bankruptcy if the plan is approved by one-half in number
and two-thirds in value of the Senior Notes that actually vote on the plan. As
of October 25, 2000, 79.7% of the Senior Note holders had tendered their Senior
Notes in the Exchange Offer the agreement in principle. See "Current
Developments" Note to the Consolidated Financial Statements for developments
concerning the Senior Notes.

The Company entered into a $65,000 credit facility with Fleet Financial
("the New Credit Facility") which was effective on October 5, 1999. The New
Credit Facility has a three year term, maturing in September, 2002 and allowed
the Company to repay amounts owed under its former credit facility out of
existing cash, in addition to providing funds for its ongoing working capital
needs. The New Credit Facility may be drawn upon up to an amount based upon a
percentage of eligible accounts receivable, inventory, supplies and rolling
stock (the "Borrowing Base"). Interest is payable monthly at a rate of prime
plus 0.25% or, at the election of the Company, LIBOR plus 2.25%. Principal
prepayments must be made with net cash proceeds resulting from sales of any
Company assets, with some exceptions. As of July 31, 2000, the Borrowing Base
was equal to $52,167, with borrowings of $33,528. The amount which the Company
could borrow was reduced by $10,338 in letters of credit and a $5,000 hold-back,
leaving $3,301 available to borrow at July 31, 2000. The Company is required to
submit weekly Borrowing Base Certificates when availability falls below $20,000.
Most recently, the weekly Borrowing Base Certificates are adjusted on a daily
basis to reflect the impact of prior day collections and sales in order to
determine borrowing capacity on a daily basis. For November 7, 2000, the
Borrowing Base was equal to $50,848 with borrowings of $34,463. The amount which
the Company could borrow was reduced by $10,188 in letters of credit and $5,000
hold-back, leaving $1,197 available to borrow as of November 7, 2000.

The loan documents evidencing the New Credit Facility are designed to
accommodate the Company's current strategic plan, including the financing of the
new mill and the exchange offer to the senior note holders. The documents
contain restrictions on the Company's activities outside of the strategic plan.
These restrictions include, among other things, a restriction on capital
expenditures and the ability to acquire additional debt as well as limitations
on liens, guaranties, dividends and other distribution. Additionally, the
Company must, at all times, have a Borrowing Base evidencing excess availability
of at least $5,000. Repayment of the New Credit Facility is secured by a first
priority lien on all real and personal property owned by the Company.

As of July 31, 1999, the Company's Senior Credit Facility (the "Facility")
was comprised of the revolving credit loans. The Facility was amended as of
April 23, 1999 as a result of the closure of a majority of the wire products
operations. The maximum permitted borrowings under the Revolving Credit Loans
were reduced to $30,000 from $80,000 and the non-recurring charge for the wire
mill closure was excluded from the various financial covenants as amended, as of
July 31, 1999.

At July 31, 1999, there were $19,600 of borrowings against the revolving
credit loans. At the option of the Company, any borrowings of revolving credit
loans bear interest at (a) the prime rate plus applicable margin, or (b) the
LIBOR rate plus applicable margin. The remaining $10,400 of availability under
the revolving credit loans has been used for letters of credit, primarily to
satisfy the funding requirements for the hazardous

33
<PAGE> 35
NORTHWESTERN STEEL AND WIRE COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

landfill closure costs and the remaining workers compensation funding
requirement of the Illinois Industrial Commission.

The 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 fixed charge
coverage ratio and a leverage ratio. Revolving credit loans are subject to
certain borrowing base criteria. Loans under the Facility are collateralized by
a lien on substantially all of the Company's assets, and all loans are
cross-collateralized.

The Company believed it would most likely violate one of the financial
covenants of the Facility in the first quarter of fiscal 2000. However, on
October 5, 1999, the Company entered into a new credit facility On that same
day, the Company repaid the $19,600 revolving credit loans using existing cash.
As such, the $19,600 Revolving Credit Loans balance has been classified as
current at July 31, 1999.

At July 31, 2000, $114,913 (net of unamortized discount of $87) of Senior
Notes were outstanding. The Senior Notes bear 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. On or before June 14, 1999, the Company
could have, at its option, redeemed the Senior Notes in whole or in part at a
premium plus accrued and unpaid interest. The Company, having declined to
exercise the early pay option, must redeem in whole or in part the Senior Notes
at the aggregate principal amount plus accrued and unpaid interest on the due
date. As such, the Senior Notes have been classified as current at July 31,
2000.

The Senior Notes are unsecured obligations of the Company. They are senior
to all subordinated indebtedness of the Company, and rank pari passu with all
other existing and future senior indebtedness of the Company and contain various
covenants equal to or less restrictive than the Facility. Upon the occurrence of
a change in control, the holders will have the option to cause the Company to
repurchase all or a portion of the outstanding Senior Notes at 101% of the
principal amount.

Annual maturities of long term debt for the years subsequent to fiscal 2000
are:

<TABLE>
<S> <C>
2001........................................................ $115,012
2002........................................................ 111
2003........................................................ 33,643
2004........................................................ 118
2005........................................................ 122
Remaining years............................................. 242
--------
Total.................................................. $149,248
========
</TABLE>

As of July 31, 2000, the Company has utilized the amount offered to the
senior noteholders through the proposed exchange offer as an estimate of the
market value of the Senior Notes. As of July 31, 1999, the Company estimated the
market value of its debt by utilizing a discounted cash flow methodology.

34
<PAGE> 36
NORTHWESTERN STEEL AND WIRE COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SUPPLEMENTAL BALANCE SHEET DATA

The following balance sheet information is provided as of July 31:

<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
INVENTORIES:
Raw materials and supplies.................................. $ 6,382 $ 10,048
Semi-finished products...................................... 10,562 16,268
Finished products........................................... 28,031 25,169
-------- --------
$ 44,975 $ 51,485
======== ========
PLANT AND EQUIPMENT:
Land........................................................ $ 3,017 $ 2,828
Buildings................................................... 28,138 27,979
Machinery and equipment..................................... 293,375 257,223
Construction in progress.................................... 16,779 7,157
-------- --------
Total.................................................. 341,309 295,187
Less accumulated depreciation............................... 186,513 173,175
-------- --------
Net plant and equipment................................ $154,796 $122,012
======== ========
ACCRUED EXPENSES:
Salaries and wages.......................................... $ 8,167 $ 7,762
Other employment costs...................................... 8,324 7,659
Postretirement welfare benefits............................. 5,000 5,000
Other accrued expenses...................................... 6,552 6,643
-------- --------
$ 28,043 $ 27,064
======== ========
OTHER LONG TERM LIABILITIES:
Postretirement welfare benefits............................. $ 75,567 $ 74,484
Minimum pension liability................................... -- 6,027
Other long term liabilities................................. 10,051 10,689
-------- --------
$ 85,618 $ 91,200
======== ========
</TABLE>

STOCK OPTION PLANS

The Company has three active stock option plans and three plans under which
no further awards may be made, all approved by shareholders.

During fiscal 1999, the Company approved the establishment of the 1998
Employee Incentive Compensation Plan (the "1998 Plan") and reserved 2,000,000
shares of Common stock for issuance under the 1998 Plan. The 1998 Plan provides
for the granting to key employees and other key individuals who perform services
for the Company of 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 1998 Plan. Twenty-five percent of the
options become vested and exercisable upon the grant date and twenty-five
percent vest on each of the next three anniversaries of that date. Options for
515,000 shares were outstanding at July 31, 2000.

The Company also approved the establishment of the 1998 Non-Employee
Director Stock Option Plan (the "1998 Director Plan") and reserved 100,000
shares of Common Stock for issuance under the 1998 Director Plan. The 1998
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

35
<PAGE> 37
NORTHWESTERN STEEL AND WIRE COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 ten years from the grant date. Options to purchase an aggregate
of 10,000 shares of Common Stock at an exercise price of $0.90625 per share are
outstanding.

Under the 1994 Long Term Incentive Plan, 1,250,000 shares of common stock
are reserved for issuance to key employees and other key individuals who perform
services for the Company. Stock options, stock appreciation rights and
restricted stock may be granted by the Board of Directors at not less than the
fair market value on the date of grant. Such grants generally vest over three
years and expire five years from the date of grant. At July 31, 2000, shares
available for future grants were 440,886.

Under the 1994 Director Stock Plan, 50,000 common shares are reserved for
issuance of non-qualified stock options to directors who are not employees of
the Company or affiliates of Kohlberg & Co., L.P. and expire not less than five
years nor more than ten years from the grant date. At July 31, 2000 there were
no shares available for future grants.

An aggregate of 1,400,000 common shares had been reserved for the
Management Stock Option Plan and the Employee Stock Purchase and Option Plan.
Options generally expire ten years from the date of grant. No further awards may
be granted under either Plan.

Activity for common shares under option for the years ended July 31, 2000,
1999 and 1998 were as follows:

<TABLE>
<CAPTION>
NUMBER OF AVERAGE
SHARES PRICE
--------- -------
<S> <C> <C>
Outstanding, July 31, 1997................................ 1,681,013 $5.25
Granted................................................. 942,225 3.69
Exercised............................................... (2,000) 3.59
Canceled................................................ (951,741) 5.42
---------- -----
Outstanding, July 31, 1998................................ 1,669,497 4.27
Granted................................................. 1,062,900 1.33
Exercised............................................... -- --
Canceled................................................ (1,241,482) 4.19
---------- -----
Outstanding, July 31, 1999................................ 1,490,915 2.25
Granted................................................. 140,000 .63
Exercised............................................... -- --
Canceled................................................ (329,313) 3.06
---------- -----
Outstanding July 31, 2000................................. 1,301,602 $1.87
========== =====
Exercisable July 31, 2000................................. 744,763 $2.22
========== =====
</TABLE>

The following table summarizes the status of outstanding stock options as
of July 31, 2000:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -----------------------------
NUMBER OF WEIGHTED WEIGHTED NUMBER OF WEIGHTED
RANGE OF OPTIONS AVERAGE LIFE AVERAGE OPTIONS AVERAGE
EXERCISE PRICES OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0 to $2.99........................ 1,011,650 8.29 $1.27 490,825 $1.30
$3.00 to $5.99..................... 269,952 4.10 $3.72 233,938 $3.74
$6.00 to $8.00..................... 20,000 5.00 $7.19 20,000 $7.19
</TABLE>

36
<PAGE> 38
NORTHWESTERN STEEL AND WIRE COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The fair value for the options was estimated at the date of grant using a
present value approach with the following weighted-average assumptions: risk
free interest rates on the 1994 Long Term Incentive Plan and the 1998 Plan
ranging from 4.55%-4.80% and 5.33%-5.86%, respectively, and a risk free interest
rate on the 1998 Director Plan of 5.06%; no expected dividend yield; an
estimated volatility of 70.7%, and an average expected life of the options under
the 1994 Long Term Incentive Plan, the 1998 Plan and the 1998 Director Plan of
5, 8 and 5 years, respectively.

The Company applies APB Opinion No. 25 and related Interpretations in
accounting for their stock-based compensation plans. Accordingly, no
compensation cost has been recognized within the Statements of Operations as
presented. Had compensation cost for the Company's plans been determined based
on the fair value at the grant dates for awards under those plans consistent
with the method prescribed by SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
JULY 31, JULY 31, JULY 31,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net (loss) income as reported................... $(83,257) $(45,347) $ 41,696
Pro forma net (loss) income..................... $(83,275) $(45,371) $ 41,502
(Loss) earnings per share, as reported.......... $ (3.40) $ (1.85) $ 1.70
Pro forma net (loss) income per share........... $ (3.40) $ (1.85) $ 1.70
</TABLE>

COMMITMENTS AND CONTINGENCIES

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.
Primarily because the scrap melting process 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 and is therefore
subject to periodic compliance reviews by the United States Environmental
Protection Agency ("USEPA"). The Company currently estimates a cost of
approximately $3,100 to close its hazardous waste disposal site in 2008, of
which approximately $2,000 has been accrued to date.

37
<PAGE> 39
NORTHWESTERN STEEL AND WIRE COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has been identified by the Illinois Environmental Protection
Agency (IEPA) as one of the potentially responsible parties for costs associated
with a third party owned disposal site. The IEPA is likely to seek compensation
from the Company as an alleged waste generator for recovery of past costs and
future remediation of the waste site. Under Illinois law, the Company's share of
liability can be limited to its proportionate share based upon causation of the
total cost of the site cleanup. Based on data available, the Company's share
will be a small fraction of the total site clean up costs, however reasonable
estimation of total cost for remediation cannot be made at this time.

The Company has also been cited by the USEPA for alleged violations of
clean air standards under the 1990 Clean Air Act ("CAA") and other requirements
at its Sterling furnace operations. On October 22, 1997, the Company was
notified by the U. S. Department of Justice ("DOJ") that it intended to file
suit against the Company for alleged violations of the CAA. The Company and the
DOJ have agreed to settle this claim and are scheduled to present the agreement
in court on November 16, 2000. The agreement requires the Company to pay a civil
penalty of approximately $600, which has been fully accrued as of July 31, 2000,
and achieve and maintain compliance with the CAA through capital expenditures
that the Company has incurred at July 31, 2000, for $12,300. The Company would
also undertake several Supplemental Environmental Projects that could total
$1,000 in capital expenditures. In compliance with the consent decree, on
October 8, 2000 the Company removed from operations the #6 furnace which was
originally cited for the violations discussed.

The Company is currently a party of an OSHA complaint from August 1998
regarding potential overloading of a crane. The Company has taken corrective
action and is vigorously pursuing a resolution of the complaint. The case has
been assigned to a judge for resolution in November 1999. The notice of
assignment reads "the intent is to facilitate amicable settlement of disputes
between parties quickly and with the least amount of expense to the parties and
to the Commission." A reasonable estimation of these costs can not be made at
this time.

DESCRIPTION OF LEASING ARRANGEMENTS

The Company has entered into various operating leases for transportation
equipment (principally over-the-road tractors and trailers for shipment of a
portion of the Company's products) and other equipment. The majority of the
transportation equipment leases are committed through March 2001.

The future minimum rental payments required for the noncancelable lease
term of the operating leases as of July 31, 2000, were as follows:

Fiscal year ending July 31:

<TABLE>
<S> <C>
2001........................................................ $1,300
2002........................................................ 1,014
2003........................................................ 723
2004........................................................ 88
2005........................................................ --
Remaining years............................................. --
------
Total minimum future lease payments......................... $3,125
======
</TABLE>

Rental expense under operating leases for the years ended July 31, 2000,
1999 and 1998 was approximately $1,569; $2,162; and $2,130, respectively.

38
<PAGE> 40
NORTHWESTERN STEEL AND WIRE COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NON-RECURRING ITEMS

During the first quarter of fiscal 1999, the Company announced the closure
of its unprofitable wire fabricating operation. As a result, the Company
recorded a one-time, non-recurring pre-tax charge of approximately $41,597. The
charge was primarily non-cash and included the write-down to estimated fair
market value of the facility and equipment related to the wire operations,
closure costs, and employee termination expenses for approximately 300 employees
as follows:

<TABLE>
<S> <C>
Asset Impairment............................................ $ 3,889
Inventory write-down........................................ 2,514
Employee termination expenses, including pension and
post-retirement impacts..................................... 33,100
Other....................................................... 2,094
-------
$41,597
=======
</TABLE>

The last affected production departments ceased operations in November 1998
and shipments ceased in March 1999.

As of the closure of the wire fabricating operations, approximately $9,900
in related fixed assets were identified by the Company. A significant amount of
the identified fixed assets were reconfigured to be utilized in the Company's
on-going operations. The asset impairment charge for the wire operations
includes primarily machinery and equipment utilized in the wire operations that
cannot be utilized elsewhere in the Company's on-going production process. The
net book value of the impaired fixed assets was $4,100. Due to the age of these
wire fabricating fixed assets, the Company did not believe it was likely that
they would recover a significant portion of the remaining net book value. In the
fourth quarter of 1999, the Company amended their original asset impairment
estimate based on actual proceeds received on the sale of the wire operations
fixed assets of $1,900. This reduced the non-recurring charge by $1,700.

The closure of the wire mill resulted in the termination or retirement of
employees, consisting primarily of hourly wire mill workers covered under the
Company's current collective bargaining agreement with the Company's union as
well as certain salary administrative personnel affiliated with the wire mill.
The employee termination charge consists of a pension curtailment charge, a
post-retirement curtailment charge, special termination benefits required
pursuant to the existing collective bargaining agreement, severance, vacation
pay and WARN pay. Approximately 100 hourly employees included in the original
estimate of terminations were able to find employment elsewhere within the
Company's steel operations, resulting in lower employee termination expense than
originally estimated (primarily WARN pay, severance and vacation pay).
Approximately 150 employees elected the retirement option (as opposed to
approximately 135 included in the original estimate) pursuant to the collective
bargaining agreement resulting in higher employee retirements than originally
estimated. The net impact of lower employee terminations and higher employee
retirements resulted in the Company reducing its employee termination charge by
approximately $2,700 in the third quarter of fiscal 1999. As of July 31, 2000,
the Company has remaining reserves of approximately $1,000 for unpaid employee
termination expenses, which are expected to be spent during the next two fiscal
years. The number of employees terminated through July 31, 2000 was 226.

39
<PAGE> 41
NORTHWESTERN STEEL AND WIRE COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The estimated annual revenue and net operating losses related to the wire
operations that will not be continued are $72,625 million and $3,949 million,
respectively. These amounts have been estimated by utilizing the 1998 results
for the wire operations.

During the third fiscal quarter of fiscal 1999, the Company sold its
Hickman facility for cash. The sale included all of the assets at the facility
including the real estate, equipment, inventory and operating supplies on site
as of April 30, 1999. The sale resulted in a one-time non-recurring charge of
approximately $8,200, which was primarily non-cash and included the write-down
of the land, buildings, equipment and inventory to the contract price.

During fiscal 1997 the Company closed its Houston rolling mill, incurring a
one-time, non-recurring charge of approximately $92,900. The charge was
primarily for the write-down of facilities and equipment to estimated fair
market value. The property has been marketed since that time and in the fourth
fiscal quarter of 1999, the facility was sold for cash. As a result of the sale
of the Houston facility in the fourth quarter of 1999, and the sale of remaining
equipment subsequent to year end, the Company recorded an additional
non-recurring charge of approximately $900 in the fourth quarter of fiscal 1999
to write-down these assets to their realized value. At July 31, 2000 no reserves
remain related to the Houston mill closure.

40
<PAGE> 42

QUARTERLY FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
2000 OCTOBER JANUARY APRIL JULY
---- ------- ------- ----- ----
<S> <C> <C> <C> <C>
Net sales...................................... $ 87,131 $ 90,179 $ 94,754 $ 93,205
Gross profit(1)................................ 586 477 111 4,820
Net loss....................................... (4,884) (9,164) (11,375) (57,834)(5)
Per common share data:
Net loss..................................... $ (0.20) $ (0.37) $ (0.46) $ (2.37)(5)
Stock price range --
High...................................... 29/32 11/16 61/93 7/16
Low....................................... 1/4 1/4 1/4 9/32
Close..................................... 3/8 9/16 12/35 3/8
Tons Shipped................................... 284,493 277,730 276,734 272,933
</TABLE>

<TABLE>
<CAPTION>
1999 OCTOBER JANUARY APRIL JULY
---- ------- ------- ----- ----
<S> <C> <C> <C> <C>
Net sales...................................... $113,516 $ 76,969 $ 81,314 $ 77,546
Gross profit(1)................................ 10,554 965 1,506 (3,207)
Net loss....................................... (24,568)(2) (5,218) (8,587)(3) (6,974)(4)
Per common share data:
Net income................................... $ (1.00)(2) $ (0.21) $ (0.35)(3) $ (0.29)(4)
Stock price range --
High...................................... 3 1/4 1 31/32 1 1/2 1 1/4
Low....................................... 1 1/8 5/8 23/32 11/16
Close..................................... 1 17/32 27/32 1 1/8 13/16
Tons Shipped................................... 295,059 223,526 262,111 259,149
</TABLE>

The common stock of the Company is traded on the Over the Counter Bulletin
Board (Symbol: NWSW).

NOTES:

(1) Gross profit is defined as net sales less cost of goods sold excluding
depreciation.

(2) For the quarter ended October 31, 1998, net income included a charge of
$24.6 million ($1.00 per share) related to the closure of the majority of
the Company's wire mill operations.

(3) For the quarter ended April 30, 1999, net income included a charge of $3.5
million ($.14 per share), primarily due to the sale of the Hickman, Kentucky
facility, which was offset by certain revisions to estimates contained in
the first quarter wire mill charge.

(4) For the quarter and year ended July 31, 1999, net income included a charge
of $.3 million ($.01 per share) related to the write-down of certain Houston
assets to their realized sale value, which was offset by the benefit of the
revisions of estimates included in the first quarter charge of $1.1 million
($.04 per share).

(5) For the quarter July 31, 2000, net income included a charge of $47.6 million
($1.94 per share) for the write-off of deferred tax assets that were more
likely than not to expire before realization.

41
<PAGE> 43

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF NORTHWESTERN STEEL AND WIRE COMPANY

In our opinion, the consolidated financial statements listed in the index
included in Item 14 of this Form 10-K present fairly, in all material respects,
the financial position of Northwestern Steel and Wire Company and Subsidiaries
at July 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended July 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index included in Item 14 of this Form 10-K, presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in the Current
Developments Note to the Consolidated Financial Statements, the Company has
suffered losses from operations, is experiencing a liquidity shortage, and has
not been able to refinance its $115 million senior notes due June 15, 2001 that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in the Current
Developments Note to the Consolidated Financial Statements. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

PRICEWATERHOUSECOOPERS LLP

Chicago, Illinois
November 13, 2000

REPORT OF MANAGEMENT

The management of Northwestern Steel and Wire Company prepared, and is
responsible for, the consolidated financial statements and the other information
appearing in this annual report. The consolidated financial statements include
amounts that are based on management's best estimates and judgments.

The Company's financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants, selected by the Audit
Committee of the Board of Directors. Management has made available to
PricewaterhouseCoopers LLP all of the Company's financial records and related
data, as well as the minutes of shareholders' and directors' meetings.

Management of the Company has established and maintains a system of
internal accounting controls. We believe the internal controls in use provide
reasonable assurance that assets are safeguarded, transactions are authorized
and properly recorded and that the reports do not contain any material
misstatement.

The financial statements and related notes in this report have been
prepared according to generally accepted accounting principles, and we believe
they are accurate in all material respects.

Frederick J. Rocchio, Jr.
Chief Executive Officer
Thomas M. Vercillo
Vice President -- Finance, CFO

42
<PAGE> 44

SCHEDULE II

NORTHWESTERN STEEL AND WIRE COMPANY

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JULY 31, 2000, 1999 AND 1998
(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
CHARGED
BALANCE AT TO COSTS BALANCE AT
BEGINNING AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
FOR THE YEAR
ENDED JULY 31, 2000............................. $ 420 $1,460 $ (439) $1,441
====== ====== ======= ======
FOR THE YEAR
ENDED JULY 31, 1999............................. $1,175 $ 400 $(1,155) $ 420
====== ====== ======= ======
FOR THE YEAR
ENDED JULY 31, 1998............................. $1,375 $ 500 $ (700) $1,175
====== ====== ======= ======
Inventory valuation allowance:
FOR THE YEAR
ENDED JULY 31, 2000............................. $ 971 $ 337 $(1,056) $ 252
====== ====== ======= ======
FOR THE YEAR
ENDED JULY 31, 1999............................. $ 214 $3,815 $(3,058) $ 971
====== ====== ======= ======
FOR THE YEAR
ENDED JULY 31, 1998............................. $ 103 $ 297 $ (186) $ 214
====== ====== ======= ======
</TABLE>

43
<PAGE> 45

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

The following persons are members of the Company's Board of Directors which
board consists of six directors. The Bylaws of the Company provide for the
election of directors at each annual meeting.

<TABLE>
<CAPTION>
SERVED AS
NAME AGE DIRECTOR SINCE
---- --- --------------
<S> <C> <C>
William F. Andrews (1)(2)................................... 69 1994
Frederick J. Rocchio, Jr. (2)............................... 53 1998
Darius W. Gaskins (3)(4).................................... 61 1994
Thomas A. Gildehaus (1)..................................... 60 1997
David L. Gore (1)(3)........................................ 62 1997
Christopher Lacovara (2)(3)(4).............................. 36 1992
</TABLE>

-------------------------
(1) Member of Audit Committee.

(2) Member of Executive Committee.

(3) Member of Pension Committee.

(4) Member of Compensation Committee.

William F. Andrews has been Chairman of Northwestern Steel and Wire Company
since November 1998. From 1995 to the present, he has been Chairman of Scovill
Fasteners, Inc., a designer, manufacturer and distributor of apparel fasteners
and specialty industrial fasteners. Mr. Andrews was named Chairman of
Corrections Corporation of America and Prison Realty Trust, the leading private
manager of prisons, in August 2000. From 1995 to 1998 Mr. Andrews was also
Chairman of Schrader-Bridgeport International Inc., a manufacturer of tire
valves and pressure control devices. From 1993 to 1995, Mr. Andrews was
Chairman, Chief Executive Officer, and President of Amdura Corporation, a
manufacturer of hardware and industrial equipment. Mr. Andrews is also a
Director of Black Box Corporation, Johnson Controls, Inc., Katy Industries,
Navistar, Inc. and Trex Corporation.

Frederick J. Rocchio, Jr., has been the President and Chief Executive
Officer since November 1998 and a Director since December 1998. From 1997 to
November 1998, Mr. Rocchio was the Executive Vice President, Development and
Technology for Birmingham Steel Corporation ("Birmingham") and from 1995 to 1997
was President, Steel Services Business Unit for Birmingham. From 1991 to 1995,
Mr. Rocchio was the Vice President, Integrated Steelmaking and Hot Rolling
Operations for Inland Steel Company.

Darius W. Gaskins, Jr. has been a Partner of Norbridge (formerly CFG&W), a
management consulting firm, since 1993, and a Partner of High Street Associates,
Inc., an investment partnership, since 1991. From 1994 to 1995, Mr. Gaskins was
Chairman of Leaseway Transportation Corporation, a distribution services
provider. Mr. Gaskins is also a Director of Anacomp, Inc., Sapient Corporation
and R. H. Donnelley, Inc.

Thomas A. Gildehaus has been a Director of the Company since January 1997.
From April 1997 to November 1998, Mr. Gildehaus was Chairman and Chief Executive
Officer of the Company. From 1992 to April 1997, Mr. Gildehaus was President,
Chief Executive Officer and a Director of UNR, a manufacturer of infrastructure
products used in the wireless communication industry. Mr. Gildehaus is also a
Director of Navigant Consulting, Inc.

44
<PAGE> 46

David L. Gore has been an attorney in private practice regarding labor law
since 1982. From 1982 to 1994, Mr. Gore was a partner in the firm of Kleiman,
Whitney, Wolfe & Gore. From 1994 to the present, Mr. Gore has been District
Counsel for District 7 of the United Steelworkers of America, handling a variety
of legal matters for the Steelworkers (the "Union"), and is a member of the firm
of Gore & Gore.

Christopher Lacovara has been a Principal of Kohlberg since 1995 and an
associate of Kohlberg from 1988 to 1994. Mr. Lacovara has been a Director of
Holley Performance Products, Inc., since 1997.

Pursuant to the Company's current agreement with the Union, the
International President of the Union may designate an individual for appointment
to the Board of Directors. Subject to the approval of, and then recommendation
by, the Chief Executive Officer, the Board shall consider such designee. In
accordance with this procedure, Mr. Gore was appointed to the Board of Directors
effective June 5, 1997.

MANAGEMENT

The following persons are executive officers of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William F. Andrews........................ 69 Chairman of the Board
Frederick J. Rocchio, Jr.................. 53 President and Chief Executive Officer
Dennis E. Barry........................... 59 Vice President/General Manager of Primary
Operations
Daniel J. Brisson......................... 42 Vice President -- Rod and Wire Division
Joseph D. Corso........................... 58 Senior Vice President of Administration
Andrew R. Moore........................... 47 Vice President -- Human Resources
Louis L. Pisani........................... 48 Vice President/General
Manager -- Structural Operations
Michael S. Venie.......................... 52 Senior Vice President -- Sales and
Marketing
Thomas M. Vercillo........................ 45 Vice President -- Finance, Chief Financial
Officer, Secretary and Treasurer
</TABLE>

William F. Andrews has been Chairman of Northwestern Steel and Wire Company
since November 1998. From 1995 to the present, he has been Chairman of Scovill
Fasteners, Inc., a designer, manufacturer and distributor of apparel fasteners
and specialty industrial fasteners. Mr. Andrews was named Chairman of
Corrections Corporation of America and Prison Realty Trust, the leading private
manager of prisons, in August 2000. From 1995 to 1998 Mr. Andrews was also
Chairman of Schrader-Bridgeport International Inc., a manufacturer of tire
valves and pressure control devices. From 1993 to 1995, Mr. Andrews was
Chairman, Chief Executive Officer, and President of Amdura Corporation, a
manufacturer of hardware and industrial equipment. Mr. Andrews is also a
Director of Black Box Corporation, Dayton Superior Corp., Johnson Controls,
Inc., Katy Industries, Navistar, Inc. and Trex Corporation.

Dennis E. Barry has been Vice President/General Manager of Primary
Operations since July, 2000. From 1999 to July 2000, Mr. Barry was Vice
President of Operations at Franklin Industries. From 1997 to 1999 he was General
Manager, Birmingham Southeast, Birmingham Steel Corporation, the Cartersville
Division. From 1996 to 1997 he was General Manager, Great Lakes Recovery
Systems. From 1995 to 1996 he held the position of Manager of Melting and
Casting at Austeel Lemont Company.

Daniel J. Brisson has been Vice President -- Quality and Planning since
October 1999 and Vice President -- Rod and Wire Division since October 2000.
Prior to this he was Vice President of Quality and Development since March 1999.
From 1996 to March 1999, Mr. Brisson was Caster Manager and Division

45
<PAGE> 47

Quality Manager at Birmingham Steel Company. From 1980 to 1996, he held various
management positions at Inland Steel Company.

Joseph D. Corso has been Senior Vice President of Administration since
April, 2000. From 1996 to 1999 he was President, Birmingham Southeast, LLC,
Birmingham Steel Corporation. From 1993 to 1996, Mr. Corso was President/CEO of
McLouth Steel Products Corporation, Trenton, Michigan.

Andrew R. Moore has been Vice President -- Human Resources since October
1996. Mr. Moore was previously the Manager of Employee Benefits for the Company
from November 1992.

Louis L. Pisani has been Vice President/General Manager -- Structural
Operations since October 1999. Prior to this he was Vice President of
Engineering and Maintenance since April 1999. From 1994 to 1998, Mr. Pisani held
the positions of Manager, Construction Coordination and Manager, Material
Handling Services at Ispat Inland and Birmingham Steel Company.

Michael S. Venie has been Senior Vice President -- Sales and Marketing
since January 1999. Prior to this he was Vice President -- Sales and Marketing
since September 1995. From 1991 through 1995 Mr. Venie was Vice
President-Automotive Marketing of Kaiser Aluminum & Chemical Corporation, a
subsidiary of Kaiser Aluminum Corporation, a producer of aluminum and aluminum
products.

Thomas M. Vercillo has been Vice President -- Finance since May 1999. He
has also been Chief Financial Officer, Secretary and Treasurer since August
1998. Prior to his current position he was Corporate Controller. From 1992
through 1996, Mr. Vercillo was Manager of Corporate Accounting for the Company.

46
<PAGE> 48

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following Summary Compensation Table discloses, for the fiscal years
indicated, individual compensation information on the Company's Chief Executive
Officer and the next four most highly compensated executive officers ("Named
Executive Officers") in fiscal 2000.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
--------------------- # OPTION ALL OTHER
NAME AND TITLE FISCAL YEAR SALARY BONUS (1) AWARDS COMPENSATION
-------------- ----------- -------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Frederick J. Rocchio, Jr. ............. 2000 $386,569 $ -- -- $ 4,638(2)
President and Chief Executive 1999 $262,503 $ 63,125 400,000 $102,766
Michael S. Venie....................... 2000 $193,330 $ -- -- $ 234(2)
Senior Vice President -- 1999 $182,504 $ 8,800 70,000 $ --
Sales and Marketing 1998 $169,375 $104,234 60,000 $ 1,693
Thomas M. Vercillo..................... 2000 $158,750 $ -- -- $ 121(2)
Vice President, Chief Financial 1999 $123,075 $ 3,900 52,000 --
Officer Secretary and 1998 $109,165 $ 77,540 18,500 --
Treasurer
Andrew R. Moore........................ 2000 $135,830 $ -- -- $ 5,401(3)
Vice President --Human 1999 $122,504 $ 2,200 60,000 --
Resources 1998 $108,749 $ 80,180 23,500 --
Daniel J. Brisson...................... 2000 $135,330 $ -- -- $ 29,192(4)
Vice President -- Rod and 1999 $ 46,453 -- 40,000 $ 5,269
Wire Division
</TABLE>

-------------------------
(1) All the bonuses for any given fiscal year are accrued in such fiscal year
and paid in the following fiscal year.

(2) Includes group term life insurance.

(3) Includes $5,308 in sold 1999 vacation and $93 in group term life insurance.

(4) Includes $29,132 relocation expenses and $60 group term life insurance.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

No options/SAR's were granted in fiscal year 2000.

OPTION EXERCISES AND FISCAL YEAR END VALUES FOR THE YEAR ENDED JULY 31, 2000

<TABLE>
<CAPTION>
SHARES NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED ON VALUE OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
EXERCISE REALIZED FY-END (#) AT FY-END ($)
NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
---- ----------- -------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Frederick J. Rocchio, Jr. ... 0 0 200,000/200,000 0/0
Michael S. Venie............. 0 0 80,000/50,000 0/0
Thomas M. Vercillo........... 0 0 79,875/30,625 0/0
Andrew R. Moore.............. 0 0 47,625/35,875 0/0
Daniel J. Brisson............ 0 0 20,000/20,000 0/0
</TABLE>

-------------------------
(1) The closing price of the Common Stock on July 31, 2000 was $0.375.

DIRECTOR COMPENSATION

Pursuant to the Company's Director Stock Option Plan, directors who are not
employees of the Company or affiliates of KNSW Acquisition Company, L.P.
("KNSW"), receive 2,500 Options on an annual basis
47
<PAGE> 49

during their tenure as directors and are paid a quarterly fee of $5,000. During
the fiscal year ended July 31, 2000 no options were granted

EMPLOYMENT AGREEMENT

On October 22, 1998, the Company, upon Compensation Committee and Board of
Director approval, entered into an employment agreement with Frederick J.
Rocchio, Jr. in connection with his becoming employed by the Company as
President and Chief Executive Officer. At that time, the Company granted 400,000
options to Mr. Rocchio. The employment agreement provides for a minimum base
salary of $350,000 per year, participation in the Company's annual short term
incentive plan, with a guaranteed bonus of $50,000 during the first fiscal year,
and in the Company's non-qualified Supplemental Executive Retirement Plan, life
insurance, disability income policy and other typical Company benefit programs.
The employment agreement also includes a $100,000 sign-on bonus and severance
benefits in the event of termination for any reason other than "for cause" equal
to one year of base compensation if termination occurs during the first year of
employment and two years of base compensation thereafter.

On October 18, 2000, the board of directors approved a Key Employee
Retention and Severance Plan for 20 of the Company's critical employees other
than the Chief Executive Officer whose severance arrangements are provided for
through an employment agreement as discussed above. The plan provides a
retention bonus to each of the identified employees if they remain in the
Company's employ until the end of the 2001 calendar year. In the event that any
identified employee is severed from their employment with the Company during the
2001 calendar year for any reason other than cause they would receive a
severance benefit. Finally, if the Company entered into Chapter 11 bankruptcy
proceedings, the identified employees would receive (i) a retention bonus if
they remain with the Company until an exit plan from bankruptcy is filed or it
is resolved that the Company is unable to execute an exit plan or (ii) severance
benefits if they severed from the Company for any reason other than cause while
the Company is in Chapter 11 proceedings.

CHANGE OF CONTROL AGREEMENTS

The Company is party to agreements with its Named Executive Officers, which
provide that in the event the Company terminates such executive's employment for
a reason other than "cause" as defined in the agreement or the executive quits
his employment with the Company for "good reason" as defined in the agreement,
after a "change of control" of the Company, he will be entitled to receive
payment for (i) up to two years of base salary, and (ii) bonus payout under any
bonus plan or program covering the executive as of the change of control,
prorated for that portion of the year prior to separation from service. In
addition, during the period under (i) above, the Company will provide the
executive with benefit plans and programs no less favorable than those in effect
at any time during the 120 days prior to the change of control or to the extent
more favorable, no less favorable than those provided to senior executives of
similar capacity preceding or after the change of control.

For purposes of the agreements, a "change of control" of the Company occurs
if (i) a person or entity becomes the beneficial owner, directly or indirectly,
of securities of the Company representing 30% or more of the combined voting
power of the Company's then outstanding securities entitled to vote in the
election of directors of the Company; (ii) during any period of two consecutive
years, individuals who at the beginning of such period constituted the Board of
Directors and any new directors who were approved by a vote of at least three
quarters of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination was previously so
approved, cease for any reason to constitute at least a majority thereof; or
(iii) all or substantially all of the assets of the Company are liquidated or
distributed.

In return for the benefits provided by his agreement, each executive agrees
to continue to perform the regular duties of his current office (and/or such
duties of such other positions to which he may be assigned).

PENSION PLAN

The Company maintains a pension plan for all eligible employees. A
participant who retires on or after turning 65 and has completed at least five
years of service will qualify for an annual pension equal to 1.155% of
48
<PAGE> 50

the participant's average earnings for each year of service not in excess of 30
years and 1.26% of the participant's final average earnings for each year of
service in excess of 30 years. Final average earnings are based on total
compensation (exclusive of certain cost-of-living adjustments) during the
participant's highest five consecutive years in the participant's last 15 years
of service. A deferred vested pension benefit normally commencing at age 65 is
provided for any employee who does not qualify for retirement under the plan but
has completed at least five years of service.

As of July 31, 2000 years of service for purposes of the plan with respect
to the officers of the Company named in the Summary Compensation Table are as
follows: Mr. Rocchio, 2 years; Mr. Venie, 5 years; Mr.Vercillo, 15 years; Mr.
Moore 21 years and Mr. Brisson 1 year. The following table shows the projected
annual pension benefits payable, under the pension plan at the normal retirement
age of 65:

ANNUAL NORMAL PENSION BENEFITS
FOR YEARS OF SERVICE SHOWN (1)

<TABLE>
<CAPTION>
AVERAGE
ANNUAL
PENSION
EARNING 5 YEARS 10 YEARS 20 YEARS 30 YEARS 40 YEARS 50 YEARS
------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$50,000................................ $2,888 $ 5,775 $11,550 $17,325 $23,625 $29,925
100,000................................ 5,775 11,550 23,100 34,650 47,250 59,850
150,000................................ 8,663 17,325 34,650 51,975 70,875 89,775
200,000................................ 9,818 19,635 39,270 58,905 80,325 101,745
250,000................................ 9,818 19,635 39,270 58,905 80,325 101,745
300,000................................ 9,818 19,635 39,270 58,905 80,325 101,745
350,000................................ 9,818 19,635 39,270 58,905 80,325 101,745
400,000................................ 9,818 19,635 39,270 58,905 80,325 101,745
450,000................................ 9,818 19,635 39,270 58,905 80,325 101,745
</TABLE>

-------------------------
(1) Normal pension benefits are formula based and are not subject to a social
security offset. With exceptions not applicable to any of the officers named
in the above compensation table, Sections 401(a)(17) and 415 of the Internal
Revenue Code limit the annual pension earnings that can be considered under
the plan to $170,000 and the annual benefits to $135,000.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN FOR COVERED EXECUTIVES

Effective August 1, 1997, the Company adopted a Supplemental Executive
Retirement Plan for Covered Executives (the "Plan"). Participation in the Plan
is limited to key employees of the Company, designed by the Compensation
Committee, whose benefits under the Pension Plan B of Northwestern Steel and
Wire Company (the "Pension Plan") and the Northwestern Steel and Wire Company
401(k) Salary Deferral Plan (the "401(k) Plan") are limited under applicable
provisions of the Internal Revenue Code (the "Code"). The Plan is a
nonqualified, unfunded plan.

For each Plan participant, benefits under the Plan have two components.
First component: With respect to the Pension Plan, benefits under the Plan are
provided in amounts equal to the reduction of the participant's accrued benefits
under the Pension Plan as a result of applicable Code limitations, and are paid
based on the participant's election for benefit distribution under the Pension
Plan. Second component: With respect to the 401(k) Plan, each Plan participant
is credited with (i) a Company match equal to two percent (2%) of the portion of
such participant's compensation in excess of applicable Code limitations, and
(ii) an amount equal to the reduction of the Company's non-elective
contributions under the 401(k) Plan pursuant to applicable Code limitations. The
second component of a participant's benefit under the Plan is paid in a lump
sum.

In the event of a change in control, benefits accrued under the Plan as of
the date of such change in control are payable to Plan participants within sixty
(60) days following such change in control.

49
<PAGE> 51

As of July 31, 2000, the designated Plan participants consist of Frederick
J. Rocchio, Jr. Daniel J. Brisson, Joseph D. Corso, Louis L. Pisani, Thomas M.
Vercillo, Michael S. Venie and certain other former retired executives. The
Company has estimated and reserved $522,000 to cover the benefits which the Plan
participants are eligible to receive pursuant to the Plan.

RULE 16(B) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

The Company's executive officers, directors and 10% shareholders are
required under the Securities Exchange Act of 1934, as amended, to file reports
of ownership with the Securities and Exchange Commission. Copies of these
reports must also be furnished to the Company. Based solely upon a review of
copies of such reports, or written representations that no reports were
required, the Company believes that all filing requirements applicable to its
executive officers, directors and 10% shareholders were complied with by such
persons.

50
<PAGE> 52

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The table below sets forth certain information regarding beneficial
ownership of Common Stock as of November 13, 2000 by each person or entity known
to the Company who owns of record or beneficially five percent or more of the
Common Stock and by each Named Executive Officer and director and all executive
officers and directors as a group.

<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
OF COMMON STOCK OUTSTANDING
NAME (1) COMMON STOCK
---- ---------------- -------------
<S> <C> <C>
KNSW Acquisition Company, L.P.(2)........................... 8,687,000 34.6%
William F. Andrews.......................................... 18,020 *
Daniel J. Brisson........................................... 20,000 *
Darius W. Gaskins, Jr. ..................................... 32,500 *
Thomas A. Gildehaus......................................... 15,000 *
David L. Gore............................................... 5,400 *
Christopher Lacovara(3)..................................... 8,687,000 34.6%
Andrew R. Moore............................................. 68,899 *
Frederick J. Rocchio........................................ 351,184 1.4%
Michael S. Venie............................................ 100,000 *
Thomas M. Vercillo.......................................... 91,263 *
All executive officers and directors as a group (11
persons)(3)............................................... 9,409,266 37.5%
</TABLE>

-------------------------
* Less than 1%.

(1) Includes shares issuable pursuant to options which may be exercised within
60 days after November 13, 2000.

(2) KNSW owns directly 8,687,000 shares of Common Stock. Kohlberg Associates,
L.P., a Delaware limited partnership ("Associates"), is the general partner
of KNSW. Kohlberg & Kohlberg, L.L.C., is the general partner of Associates.
Messrs. Kohlberg and Lacovara may be deemed to share voting and dispositive
power as to all shares of Common Stock owned by KNSW. Messrs. Kohlberg and
Lacovara disclaim beneficial ownership with respect to such shares. The
address for KNSW is c/o Kohlberg & Co., 111 Radio Circle, Mt. Kisco, NY
10549.

(3) Includes the 8,687,000 shares of Common Stock owned by KNSW. See Note 2.

51
<PAGE> 53

ITEM 13. CERTAIN TRANSACTIONS AND RELATED TRANSACTIONS

CERTAIN TRANSACTIONS

In August 1992, the Company underwent a reorganization which included the
sale of 8,687,000 shares of Common Stock to KNSW (the "1992 Investment"), which
represented at such time approximately 52% of the outstanding Common Stock. KNSW
is an affiliate of Kohlberg. At the time of the 1992 Investment, the Company and
Kohlberg entered into a fee agreement (the "Fee Agreement") pursuant to which
Kohlberg agreed to provide such advisory and management services to the Company
and its subsidiaries as the Board of Directors reasonably requests in
consideration for which the Company pays Kohlberg a fee of $43,435 per fiscal
quarter at the beginning of each quarter. The Fee Agreement provides that
Kohlberg, but not the Company, may terminate the Fee Agreement at any time. The
Fee Agreement will terminate automatically on the earlier of the end of the
fiscal year in which KNSW's percentage interest in the outstanding Common Stock
is less than 25% and the tenth anniversary of the Fee Agreement. The Fee
Agreement also provides that the Company will indemnify Kohlberg and its
affiliates and their respective partners, officers, directors, stockholders,
agents and employees against any third party claims arising from the Fee
Agreement and the services provided thereunder, the 1992 Investment or their
equity interest in the Company.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) 1. Financial Statements

The consolidated financial statements included in Item 8 are filed as
part of this annual report.

2. Financial Statements Schedule:

The consolidated financial statement schedule included in Item 8 is
filed as part of this annual report.

52
<PAGE> 54

3. Exhibits

<TABLE>
<CAPTION>
EXHIBIT INCORPORATED BY REFERENCE
NUMBER DESCRIPTION TO OTHER DOCUMENT
------- ----------- -------------------------
<S> <C> <C>
3 Articles of Incorporation and By-Laws
3.1 Second Amended and Restated Articles of Annual Report on Form 10-K filed for
Incorporation of the Company dated as the fiscal year ended July 31, 1999,
of August 12, 1992 File No. 0-21556, Exhibit 3.1
3.2 First Amendment to the Second Amended Registration Statement on Form S-1
and Restate Articles of Incorporation filed with the Commission on April 18,
1993, File No. 33-60764, Exhibit 3.2
3.3 Amended and Restated By-Laws of the Registration Statement on Form S-8
Company filed with the Commission on May 24,
1999, File No. 333-79143, Exhibit 4.3
4 Instruments Defining the Rights of
Security Holders, Including Indentures
4.1 Form of Indenture dated as of 1993, Registration Statement on Form S-1
between the Company and Continental filed with the Commission on April 15,
Bank, National Association, as Trustee 1993 File No. 33-60766, Exhibit 4.38
(including form of Senior Note)
4.2 Loan and Security Agreement effective Annual Report on Form 10-K filed for
October 5, 1999 the fiscal year ended July 31, 1999,
File No. 0-21556, Exhibit 4.5
10 Material Contracts
10.1 Employment Agreement between Frederick Annual Report on Form 10-K filed for
J. Rocchio, Jr., and the Company dated the fiscal year ended July 31, 1999,
as of October 22, 1998 File No. 0-21556, Exhibit 10.1
10.2 Form of Indemnification Agreements Annual Report on Form 10-K for the
between the Company and each of its fiscal year ended July 31, 1997, File
directors and officers serving at any No. 0-21556, Exhibit 10.2
time after January 31, 1997
10.3 Northwestern Steel and Wire Company Annual Report on Form 10-K filed for
Management Stock Option Plan effective the fiscal year ended July 31, 1999,
August 12, 1992 File No. 0-21556, Exhibit 10.3
10.4 Fee Agreement dated as of August 12, Annual Report on Form 10-K filed for
1992 between the Company and Kohlberg the fiscal year ended July 31, 1999,
File No. 0-21556, Exhibit 10.4
10.5 1994 Long Term Incentive Plan Registration Statement on Form S-8 and
Form S-3, No. 33-53471, Exhibit 4(d)
10.6 1994 Director Stock Option Plan Registration Statement on Form S-8 and
Form S-3, No. 33-53471, Exhibit 4(e)
10.7 Employee Stock Purchase and Option Plan Registration Statement on Form S-8
filed with the Commission December 28,
1992, File No. 33-56412, Exhibit 4.3
</TABLE>

53
<PAGE> 55

<TABLE>
<CAPTION>
EXHIBIT INCORPORATED BY REFERENCE
NUMBER DESCRIPTION TO OTHER DOCUMENT
------- ----------- -------------------------
<S> <C> <C>
10.8 Form of Termination of Control Annual Report on Form 10-K for the
Agreement between the Company and named fiscal year ended July 31, 1997, File
executives No. 0-21556, Exhibit 10.10
10.9 Form of Supplemental Executive Annual Report on Form 10-K for the
Retirement Plan for Covered Executives fiscal year ended July 31, 1997, File
No. 0-21556, Exhibit 10.11
10.10 Northwestern Steel and Wire Company Registration statement on Form S-8
1998 Non-Employee Directors' Stock filed with the Commission May 24, 1999,
Option Plan File No. 333-79179, Exhibit 4.5
10.11 Northwestern Steel and Wire Company Registration statement on Form S-8
Employee Incentive Compensation Plan filed with the Commission May 24, 1999,
File No. 333-79179, Exhibit 4.4
10.12 Northwestern Steel and Wire Company Filed herewith
2000 Stock Incentive Plan
21 Subsidiaries of the Registrant
21.1 The Company has three subsidiaries:
Northwestern Steel and Wire Company
(formerly H/N Steel Company, Inc.), a
Texas corporation, Northwestern Steel
and Wire Company, a Delaware
corporation, and Northwestern Steel and
Wire Company -- Kentucky, a Delaware
corporation
23 Consent of Experts and Counsel
23.1 Consent of Independent Accountants Filed herewith
dated November 13, 2000
27 Financial Data Schedule
27.1 Financial Data Schedule Filed herewith
</TABLE>

(b) Reports on Form 8-K

None.

54
<PAGE> 56

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on the 13th day of
November 2000.

NORTHWESTERN STEEL AND WIRE
COMPANY

By: /s/ THOMAS M. VERCILLO
------------------------------------
Thomas M. Vercillo
Vice President -- Finance, Chief
Financial Officer

Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Company and in the
capacities indicated on the 13h day of November, 2000.

SIGNATURES

/s/ WILLIAM F. ANDREWS
---------------------------------------------------
William F. Andrews
Chairman of the Board and Director

/s/ FREDERICK J. ROCCHIO, JR.
---------------------------------------------------
Frederick J. Rocchio, Jr.
President, Chief Executive Officer and Director

/s/ DARIUS W. GASKINS, JR.
---------------------------------------------------
Darius W. Gaskin, Jr.
Director
/s/ THOMAS A. GILDEHAUS.
---------------------------------------------------
Thomas A. Gildehaus
Director

/s/ DAVID L. GORE
---------------------------------------------------
David L. Gore
Director

/s/ CHRISTOPHER LACOVARA
---------------------------------------------------
Christopher Lacovara
Director

55
<PAGE> 57

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.12 Northwestern Steel and Wire Company 2000 Stock Incentive
Plan
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
</TABLE>