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STEEL OF WEST VIRGINIA
April 15, 1997
Dear Stockholder:
As you may be aware, your Company recently received an unsolicited proposal from
CPT Holdings, Inc. to enter into discussions regarding a possible sale of Steel
of West Virginia to CPT. After careful consideration, your Board of Directors
concluded, based upon the recommendation of a Special Committee of outside
Directors, with the advice of an investment banker and outside counsel, that
pursuing CPT's proposal was not in the best interests of the Company and its
shareholders. As indicated by Albert Eastburn, former President of the Steel
Division of Lukens, Inc. and Chairman of the Special Committee, on behalf of the
Special Committee and the Board of Directors, the CPT proposal was poorly timed
and grossly inadequate in light of the Company's recent results of operations
and the anticipated impact of SWVA's expansion and modernization program.
WHY DID THE BOARD CONCLUDE THAT CPT'S PROPOSAL WAS POORLY TIMED AND GROSSLY
INADEQUATE? FOR THREE VERY IMPORTANT REASONS:
First, CPT's proposal was made at a time when SWVA's stock price did not reflect
the fact that the Company's historically cyclical markets appear to be
improving, or the fact that our order book is strengthening. Since receiving
the CPT proposal, we announced our financial results for the first quarter of
1997, in which gross profit increased to $4,061,000, as compared to $3,407,000
in the first quarter of 1996. Gross profit margin also increased, to 16.6%
from 12.8% over the same periods, reflecting both an increase in productivity
and lower costs for maintenance spending and labor. The new production lines
are working efficiently and the cost reduction programs that were previously
instituted have begun to have positive effects. Net income for the most
recent quarter was $1,545,000 ($.26 per share) as compared to $14,000 ($.00
per share) for the previous year. The increase in net income reflected both
an increase in gross profit and the absence, in this year's results, of a loss
on disposal of assets.
Second, we are currently entering a significant new market, the manufactured
housing market. We believe that the manufactured housing market is over 300,000
tons per year and that it is growing. The products which SWVA will sell to this
market are the 8 inch, 10 inch, and 12 inch I-Beams, which are the main support
beams for the frames of manufactured houses. SWVA has shipped these beams to a
number of manufactured housing builders. Based upon initial favorable
reactions, as well as our facility's location, we are optimistic concerning our
ability to successfully make in-roads with this new customer base. This new
market, with others, offers the opportunity for significant growth at SWVA.
SWVA believes that it has positioned itself to capture substantial market share
in the manufactured housing market.
Third, the Company's expansion and modernization program is scheduled to
be completed by late this year. The program is expected to expand SWVA's
range of products,
Phone: (304) 696-8200 Phone (800) 624-3492 Fax (304) 529-1479
HUNTINGTON, WEST VIRGINIA 25726-2547
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improve product quality, reduce operating costs and increase the plant's rolling
capacity approximately 60%, to over 420,000 tons per year. We are confident
that the equipment upgrade will further our strategy of producing high quality
products on a cost effective basis for the long term in both our current markets
as well as related product lines, such as the manufactured housing market. Upon
completion of the expansion and modernization program, the Board expects SWVA to
be a premier, low-cost provider in both its current market and related product
lines, including the manufactured housing market. If SWVA's expansion and
modernization program is completed on schedule in late 1997, the Company will
have the capacity to generate substantially higher net income in 1998.
We also note that as of December 31, 1996, CPT's balance sheet showed
approximately $60 million of long-term debt, and a shareholder's deficit of
almost $10 million. Additionally, as of December 31, 1996, J&L Structural
(CPT's steel manufacturing subsidiary, with which CPT wants SWVA to merge) was
not in compliance with its operating cash flow and total debt service covenants
with its senior and subordinated lenders. As reported in AMERICAN METAL MARKET,
one steel industry analyst said that CPT's offer may have been made in a panicky
attempt to prevent SWVA from usurping its market.
In conclusion, we repeat, it is the opinion of the Board, after careful
consideration, that CPT's proposal is poorly timed and grossly inadequate, and
that it would deny SWVA's shareholders the benefit of the substantial value
being created. We do not believe that it is in the best interests of the
Company and the shareholders to pursue this proposal.
SWVA is optimistic and excited about the future. The Company is creating
substantial value, which is beginning to be recognized by the marketplace. We
have received strong and widespread support from our shareholders, which we
appreciate. We will continue to work in your best interest.
On behalf of the Board of Directors
ANY FORWARD LOOKING STATEMENTS CONTAINED HEREIN ARE SUBJECT TO THE SECTION ON
FORWARD LOOKING STATEMENTS CONTAINED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996, INCLUDING THE FOLLOWING RISK FACTORS SET
FORTH THEREIN: THE CYCLICAL AND CAPITAL INTENSIVE NATURE OF THE INDUSTRY;
PRESSURE RESULTING FROM FOREIGN AND DOMESTIC COMPETITION; REDUCTION IN DEMAND
FOR THE COMPANY'S PRODUCTS AND INDUSTRY PRICING; VOLATILITY OF RAW MATERIAL
COSTS, ESPECIALLY STEEL SCRAP, RESULTING IN REDUCED PROFIT MARGINS; EXCESS
INDUSTRY CAPACITY RESULTING IN REDUCED PROFIT MARGINS; COST OF COMPLIANCE WITH
ENVIRONMENTAL REGULATIONS; AND MANAGEMENT'S ESTIMATES OF NICHE MARKET DATA. IN
ADDITION, THE FORWARD LOOKING STATEMENTS CONTAINED HEREIN ARE ALSO SUBJECT TO
THE TIMELY COMPLETION OF THE MODERNIZATION AND EXPANSION PROGRAM; THE COMPANY'S
ABILITY TO EFFECTIVELY INTEGRATE NEW EQUIPMENT; THE COMPANY'S ABILITY TO
PENETRATE NEW MARKETS; AND MAINTENANCE OF MARGINS.
Phone: (304) 696-8200 Phone (800) 624-3492 Fax (304) 529-1479
HUNTINGTON, WEST VIRGINIA 25726-2547
