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 October 31, 1999
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
- --------------------------------------------------------------------------------
(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 December 14, 1999:
Common Stock 24,905,424 shares
(includes 420,601 treasury shares)
Page 1 of 16
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHWESTERN STEEL AND WIRE COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
October 31,
-----------------------------------
1999 1998
(Unaudited)
(in thousands of dollars except per
share data and tonnage data)
Net sales $ 87,131 $ 113,516
--------- ---------
Cost and operating expenses:
Cost of goods sold (excluding depreciation) 86,545 100,448
Depreciation 3,264 3,744
Selling and administrative 3,408 2,466
Non-recurring item -- 41,597
--------- ---------
Total cost and operating expenses 93,217 148,255
--------- ---------
Operating loss (6,086) (34,739)
--------- ---------
Other income and expenses:
Interest expense 3,308 3,226
Interest and other income (1,282) (417)
--------- ---------
Total other income and expenses 2,026 2,809
--------- ---------
Loss before income taxes (8,112) (37,548)
Benefit for income taxes -- (12,980)
--------- ---------
Net loss $ (8,112) $ (24,568)
========= =========
Basic net loss per share $ (0.33) $ (1.00)
========= =========
Net tons shipped 284,493 295,059
========= =========
The accompanying notes are an integral part
of the unaudited consolidated financial statements
2
3
NORTHWESTERN STEEL AND WIRE COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars except share data)
October 31, July 31,
1999 1999
----------- ----------
ASSETS
CURRENT ASSETS (Unaudited)
Cash and cash equivalents $ 10,356 $ 39,415
Receivables, less allowance of $420 34,252 29,585
Income tax receivable 4,806 4,806
Other assets 2,964 3,967
--------- ---------
52,378 77,773
--------- ---------
Inventories, at lower of cost or market:
Finished products 24,082 25,169
Semi-finished products 23,894 16,268
Raw materials and supplies 7,299 10,048
--------- ---------
55,275 51,485
--------- ---------
Total current assets 107,653 129,258
--------- ---------
PLANT AND EQUIPMENT, at cost 302,083 295,187
Accumulated depreciation 176,442 173,175
--------- ---------
Net plant and equipment 125,641 122,012
--------- ---------
RESTRICTED CASH -- 2,060
DEFERRED INCOME TAXES 47,585 47,585
DEFERRED FINANCING COST 1,505 869
OTHER ASSETS 20,437 16,625
--------- ---------
Total assets $ 302,821 $ 318,409
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 26,121 $ 17,482
Accrued expenses 29,935 27,064
Current portion of long term debt 609 20,209
--------- ---------
Total current liabilities 56,665 64,755
LONG TERM DEBT 115,626 115,628
OTHER LONG TERM LIABILITIES 91,816 91,200
--------- ---------
Total liabilities 264,107 271,583
--------- ---------
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 (79,934) (71,822)
Treasury shares, at cost; 420,601 shares (5,325) (5,325)
--------- ---------
Total shareholders' equity 38,714 46,826
--------- ---------
Total liabilities and shareholders' equity $ 302,821 $ 318,409
========= =========
The accompanying notes are an integral part
of the unaudited consolidated financial statements
3
4
NORTHWESTERN STEEL AND WIRE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
October 31,
--------------------------
1999 1998
---------- ------------
(Unaudited)
(In thousands of dollars)
Cash Flows From Operations:
Net loss $ (8,112) $(24,568)
Depreciation 3,264 3,744
Non-recurring item -- 41,597
Gain on sale of plant and equipment (995) --
Amortization of deferred financing costs and debt discount 279 331
Deferred income tax benefit -- (13,680)
(Increase) decrease in receivables (4,667) 6,735
Increase in inventories (3,790) (5,660)
Decrease (increase) in other current assets 1,003 (11,344)
(Increase) other long term assets (3,812)
Increase (decrease) in accounts payable and accrued expenses 11,510 (20,159)
Increase in other long term liabilities 616 449
-------- --------
Net cash used in operations (4,704) (22,555)
-------- --------
Cash Flows From Investing Activities:
Capital expenditures (8,093) (3,198)
Proceeds from sale of plant and equipment 2,195 --
Decrease in restricted cash 2,060
-------- --------
Net cash used in investing activities (3,838) (3,198)
-------- --------
Cash Flows From Financing Activities:
Payments of long term debt (19,626) (25)
Payments for deferred financing fees (891)
-------- --------
Net cash used in financing activities (20,517) (25)
-------- --------
Decrease in cash and cash equivalents (29,059) (25,778)
Cash and Cash Equivalents:
Beginning of period 39,415 36,930
-------- --------
End of period $ 10,356 $ 11,152
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Period For:
Interest $ 189 $ 214
Income taxes -- --
The accompanying notes are an integral part
of the unaudited consolidated financial statements
4
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 month periods ended
October 31, 1999 and 1998 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 months ended October 31, 1999 and 1998. 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 months ended October 31, 1999. 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 35% for the three months
ended October 31, 1998. The rate approximates the combined Federal and State
statutory rates for all 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 300 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 October 31, 1999 the Company has remaining reserves of
approximately $2,047 of which $1,709 are for employee termination expenses,
which are expected to be spent during the next one to three fiscal years.
5
6
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 October 31, 1999
was $60,367. Of that amount, the Company held approximately $10,300 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.
Therefore as of October 31, 1999 there was approximately $45,000 available for
the Company to borrow. There were no amounts outstanding under the New Credit
Facility as of October 31, 1999. 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, applications for
guarantees under the Guarantee Act must be submitted to the United States
Department of Commerce on or before January 31, 2000, and guarantees are
anticipated to be awarded approximately six to eight weeks after the application
deadline. In January, 2000 the Company anticipates filing 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 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. The Company has reached an agreement in principle
with the representatives of an unofficial committee of the 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
6
7
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. 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.
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 $600 and achieve and
maintain compliance with the CAA through future capital expenditures that the
Company anticipates to range between $8,000 and $10,000, of which at October 31,
1999, the Company has already spent approximately $7,300 Additionally, the
Company would also undertake several Supplementary Environmental Projects that
could total approximately $1,000 in capital expenditures.
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.
7
8
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
October 31, 1999, 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
business and capital market 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 steel and other
raw material inputs; changes in domestic manufacturing capacity; the level of
non-residential construction; final approval of the restructuring agreement in
principle with 95% of the holders of the senior notes and approval by the
Company's stockholder; whether the Company can obtain a federal guarantee of
debt in an acceptable amount with acceptable terms so that it can construct the
New Mill as part of its strategic plan; overall economic growth in the United
States; changes in legislative or regulatory requirements; and the level of
imported products in the Company's markets. The Company assumes no obligation to
update the information contained herein.
RESULTS OF OPERATIONS
Net sales for the Company were $87.1 million on shipments of 284,493 net tons
for the three months ended October 31, 1999, compared to $113.5 million on
shipments of 295,059 net tons for the three months ended October 31, 1998. The
Company recorded a net loss for the quarter of $8.1 million, or $.33 per share
which included expenses of over $1.0 million, or $.04 per share of expenses
associated with the anticipated new mill construction . In the first quarter of
the prior year, the Company announced the exit from a significant portion of its
wire business, resulting in a net loss for the quarter of $24.6
8
9
million, or $1.00 per share. Excluding the wire business exit costs, the Company
earned $2.5 million, or $.10 per share.
Tons shipped in the quarter decreased approximately 4% compared to the prior
year period. During the first quarter of fiscal 1999, 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 October 31, 1999. The Company is party to a rod trade case
filed with Federal Trade Commission on December 29, 1998 by the domestic steel
rod producers. On May 12, 1999 the Commission ruled favorably for the domestic
industry and sent the case into an injury investigation phase. Since May 12,
1999 the investigations have been completed and recommendations were sent to the
President. His final decision was due on September 27, 1999, but as of December
15, 1999, the President has not responded. If the President responds in favor of
the domestic producers, the Company anticipates a reduction in the level of
imports and modest price increases. However, there can be no assurances that the
President will respond favorably, and a negative response could lead to an
increase in imports and further price deterioration.
Cost of goods sold, excluding depreciation, as a percentage of net sales for
the three-month period ended October 31, 1999 increased to 99.2% compared to the
prior year at 88.5%. While the Company's facilities did operate near capacity
during the quarter, pricing for the Company's rod and structurals products
remained depressed. Pricing for structurals for the quarter ended October 31,
1999 was down approximately 19% from the same period of the prior year. However,
an announced price increase effective late in the first quarter and additional
announced increases effective at varying times in the second fiscal quarter, are
expected to significantly improve the Company's operating margins. The Company
currently estimates that approximately one-half of the 19% decline in structural
selling from the prior year quarter should be recaptured by the end of the
second quarter of fiscal 2000. In future periods the cost of goods sold to net
sales percentage is expected to decrease as announced structural price increases
are realized.
Depreciation expense decreased almost 13% from $3.7 million in the first
quarter of fiscal 1998 to $3.3 million in the current year's first quarter. This
decrease was due primarily to the write-off of certain fabricated wire
producing assets at the end of the first fiscal quarter in October 1998 related
to the closure of a significant portion of the wire products business and
overall reduced capital expenditures in recent years.
For the quarter ended October 31, 1999, selling and administrative expense
was $3.3 million compared to $2.5 million in the prior fiscal year period. The
increase is due primarily to increased professional fees related to the efforts
by the Company to restructure its existing $115 million debt.
Interest expense was $3.3 million for the quarter ended October 31, 1999
compared to $3.2 million in the prior fiscal year period.
Interest and other income for the quarter ended October 31, 1999 was $1.3
million compared to $.4 million for the prior year, primarily due to asset sales
for idled equipment.
9
10
No tax benefit was recorded for the three months ended October 31, 1999. 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 $13.0 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 300 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 October 31, 1999 the Company has remaining reserves of
approximately $2,047 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. As of October 31, 1999, total liquidity, comprising
cash, cash equivalents and funds available under the Company's credit facility,
was $58.4 million compared to $39.4 million at July 31, 1999. The Company used
cash in operations of $4.7 million in the first quarter of fiscal 1999 compared
to operations using cash of $22.6 million in the prior year period. The decrease
is largely attributable to decreased operating losses and improved management of
invested working capital.
Net cash used in investing activities amounted to $3.8 million in the first
quarter of fiscal 2000 compared to $3.2 million in the prior year period. The
Company has begun spending on engineering for its new structural rolling mill
and anticipates completion of an approved project to replace its two existing
electric furnaces with one new high efficiency furnace scheduled to be installed
by the end of the second fiscal quarter of fiscal 2000.
Net cash used in financing activities for the three months ended October 31,
1999 was $20.5 million. This was significantly higher than the prior year
quarter 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
10
11
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 October 31, 1999
was $60,367 and there was approximately $45,000 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 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).
11
12
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,
is implementing the 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 the
modernization construction, but as yet has not been able to obtain the necessary
financing because of poor operating results caused largely by imports and
because of the 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 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
12
13
agreement calls for the exchange of the outstanding notes for $52.5 million 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. The 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. 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
13
14
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 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 .
FINANCIAL AND INFORMATION SYSTEM APPLICATIONS: The Company utilized the services
of outside consultants to identify areas of exposure and solution implementation
for the financial and information system applications. Financial and information
system applications consist of the Company's main-frame computer hardware and
operating system, and the applications software. The Company has recently
upgraded the main-frame operating system, which is presently in use and has been
successfully tested for Y2K compliance. All applications software have been
identified for Y2K compliance, upgraded where necessary, tested and are
currently in use. Based on the information gathered and the testing performed,
the Company does not believe any material exposure to significant business
interruption exists as a result of Y2K issues from the financial and information
system applications.
MANUFACTURING APPLICATIONS: The Company's manufacturing facilities rely on
systems for process control and production monitoring. Failure to identify,
correct and test Y2K sensitive systems at our manufacturing facilities could
result in manufacturing interruptions. The Company has identified and catalogued
hardware and software systems used in the manufacturing process. Process
equipment within our manufacturing environment has been similarly reviewed,
tested and upgraded where necessary. The Company believes these processes are
now year 2000 compliant.
VENDOR AND OTHER THIRD-PARTY RELATIONSHIPS: The Company relies on third party
suppliers for raw materials, utilities, transportation and other key supplies
and services. Interruption of supplier operations due to Y2K issues could
adversely affect the Company's operations. The Company has evaluated the status
of supplier's efforts to prepare for Y2K compliance issues through a survey sent
to its suppliers. Responses were evaluated and second and third requests mailed
for non-responses. Suppliers who did not respond after a third request have been
eliminated as suppliers of product to the Company. Alternate sources have been
selected. These activities are intended to provide a means of managing risk, but
cannot eliminate the potential for disruption due to third-party failure. The
Company is also dependent upon its customers for sales and cash flow. The
Company does not currently have any formal information concerning the Y2K
compliance status of its customers but has received indications that most of the
Company's customers are working on Y2K compliance. Y2K interruptions in the
Company's customers' operations could result in reduced sales, increased
inventory or receivable levels and cash flow reductions. While these events are
possible, the Company believes its customer base is broad enough to minimize the
impact of isolated occurrences. The Company does not believe it will experience
material costs related to its Y2K compliance activities for vendors and other
third party relationships.
14
15
The foregoing assessment of the impact of the Y2K issue on the Company is based
on management's estimates at the present time. The assessment is based upon
numerous actions taken by the Company to-date and assumptions as to future
events. There can be no assurance that these estimates and assumptions will
prove accurate, and the actual results could differ materially. To the extent
that Y2K issues cause significant delays in production or limitation of sales,
the Company's results of operations and financial position would be materially
adversely affected.
15
16
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
(b) Reports on Form 8-K. On September 30, 1999 a Form 8-K was filed by
the Company stating that the Company has announced that as part of its
strategic plan to build a new structural rolling mill in Sterling,
Illinois, it has reached an agreement in principle with the unofficial
committee of the holders of its 9-1/2% Senior Notes to restructure the
$115 million of outstanding debt represented by the notes.
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)
December 16, 1999
16