<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended April 30, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
---------- ----------
Commission file number 0-21556
NORTHWESTERN STEEL AND WIRE COMPANY
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(Exact name of registrant as specified in its charter)
Illinois 36-1562920
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
121 Wallace Street, Sterling, Illinois 61081
--------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 815/625-2500
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Number of shares of common stock outstanding as of June 14, 2000:
Common Stock 24,905,424 shares
(includes 420,601 treasury shares)
Page 1 of 18
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHWESTERN STEEL AND WIRE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
------------------------ ------------------------
2000 1999 2000 1999
(Unaudited)
(in thousands of dollars except per share data and tonnage data)
<S> <C> <C> <C> <C>
Net sales $ 94,754 $ 81,314 $ 272,064 $ 271,799
--------- --------- --------- ---------
Cost and operating expenses:
Cost of goods sold (excluding depreciation) 94,865 79,808 271,112 258,774
Depreciation 3,656 3,660 10,239 11,042
Selling and administrative 4,373 3,342 10,984 8,700
Non-recurring item - 5,398 - 44,481
--------- --------- --------- ---------
Total cost and operating expenses 102,894 92,208 292,335 322,997
--------- --------- --------- ---------
Operating loss (8,140) (10,894) (20,272) (51,198)
--------- --------- --------- ---------
Other income and expenses:
Interest expense 3,236 3,103 9,817 9,524
Interest and other income (3) (275) (1,438) (897)
--------- --------- --------- ---------
Total other income and expenses 3,233 2,828 8,380 8,627
--------- --------- --------- ---------
Loss before income taxes (11,375) (13,722) (28,651) (59,825)
Benefit for income taxes - (5,135) - (21,452)
--------- --------- --------- ---------
Net loss $ (11,375) $ (8,587) $ (28,651) $ (38,373)
========= ========= ========= =========
Basic net loss per share $ (0.46) $ (0.35) $ (1.17) $ (1.57)
========= ========= ========= =========
Net tons shipped 276,734 262,111 838,956 780,690
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part
of the unaudited consolidated financial statements
-2-
<PAGE> 3
NORTHWESTERN STEEL AND WIRE COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars except share data)
<TABLE>
<CAPTION>
April 30, July 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS (Unaudited)
Cash and cash equivalents $ 319 $ 39,415
Receivables, less allowance of $881 and $691 respectively 36,090 29,585
Income tax receivable 266 4,806
Other assets 3,993 3,967
--------- ---------
40,668 77,773
--------- ---------
Inventories, at lower of cost or market:
Finished products 27,349 25,169
Semi-finished products 10,535 16,268
Raw materials and supplies 10,871 10,048
--------- ---------
48,755 51,485
--------- ---------
Total current assets 89,423 129,258
--------- ---------
PLANT AND EQUIPMENT, at cost 335,625 295,187
Accumulated depreciation 182,551 173,175
--------- ---------
Net plant and equipment 153,074 122,012
--------- ---------
RESTRICTED CASH - 2,060
DEFERRED INCOME TAXES 47,585 47,585
DEFERRED FINANCING COST 1,165 869
OTHER ASSETS 23,320 16,625
--------- ---------
Total assets $ 314,567 $ 318,409
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 25,254 $ 17,482
Accrued expenses 31,144 27,064
Current portion of long term debt 354 20,209
--------- ---------
Total current liabilities 56,752 64,755
LONG TERM DEBT 146,935 115,628
OTHER LONG TERM LIABILITIES 92,706 91,200
--------- ---------
Total liabilities 296,393 271,583
--------- ---------
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) (100,473) (71,822)
Treasury shares, at cost; 420,601 shares (5,326) (5,325)
--------- ---------
Total shareholders' equity 18,174 46,826
--------- ---------
Total liabilities and shareholders' equity $ 314,567 $ 318,409
========= =========
</TABLE>
The accompanying notes are an integral part
of the unaudited consolidated financial statements
-3-
<PAGE> 4
NORTHWESTERN STEEL AND WIRE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months Ended
April 30,
-------------------------
2000 1999
--------- ----------
(Unaudited)
(In thousands of dollars)
<S> <C> <C>
Cash Flows From Operations:
Net loss $(28,651) $(38,373)
Depreciation 10,239 11,042
Non-recurring item - 46,995
Gain on sale of plant and equipment (995) -
Amortization of deferred financing costs and debt discount 527 921
Deferred income tax benefit - (21,569)
Income tax receivable 4,540 -
(Increase) decrease in receivables (6,505) 19,978
Decrease (increase) in inventories 2,730 21,384
Decrease (increase) in other current assets (26) (2,988)
Increase in other assets (6,695) (11,876)
Increase (decrease) in accounts payable and accrued expenses 7,352 (32,459)
Increase (decrease) increase in other long term liabilities 1,506 (1,015)
-------- --------
Net cash used in operations (15,978) (7,960)
-------- --------
Cash Flows From Investing Activities:
Capital expenditures (42,501) (11,182)
Proceeds from sale of plant and equipment 2,195 8,291
Decrease in restricted cash 2,060 -
-------- --------
Net cash used in investing activities (38,246) (2,891)
-------- --------
Cash Flows From Financing Activities:
Payments of long-term debt (60,968) (330)
Payments for deferred financing fees (749) -
Proceeds from issuance of long term debt and revolver loans 72,346 -
Increase in cash overdraft 4,500 -
-------- --------
Net cash from (used in) financing activities 15,129 (330)
-------- --------
Decrease in cash and cash equivalents (39,096) (11,181)
Cash and Cash Equivalents:
Beginning of period 39,415 36,930
-------- --------
End of period $ 319 $ 25,749
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period For:
Interest $ 6,594 $ 5,789
Income taxes (4,540) 3,660
</TABLE>
The accompanying notes are an integral part
of the unaudited consolidated financial statements
-4-
<PAGE> 5
NORTHWESTERN STEEL AND WIRE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Dollar amounts are in thousands except share data)
1. These consolidated financial statements included herein should be read
together with the fiscal 1999 audited financial statements and notes included in
the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
2. The Consolidated Financial Statements for the three and nine month periods
ended April 30, 1999 and 2000 have not been audited. However, the Company
believes the information reflects all adjustments which, in the opinion of
management, are necessary to present fairly the results shown for the periods
indicated. Management believes all adjustments were of a normal recurring
nature, except those noted below.
3. Basic net loss per share amounts, as presented on the Consolidated Statements
of Operations, are based on the weighted average actual shares outstanding of
24,484,823 for the three and nine months ended April 30, 2000 and 1999. Only
basic net loss per share was presented for all periods since the impact for
options issued pursuant to the various Company stock option plans is
anti-dilutive.
4. An income tax provision or benefit is recorded by estimating the annual
effective income tax rate and applying that rate to pretax income or loss. No
tax benefit was recorded for the three and nine months ended April 30, 2000. The
Company will continue to reassess its ability to utilize net operating losses
currently generated in light of the senior note exchange more fully. The
effective income tax rate was approximately 37% and 36% for the three and nine
months ended April 30, 1999 respectively. The rates approximate the combined
Federal and State statutory rates for these periods.
5. 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 $41,600. 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 330 people as follows:
Asset impairment $ 3,889
Inventory write-down 2,514
Employee termination expense,
including pension and post-retirement
impacts 33,100
Other 2,094
-------
$41,597
=======
The last affected production departments ceased operations in November 1998
and shipments ceased in March 1999.
5
<PAGE> 6
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 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 $2,700 in the third quarter of fiscal 1999. As of April 30, 2000,
the Company has remaining reserves of approximately $973 for unpaid employee
termination expenses, which are expected to be spent during the next two fiscal
years. The number of employees terminated through April 30, 2000 was 226.
6
<PAGE> 7
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 April 30, 2000, approximately $138 of the "Other" charge remains
and is expected to be expended in fiscal 2000.
The estimated annual revenue and net operating losses related to the wire
operations that will not be continued are $72,625 and $3,949 respectively. These
amounts have been estimated by utilizing the 1998 results for the wire
operations.
6. On April 7, 1999, the Company announced the sale of its concrete
reinforcing products facility, located in Hickman, Kentucky. Under the terms of
the purchase agreement, the purchaser acquired the inventory, property, plant
and equipment for approximately $8.3 million. As a result of the sale, the
Company recorded a non-cash, non-recurring pre-tax charge of $8.1 million in
the third fiscal quarter. The non-cash, non-recurring charge consisted of the
asset write-down associated with the property, plant and equipment that was
sold. The Company will continue to supply a portion of the plant's raw material
requirements under a separate, three-year agreement.
7. The Company entered into a $65,000 credit facility (the "New Credit
Facility") with Fleet Capital Corporation which was effective on October 5,
1999. The New Credit Facility has a three year term, maturing in September, 2002
and is expected to provide funds to support the Company's 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. The Borrowing Base as of April 30, 2000
was $58,112. Of that amount, the Company held approximately $12,591 in letters
of credit to satisfy the funding requirements of its workers' compensation and
landfill closure cost liabilities. In addition, the New Credit Facility requires
that at all times the Company will maintain a minimum $5,000 of availability. As
of April 30, 2000, the Company had borrowings under the New Credit Facility of
$31,311. Therefore, as of April 30, 2000 there was approximately $9,210
available for the Company to borrow. As a result of the New Credit Facility, on
October 5, 1999, the Company repaid all amounts outstanding under its former
credit agreement out of existing cash.
8. Since early calendar 1999, the Company has been attempting to finance its
long-term strategic plan primarily consisting of the construction of a new, more
efficient, low cost structural rolling mill. As yet, the Company 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 has decided to pursue a guaranty under the Emergency Steel Loan
Guarantee Act of 1999 (the "Guarantee Act"). Under the Guarantee Act,
institutional lenders to domestic steel companies may apply for a United States
government guarantee of up to 85% of the principal amount of such a loan of up
to $250,000. On February 3, 2000 the Company's institutional lender filed a
guarantee application to loan approximately $170,000 to the Company in new
senior debt that would be 85% guaranteed. If the Company is able to obtain a
guaranteed loan for approximately $170,000 with acceptable terms, the Company
intends to use the proceeds of the guaranteed loan to finance its long-term
strategic plan. The Company anticipated receiving notification earlier in the
fiscal year based on estimates provided by the Loan Guarantee Board. In its
most recent statements, the Loan Guarantee Board has stated that determination
for all applicants will be made by the end of June and notification will occur
in the first week of July.
7
<PAGE> 8
The Company is also in the process of trying to reduce its significant
future debt service obligations which primarily consist of $115,000 of senior
notes scheduled to be redeemed on June 15, 2001, and significant unfunded
employee benefit obligations. After reaching an agreement in principle with the
representatives of an unofficial committee of the senior note holders, the
Company formalized the exchange offer with an Offering Memorandum that was
mailed to the senior note holders for their consideration on December 14, 1999.
The Offering Memorandum calls for the exchange of the outstanding notes for
$52,500 in cash, common stock of the Company representing 70% of the issued and
outstanding common stock on a fully diluted basis after the issuance, and 4 of
the 7 directors seats on the Board of Directors. This offer is contingent upon
95% acceptance by the senior note holders, shareholder approval (which has been
obtained), and the Company's ability to obtain a loan and a guarantee under the
Guarantee Act sufficient to finance the modernization project. The Exchange
Offer has been extended by the Company until July 15, 2000. As of June 14, 2000,
approximately 79% of the outstanding Senior Notes had been tendered.
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 having already received approval by
one-half in number and two-thirds in value of the senior notes actually voting
on the plan. The implementation of the prepackaged bankruptcy option, if
necessary, would be for the limited purpose of completing the exchange of the
senior notes. The only parties whose rights will be affected by this option are
the senior note holders. All other creditors of the Company will be paid under
normal terms or will otherwise be unaffected.
9. 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 low
levels of lead and cadmium, the Company is classified, in the same manner as
other similar steel mills in its industry, as a generator of hazardous waste.
The Company has been cited by the U. S. Environmental Protection Agency
("USEPA") for alleged violations of the 1990 Clean Air Act ("CAA") and other
requirements at its Sterling furnace operations. The Company has agreed to
settle this claim pending final approval. The agreement, if approved, would
require the Company to pay a civil penalty of approximately $435 and achieve and
maintain compliance with the CAA through future capital expenditures that the
Company anticipated to be about $12,000 of which at April 30, 2000, the Company
has completed and actually spent $12,956. Additionally, the Company would also
undertake several Supplementary Environmental Projects that will total
approximately $1,200 in capital expenditures. On May 31, 2000, the Company
signed a consent decree containing the final terms for resolution of the claim.
Upon execution of the consent
8
<PAGE> 9
decree by USEPA, which has been agreed to verbally, the Company would be
required to idle #6 furnace on or before August 15, 2000. The #7 furnace is
permitted by the Illinois Environmental Protection Agency ("IEPA") to operate,
but is currently idle and is undergoing extensive repairs to be operational as a
standby. The recently installed #8 furnace is currently operating on a permit
from the IEPA that restricts the allowed annual output of #8 furnace. The #8
furnace would need to be operating at approximately 75% of rated capacity and be
fully permitted by the IEPA on or before August 15, 2000, for the Company to
idle #6 furnace, keep #7 furnace idle on standby and still supply enough steel
to its rolling mill facilities. At this time, the Company anticipates that IEPA
will have issued a full permit on or before August 15, 2000 for #8 furnace and
that #8 furnace will be operating at or above 75% capacity to allow the Company
to idle #6 furnace and maintain #7 furnace on operational standby.
Based on continuing review of applicable regulatory requirements by the
Company's internal environmental compliance manager and advice from independent
consultants, the Company believes that it is currently in substantial compliance
with applicable environmental requirements, except as noted in the Company's
fiscal 1999 Annual Report on Form 10-K for Commitments and Contingencies.
10. 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 a hearing was held in November 1999 seeking a resolution of the
complaint. The case has been resolved, resulting in a settlement of
approximately $300 in fines payable over the next three fiscal years. As of
April 30, 2000, this settlement has been fully reserved for in the financial
statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included as Item 7 of Part II of the Company's Annual Report on Form
10-K for the year ended July 31, 1999 ("1999 10-K MD&A").
FORWARD LOOKING INFORMATION
---------------------------
Except for historical information, matters discussed in this Item 2 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", "could result"
and "appears" and similar expressions. Risk and uncertainties which could cause
actual results of performance to differ materially from these and expressed in
these statements include the following: volumes of production and product
shipments; changes in product mix and pricing; costs of scrap
9
<PAGE> 10
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 new furnace
become fully operational and to perform in accordance with specifications; and
modernizing or replacing the Company's exiting rolling mills including the need
to obtain noteholder approval for the Company's presently pending exchange
offer, and to obtain a federal guarantee of debt in an acceptable amount with
acceptable terms so that the Company can construct the new mill as part of its
strategic plan. The Company assumes no obligation to update the information
contained herein.
RESULTS OF OPERATIONS
---------------------
Net sales for the Company were $94.8 million on shipments of 276,734 net
tons for the three months ended April 30, 2000, compared to $81.3 million on
shipments of 262,111 net tons for the three months ended April 30, 1999 and
continued in calendar 2000.
The Company recorded a net loss for the quarter of $11.4 million, or $.46
per share which included expenses of approximately $.1 million, or $.01 per
share associated with the anticipated new mill construction. In the third
quarter of the prior year, the Company recorded a net loss of $8.6 million, or
$.35 per share, which included a one-time non-cash after tax charge of $3.5
million, or $.14 per share, primarily due to the sale of the Hickman, Kentucky
facility.
Tons shipped in the quarter increased approximately 6% compared to the
prior year period. The Company's bar and structural product volume improved
dramatically as imports declined in the second half of calendar 1999 and
continued in calendar 2000.
The Company is party to a structural products trade case filed with the
International Trade Commission (the "Commission") on July 7, 1999. On August 23,
1999, the Commission ruled in favor of the domestic producers and sent the case
into an injury investigation phase. The Commission, in cooperation with the
Department of Commerce, issued a preliminary determination on February 3, 2000,
naming Japan and South Korea guilty of illegal dumping. On June 2, 2000, the
Commission published a final determination in the case against Japan on a 6 to 0
vote in favor of the domestic industry. The Commission continues to investigate
the extent of the injury from South Korea to domestic producers and the final
determination is due July 13, 2000.
10
<PAGE> 11
Pricing of the Company's bars and structural products, especially wide
flange beams, continued to strengthen during the third fiscal quarter. The
Company's selling price for wide flange beams increased by 8% or $27 per ton for
the third quarter of fiscal 2000 versus the previous three months and improved
approximately 24% from the same period of the prior year. In early May 2000, in
response to increases in domestic capacity from new mills that are now operating
at higher productivity levels, several competitors announced price decreases on
select bar and light structural products ranging between $10 and $60 per ton.
The Company believes that the weighted average price impact to Northwestern will
be a price decline of approximately $21 per ton for all bar and light structural
products.
During the third quarter of fiscal 2000, the Company continued to see
elevated import levels of foreign steel in its rod markets. The import presence
has significantly impacted product pricing for rods shipped during the three
months ended April 30, 2000. Pricing for the Company's rod products remained
depressed and are 2% less compared to the third quarter of fiscal 1999. The
Company is party to a rod trade case filed with the Commission on December 29,
1998 by the domestic steel rod producers. On May 12, 1999 the Commission ruled
favorably for the domestic industry. The Commission sent the case into an injury
investigation phase and recommendations were sent to the President. The
President responded on February 11, 2000 and imposed a tariff on imports over
1.58 million tons. It is uncertain what impact, if any, the President's action
will have on rod pricing. Several of the Company's competitors have announced
price increases of between $15 and $25 per ton effective with shipments on April
1, 2000 and another increase of between $15 and $20 per ton effective July 1,
2000, on the wake of the President's decision. The Company has announced an
increase of $15 per ton effective April 1, 2000, and another $20 per ton
effective July 1, 2000. However, there can be no assurance that the increases
will be fully realized, nor is the Company certain that the President's remedy
will be strong enough to deter future import growth of rods.
For the nine-month period ended April 30, 2000, net sales were $272.1
million compared to $271.8 in the prior year period. Tons shipped increased from
780,690 net tons for the nine months ended April 30, 1999 to 838,956 net tons
for the comparable nine months in the current year. For the nine months ended
April 30, 2000, the Company recognized a net loss of $28.7 million, or $1.17 per
share. This compared to a net loss of $38.4 million or $1.57 per share, in the
prior year period, which included a one-time after tax charge of $30.6 million
or $1.25 per share, due to the exit from a significant portion of our wire
business in the first quarter of fiscal 1999 and the sale of the Hickman,
Kentucky facility in the third quarter.
Cost of goods sold, excluding depreciation and expenses associated with the
anticipated new mill construction, as a percentage of net sales for the
three-month period ended April 30, 2000 increased to 100% compared to the prior
year at 98.1%. During the third quarter, the Company recorded $1.3 million of
expense for the write-off of the idled #6 furnace. The Company's rolling mill
facilities
11
<PAGE> 12
operated at reduced rates for part of the quarter, due to shortages of
semi-finished steel resulting from the idling of #6 furnace during April and a
slower than expected start-up for the new #8 furnace. Presently, #8 furnace is
operating at approximately 50% of its rated capacity. Excluding these one-time
charges included in cost of goods sold the percentage of cost of goods sold to
net sales for the ongoing operations would be 97.9% compared to the prior year's
98.1%. Due to the furnace issues previously discussed the Company has taken
corrective actions to adequately supply semi-finished to the rolling mills in
the fourth quarter by purchasing approximately 29,000 tons of semi-finished
steel, re-starting the idled #6 furnace on May 5, 2000, and begun preparation to
be able to restart #7 furnace if needed during the fourth quarter. Additionally,
as noted above, the Company experienced improved selling prices in its bar and
structural product lines. However these increases were offset by higher incoming
material costs for scrap of nearly 20%. In future periods, the cost of goods
sold to net sales percentage is expected to improve slightly as cost
improvements from the installation of the new furnace are realized, scrap costs
decline over the near term, and rod pricing increases are realized, tempered by
bar pricing declines.
Cost of goods sold, excluding depreciation and expenses associated with the
anticipated new mill construction, as a percentage of net sales for the nine
months ended April 30, 2000 was 98.1% compared to the prior year at 94.3%.
During the first part of the prior fiscal year the impact of imported rod and
structural steel was not fully realized. For the most recent nine-month period,
selling prices for rod, bars and structural products have decreased over 3.1%
compared to the same period of the prior year. Excluding the one-time charges
included in the fiscal 2000 cost of goods sold discussed previously, the
percentage of cost of goods sold to net sales for the ongoing operation was
97.3% compared to the prior year's 94.3%.
Depreciation expense was unchanged from the third quarter of fiscal 2000
expense of $3.7 million in comparison to the current year's third quarter. For
the nine-month period ended April 30, 2000, depreciation declined 7% from $11.0
million to $10.2 million. The decrease for the nine month periods was due
primarily to the sale of Hickman at the end of the third quarter in fiscal 1999
and the closure of a majority of the wire products division in the first quarter
of fiscal 1999.
For the quarter ended April 30, 2000, selling and administrative expense
was $4.4 million compared to $3.3 million in the prior fiscal year period. For
the nine-month period ended April 30, 2000, selling and administrative expense
increased 26% from $8.7 million to $11.0 million. The increase for the three and
nine month periods are due primarily to increased professional fees related to
the efforts by the Company to restructure its existing $115 million senior
notes.
The operating loss recorded for the quarter ended April 30, 2000 was $8.1
million compared to a $10.9 million loss in the prior year. After giving effect
to the expenses associated with the anticipated new mill construction, the
non-recurring charge primarily due to the sale of the Hickman, Kentucky
facility, the expense for the write-off of #6 furnaces and the revision of the
worker's compensation reserve,
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the operating loss from ongoing operations was $5.9 million for the third
quarter of fiscal 2000 compared to a loss of $5.5 million in the prior year
period. The quarter-to-quarter change resulted primarily from the increased
professional fees related to the efforts by the Company to restructure its
existing senior notes. For the nine-month period ended April 30, 2000, the
ongoing operating loss was $13.9 million compared to the prior year's nine-month
period loss of $4.2 million. The year-over-year increased loss was the impact of
imported rod and structural steel which was not fully realized until the latter
half of fiscal 2000.
Interest expense was $3.2 million for the quarter ended April 30, 2000
compared to $3.1 million in the prior fiscal year period. Interest expense for
the most recent nine-month period was $9.8 million compared to $9.5 million for
the same period in the prior year.
No tax benefit was recorded for the three and nine months ended April 30,
2000. The Company will continue to reassess its tax situation in light of its
current operating results and the senior note exchange more fully described in
Note 7. This compared to a benefit for income taxes of $21.5 million for same
period of the prior year due primarily to the pre-tax losses generated by the
costs to exit a significant portion of its wire business. The Company
anticipates that it will pay very little in cash taxes during fiscal 2000 due to
the loss resulting from operations and the exit of a significant portion of its
wire operations in fiscal 1999.
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 $41,600. 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 330
employees. The last affected production departments ceased operations in
November 1998 and shipments ceased in March 1999. In the third quarter of fiscal
year 1999, the non-recurring charge was reduced by approximately $2,700 for
employee termination expenses that were less than originally estimated. In the
fourth quarter of fiscal year 1999, the non-recurring charge was again reduced
by approximately $1,700, primarily for the sale of wire equipment in excess of
previously estimated market values. At April 30, 2000 the Company has remaining
reserves of approximately $1,111, of which approximately $973 is for unpaid
employee termination expenses, which are expected to be spent during the next
two fiscal years.
On April 7, 1999, the Company announced the sale of its concrete
reinforcing products facility, located in Hickman, Kentucky. Under the terms of
the purchase agreement, the purchaser acquired the inventory, property, plant
and equipment for approximately $8.3 million. As a result of the sale, the
Company recorded a non-cash, non-recurring pre-tax charge of $8.1 million in the
third fiscal quarter. The non-cash, non-recurring charge consisted of the asset
write-down associated with the property, plant and equipment that was sold. The
Company will continue to supply a portion of the plant's raw material
requirements under a separate, three-year agreement.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
GENERAL Funds for the Company's operational needs have been provided from
internally generated cash and borrowings against the New Credit Facility. As of
April 30, 2000, total liquidity, comprising cash, cash equivalents and funds
available under the Company's credit facility, was $9.5 million compared to
$39.4 million at July 31, 1999. The decrease in liquidity primarily resulted
from increased spending for capital projects in the most recent three-month
period. Capital expenditures incurred during the third fiscal quarter totaled
$18.5 million and are more fully described below.
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The Company used cash in operations of $16.0 million in the first nine
months of fiscal 2000 compared to operations using cash of $8.0 million in the
prior year period. The increase is largely attributable to increased operating
losses.
Net cash used in investing activities amounted to $38.2 million in the
first nine months of fiscal 2000 compared to $2.9 million in the prior year
period. The Company continued spending on engineering for its new structural
rolling mill and has paid $11.8 million to the equipment supplier through the
end of the third quarter. In addition, the Company installed a new #8 furnace to
replace two existing electric furnaces. The furnace project also included
changes to the Company's pollution facilities that were installed at the same
time. Spending for the combined projects in the furnace department amounted to
$21.8 million for the nine months ended April 30, 2000.
Net cash from financing activities for the nine months ended April 30, 2000
was $15.1 million. This was significantly higher than the prior year period,
primarily due to increased borrowings in the third quarter of fiscal 2000.
The Company entered into a $65,000 credit facility with Fleet Capital
Corporation 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. The Borrowing Base as of April 30, 2000 was $58.1 million and there
was approximately $9.2 million available for the Company to borrow.
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; however, the documents do not contain any other financial or
liquidity ratios or tests that must be monitored. Currently, repayment of the
New Credit Facility is secured by a first priority lien on all real and personal
property owned by the Company.
The Company faces a number of serious challenges, including increased
competition, that could have 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
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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., has 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. 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).
In order 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:
- 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 entered into the new collective bargaining agreement which
is subject to the Company obtaining financing for the construction of the New
Mill. Once effective, the new agreement will replace the existing labor
agreement and will extend to October 31, 2003 and for a period of three
additional years thereafter be subject to interest arbitration with no permitted
work stoppage allowed. The Company is also implementing total quality management
and maintenance programs, and has commenced operation of the new furnace to
replace the existing furnaces as previously described. The Company also has a
plan in place for the New Mill, but will not commence construction of the New
Mill until construction financing is in place.
Since early calendar 1999, the Company has been attempting to finance its
long-term strategic plan primarily consisting of the construction of a new, more
efficient, low cost structural rolling mill. As yet, the Company has not been
able to obtain the necessary
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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 has decided to pursue a
guaranty under the Emergency Steel Loan Guarantee Act of 1999 (the "Guarantee
Act"). Under the Guarantee Act, institutional lenders to domestic steel
companies may apply for a United States government guarantee of up to 85% of the
principal amount of such a loan of up to $250,000. On February 3, 2000 the
Company's institutional lender filed a guarantee application to loan
approximately $170,000 to the Company in new senior debt that would be 85%
guaranteed. If the Company is able to obtain a guaranteed loan for approximately
$170,000 with acceptable terms, the Company intends to use the proceeds of the
guaranteed loan to finance its long-term strategic plan. The Company anticipated
receiving notification earlier in the fiscal year based on estimates provided by
the Loan Guarantee Board. In its most recent statements, the Loan Guarantee
Board has stated that determination for all applicants will be made by the end
of June and notification will occur in the first week of July.
The Company is also in the process of trying to reduce its significant
future debt service obligations which primarily consist of $115,000 of senior
notes scheduled to be redeemed on June 15, 2001, and significant unfunded
employee benefit obligations. After reaching an agreement in principle with the
representatives of an unofficial committee of the senior note holders, the
Company formalized the exchange offer with an Offering Memorandum that was
mailed to the senior note holders for their consideration on December 14, 1999.
The Offering Memorandum calls for the exchange of the outstanding notes for
$52,500 in cash, common stock of the Company representing 70% of the issued and
outstanding common stock on a fully diluted basis after the issuance, and 4 of
the 7 directors seats on the Board of Directors. This offer is contingent upon
95% acceptance by the senior note holders, shareholder approval (which has been
obtained), and the Company's ability to obtain a loan and a guarantee under the
Guarantee Act sufficient to finance the modernization project. The Exchange
Offer has been extended by the Company until July 15, 2000. As of June 14, 2000,
approximately 79% of the outstanding Senior Notes had been tendered.
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 having already received approval by
one-half in number and two-thirds in value of the senior notes actually voting
on the plan. The implementation of the prepackaged bankruptcy option, if
necessary, would be for the limited purpose of completing the exchange of the
senior notes. The only parties whose rights will be affected by this option are
the senior note holders. All other creditors of the Company will be paid under
normal terms or will otherwise be unaffected.
If the Company is able to obtain a loan guaranteed under the Guarantee Act
in an acceptable amount with acceptable terms, the Company believes it will be
able to use the proceeds of the guaranteed loan, the proceeds of the $65.0
million New Credit Facility, and cash flow from operations to make the cash
payments required to fund the modernization project, fund the agreement with
senior note holders, and meet the Company's other financial obligations as they
become due. If the Company is unable to obtain a loan guaranteed under the
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Guarantee Act, the Company believes it can use the proceeds of the New Credit
Facility and cash flow from operations to meet its financial obligations as they
become due for the current fiscal year. The Company however, will not have funds
available to pay the senior notes at maturity in June 2001 unless there are
significant improvements in the credit markets or the import situation. If the
Company does not have funds available at that time and cannot otherwise reach a
satisfactory agreement with the note holders, the Company will have to consider
other alternatives, including bankruptcy.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See Note 9 in the Notes to the Consolidated Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
None
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibit 27 - Financial Data Schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHWESTERN STEEL AND WIRE COMPANY
By /s/ T. M. Vercillo
----------------------------------
Thomas M. Vercillo
Vice President and Chief
Financial Officer
(Principal Financial Officer)
June 14, 2000
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