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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the quarterly period ended January 31, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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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
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(State or other jurisdiction of (I.R.S. Employer incorporation or
organization) Identification No.)
121 Wallace Street, Sterling, Illinois 61081
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 815/625-2500
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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
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Number of shares of common stock outstanding as of March 10, 2000:
Common Stock 24,905,424 shares
(includes 420,601 treasury shares)
Page 1 of 17
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHWESTERN STEEL AND WIRE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
January 31, January 31,
------------------------- ----------------------
2000 1999 2000 1999
(Unaudited)
(in thousands of dollars except per share data and tonnage data)
Net sales $ 90,179 $ 76,969 $ 177,310 $ 190,485
--------- --------- --------- ---------
Cost and operating expenses:
Cost of goods sold (excluding depreciation) 89,702 76,004 176,246 178,966
Depreciation 3,319 3,638 6,583 7,382
Selling and administrative 3,202 2,892 6,611 5,358
Non-recurring item -- -- -- 39,083
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Total cost and operating expenses 96,223 82,534 189,440 230,789
--------- --------- --------- ---------
Operating loss (6,044) (5,565) (12,130) (40,304)
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Other income and expenses:
Interest expense 3,273 3,195 6,581 6,421
Interest and other income (153) (205) (1,435) (622)
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Total other income and expenses 3,120 2,990 5,146 5,799
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Loss before income taxes (9,164) (8,555) (17,276) (46,103)
Benefit for income taxes -- (3,337) -- (16,317)
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Net loss $ (9,164) $ (5,218) $ (17,276) $ (29,786)
========= ========= ========= =========
Basic net loss per share $ (0.37) $ (0.21) $ (0.70) $ (1.21)
========= ========= ========= =========
Net tons shipped 277,730 223,526 562,222 518,585
========= ========= ========= =========
The accompanying notes are an integral part
of the unaudited consolidated financial statements
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NORTHWESTERN STEEL AND WIRE COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars except share data)
January 31, July 31,
2000 1999
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ASSETS
CURRENT ASSETS (Unaudited)
Cash and cash equivalents $ 590 $ 39,415
Receivables, less allowance of $691 respectively 32,047 29,585
Income tax receivable 4,806 4,806
Other assets 3,304 3,967
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40,747 77,773
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Inventories, at lower of cost or market:
Finished products 23,882 25,169
Semi-finished products 21,300 16,268
Raw materials and supplies 11,714 10,048
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56,896 51,485
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Total current assets 97,643 129,258
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PLANT AND EQUIPMENT, at cost 318,019 295,187
Accumulated depreciation 179,760 173,175
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Net plant and equipment 138,259 122,012
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RESTRICTED CASH -- 2,060
DEFERRED INCOME TAXES 47,585 47,585
DEFERRED FINANCING COST 1,337 869
OTHER ASSETS 21,573 16,625
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Total assets $ 306,397 $ 318,409
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 28,006 $ 17,482
Accrued expenses 27,475 27,064
Current portion of long term debt 354 20,209
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Total current liabilities 55,835 64,755
LONG TERM DEBT 128,734 115,628
OTHER LONG TERM LIABILITIES 92,279 91,200
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Total liabilities 276,848 271,583
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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) (89,099) (71,822)
Treasury shares, at cost; 420,601shares (5,325) (5,325)
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Total shareholders' equity 29,549 46,826
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Total liabilities and shareholders' equity $ 306,397 $ 318,409
========= =========
The accompanying notes are an integral part
of the unaudited consolidated financial statements
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NORTHWESTERN STEEL AND WIRE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
January 31,
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2000 1999
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(Unaudited)
(In thousands of dollars)
Cash Flows From Operations:
Net loss $(17,276) $(29,786)
Depreciation 6,583 7,382
Non-recurring item -- 39,083
Gain on sale of plant and equipment (995) --
Amortization of deferred financing costs and debt discount 403 706
Deferred income tax -- (16,317)
(Increase) decrease in receivables (2,462) 24,364
(Increase) decrease in inventories (5,411) 15,499
Decrease (increase) in other current assets 663 (1,704)
Increase in other assets (4,948) (11,849)
Increase (decrease) in accounts payable and accrued expenses 7,735 (39,103)
Increase (decrease) increase in other long term liabilities 1,079 (1,369)
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Net cash used in operations (14,630) (13,094)
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Cash Flows From Investing Activities:
Capital expenditures (24,031) (6,807)
Proceeds from sale of plant and equipment 2,195 --
Decrease in restricted cash 2,060 --
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Net cash used in investing activities (19,776) (6,807)
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Cash Flows From Financing Activities:
Payments of long-term debt (26,789) --
Payments for deferred financing fees (821) (306)
Proceeds from issuance of long term debt and revolver loans 19,991 --
Increase in cash overdraft 3,200 --
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Net cash used in financing activities (4,419) (306)
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Decrease in cash and cash equivalents (38,825) (20,207)
Cash and Cash Equivalents:
Beginning of period 39,415 36,930
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End of period $ 590 $ 16,723
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Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period For:
Interest $ 5,415 $ 5,789
Income taxes -- 3,660
The accompanying notes are an integral part
of the unaudited consolidated financial statements
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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 six month periods
ended January 31, 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 six months ended January 31, 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 six months ended January 31, 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.
The effective income tax rate was approximately 39% and 35% for the three and
six months ended January 31, 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
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$41,597
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The last affected production departments ceased operations in November 1998
and shipments ceased in March 1999.
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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 January 31,
2000, the Company has remaining reserves of approximately $1,800 for unpaid
employee termination expenses, which are expected to be spent during the next
one to three fiscal years. The number of employees terminated through January
31, 2000 was 226.
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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 January 31, 2000, approximately $320 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. 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 January 31, 2000
was $60,137. Of that amount, the Company held approximately $12,294 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 January 31, 2000, the Company had borrowings under the New Credit Facility of
$13,109. Therefore, as of January 31, 2000 there was approximately $29,734
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.
7. 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 apply for a 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 up to 85%
of the principal amount of a loan or loans of up to $250,000. According to the
Guaranty Act regulations published on October 18, 1999, and subsequently amended
on February 1, 2000 applications for guarantees under the Guarantee Act must be
submitted to the United States Department of Commerce on or before February 28,
2000. On February 3, 2000 the Company filed a guarantee application that would
allow it to raise approximately $170,000 in new senior debt. If the Company is
able to obtain a guaranty under the Guarantee Act in an acceptable amount with
acceptable terms, the Company intends
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to use the proceeds of the guaranteed loan to finance its long-term strategic
plan.
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 noteholders, 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, and the
Company's ability to obtain a guarantee under the Guarantee Act sufficient to
finance the modernization project. The Exchange Offer was to expire on January
21, 2000, but was extended on January 21, 2000 and again on February 29, 2000 by
the Company until March 31, 2000. As of March 13, 2000, approximately 80% 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 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 options, 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
noteholders. All other creditors of the Company will be paid under normal terms
or will otherwise be unaffected.
8. 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 anticipates to be about $10,000, of which at January 31, 2000, the
Company has already spent approximately $8,700. Additionally, the Company would
also undertake several Supplementary Environmental Projects that could total
approximately $1,000 in capital expenditures. On February 17, 2000, the USEPA
issued a draft consent
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decree outlining the final terms for resolution of the claim. If the draft
consent decree is agreed to by both parties, the Company would be required to
idle #6 furnace on or before April 30, 2000, or incur penalties of not less than
$20 per day of operations past April 30, 2000. The recently installed #8 furnace
is currently operating at a very low capacity on a temporary permit from the
Illinois Environmental Protection Agency ("IEPA") that restricts the allowed
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 about April 30,
2000, for the Company to idle #6 furnace and still supply enough steel to its
rolling mill facilities. At this time, the Company anticipates that #8 will be
operating at or above 75% capacity and that IEPA will have issued a full permit
on or about April 30, 2000 to allow the Company to idle #6 furnace and not incur
the penalties.
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.
9. 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
January 31, 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
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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, shareholder approval of items to be considered at the Company's annual
meeting of shareholders, 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 $90.2 million on shipments of 277,730 net
tons for the three months ended January 31, 2000, compared to $77.0 million on
shipments of 223,526 net tons for the three months ended January 31, 1999. The
Company recorded a net loss for the quarter of $9.2 million, or $.37 per share
which included expenses of approximately $3.0 million, or $.12 per share of
expenses associated with the anticipated new mill construction. In the second
quarter of the prior year, the Company recorded a net loss of $5.2 million, or
$.21 per share.
Tons shipped in the quarter increased approximately 24% 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. 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. The Commission continues
to investigate the extent of the injury to domestic producers. Pricing of the
Company's bars and structural products, especially wide flange beams, continued
to strengthen during the second fiscal quarter. The Company's selling price for
wide flange beams increased by 18% or $55 per ton for the second quarter of
fiscal 2000 versus the previous three months and improved approximately 10.6%
from the same period of the prior year. Additionally, a price increase was
announced for wide flange beams effective late in the second quarter and another
for bars and non-wide flange structural products effective early in the third
quarter, are expected to improve the Company's operating margins for the balance
of fiscal 2000.
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During the second quarter of fiscal 2000, the Company continued to see
record 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 January 31, 2000. Pricing for the Company's rod products remained
depressed and are 4% less compared to the second 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. His final
decision was due on September 27, 1999, but the President did not respond until
February 11, 2000. He imposed a tariff on any 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 $30 per ton effective with shipments on April 1, 2000 on the
wake of the President's decision. The Company has announced an increase of $25
per ton effective April 1, 2000. However, there can be no assurance that the
increase 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 six-month period ended January 31, 2000, net sales were $177.3
million compared to $190.5 in the prior year period. Tons shipped increased from
518,585 net tons for the six months ended January 31, 1999 to 562,222 net tons
for the comparable six months in the current year. For the six months ended
January 31, 2000, the Company recognized a net loss of $17.3 million, or $0.70.
This compared to a net loss of $29.8 million or $1.21 per share, in the prior
year period, which included a one-time after tax charge of $27.1 million or
$1.10 per share, due to the exit from a significant portion of our wire business
in the first quarter fiscal 1999.
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 January 31, 2000 decreased to 96.1% compared to the
prior year at 98.7%. The Company's facilities operated near capacity for most of
the quarter, resulting in improved operating rates. Additionally, as noted
above, the Company realized improved selling prices in wide flange beams however
these increases were offset by higher incoming material costs for scrap of over
18%. In future periods, the cost of goods sold to net sales percentage is
expected to continue to improve even further as announced rod, bar and
structural price increases are realized, and cost improvements from the
installation of the new furnace are realized. Additionally, scrap costs are
anticipated to remain stable over the near term.
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Cost of goods sold, excluding depreciation and expenses associated with the
anticipated new mill construction, as a percentage of net sales for the six
months ended January 31, 2000 was 97.1% compared to the prior year at 94.0%.
During the first part of the prior fiscal year the impact of imported steel was
not fully realized. For the most recent six month period, selling prices for rod
are down over 8% and structural products have decreased over 10% compared to the
same period of the prior year.
Depreciation expense decreased almost 9% from $3.6 million in the second
quarter of fiscal 1999 to $3.3 million in the current year's second quarter. For
the six-month period ended January 31, 2000, depreciation declined almost 11%
from $7.4 million to $6.6 million. The decrease for the three and six month
periods was due primarily to reduced capital expenditures in recent years.
For the quarter ended January 31, 2000, selling and administrative expense
was $3.2 million compared to $2.9 million in the prior fiscal year period. For
the six-month period ended January 31, 2000, selling and administrative expense
increased 23% from $5.4 million to $6.6 million. The increase for the three and
six month periods are due primarily to increased professional fees related to
the efforts by the Company to restructure its existing $115 million senior
notes.
Interest expense was $3.3 million for the quarter ended January 31, 2000
compared to $3.2 million in the prior fiscal year period. Interest expense for
the most recent six-month period was $6.6 million compared to $6.4 million for
the same period in the prior year.
Interest and other income for the quarter ended January 31, 2000 was $.15
million compared to $.21 million for the prior year. For the six month period
ended January 31, 2000, interest and other income was $1.44 million in
comparison to $0.62 million for the same period in the prior year primarily due
to asset sales in the current year.
No tax benefit was recorded for the six months ended January 31, 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 $16.3 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
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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 January 31, 2000 the Company has
remaining reserves of approximately $2,100, of which approximately $1,800 is for
unpaid employee termination expenses, which are expected to be spent during the
next one to three fiscal years.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL Funds for the Company's operational needs have been provided from
internally generated cash and borrowings against the new revolving credit
facility. As of January 31, 2000, total liquidity, comprising cash, cash
equivalents and funds available under the Company's credit facility, was $30.2
million compared to $39.4 million at July 31, 1999. The Company used cash in
operations of $14.6 million in the first six months of fiscal 2000 compared to
operations using cash of $13.1 million in the prior year period. The increase is
largely attributable to increased operating losses.
Net cash used in investing activities amounted to $19.8 million in the
first six months of fiscal 2000 compared to $6.8 million in the prior year
period. The Company continued spending on engineering for its new structural
rolling mill and has paid $4.6 million to the equipment supplier through the end
of the second quarter. In addition, the Company began installation of an
approved project to replace its two existing electric furnaces with one new high
efficiency furnace. The furnace project also included changes to the Company's
pollution facilities that were installed at the same time.
Net cash used in financing activities for the six months ended January 31,
2000 was $4.4 million. This was significantly higher than the prior year
quarter, primarily due to the payment by the Company of $19.6 million to settle
the outstanding balance under its old revolving credit facility.
The Company also has 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 January 31, 2000 was $60,137 and there
was approximately $29,734 available for the Company to borrow.
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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 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.
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- - 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 construction of the new furnace to
replace the existing furnaces. 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. 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 deterioration in the credit markets which
traditionally provide funding to steel companies. Consequently, the Company has
decided to apply for a guaranty under 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 $250.0 million. If
the Company is able to obtain a guaranty 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 has also been trying to reduce its 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. The Company has reached an agreement in principle with the
representatives of an unofficial committee of senior noteholders that own
approximately 73% of the principal amount of the notes. The agreement 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, and the Company's ability to obtain a guarantee
under the Guarantee Act sufficient to finance the modernization project. On
December 14, 1999, the Company formalized the exchange offer with an Offering
Memorandum that was mailed to the senior note holders for their consideration.
The Exchange Offer was to expire on January 21, 2000, but was extended on
January 21, 2000 and again on February 29, 2000 by the Company until March 31,
2000. As of March 9, 2000, approximately 80% of the outstanding Senior Notes had
been tendered.
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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 with the approval by one-half in
number and two-thirds in value of the senior notes that actually vote on the
plan. In anticipation of the Guarantee Act application, the Company has received
"lock-up" letters from the majority of the representatives of the unofficial
committee of the holders of the senior notes acknowledging their acceptance of
the agreement and recommendation that the exchange be accepted by all senior
noteholders. The implementation of the prepackaged bankruptcy options, 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 noteholders. 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 Guarantee Act guarantee 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 guarantee under the 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.
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. Such computer
systems will be unable to interpret dates beyond the year 1999, which could
cause a system failure or other computer errors, leading to disruptions in
operations. In 1997, the Company identified the following areas critical for its
successful implementation of Y2K compliance: (1) financial and information
system applications, (2) manufacturing applications and (3) vendor and other
third-party relationships. For each of these areas, the Company established the
following procedures to enable it to meet its Y2K compliance obligation: (a)
identify systems potentially susceptible to Y2K compliance issues, (b) develop
and implement corrective actions and (c) test to ensure compliance. Management
believes that the Company has identified and resolved all significant Y2K
issues. The
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Company experienced only minor problems during the rollover period and shortly
after, none of which caused any operating problems. The total cost of these Y2K
compliance activities, costing less than $1.0 million, has not been, and is not
anticipated to be material to the Company's financial position or its results of
operations and have all been expensed as incurred.
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)
March 14, 2000
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