<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1998
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: 33-67532
SHEFFIELD STEEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-2191557
(State or other (I.R.S. Employer
jurisdiction of incorporation) identification No.)
220 NORTH JEFFERSON STREET
SAND SPRINGS, OK 74063
(Address of principal executive offices)
(918) 245-1335
(Registrant's telephone number, including area code)
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.
X
Yes ____ No _____
At the date of this filing, there were 3,410,925 shares of the Registrant's
$.01 par value Common Stock outstanding. The aggregate market value of voting
stock held by nonaffiliates is unknown as the Registrant's stock is not traded
on an established public trading market.
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SHEFFIELD STEEL CORPORATION
FORM 10-Q
INDEX
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PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
April 30, 1998 and October 31, 1998 3
Consolidated Condensed Statements of Operations -
Three months and six months ended
October 31, 1997 and 1998 4
Consolidated Condensed Statements of Cash Flows -
Six months ended October 31, 1997 and 1998 5
Notes to Consolidated Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
</TABLE>
2
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SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
October 31,
April 30, 1998
ASSETS 1998 Unaudited
--------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,590 364
Accounts receivable, less allowance for doubtful accounts of $658
and $808 at April 30, 1998 and October 31, 1998, respectively 20,994 21,429
Inventories 33,548 38,322
Other current assets 3,803 3,788
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Total current assets 60,935 63,903
Property, plant and equipment, net 68,730 69,366
Intangible assets, net 8,672 10,564
Other assets 3,238 3,239
Deferred income tax asset, net 2,043 2,108
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Total assets $143,618 149,180
======== =======
- ----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
- ----------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,702 3,250
Accounts payable 19,745 10,766
Accrued interest payable 5,151 5,281
Accrued liabilities 6,375 6,840
-------- -------
Total current liabilities 32,973 26,137
Long-term debt, excluding current portion 112,682 123,899
Other liabilities 12,089 13,052
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Total liabilities 157,744 163,088
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Stockholders' deficit:
Common stock 36 34
Additional paid-in capital 2,536 1,650
Accumulated deficit (15,698) (14,565)
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Total stockholders' deficit (13,126) (12,881)
Less loans to stockholders 1,000 1,027
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(14,126) (13,908)
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Total liabilities and stockholders' deficit $143,618 149,180
======== =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
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SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
-------------------------- ---------------------------
1997 1998 1997 1998
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Sales $46,464 40,592 94,181 83,669
Cost of sales 37,073 31,068 75,382 64,916
------- ------ ------ ------
Gross profit 9,391 9,524 18,799 18,753
Selling, general and administrative expense 3,334 3,836 6,631 7,438
Depreciation and amortization expense 1,749 1,890 3,460 3,754
Postretirement benefit expense other than pensions 685 730 1,373 1,460
Litigation settlement - (2,200) - (2,200)
------- ------ ------ ------
Operating income 3,623 5,268 7,335 8,301
Other expense:
Interest expense, net 2,811 3,657 5,768 7,138
Other - 15 - 30
------- ------ ------ ------
Income from operations before income taxes 812 1,596 1,567 1,133
Income tax expense - - - -
------- ------ ------ ------
Net income $ 812 1,596 1,567 1,133
======= ====== ====== ======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
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SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
October 31,
-----------------------------------
1997 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,567 1,133
Adjustments to reconcile net income to net cash provided
by (used in) operations:
Depreciation and amortization 3,593 3,917
Loss (gain) on retirement of assets 81 (2)
Accrual of postretirement benefits other than pensions,
net of cash paid 876 960
Changes in assets and liabilities, net of effects from
Acquisition of business 4,378 (13,479)
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Net cash provided by (used in) operations 10,495 (7,471)
------- -------
Cash flows from investing activities:
Capital expenditures (1,849) (3,641)
Acquisition of business, net of cash acquired (2,317) (2,635)
------- -------
Net cash used in investing activities (4,166) (6,276)
------- -------
Cash flows from financing activities:
Net (decrease) increase in long-term debt (5,603) 12,530
Other - (1,009)
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Net cash (used in) provided by financing activities (5,603) 11,521
------- -------
Net (decrease) increase in cash 726 (2,226)
Cash and cash equivalents at beginning of period 15 2,590
------- -------
Cash and cash equivalents at end of period $ 741 364
======= =======
Supplemental disclosure of cash flow information
- ------------------------------------------------
Cash paid during the period for interest $ 5,635 6,845
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
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SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1998
(IN THOUSANDS)
(UNAUDITED)
1) BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
The consolidated financial statements of Sheffield Steel Corporation (the
Company) include the accounts of its divisions, Sheffield Steel-Sand Springs
(Sand Springs), Sheffield Steel-Kansas City (Kansas City), and Sheffield Steel-
Joliet (Joliet) and its wholly owned subsidiaries, Sheffield Steel Corporation-
Oklahoma City (Oklahoma City), Waddell's Rebar Fabricators, Inc. (Waddell) since
October 28, 1997, Wellington Industries, Inc. (Wellington) since October 6, 1998
and Sand Springs Railway Company (the Railway). HMK Enterprises, Inc. (HMK)
owns approximately 95% of the currently issued and outstanding common stock.
All material intercompany transactions and balances have been eliminated in
consolidation. The Company's primary business is the production of concrete
reinforcing bar, fence posts, and a range of hot rolled bar products including
rounds, flats, and squares. The Company's products are sold throughout the
continental United States.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the financial
statements contained in the Company's Form 10-K, for the year ended April 30,
1998. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the quarter and six months ended October 31,
1998 are not necessarily indicative of the results that may be expected for the
year ending April 30, 1999.
2) INVENTORIES
The components of inventories are as follows:
<TABLE>
October 31,
April 30, 1998
1998 (Unaudited)
---- ---------
<S> <C> <C>
Raw materials and storeroom supplies $10,673 12,445
Work in process 11,721 9,729
Finished goods 11,154 16,148
------- ------
$33,548 38,322
======= ======
</TABLE>
3) LITIGATION SETTLEMENT
The Company is party to a lawsuit with several other steel manufacturers against
certain manufacturers of carbon electrodes related to price fixing within the
electrode industry. The Company uses carbon electrodes in its manufacturing
process. During the second quarter, the Company recognized approximately $2.2
million related to settlements reached to date with certain of the defendants.
6
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SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
4) ACQUISITION
On October 6, 1998, the Company acquired all of the outstanding capital stock
of Wellington Industries, Inc. (Wellington). The acquisition price consisted
of $1,500,000 in cash, subject to performance related contingency payments, and
unsecured, subordinated promissory notes in an aggregate principal amount of
$1,464,000. The notes mature annually over three years and bear interest at
the NationsBank prime rate. Wellington fabricates railroad track spikes from
steel supplied by the Company.
7
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SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
The following discussion should be read in conjunction with the
Consolidated Condensed Financial Statements of the Company and the notes
thereto elsewhere in this Form 10-Q.
This Quarterly Report on Form 10-Q may contain forward-looking statements
as that term is defined in the Private Securities Litigation Reform Act of
1995. Such statements are based on management's current expectations and are
subject to a number of factors and uncertainties which could cause results to
differ materially from those described in the forward-looking statements.
There can be no assurance that actual results or business conditions will not
differ materially from those anticipated or suggested in such forward-looking
statements as a result of various factors, including, but not limited to, the
following: the size and timing of significant orders, as well as deferral of
orders, over which the Company has no control; the variation in the Company's
sales cycles from customer to customer; increased competition posed by other
mini-mill producers; changes in pricing policies by the Company and its
competitors; the need to secure or build manufacturing capacity in order to
meet demand for the Company's products; the Company's success in expanding its
sales programs and its ability to gain increased market acceptance for its
existing product lines; the ability to scale up and successfully produce its
products; the potential for significant quarterly variations in the mix of
sales among the Company's products; the gain or loss of significant customers;
shortages in the availability of raw materials from the Company's suppliers;
fluctuations in energy costs; the costs of environmental compliance and the
impact of government regulations; the Company's relationship with its work
force; the restrictive covenants and tests contained in the Company's debt
instruments, which could limit the Company's operating and financial
flexibility; and general economic conditions.
On October 6, 1998, the Company acquired all of the outstanding capital
stock of Wellington Industries, Inc. (Wellington). The acquisition price
consisted of $1,500,000 in cash, subject to performance related contingency
payments, and unsecured, subordinated promissory notes in an aggregate
principal amount of $1,464,000. The notes mature annually over three years and
bear interest at the NationsBank prime rate. Wellington is a railroad track
spike fabricator located in Sand Springs, Oklahoma. Management believes that
the acquisition of Wellington will secure tonnage in a down stream market that
integrates with the Company's existing hot rolled bar product line.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1998 AS COMPARED TO THREE MONTHS ENDED OCTOBER
31, 1997
SALES. Sales for the Company for the three month period ended October 31,
1998 were approximately $40.6 million as compared to sales of approximately
$46.5 million for the three month period ended October 31, 1997, a decrease of
approximately $5.9 million or 12.6%. Shipping levels decreased 16.5% to
101,795 tons from 121,859 tons and the average price per ton shipped increased
to $399 from $381. The decrease in tons shipped was due to the low inventory
position at the Sand Springs Facility that continued from the first quarter
into the beginning of the second quarter. The low inventory position was a
result of the Sand Springs Facility rolling mill outage in the fourth quarter
of fiscal 1998 to install the new shear line. In addition, during the quarter
ended October 31, 1998, the Sand Springs Facility melt shop experienced
shutdowns during peak periods of power usage due to the high
8
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SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
cost of electricity and unscheduled maintenance that impacted production at the
Sand Springs and Joliet rolling mills.
Hot Rolled Bar Products. Shipments for the three month period ended
October 31, 1998 were 38,943 tons compared to 48,774 tons for the three month
period ended October 31, 1997, a decrease of 9,831 tons or 20.2%. The Company
produced less hot rolled bar and more rebar during this quarter due to
immediate customer needs and the lack of rebar inventory during the first
fiscal quarter. Sales of hot rolled bar products from the Joliet Facility
decreased due to weaker market conditions. The average price per ton of hot
rolled bar products for the three month period ended October 31, 1998 increased
to $470 from $459, reflecting an increase in sales prices at the Sand Springs
Facility.
Rebar. Rebar shipments for the three month period ended October 31, 1998
were 47,372 tons compared to 55,571 tons for the three month period ended
October 31, 1997, a decrease of 8,199 or 14.8%. The decrease was primarily due
to the low inventory position at the beginning of the quarter. The average
price per ton of rebar for the three month period ended October 31, 1998
increased to $306 from $296 mainly due to improved rebar product mix.
Fabricated Products. Shipments of fabricated products for the three month
period ended October 31, 1998 were 12,511 tons compared to 13,086 tons for the
three month period ended October 31, 1997, a decrease of 575 tons or 4.4%. The
decrease in shipments was primarily due a slight decrease in shipments from the
Sand Springs fence post shop. The average price per ton for the three month
period ended October 31, 1998 increased to $522 from $454. The increase in
average price per ton was primarily due to the acquisition of Waddell as well
as improved product mix and pricing at the Kansas City Facility.
Billets. Shipments of billets to third parties for the three month period
ended October 31, 1998 were 2,969 tons compared to 4,428 tons for the three
month period ended October 31, 1997, a decrease of 1,459 tons or 32.9%. This
decrease resulted from a curtailment of billet sales to third parties due to
the maintenance problems and power outages in the Sand Springs Facility melt
shop. The average price per ton for the three month period ended October 31,
1998 decreased to $214 from $227 as a result of reduced scrap raw material
prices to which billet pricing is related.
COST OF SALES. The cost of sales for the three months ended October 31,
1998 were approximately $31.1 million as compared to approximately $37.1
million for the three months ended October 31, 1997. On an average per ton
basis, cost of sales increased to $305 per ton for the three months ended
October 31, 1998 from $304 per ton for the three months ended October 31, 1997.
Cost of sales was consistent for the three months ended October 31, 1998 and
1997.
GROSS PROFIT. Gross profit for the Company for the three months ended
October 31, 1998 was approximately $9.5 million as compared to gross profit of
approximately $9.4 million for the three months ended October 31, 1998, an
increase of approximately $0.1 million or 1.4%. Gross profit for the Company
as a percentage of sales for the three months ended October 31, 1998 was 23.5%
as compared to 20.2% for the three months ended October 31, 1997. The increase
is a result of higher average selling prices primarily for hot rolled bar and
fabricated products.
9
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SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense for the Company for the three months ended October 31,
1998 was approximately $3.8 million compared to $3.3 million for the three
months ended October 31, 1997. The increase of approximately $0.5 million is a
result of additional environmental compliance expenditures, higher property
taxes, and the addition of Waddell in October, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
three months ended October 31, 1998 was approximately $1.9 million compared to
$1.7 million for the three months ended October 31, 1997. The increase in
amortization is due to increased intangible assets associated with the
acquisition of Waddell. Depreciation expense increased at the Sand Springs
Facility due to capital expenditures.
POSTRETIREMENT BENEFIT EXPENSE. Postretirement benefit expense remained
approximately the same for the three month period ended October 31, 1998, as
compared to the three months ended October 31, 1997.
OPERATING INCOME. Operating income for the Company for the three months
ended October 31, 1998 was approximately $5.3 million as compared to
approximately $3.6 million for the three months ended October 31, 1997, an
increase of approximately $1.6 million or 45.4%. Operating income for the
Company as a percentage of sales for the three months ended October 31, 1998
was 13.0% as compared to 7.8% for the three months ended October 31, 1997. The
increase was due to the carbon electrode settlement offset by increases in
selling, general and administrative expense and depreciation and amortization
expense.
INTEREST EXPENSE. Interest expense for the Company for the three months
ended October 31, 1998 was approximately $3.7 million as compared to
approximately $2.8 million for the three months ended October 31, 1997. The
increase was due to the increase in outstanding debt during the period.
SIX MONTHS ENDED OCTOBER 31, 1998 AS COMPARED TO SIX MONTHS ENDED OCTOBER 31,
1997
SALES. Sales for the Company for the six month period ended October 31,
1998 were approximately $83.7 million as compared to sales of approximately
$94.2 million for the six month period ended October 31, 1997, a decrease of
approximately $10.5 million or 11.2%. Shipping levels decreased 16.7% to
212,113 tons from 254,656 tons. The decrease in tons shipped is due to the low
inventory position at the beginning of the year resulting from the rolling mill
outage at the Sand Springs Facility in the fourth quarter of fiscal 1998. The
outage was due to installation of the new shear line that improved the
efficiency of the cooling bed and increased the capacity of the shear line.
The average price per ton shipped for the six month period ended October 31,
1998 increased to $394 from $370 for the six month period ended October 31,
1997. The average selling price per ton increased in all product lines except
billets and the mix of products was weighted toward higher priced products in
comparison to the same period in the prior year.
Hot Rolled Bar Products. Shipments for the six month period ended October
31, 1998 were 83,607 tons compared to 93,828 tons for the six month period
ended October 31, 1997, a decrease of 10,221 tons or 10.9%. Shipments from the
Sand Springs Facility for the six month period ended October 31, 1998 decreased
20.0% over the same period in the previous year because the Company needed to
rebuild its rebar inventory to fulfill specific customer's orders during the
second fiscal quarter. Shipments of hot rolled bar products from the Joliet
Facility also decreased reflecting
10
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SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
weaker market conditions. The average price per ton of hot rolled bar products
for the six month period ended October 31, 1998 increased to $470 per ton
compared to $459 per ton for the six month period ended October 31, 1997,
reflecting improved selling prices at the Sand Springs Facility.
Rebar. Rebar shipments for the six month period ended October 31, 1998
were 89,041 tons compared to 112,122 tons for the six month period ended
October 31, 1997, a decrease of 23,081 tons or 20.1%. This decrease was
primarily a result of the low inventory position at the beginning of the fiscal
year. The average price per ton of rebar for the six month period ended
October 31, 1998 increased to $304 from $296. The increase in average price
per ton is attributable to improved rebar product mix.
Fabricated Products. Shipments of fabricated products for the six month
period ended October 31, 1998 were 27,049 tons compared to 27,911 tons for the
six month period ended October 31, 1997, a decrease of 862 tons or 3.1%. The
average price per ton for fabricated products for the six months ended October
31, 1998 increased to $508 from $456. The decrease in shipments is due to less
shipments of fence post from the Sand Springs fence post shop. The increase in
average selling prices is attributable to the acquisition of Waddell as well as
improved product mix and pricing at the Kansas City Facility.
Billets. Shipments of billets to third parties for the six month period
ended October 31, 1998 were 12,416 tons compared to 20,795 tons for the six
month period ended October 31, 1997, a decrease of 8,379 or 40.3%. This
decrease resulted from a curtailment of billet sales to third parties due to
the maintenance problems and power outages in the Sand Springs Facility melt
shop and increased internal billet usage by the Sand Springs rolling mill. The
average price per ton for billets for the six month period ended October 31,
1998 decreased to $221 from $227 per ton for the six month period ended October
31, 1997 as a result of reduced scrap raw material prices.
COST OF SALES. The cost of sales for the six month period ended October
31, 1998 were approximately $64.9 million as compared to approximately $75.4
million for the six month period ended October 31, 1997. On an average per ton
basis, cost of sales increased to $306 per ton for the six months ended October
31, 1998 from $296 per ton for the six months ended October 31, 1997. The
increase in cost of sales per ton is due to higher conversion costs per ton in
the melt shop due to maintenance expenditures and power outages that caused
decreased production. The higher conversion costs were offset by lower scrap
raw material costs.
Gross Profit. Gross profit for the Company for the six month periods
ended October 31, 1998 and 1997 was approximately $18.8 million. Gross profit
for the Company as a percentage of sales for the six month period ended October
31, 1998 was 22.4% as compared to 20.0% for the six month period ended October
31, 1997. The increase is a result of higher average selling prices due
primarily to a more favorable product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense for the Company for the six month period ended October
31, 1998 was approximately $7.4 million as compared to approximately $6.6
million for the six months ended October 31, 1997. The increase is a result
of the acquisition of Waddell, additional environmental expenditures and an
increase in property taxes.
11
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SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the six
months ended October 31, 1998 was approximately $3.8 million compared to $3.5
million for the six months ended October 31, 1997. The increase in amortization
is due to increased intangible assets associated with the acquisition of
Waddell. Depreciation expense increased at the Sand Springs Facility due to
capital expenditures.
POSTRETIREMENT BENEFIT EXPENSE. Postretirement benefit expense remained
approximately the same for the six month period ended October 31, 1998 as
compared to the six month period ended October 31, 1997.
OPERATING INCOME. Operating income for the Company for the six month
period ended October 31, 1998 was approximately $8.3 million as compared to
approximately $7.3 million for six month period ended October 31, 1997, an
increase of approximately $1.0 million or 13.2%. Operating income for the
Company as a percentage of sales for the six months ended October 31, 1998 was
9.9% as compared to 7.8% for the six months ended October 31, 1997. The
increase was primarily due to the carbon electrode settlement offset by
increased selling, general and administrative expense and depreciation and
amortization expense.
INTEREST EXPENSE. Interest expense for the Company for the six months
ended October 31, 1998 was approximately $7.1 million as compared to
approximately $5.8 million for the six months ended October 31, 1997. The
increase was due to the increase in outstanding debt during the period.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1998, the Company's long-term indebtedness, including
current portion, was approximately $127 million. The Company had approximately
$24 million of borrowing availability at October 31, 1998 under its revolving
credit agreements.
Cash flow used in operations was approximately $7.5 million for the six
month period ended October 31, 1998, as compared with cash flow provided by
operations of approximately $10.5 million for the six month period ended
October 31, 1997. The decrease in cash provided by operations was primarily
due to increases in inventories and decreases in accounts payable. Cash used
in investing activities in the six months ended October 31, 1998 was
approximately $6.3 million, consisting of required replacement of plant
equipment, final payments on the shear line project and the purchase of
Wellington. For the six month period ended October 31, 1998, cash provided by
financing activities consisted primarily of draws on the Revolving Credit
Facility and on the equipment financing agreement.
The Company's cash flow from operations and borrowings under the Revolving
Credit Facility and the Railway Credit Facility are expected to be sufficient
to fund budgetted capital improvements and meet near-term working capital
requirements.
On a long term basis, the Company has significant future debt service
obligations. The Company's ability to satisfy these obligations is dependent
on its ability to generate adequate cash flow from operations. The Company
expects that its cash flow from operations and available borrowings under its
revolving credit facilities and equipment financing agreements will be
sufficient to fund the repayment of the long term debt and other investing
activities. The Company's future operating results are dependent on its
overall operating performance and are subject to general business, financial
and other factors affecting the Company and the domestic steel
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SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
industry, as well as prevailing economic conditions, certain of which are
beyond the control of the Company.
CAPITAL EXPENDITURES
Capital expenditures for the six month period ended October 31, 1998 were
approximately $3.6 million. Primarily all of the expenditures consisted of
normal capital projects required or deemed economically feasible, and included
approximately $0.8 million in final payments on the shear line project. The
Company's cash flow from operations and borrowings under its revolving credit
facilities and equipment financing agreements are expected to be sufficient to
meet any near-term working capital requirements the Company may have and to
fund anticipated capital improvements.
YEAR 2000 COMPLIANCE
The Company's State of Readiness. The company recognized the Year 2000
(Y2K) Information Technology issues in 1986 and began to address the problem
with the re-design of the Company's information systems. The Company
instituted a comprehensive Year 2000 strategy in 1997 and created a formal Y2K
Task Force in early 1998 with executive oversight to examine Y2K issues as they
pertain to areas outside internal information systems including the following:
Information Systems Infrastructure. Hardware, networks and operating systems
that support the Company's software.
Desktop Applications. Private user spreadsheets and data collection that may
have Y2K issues.
Facilities. Basic infrastructure items as well as backup power, fire control
systems, security systems, scales and phones.
Manufacturing/Distribution. Process control equipment and software and other
manufacturing operations that have personal computers, board level computers,
or PLC's (Programmable Logic Controllers) interfaced to them.
Product Compliance. Primarily testing equipment. Spectrometers, personal
computers interfaced to testing equipment, meters and gauges used by the
quality assurance department.
Supply Chain. Supply vendors, transportation and utilities, third party
support organizations, banking and finance.
The Task Force was responsible for taking an inventory of all systems
software and equipment to identify potential Y2K issues and for developing
remediation plans for problems identified. To date, the majority of the
financial and commercial systems have been converted to full Y2K compliance.
The payroll system and the accounts receivable systems are currently not Y2K
compliant. However, the payroll system is in Phase III of a four-phase project
to convert it to an outside vendor. The accounts receivable system is
currently in Phase I of a three-phase conversion. Both projects are on
schedule and expected to be completed by May 1, 1999. In addition, the
accounts payable system has a minor Y2K problem but testing has confirmed that
it does not pose a service interruption risk.
Outside the areas of noted above, only minor problems were identified with
electronic equipment and third party software. The Company's rolling mill and
shear line at the Sand Springs Facility were both installed in the last four
years. The rolling mill relies on a third party system that has represented to
the Company that it is Y2K compliant, with the exception of certain upgrades
that the Company will have installed by May of 1999. All remaining third party
software has been examined and has been represented by the vendor as being Y2K
compliant. The Task Force has surveyed all vendors with invoices that total
over $10,000 in the previous calendar year in an attempt to ascertain the
potential risks within the supply chain, specifically in the areas of raw
materials and
13
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
utilities. The Company has received responses from approximately
47% of the vendors surveyed and the Task Force has recommended additional
follow up for vendors failing to respond to the survey. To date, the Company
has not received any unfavorable responses from significant vendors. It is
anticipated that the vendor survey process will be completed by the spring of
1999. Although others in the steel industry will be required to spend
significant amounts to become Y2K compliant, the Company identified problem
areas early and upgraded equipment and systems in the normal course of
business. The historical and estimated future costs related to Y2K issues have
not been and are not expected to be a material cost to the Company.
The Risks of the Company's Year 2000 Issues and Contingency Plans. While
the Company believes it has taken the necessary steps to identify and remediate
its Y2K issues, the failure to do so prior to January 1, 2000 could result in
system/equipment failures causing disruption in routine business activities
including the production of goods. The Company views the greatest risk of Y2K
issues to be related to its third party suppliers and customers. The failure
of third parties upon whom the Company relies to timely remediate their Y2K
issues could result in disruption in the Company's daily operations including
the production of steel products. As a result of the Company's reliance on
third parties to resolve their own Y2K issues, the overall risks associated
with the year 2000 remain difficult to accurately describe and quantify. There
can be no assurance that the Y2K issues will not have a material adverse impact
on the Company and its operations. The Company is in the process of developing
contingency plans in areas where the risk of Y2K failures appears to be
possible.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("Statement") No. 130
"Reporting Comprehensive Income". Statement No. 130 establishes standards for
reporting and display of comprehensive income and its components in the
financial statements. Statement No. 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements
for earlier periods provided for comparative purposes is required. The Company
adopted Statement No. 130 in the quarter ended July 31, 1998. The adoption did
not have an impact on the Company's consolidated results of operations,
financial position or cash flow.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information". Statement No. 131,
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Statement No. 131 is effective for
financial statements for fiscal years beginning after December 15, 1997.
Financial statement disclosures for prior periods are required to be restated.
The Company plans to adopt Statement No. 131 for the year ended April 30, 1999.
The adoption of Statement No. 131 is not expected to have a material impact on
the Company's consolidated results of operations, financial position or cash
flows.
Currently, the Company has no significant derivative instruments and
accordingly, the adoption of Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities issued by the FASB on June 15, 1998, is
expected to have no significant effect on the Company's consolidated results of
operations, financial position, or cash flows.
14
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any significant pending legal proceedings
other than litigation incidental to its business which the Company believes
will not materially affect its financial position, results of operations or
liquidity. Such claims against the Company are ordinarily covered by
insurance. There can be no assurance, however, that insurance will be
available in the future at reasonable rates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLERS
At the Annual Meeting of Stockholders held on September 3, 1998, for which
proxies for the meeting were solicited pursuant to Regulation 14A of the
Securities Exchange Act of 1934, the stockholders of the Company unanimously
elected Steven E. Karol, Robert W. Ackerman, Dale S. Okonow, Howard H.
Stevenson, John D. Lefler and Jane M. Karol to serve as members of the Board of
Directors for a period of one year.
At the Annual Meeting of Stockholders, the stockholders also unanimously
approved the reappointment of KPMG Peat Marwick LLP as independent auditors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
See exhibit index.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter ended October 31,
1998.
15
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
SHEFFIELD STEEL CORPORATION
Date: Dec. 11, 1998 /s/ Robert W. Ackerman
----------------- -----------------------
Robert W. Ackerman, President
and Chief Executive Officer
Date: Dec. 11, 1998 /s/ Stephen R. Johnson
----------------- -----------------------
Stephen R. Johnson, Vice President
and Chief Financial Officer
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
----------- ----------- --------
<C> <S> <C>
10.36 Stock Purchase Agreement between Sheffield Steel Corporation, Wellington 18
Industries, Inc. and the Stockholders of Wellington Industries, Inc. dated
October 6, 1998.
</TABLE>
<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement, dated as of this 6th day of October,
1998 (this "Agreement"), is entered into among Sheffield Steel Corporation, a
---------
Delaware corporation ("Sheffield"), Brenda Marple of Mannford, Oklahoma ("B.
--------- --
Marple"), Dwain Marple of Mannford, Oklahoma ("D. Marple"), Rebecca Stiles of
- ------ ---------
South Merritt Island, Florida ("Stiles"), collectively B. Marple, D. Marple and
------
Stiles being sometimes referred to herein as ("Stockholders" or "Sellers") and
------------ -------
Wellington Industries, Inc., a Texas corporation ("Company").
-------
In consideration of the mutual covenants and agreements herein
contained, the parties agree as follows:
1. Definitions. Capitalized terms used in this Agreement and not otherwise
-----------
defined in this Agreement shall have the following meanings when used in
this Agreement:
1.1. "Adverse Consequences" means all actions, suits, proceedings,
--------------------
hearings, investigations, charges, complaints, claims, demands, injunctions,
judgments, orders, decrees, rulings, damages, dues, penalties, fines, costs,
liabilities, obligations, taxes, liens, losses, expenses, and fees, including
court costs and attorneys' fees and expenses.
1.2. "Affiliate" has the meaning set forth in Rule 12b-2 of the
---------
regulations promulgated under the Securities Exchange Act, and includes, without
limitation, the Subsidiaries as defined below.
1.3. "Affiliated Group" means any affiliated group within the
----------------
meaning of Section 1504 of the Code or any similar group defined under a similar
provision of state, local, or foreign law
1.4. "Code" means the United States Internal Revenue Code of 1986,
----
as amended.
1.5. "Company" means Wellington Industries, Inc., a Texas
-------
corporation.
1.6. "Confidential Information" means any information concerning
------------------------
the businesses and affairs of the parties or their Affiliates that is not
already generally available to the public.
1.7. "Employment Agreements" mean the Employment Agreements entered
---------------------
into on even date herewith between the Company and each of D. Marple and Stiles.
1.8. "Environmental, Health, and Safety Laws" means the United
--------------------------------------
States Federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980, the Resource Conservation and Recovery Act of 1976, and the
Occupational Safety and Health Act of 1970, each as amended, together with all
other laws (including rules, regulations, judgments, orders, and charges
thereunder) of federal, state, local, and foreign governments (and all agencies
thereof) concerning pollution or protection of the environment, public health
and safety, or employee health and safety, and including, without limitation,
laws and regulations relating to emissions, discharges, releases, or threatened
releases of pollutants, contaminants, or chemical, industrial, hazardous, or
toxic materials or wastes (including asbestos and oil or petroleum)
(collectively, "Hazardous Materials") into ambient air, surface water, ground
-------------------
water, or lands or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling of
pollutants, contaminants, or chemical, industrial, hazardous, or toxic materials
or wastes.
1.9. "Income Tax" means any federal, state, local, or foreign
----------
income tax, including any interest, penalty, or addition thereto, whether
disputed or not.
1.10. "Intellectual Property" means (a) all inventions (whether
---------------------
patentable or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents, patent applications, and patent
disclosures, together with all reissuances, continuations, continuations-in-
part, revisions, extensions, and reexaminations thereof, (b) all trademarks,
service marks, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all
<PAGE>
applications, registrations, and renewals in connection therewith, (c) all
copyrightable works, all copyrights, and all applications, registrations, and
renewals in connection therewith, (d) all works and all applications,
registrations, and renewals in connection therewith, (e) all trade secrets and
confidential business information (including ideas, research and development,
know-how, formulas, compositions, manufacturing and production processes and
techniques, technical data, designs, drawings. specifications, customer and
supplier lists, pricing and cost information, and business and marketing plans
and proposals), (f) all computer software (including data and related
documentation), (g) all other proprietary rights, and (h) all copies and
tangible embodiments thereof (in whatever form or medium).
1.11. "Material Adverse Effect" means any adverse change in or
-----------------------
effect on the business, operations, assets, liabilities, prospects or condition,
financial or otherwise, of a party which, when considered either singly or
together with all other adverse changes and effects with respect to which such
phrase is used in this Agreement, is material to such party.
1.12. "Ordinary Course of Business" means the ordinary course of
---------------------------
business consistent with past custom and practice.
1.13. "Person" means an individual, partnership, corporation,
------
association, trust, joint venture, limited liability company, or a governmental
entity (or any department, agency, or political subdivision thereof).
1.14. "Securities Exchange Act" means the United States Federal
-----------------------
Securities Exchange Act of 1934, as amended.
1.15. "Stock" means the 80,000 shares of no par value ($1.00 stated
-----
value) Class "A" common stock of the Company issued to the Stockholders.
1.16. "Tax Return" means any return, declaration, report, claim for
----------
refund, or information return or statement relating to Income Taxes, including
any schedule or attachment thereto, and including any amendment thereof.
1.17. "Taxes" means all taxes, charges, fees, levies, tariffs,
-----
duties or other similar assessments, including (i) income, gross receipts,
gains, surtax, severance, payroll, productions, ad valorem or value added,
surtax premium, excise, real property, personal property, windfall profit,
sales, use, transfer, duty, licensing, withholding, employment, payroll,
estimated and franchise taxes imposed by the United States of America, any
state, local, or foreign government, and (ii) any interest, fines, penalties,
assessments, or additions, to tax resulting from, attributable to or incurred in
connection with any tax or any contest, dispute or refund thereto.
2. Purchase and Sale.
-----------------
2.1. Effective Date. Effective on the date of this Agreement,
--------------
Sheffield has acquired the Stock from the Stockholders and the Stockholders have
sold the Stock to Sheffield.
2.2. Purchase Price.
--------------
(i) The total consideration paid by Sheffield to the Stockholders
for the Stock is $37.50 per share for a total consideration of $3,000,000
("Purchase Price"). $1,500,000 of the Purchase Price has been paid by wire
- ----------------
transfer to accounts designated by the Stockholders and the balance of
$1,500,000 shall be paid in accordance with the terms of those certain
Promissory Notes dated on even date herewith ("Notes") executed by Sheffield in
-----
favor of each of the Stockholders', copies of which are attached hereto, marked
SCHEDULES 2.2(I)(1), (I)(2) AND (I)(3). The Notes provide for three equal
annual payments of principal with interest thereon at the prime rate as
announced by NationsBank of Oklahoma, N.A. from time to time as its prime rate
or base rate.
(ii) The Purchase Price shall be adjusted ("Stockholder's Equity
--------------------
Adjustment") based on the difference between the (a) Stockholder's Equity (as
- ----------
defined below) as of July 31, 1998 (as set forth on SCHEDULE 2.2(II)) and (b)
the Stockholder's Equity as of the date hereof. If the Stockholder's Equity
Adjustment is negative, then the cash portion of the Purchase Price shall be
reduced on a dollar-for-dollar basis by the full amount of the Stockholder's
Equity Adjustment. If the Stockholder's Equity Adjustment is positive, then
within five business days of such determination the Sheffield shall
2
<PAGE>
pay to the Stockholders, pursuant to instructions previously provided to
Sheffield by the Stockholders, an amount equal to such positive amount.
(iii) As promptly as possible, but in any event within sixty days
after the date hereof, Sheffield will deliver to the Stockholders a schedule
setting forth the calculation of the Stockholder's Equity Adjustment
("Adjustment Schedule"), together with the written report of KPMG Peat Marwick
- ---------------------
LLP, its independent certified public accountants, stating that, in their
opinion, such schedule fairly states the Stockholder's Equity Adjustment in
accordance with the provisions of this Agreement. The Stockholders and
Heatherington & Fields, the Stockholders' independent certified public
accountants, shall have the right to observe and comment upon the preparation of
such schedule. Within sixty days after delivery of the Adjustment Schedule, the
Stockholders may notify Sheffield in writing that such schedule does not, in the
opinion of Heatherington & Fields, fairly state the Stockholder's Equity
Adjustment in accordance with the provisions of this Agreement. In the event
that the Stockholders and Sheffield are unable to resolve any dispute so raised
within twenty days after delivery of the objections to the Adjustment Schedule,
they shall appoint a "big six" accounting firm acceptable to all of them, whose
expenses will be shared one-half by the Stockholders and one-half by Sheffield.
The third firm shall determine whether the Adjustment Schedule fairly states, in
accordance with the provisions of this Agreement. The determination of such
Stockholder's Equity Adjustment by such third firm shall be conclusive and
binding on all the parties hereto.
(iv) Within five business days after delivery of the report by such
third firm or the settlement of any dispute, or within thirty days following
delivery of the Adjustment Schedule if no dispute exists, payment shall be made
of the amount necessary to reflect the Stockholder's Equity Adjustment, provided
however, if the adjustment results in amounts being due to the Stockholders,
then such amount shall be paid on the same day as the next installment is due
under the Notes and provided further, if the adjustment results in funds being
due to Sheffield, then such amount shall be deducted from the next maturing
installment(s) on the Notes.
(v) For purposes of calculating the Stockholder's Equity Adjustment,
the term "Stockholder's Equity" shall mean, as of any date, the stockholder's
equity in the Company as of such date, calculated in accordance with GAAP (as
defined below) and on a basis consistent with the preparation of SCHEDULE
2.2(II).
2.3. Contingent Incentive Purchase Price Consideration. The
-------------------------------------------------
Stockholders are collectively entitled to receive an amount equal to 15% of the
Operating Profit (as defined below) of the Company ("Incentive Consideration")
-----------------------
for the period commencing November 1, 1998 and ending on October 31, 1999
("Incentive Period"). The Operating Profit is defined herein as the Company's
- ------------------
profit before Taxes, depreciation and interest expense, applying GAAP thereto,
provided however, an interest charge equal to 10% of any investment in equipment
to increase the production capacity of the Company made during the applicable
Incentive Period shall be deducted from Operating Profit before the 15%
incentive multiplier is applied. Additional Incentive Consideration shall be
computed and paid on the same basis for the year commencing November 1, 1999 and
ending October 31, 2000 and the year commencing November 1, 2000 and ending
October 31, 2001. Computation of the Incentive Consideration shall be made by
Sheffield. The Incentive Consideration shall be distributed in accordance with
the Stockholders' stock interest in the Company immediately preceding the
closing of the transactions described in this Agreement and shall be paid within
90 days following the close of each of the three applicable Incentive Periods.
Sheffield agrees that the transfer pricing used to determine the price of
products sold to Wellington by Sheffield for purposes of calculating the
operating profit of Wellington during the Incentive Periods shall not exceed
61.2% of the total average net price of Wellington's AREA railroad spikes.
2.4. Excluded Liabilities. Regardless of any disclosure to
--------------------
Sheffield herein or in any attachment hereto, Sheffield shall not assume or be
responsible for any liabilities of any of the Companies (as defined herein
below) other than the liabilities of the Company stated on the Most Recent
Financial Statements (as defined below) and liabilities incurred by the Company
in the Ordinary Course of Business from the date of the Most Recent Financial
Statements to the date hereof and included in the Adjustment Schedule (as
defined below) ("Excluded Liabilities") and Sellers jointly and severally agree
--------------------
to satisfy and discharge all Excluded Liabilities, including, without
limitation, all liabilities, obligations or commitments, known or unknown,
direct or indirect, relating to or arising out of (i) the operation of any of
the Companies' businesses prior to the date hereof, (ii) the ownership any of
the Companies' assets prior to the date hereof, or (iii) any Excluded Liability
relating to any event involving any of the Companies for any period of time
occurring at or prior to the date hereof.
3
<PAGE>
3. Representations and Warranties of the Stockholders and the Company. The
-------------------------------------------------------------------
Stockholders and the Company jointly and severally represent and warrant to
Sheffield as follows (provided however, any exceptions thereto are set out
in the attached ("Disclosure Schedule"). The Disclosure Schedule is
-------------------
arranged in paragraphs corresponding to the lettered and numbered
paragraphs contained in this SECTION 3.
3.1. Title.
-----
(i) B. Marple owns 40,000 shares of the Company's Class "A" common
stock which represents 50% of the issued and outstanding shares of the Company.
D. Marple owns 20,000 shares of the Company's Class "A" common stock which
represents 25% of the issued and outstanding shares of the Company. Stiles owns
20,000 shares of the Company's Class "A" common stock which represents 25% of
the issued and outstanding shares of the Company. Collectively the Stockholders
hold of record and own beneficially all of the Stock, which represents 100% of
the issued and outstanding shares in the Company, free and clear of any liens,
encumbrances, or restrictions. The Stockholders are not parties to any option,
warrant, purchase right, or other contract or commitment that could require any
Stockholder to sell, transfer, or otherwise dispose of any of any of the Stock
other than pursuant to this Agreement and the Stockholders are not parties to
any voting trust, proxy, or other agreement or understanding with respect to any
of the Stock.
(ii) The Company previously owned 100% of the issued and outstanding
shares of Southwestern Rail Products, Inc., an Oklahoma corporation (inactive
since 1980), Arrowhead Products, Inc., an Oklahoma corporation (inactive since
1988), Monarch Castings Corporation, a Texas corporation (the assets of which
have all been sold), and Total Packaging Corporation, a Colorado corporation,
(inactive since 1988), (collectively the "Subsidiaries"), free and clear of all
------------
liens, encumbrances or restrictions. The Stockholders now own all of the issued
and outstanding shares of each of the Subsidiaries (collectively the "Subsidiary
----------
Stock"). Immediately preceding the execution and delivery of this Agreement,
- -----
the Stockholders purchased 100% of the Subsidiary Stock from the Company on
terms deemed mutually acceptable to the Company and the Stockholders.
Accordingly, all of the interest of the Company in each of the Subsidiaries has
been transferred to the Stockholders proportionate to the percentage stock
ownership of each Stockholder in the Company immediately preceding the date of
this Agreement. The Subsidiaries have no assets and no liabilities, known or
unknown. Neither the Company, nor the Stockholders have any obligation owed to
any prior stockholder, director, officer, employee, stockholder, vendor,
customer or supplier of any of the Subsidiaries. The Company has no liability
to the purchasers of the assets of Monarch Castings. The Company, together with
all of the Subsidiaries, are sometimes collectively referred to herein as the
"Companies".
- ----------
3.2. Organization, Qualification, and Corporate Power. The Company
------------------------------------------------
is a corporation duly organized, validly existing, and in good standing under
the laws of the State of Texas. The Company is duly authorized to conduct
business and is in good standing under the laws of each jurisdiction where such
qualification is required or appropriate. The Company has the corporate power
and authority to carry on the businesses in which it is engaged and to own and
use the properties owned and used by it. The Directors of the Company are the
Stockholders. The officers of the Company are as follows: Dwain Marple,
President, Brenda Marple, Secretary/Treasurer, and Rebecca Stiles, Vice
President. The officers and directors of each of the Subsidiaries is the same
as the Company. The Subsidiaries were duly organized and were validly existing
but may no longer be in good standing in the state of their incorporation.
3.3. Authorization of Transaction. The Stockholders and the
----------------------------
Company have full power and authority to execute and deliver this Agreement and
to perform their obligations hereunder. This Agreement constitutes the valid
and legally binding obligation of each of the Stockholders and the Company,
enforceable in accordance with its terms and conditions. Neither any of the
Stockholders, nor the Company, need give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or governmental
agency in order to consummate the transactions contemplated by this Agreement
that has not been obtained prior to the date hereof.
3.4. Capitalization. As of the date hereof, the entire authorized
--------------
capital stock of the Company consists of (i) 1,000,000 shares of Class "A" (no
par but $1.00 stated value) common stock, of which 80,000 shares are issued and
outstanding and 20,000 are retained as treasury shares, and (ii) 3,000,000
shares of Class "B" (no par value) Non-Voting Common Stock of which none are
issued or outstanding. The Company is not, and has never been, an "S"
corporation as defined by the Code. All of the Stock has been duly authorized,
is validly issued, fully paid, and nonassessable, and is held of record by the
Stockholders. There are no outstanding or authorized options, warrants,
4
<PAGE>
purchase rights, subscription rights, conversion rights, exchange rights, or
other contracts or commitments that could require any of the Companies to issue,
sell, or otherwise cause to become outstanding any of their authorized and
unissued stock. The Subsidiary Stock is validly issued, fully paid,
nonassessable, and is held of record solely by the Stockholders.
3.5. Noncontravention. Neither the execution and the delivery of
----------------
this Agreement, nor the consummation of the transactions contemplated hereby,
will (a) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which the Company or any of the Stockholders is
subject or any provision of the charter or bylaws of the Company, or (b)
conflict with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any agreement, contract, lease, license,
instrument, or other arrangement to which the Company or any of the Stockholders
is a party or by which any of them is bound.
3.6. Title to Assets. The Company has good and marketable title
---------------
to, or a valid leasehold interest in, the properties and assets used by it,
located on its premises, or shown on the Most Recent Financial Statements (as
defined below) or acquired after the date thereof in the Ordinary Course of
Business, free and clear of all liens, claims or obligations to any third party,
except for properties and assets disposed of in the Ordinary Course of Business
after the date of the Most Recent Financial Statements up to the date hereof.
3.7. Brokers' Fees. Neither the Stockholder nor the Company has
-------------
any liability or obligation to pay any fees or commissions to any broker or
agent with respect to the transactions contemplated by this Agreement.
3.8. Financial Statements. The following financial statements
--------------------
respecting the Company are attached to SECTION 3.8 of the Disclosure Statement
(collectively the "Financial Statements"):
--------------------
(i) reviewed (unaudited) Consolidated and Consolidating Balance
Sheet, Statement of Income and Retained Earnings and Statement of Cash Flows of
the Company for the fiscal year ended July 31, 1997 prepared by Heatherington &
Fields, Certified Public Accountants ("Most Recent Reviewed Financial
------------------------------
Statements"); and
(ii) internally prepared consolidated and consolidating financial
statements for the period ended July 31, 1998, ("Most Recent Financial
---------------------
Statements").
- ----------
The Financial Statements (i) were prepared from the books and records of the
Company, which books and records are complete and correct in all respects and
accurately reflect all transactions of the Company, (ii) have been prepared in
accordance with generally accepted accounting principles, applied on a
consistent basis throughout the periods covered thereby ("GAAP"), and (iii)
present fairly the financial condition of the Company as of such dates and the
results of operations and cash flow of the Company for such periods. The
Financial Statements reflect reserves appropriate and adequate for all known
liabilities and anticipated losses of the Company.
3.9. Events Subsequent to Most Recent Reviewed Financial
---------------------------------------------------
Statements. Since the Most Recent Financial Statements, there has not been any
change in the business, financial condition, operations, results of operations,
or future prospects of the Companies. Since the Most Recent Financial
Statements, the Company has operated only in the Ordinary Course of Business.
3.10. Undisclosed Liabilities. As of the date hereof, the Company
-----------------------
has no outstanding indebtedness and no liability (whether known or unknown,
asserted or unasserted, absolute or contingent, accrued or unaccrued, liquidated
or unliquidated, and whether due or to become due), except for (i) liabilities
set forth on the face of the Most Recent Financial Statements (exclusive of the
Notes attached thereto) and (ii) liabilities which have arisen after the Most
Recent Financial Statements in the Ordinary Course of Business up to the date
hereof which liabilities will be included in the Adjustment Schedule.
3.11. Transactions with Affiliates. No Affiliate of the Company (or
----------------------------
any family member thereof) is an officer, director, employee, consultant,
competitor, customer, distributor, supplier or vendor of, or is a party to any
contractual obligation with, the Company. There is no Intellectual Property,
franchises, know-how, proprietary or confidential knowledge that any such
Affiliate owns, is licensed or otherwise has the right to use which are used or
useful in, or necessary to the conduct of the business of the Company. The
Company owes no compensation or other
5
<PAGE>
obligation to any of the Stockholders or any Affiliate thereof and no loans
exist between any of the Stockholders or their Affiliates and the Company except
the loan owed by Rebecca Stiles to the Company of $10,000.
3.12. Accounts; Funds, etc. SECTION 3.12 to the Disclosure
---------------------
Schedule identifies each bank account or similar account for the deposit of cash
or securities maintained by or on behalf of any of the Companies, indicating the
name and address of the bank or other financial institution, the account name
and number and the individuals with signing authority with respect to each
account.
3.13. Legal Compliance. The Company has complied with all
----------------
applicable laws (including rules, regulations, codes, plans, judgments, orders,
and charges thereunder) of federal, state, local, and foreign governments (and
all agencies thereof), and no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, demand, or notice has been filed or commenced against
the Company alleging any failure to so comply.
3.14. Tax Matters. All Tax Returns required to be filed by or on
-----------
behalf of each of the Companies has been timely filed with the appropriate
governmental agencies in all jurisdictions in which such returns and reports are
required to be filed, all amounts shown as owing thereon have been paid, and all
such filed Tax Returns are accurate and complete in all material respects. All
Taxes which have become due or payable or required to be collected by any of the
Companies (including all required estimated Tax payments and all Taxes required
to be withheld) on or before the date hereof and all interest and penalties
thereon, whether disputed or not, and whether or not shown on any Tax Return
have been paid in full. The Companies have withheld and paid all Taxes required
to have been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder or other third party.
The Companies are not liable for the payment of any Taxes and Sheffield shall
have no liability for any Taxes related to the ownership of the Stock or the
operation of any of the Companies businesses prior to the date hereof in excess
of the reserves therefore set forth on the Adjustment Schedule. The Company has
delivered to Sheffield true and complete copies of the Company's federal and
state income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Company for its three prior fiscal periods.
The Company has not taken or failed to take any action which could create any
tax lien on any of the shares of its capital stock. No Tax liabilities,
disallowances, or assessments have been assessed or proposed which remain unpaid
and no fact or state of facts exists or has existed which would constitute the
grounds for the assessment of any Tax liability other than so reflected and
provided for. No examination of the Tax Returns of the Company are currently in
progress or threatened. The Companies have not given any waiver of extension of
any period of limitation governing the time of assessment or collection of any
Tax for any year which is still open for assessment or remains in effect. There
are no security interests on any of the assets of the Company that arose in
connection with any failure (or alleged failure) to pay any Tax. The Company
has not executed or entered into any closing agreement under Section 7121 of the
Code (or any similar provision of state, local or foreign law) nor have agreed
to make any adjustment to its income or deductions pursuant to Section 481(a) of
the Code (or similar provision of state, local or foreign law), in either case
that could affect its tax liability after the date hereof in any respect. The
Company has no liability for the Taxes of any person under Treasury Reg. (S)
1.1502-6 (or any similar provision of state, local, or foreign law), as a
transferee or successor, by contract, or otherwise.
3.15. Real Property. SECTION 3.15 to the Disclosure Schedule lists
-------------
and describes all real property currently leased or subleased by the Company
("Leased Real Property"). The Companies are not now, and never have been, the
- ----------------------
lessor, lessee, sublessor or sublessee of any real property lease except for the
lease ("Lease") a copy of which is attached to SECTION 3.15 to the Disclosure
-----
Statement. The Companies do not own, and have never owned any interest in any
real property except as disclosed in SECTION 3.15 to the Disclosure Schedule.
The lease is legal, valid, binding, enforceable, and in full force and effect in
all respects. The Company and the landlord thereof ("Landlord") is not in
--------
breach or default, and no event has occurred which, with notice or lapse of
time, would constitute a breach or default or permit termination, modification,
or acceleration thereunder. The Company has not assigned or encumbered any
interest in the Lease. All facilities leased thereunder have received all
approvals of governmental authorities (including all licenses and permits)
required in connection with the construction and present use and operation
thereof as well as the lawful occupancy of such facilities, and such facilities
have been operated and maintained in accordance therewith and with all
applicable laws, rules, and regulations, and all licenses, permits and
approvals, including certificates of occupancy, shall continue in full force and
effect after giving effect to the transactions contemplated by this Agreement.
None of the facilities leased thereunder are in need of any repair necessary to
conduct the business of the Company as currently conducted. There are no
pending or threatened condemnation proceedings, lawsuits, or administrative
actions relating to the Leased Real Property or other matters affecting the
current use, occupancy, or value thereof. There are no parties other than the
Company in possession of the Leased Real Property. All real
6
<PAGE>
property previously owned or leased by any of the Companies, or their
predecessors, were owned, leased, operated and/or maintained in accordance with
all applicable laws, rules and regulations, including, without limitation, all
Environmental, Health and Safety Laws.
3.16. Intellectual Property. SECTION 3.16 to the Disclosure
---------------------
Schedule lists all Intellectual Property owned, used, possessed, licensed, or
controlled by the Company and each item of Intellectual Property that any third
party owns that the Company uses pursuant to an agreement or permission from a
third party. The Company has not infringed upon or violated any Intellectual
Property rights of third parties, and the Stockholders, directors and officers
of the Company have never received any claim or notice alleging any infringement
or violation of any Intellectual Property rights of any third party. No third
party has infringed upon or violated any Intellectual Property rights of the
Company. Each document listed in SECTION 3.16 to the Disclosure Schedule is
legal, valid, binding, enforceable, and in full force and effect and neither the
Company, nor any other party to each such document, is in breach or default of
any term therein.
3.17. Contracts. SECTION 3.17 to the Disclosure Schedule lists all
---------
written and verbal agreements to which the Company is a party or by which it is
bound except for purchase orders, invoices and bids in the Ordinary Course of
Business which, in each instance, does not exceed $10,000 in value. The
Stockholders have delivered, or made available to Sheffield a complete copy of
each such agreement. With respect to each such agreement: (a) the agreement is
legal, valid, binding, enforceable, and in full force and effect, and (b) the
Company, nor any other party, is in breach or default thereof. The Subsidiaries
are not a party to or bound by any contract or agreement, written or verbal, of
any kind.
3.18. Notes and Accounts Receivable. All notes and accounts
-----------------------------
receivable of the Company are reflected properly on its books and records, are
valid receivables subject to no setoffs or counterclaims, are current and
collectible, and will be collected in accordance with their terms at their
recorded amounts. SECTION 3.18 to the Disclosure Schedule contains a listing of
the accounts receivable of the Company as of the close of business the next
business day preceding the date hereof and sets for the aging of the same.
3.19. Insurance. SECTION 3.19 to the Disclosure Schedule describes
---------
each insurance policy with respect to which the Company is a party, a named
insured, or otherwise the beneficiary of coverage. Copies of each policy have
been provided by the Stockholders to Sheffield. With respect to each such
insurance policy: (a) the policy is legal, binding, enforceable, and in full
force and effect in all respects and is in an amount and scope (customary for
persons engaged in business and having assets similar to those of the Company,
and (b) neither the Company, nor any other party to each policy, is in breach or
default therein. All existing term life insurance policies covering any of the
Stockholders shall be transferred by the Company to the applicable Stockholder
promptly following the date hereof.
3.20. Litigation. Except as set forth in SECTION 3.20 to the
----------
Disclosure Schedule, neither the Company, nor any of the Stockholders (i) is
subject to any outstanding injunction, judgment, or order, or (ii) is a party,
or threatened to be made a party, to any suit, proceedings, hearing, or
investigation before any court or administrative body of any federal, state,
local, or foreign jurisdiction or before any arbitrator.
3.21. Product Warranty. All of the goods and services provided by
----------------
the Company are subject to the standard terms and conditions of sale (including
warranty obligations) set forth in SECTION 3.21 to the Disclosure Schedule and
have conformed in all respects with all applicable contractual commitments and
all express and implied warranties relating thereto. The Company has no
liability whether known or unknown, asserted or unasserted, for replacement or
repair of goods serviced by the Company prior to the date hereof or other
damages in connection therewith. All actual costs incurred by the Sheffield or
the Company after the date hereof (including reasonable overhead) for performing
any warranty services or providing any credits or re-work on goods sold by the
Company prior to the date hereof shall reimbursed by the Stockholders to the
Company or to Sheffield, provided however this shall not apply to costs incurred
for services product warranty services provided by Sheffield that are not
required by applicable commercial code law unless such warranty obligation was
expressly provided by the Company to its customer prior to the date hereof.
3.22. Product Liability. The Company has no liability (whether
-----------------
known or unknown, asserted or unasserted, absolute or contingent and whether due
or to become due) arising out of any injury to individuals or damage to property
as a result of the ownership, possession, or use of any product manufactured,
sold, leased, or delivered by, or out of or related to any service provided by,
the Company up to the date hereof.
7
<PAGE>
3.23. Employees. To the best of the Stockholders' knowledge, no
---------
executive, key employee, or significant group of employees plan to terminate
employment with the Company during the next six months. The Company is not a
party to or bound by any collective bargaining agreement, nor has it experienced
any strike or grievance, claim of unfair labor practices, or other collective
bargaining dispute within the past five years. The Company has never committed
any unfair labor practice. No organizational effort is presently being made or
threatened by any labor union or organization. The Company has no written
employment or compensation agreements with any of its employees and currently
owes no bonuses or compensation to its employees except accrued wages in the
Ordinary Course of Business and accrued and unused vacation for 1998.
3.24. Employee Benefits.
-----------------
(i) SECTION 3.24 to the Disclosure Schedule lists each employee
benefit plan that the Company maintains, contributes to, or has any actual or
contingent liability toward as defined by the U.S. Employee Retirement Income
Security Act of 1974, as amended ("ERISA") and any other plan, agreement or
-----
arrangement providing any employee, dependent or beneficiary with any fringe
benefits or incentive compensation (collectively the "Employee Benefit Plans").
----------------------
Since the acquisition of the Company's interest in each Subsidiary, each such
Subsidiary has not maintained, operated, or participated in any Employee Benefit
Plan of any type. The Company also maintains and administers a Medical
Reimbursement Health and Dental Plan ("Medical Reimbursement Plan") for its
--------------------------
officers which shall continue to be operated by the Company following the date
hereof for so long as any of the Stockholders remain employed by the Company.
(ii) Each such Employee Benefit Plan (and each related trust,
insurance contract, or fund) is (and always has been) in compliance with the
applicable requirements of ERISA, the Code, and other applicable laws. The
Company and the administrators or trustees of each Employee Benefit Plan have
never committed a "prohibited transaction" or "prohibited act" as provided by
ERISA in connection with any such Employee Benefit Plan.
(iii) All required reports and descriptions (including Form 5500
Annual Reports, Summary Annual Reports, and Summary Plan Descriptions, if
applicable) have been filed or distributed as required by law. The requirements
of Part 6 of Subtitle B of Title I of ERISA and of Section 4980B of the Code
have been met in all respects with respect to each such Employee Benefit Plan
which is an Employee Welfare Benefit Plan as defined by ERISA.
(iv) All contributions (including all employer contributions and
employee salary reduction contributions, if applicable) which are due have been
paid to each such Employee Benefit Plan and all contributions for any period
ending on or before the date hereof which are not yet due have been paid to each
such Employee Benefit Plan or are reflected on the Most Recent Financial
Statements.
(v) Each such Employee Benefit Plan which is intended to be a
"qualified plan" under Section 401(a) of the Code and has received, within the
last two years, a favorable determination letter from the Internal Revenue
Service.
(vi) The Stockholders have delivered to Sheffield correct and
complete copies of the plan documents and summary plan descriptions, the most
recent determination letter received from the Internal Revenue Service, the most
recent Form 5500 Annual Report, and all related trust agreements, insurance
contracts, and other funding agreements which implement each such Employee
Benefit Plan.
(vii) No action, suit, proceeding, hearing, or investigation with
respect to the administration or the investment of the assets of any such
Employee Benefit Plan (other than routine claims for benefits) is pending or
threatened.
(viii) The Company has not contributed to or has ever been required to
contribute to or has any actual or contingent liability with respect to any
Employee Benefit Plan subject to Title IV of ERISA.
(ix) The Company does not maintain and never has maintained or
contributed, ever has contributed, or ever has been required to contribute to
any Employee Benefit Plan providing medical, health, or life insurance or other
welfare-type benefits for current or future retired or terminated employees,
their spouses, or their dependents (other than in accordance with Section 4980B
of the Code).
8
<PAGE>
(x) The Exec-U-Care Medical Reimbursement Plan ("MR Plan") is a
-------
fully insured plan and the administration and handling of the MR Plan complies
with all laws, rules and regulations of the federal government, the Internal
Revenue Service and state laws governing such plans.
3.25. Environment, Health, and Safety.
-------------------------------
(i) The Company (and its predecessors in interest and previously
owned subsidiaries), (a) are and have been in compliance with all Environmental,
Health, and Safety Laws in all respects (and no suit, hearing, investigation,
claim, or notice has been commenced alleging any such failure to comply), and
(b) have obtained and are and have been in substantial compliance with all of
the terms of all permits, licenses, and other authorizations which are required
under the Environmental, Health, and Safety Laws for the continued conduct of
business of the Company (and its predecessors in interest and previously owned
subsidiaries) as now conducted and which have been historically required under
the Environmental, Health and Safety Laws for the prior conduct of each of the
Companies' businesses.
(ii) The Company (and its predecessors in interest and previously
owned subsidiaries) (a) have no liability (whether known or unknown, asserted or
unasserted, absolute or contingent and whether due or to become due) with regard
to any violation of any Environmental, Health and Safety Law, (b) have handled
or disposed of all substances and arranged for the disposal of all substances
whether at an on-site or off-site location in compliance with all Environmental,
Health and Safety Laws, (c) have not exposed any employee or other individual to
any substance or condition in violation of any Environmental, Health or Safety
Law, (d) have not owned or operated (now or in the past) any property at which
the presence, disposal or release of any Hazardous Materials in violation of the
Environmental, Health and Safety Laws has occurred, or that could give rise to
any liability, for damage to any site, for any illness of or personal injury to
any employee or other individual, or for any other reason under any
Environmental, Health, and Safety Law.
(iii) The Company has provided Sheffield with all environmental
audits, inspections, assessments, investigations or similar reports in the
Company's possession or of which the Company is aware relating to the real
property or business or to compliance or noncompliance by each of the Companies
with all Environmental, Health and Safety Laws and such information is
summarized on SECTION 3.25 to the Disclosure Schedule.
3.26. Inventory. All of the Company's inventory reflected in the
---------
Financial Statements or thereafter acquired (and not subsequently sold in the
Ordinary Course of Business) consist of items of a quality and quantity usable
or saleable in the Ordinary Course of the Company's Business as first quality
goods at prices at least equal to the amounts reflected in the Financial
Statements, or, with respect to after-acquired inventory, at least equal to the
cost thereof plus markups consistent with past practice. Each item of such
inventory is valued in the Financial Statements at the lower of cost or market
in accordance with GAAP. The current level of inventories are at normal and
adequate levels for the continuation of the Business in the Ordinary Course and
consistent with the Company's past practices. All work-in-progress can be
completed for sale in the Ordinary Course of Business in accordance with the
usual standards and practices of the Company. The Financial Statements reflect
adequate reserves for excess and obsolete inventories consistent with GAAP and
consistent with the Company's past practices.
3.27. Certain Practices. Neither the Company, nor any of the
-----------------
officers or employees of the Company has, directly or indirectly, given or
agreed to give any significant rebate, gift or similar benefit to any supplier,
customer, governmental employee or other person who was, is or may be in a
position to help or hinder the Company (or assist in connection with any actual
or proposed transaction) which (i) could subject the Company or Sheffield to any
damage or penalty in any civil, criminal or governmental litigation or
proceeding, or (ii) if not continued in the future, could have a Material
Adverse Effect on the Company or its business.
3.28. Licenses and Permits. SECTION 3.28 to the Disclosure
--------------------
Statement contains a complete and accurate list and description of all licenses
and permits that are held by the Company or are necessary or appropriate for the
operation of the Company's business or the use of its assets and facilities
("Permits"). No other permits or licenses are required in connection with the
operation of the business. The Company has complied with all conditions and
requirements imposed by the Permits and the Company has not received any notice
of, and has no reason to believe, that any appropriate authority intends to
cancel or terminate any of the Permits or that valid grounds for such
cancellation or termination exist. The Company owns or has the right to use the
Permits in accordance with the terms thereof without any conflict or alleged
conflict or infringement with the rights of others and subject to no Claim, and
each Permit is valid and in full force and effect, and will not be terminated or
adversely affected by the transactions contemplated hereby.
9
<PAGE>
3.29. Tangible Owned Properties. SECTION 3.29 to the Disclosure
-------------------------
Statement contains a true and complete list of all tangible personal property
and leasehold improvements owned by or leased to the Company (the "Tangible
Personal Property"). Except as shown on SECTION 3.29 to the Disclosure
Statement, the Company has good and marketable title free and clear of all
Claims to the Tangible Personal Property listed as owned by the Company. With
respect to Tangible Personal Property leased by the Company as lessee, all
leases, conditional sale contracts, franchises or licenses pursuant to which the
Company may hold or use (or permit others to hold or use) such Tangible Personal
Property are valid and in full force and effect, and there is not under any of
such existing default or event of default or event which with notice or lapse of
time or both would constitute such a default. The Company's possession and use
of such property has not been disturbed and no claim has been asserted against
the Company adverse to its rights in such leasehold interests. All Tangible
Personal Property ia adequate and usable for the purposes for which it is
currently used and has been properly maintained and repaired and each item of
Tangible Personal Property, whether owned or leased, is in good operating
condition and repair and has been property maintained. All of the Company's
machinery and equipment owned, leased, or used by the Company in connection with
the performance of its business is included in SECTION 3.29 to the Disclosure
Statement and all such machinery and equipment is in good working and operating
condition and state of repair as of the date hereof.
3.30. Hart-Scott-Rodino Compliance. The Company does not possess in
----------------------------
excess of $10,000,000 in net assets nor has the Company incurred sales of
products and services in excess of $10,000,000 during the last twelve months;
thus, this transaction does not require any filing under the provisions of the
United States Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
3.31. Interim Changes. Between July 31, 1998 and the date hereof
---------------
(a) the Company has maintained its assets, properties and business in
substantially the same manner as prior to July 31, 1998, (b) no transactions
have occurred involving the Company or its assets or business that are not
within the Ordinary Course of Business, (c) the Company has not incurred any
debt under its secured credit facilities or any other secured debt, (d) the
Company has not incurred any debt other than trade debt in the Ordinary Course
of Business, (d) no transactions have occurred with respect to the capital or
stock of the Company including, without limitation, dividends, redemptions, re-
capitalizations, and (e) the Components of the Company's net working capital (as
defined below), and the amount of each Component, has not changed from July 31,
1998 except as a result of operations in the Ordinary Course of Business. For
purposes of this SECTION 3.30, the ("Components") of the Company's net working
----------
capital are (a) current assets, cash, accounts receivable, inventories, prepaid
expenses and deferred income taxes, and (b) current liabilities, accounts
payable and accrued liabilities.
3.32. ESOP Termination. The Company previously adopted and
----------------
maintained an Employee Stock Ownership Plan ("ESOP Plan") in compliance with all
---------
laws, rules and regulations relating thereto; however, in 1992, the Company
terminated the ESOP Plan, re-purchased all of the Company stock that had been
issued to the ESOP Plan participants, and received a favorable termination
letter for the ESOP Plan from the Internal Revenue Service. The Company has no
obligation or liability relating to the creation, maintenance, operation or
termination of the ESOP Plan to any person, employee, or governmental entity or
authority.
4. Representations and Warranties of Sheffield. Sheffield represents and
-------------------------------------------
warrants to the Stockholders as follows:
4.1. Organization of Sheffield. Sheffield is a corporation duly
-------------------------
organized, validly existing, and in good standing under the laws of the State of
Delaware.
4.2. Authorization of Transaction. Sheffield has full power and
----------------------------
authority (including full corporate power and authority) to execute and deliver
this Agreement and to perform its obligations hereunder. This Agreement
constitutes the valid and legally binding obligation of Sheffield, enforceable
in accordance with its terms and conditions. Sheffield need not give any notice
to, make any filing with, or obtain any authorization, consent, or approval of
any government or governmental agency in order to consummate the transactions
contemplated by this Agreement.
4.3. Noncontravention. Neither the execution and the delivery of
----------------
this Agreement, nor the consummation of the transactions contemplated hereby,
will (a) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which Sheffield is subject or any provision of
the charter or bylaws of Sheffield, or (b) conflict with, result in a
10
<PAGE>
breach of, constitute a default under, result in the acceleration of, create in
any party the right to accelerate, terminate, modify, or cancel, or require any
notice under any agreement, contract, lease, license, instrument, or other
arrangement to which Sheffield is a party or by which it is bound.
4.4. Brokers' Fees. Sheffield has no liability or obligation to
-------------
pay any fees or commissions to any broker or agent with respect to the
transactions contemplated by this Agreement.
5. Covenants. Sheffield, the Company and the Stockholders covenant and agree
---------
with one another as follows:
5.1. Transaction Costs. The Stockholders shall pay all financial,
-----------------
advisory, brokerage, legal, accounting and other fees and expenses incurred by
the Stockholders, the Company or any of their Affiliates in connection with the
transactions contemplated by this Agreement. Sheffield shall bear all
financial, advisory, legal, accounting and other fees and expenses incurred by
Sheffield in connection with the transactions contemplated by this Agreement.
5.2. Sales Taxes. The Stockholders shall be solely liable for any
-----------
sales taxes due to the State of Oklahoma, if any, resulting from the
transactions described in this Agreement.
5.3. Continuing Assistance. If any time after the date hereof any
---------------------
further action is necessary to carry out the purposes of this Agreement, each of
the parties agree to take such further action as the other parties may
reasonably request, all at the sole cost and expense of the requesting party(s)
unless the requesting party(s) is entitled to indemnification therefor under
applicable provisions of this Agreement. The Company and the Stockholder each
acknowledge and agree that after the date hereof, the Company and Sheffield will
be entitled to possession of all documents, books, records, tax records,
agreements, and financial data relating to the Company. Sheffield agrees that it
shall cause the Company to maintain such records for a period of at least 5
years following the date hereof and shall allow the Stockholders access to such
records during such 5 years if the Stockholders need access for legitimate
purposes such as in connection with tax reviews or similar occurrences.
5.4. Confidentiality. From and after the date hereof the Company
---------------
and each of the Stockholders agree not to divulge, communicate or disclose,
except as may be required by law or for the performance of this Agreement, or
use to the detriment of Sheffield or the Company or for the benefit of any other
person or persons, or misuse in any way, any confidential information of
Sheffield, the Company and the Business (whether such confidential information
relates to the operation of the Company's business before or after the date
hereof), including any trade or business secrets with respect to the business
and any technical or business materials that are confidential or proprietary,
including without limitation information (whether in written, oral or machine-
readable form) concerning: general business operations; methods of doing
business; customer and supplier relations; advertising and promotion plans;
financial information including costs, profits and sales; pricing and marketing
strategies; names of suppliers, personnel and customers (including customer
lists); software programs, however embodied; and information obtained by or
given to the Stockholders about or belonging to third parties (collectively, the
"Confidential Information"). The term "Confidential Information" does not
include information that is at the time of disclosure or later becomes generally
known to the public or within the industry or segment of the industry to which
such information relates without violation by the Stockholders of any
obligations hereunder and not through any action by an affiliates, employees,
advisors, or agents of a Stockholder which if committed by Stockholders would
have constituted a violation by the Stockholders of any obligation hereunder.
5.5. Noncompete/Nonsolicitation. For a period of three years from
--------------------------
and after the date hereof, B. Marple will not (i) engage directly or indirectly
in any business that the Company conducts as of the date hereof within the State
of Oklahoma, or (ii) knowingly hire or attempt to hire any employee of the
Company, knowingly assist in such hiring by any person, encourage any such
employee to terminate his or her relationship with the Company, or solicit or
encourage any customer or vendor of the Company to terminate its relationship
with the Company, or, in the case of a customer, to conduct with any person or
entity any business or activity which such customer conducts or could conduct
with the Company. If the final judgment of a court of competent jurisdiction
determines that any term of this SECTION 5.5 is invalid or unenforceable, the
parties agree that the court making the determination of invalidity or
unenforceability shall have the power to reduce the scope, duration, or area of
the term or provision, to delete specific words or phrases, or to replace any
invalid or unenforceable term or provision with a term or provision that is
valid and enforceable and that comes closest to expressing the intention of the
invalid or unenforceable term or provision, and this Agreement shall be
enforceable as so modified. The obligation of B. Marple not to compete as
herein recited shall
11
<PAGE>
automatically terminate if Sheffield defaults on its obligations under the Note
following any applicable cure period and if B. Marple obtains a court ordered
judgment against Sheffield with respect to such default.
5.6. Tax Returns. The following provisions shall govern the
-----------
allocation of responsibility as between Sheffield and the Stockholders for
certain Tax matters following the date hereof.
(i) Tax Periods Ending on or Before July 31, 1998. The Stockholders
---------------------------------------------
shall prepare or cause to be prepared and file or cause to be filed all Tax
Returns for the Company for all periods ending on or prior to July 31, 1998.
The Stockholders shall permit Sheffield to review and comment on each such Tax
Return prior to filing. Each of the Stockholders agree to jointly and severally
be responsible for, and shall pay or cause to be paid, and shall indemnify,
defend and hold harmless Sheffield from and against the entirety of any damages
Sheffield may suffer resulting from, arising out of, relating to, in the nature
of, or caused by any liability of the Company, and the Stockholders shall
reimburse Sheffield for Taxes of the Company within fifteen days after payment
by Sheffield or the Company for any and all Taxes of any of the Company with
respect to any tax year or portion thereof ending on or before the date hereof
(or for any tax year beginning before and ending after the date hereof) to the
extent allocable (determined in a manner consistent with SECTION 5.6(II) to the
portion of such period beginning before and ending on the date hereof, to the
extent such Taxes are not reflected in the reserve for tax liability (rather
than any reserve for deferred Taxes established to reflect timing differences
between book and tax income) shown on the face of the Financial Statements
(rather than in any notes thereto), as such reserve is adjusted for the passage
of time through the date hereof in accordance with the past custom and practice
of the Company in filing its Tax Returns.
(ii) Tax Periods Beginning Before and Ending After July 31, 1998.
-----------------------------------------------------------
Sheffield shall prepare or cause to be prepared and file or cause to be filed
any Tax Returns of the Company for tax periods which begin after July 31, 1998
and end after the date hereof. For purposes of this Section, in the case of any
Taxes that are imposed on a periodic basis and are payable for a taxable period
that includes (but does not end on) the date hereof, the portion of such Tax
which relates to the portion of such taxable period ending on the date hereof
shall (x) in the case of any Taxes other than Taxes based upon or related to
income or receipts, be deemed to be the amount of such Tax for the entire
taxable period multiplied by a fraction the numerator of which is the number of
days in the taxable period ending on the date hereof and the denominator of
which is the number of days in the entire Taxable period, and (y) in the case of
any Tax based upon or related to income or receipts be deemed equal to the
amount which would be payable if the relevant taxable period ended on the date
hereof. Any credits relating to a taxable period that begins before and ends
after the date hereof shall be taken into account as though the relevant taxable
period ended on the date hereof. All determinations necessary to give effect to
the foregoing allocations shall be made in a manner consistent with prior
practices of the Company. The Company has made an application for 1995 tax
credits to the State of Oklahoma respecting the recapture of certain sales taxes
which, if successful, would result in the credit of approximately $3,200. Since
these credits have been historically accrued by the Company, then such credits
shall remain the property of the Company following the date hereof and the
Stockholders shall have no right thereto. If the Company secures similar tax
credits after the date hereof for tax years 1996 and 1997 before the three year
statute of limitations expires with respect thereto, then the Company shall
deliver such credits to the Stockholders promptly following receipt thereof,
less the actual costs incurred by the Company to obtain said credits. Such
payment to the Stockholders, if any, shall be deemed additional purchase price
consideration for the Stock.
(iii) Adjustment For Any Tax Accruals Prior to Closing. Sheffield
------------------------------------------------
shall provide to each of the Stockholders one copy of (i) any refund or
application for any credit applicable to Tax amounts accrued by the Company
prior to the date hereof and attributable to the carryback or carryforward of
any net operating loss of the Company, or (ii) any documentation evidencing a
deficiency in Tax amounts accrued by the Company prior to the date hereof. Any
such refund or credit derived by, or deficiency realized by, Sheffield from a
Tax return filed after the date hereof shall constitute a Net Worth Adjustment
which shall be accounted for as provided in SECTION 2.2 hereof.
(iv) Certain Taxes. All transfer, documentary, sales, use, stamp,
-------------
registration and other such Taxes and fees (including any penalties and
interest) incurred in connection with this Agreement shall be paid by the
Stockholders when due, and the Stockholders will, at their own expense, file all
necessary Tax Returns and other documentation with respect to all such transfer,
documentary, sales, use, stamp, registration and other Taxes and fees, and, if
required by applicable law, Sheffield will, and will cause its affiliates to,
join in the execution of any such Tax Returns and other documentation.
5.7. Employment Agreements. The parties acknowledge that
---------------------
immediately following the closing of the transactions described in this
Agreement, the Company entered into written employment agreements wherein the
12
<PAGE>
Company engaged the services of D. Marple and Stiles for a term of three years
pursuant to the provisions contained in said Employment Agreements which
provisions are incorporated herein by reference.
6. Survival of Provisions. All of the representations, warranties and
----------------------
covenants of the parties to this Agreement shall survive the execution
hereof and shall continue in full force and effect following the completion
of the transactions described in this Agreement.
7. Indemnification. The parties agree to indemnification as follows:
---------------
7.1. Indemnification by Stockholders. Each of the Stockholders
-------------------------------
jointly and severally (each in his or her individual capacity and on behalf of
his or her heirs, successors and permitted assigns, as an indemnifying party, an
"Indemnifying Party") covenant and agree to indemnify, defend, protect, and hold
------------------
harmless Sheffield and its Affiliates, successors and assigns (each in its
capacity as an indemnified party, an "Indemnitee") at all times from and after
----------
the date of this Agreement from and against all Adverse Consequences incurred by
such Indemnitee as a result of:
(i) any breach of any representation or warranty of any of the
Stockholders or the Company in this Agreement;
(ii) any nonfulfillment or noncompliance by the Stockholders or the
Company of any covenant or obligation thereof contained herein and which is
within the direct or indirect control of such Stockholder or the Company;
(iii) any Tax obligations and liabilities, (including, without
limitation, all penalties, interest or fines and charges), due after the date
hereof but (a) resulting from earnings, operations or other events respecting
the Company for all periods up to the date hereof, or (b) incident to any Taxes
imposed on the Company for any Taxable year or period that ends on or before the
date hereof;
(iv) any liabilities or claims asserted by any Person after the date
hereof for personal injuries or property damages (including, without limitation,
any indirect, consequential, or punitive damages) arising out of wrongful acts,
negligence or strict liability for goods sold or services rendered by the
Company prior to the date hereof;
(v) the presence, emanation, migration, disposal, release or
threatened release of any Hazardous Materials on, within, or to or from any of
the properties presently or heretofore owned or leased by any of the Companies,
their Affiliates, or any predecessor thereof or the violation or noncompliance
by any of the Companies, their Affiliates, or any predecessor thereof with any
Environmental, Health and Safety Law, rule or regulation relating to any of the
Companies, their Affiliates or their predecessors;
(vi) any liability, including attorney fees and defense costs, in
defending or prosecuting the pending litigation among the Company and Darrell J.
Thomas in the Collingsworth County, Texas District Court proceeding No. 6313;
(vii) any liability to any person or governmental agency relating to
or arising in any manner out of the ESOP Plan or the MR Plan;
(viii) any liability to any person, entity or governmental agency
relating to or arising in any manner out of the Company's association with any
of the Subsidiaries or relating in any manner to the operations, assets, taxes,
liabilities, or activities of any of the Subsidiaries; and/or,
(ix) the Excluded Liabilities and any liability of the Company
(except the liabilities identified in the Most Recent Financial Statements or
stated in the Adjustment Schedule) relating to its operations, assets,
employees, contracts, agreements, insurance plans, or employee benefit plans
arising in whole or in part from any event or act occurring or omissions
occurring before the date hereof (whether or not known to the Stockholders or
the Company prior to the date hereof).
7.2. Indemnification by Sheffield. Sheffield (in its capacity and
----------------------------
on behalf of its successors and permitted assigns, as an indemnifying party, (an
"Indemnifying Party") covenants and agrees to indemnify, defend, protect and
------------------
hold harmless each of the Stockholders (each in his or her capacity as an
indemnified party, an "Indemnitee") at all times from and after the date of this
----------
Agreement from and against all Adverse Consequences incurred by such Indemnitee
as a result of:
13
<PAGE>
(i) any breach of any representation or warranty of Sheffield in
this Agreement;
(ii) any nonfulfillment or noncompliance by Sheffield of any covenant
or obligation thereof contained herein and which is within the direct or
indirect control of Sheffield;
(iii) any Tax obligations and liabilities, (including, without
limitation, all penalties, interest or fines and charges), due after the date
hereof but (a) resulting from earnings, operations or other events respecting
the Company for all periods after the date hereof, or (b) incident to any Taxes
imposed on the Company for any Taxable year or period that ends after the date
hereof;
(iv) any liabilities or claims asserted by any Person after the date
hereof for personal injuries or property damages (including, without limitation,
any indirect, consequential, or punitive damages) arising out of wrongful acts,
negligence or strict liability for goods sold or services rendered by the
Company after the date hereof;
(v) the presence, emanation, migration, disposal, release or
threatened release of any Hazardous Materials on, within, or to or from any of
the properties presently or hereafter owned or leased by the Company and
occurring after the date hereof, or the violation or noncompliance by the
Company with any Environmental, Health and Safety Law, rule or regulation
relating to the Company after the date hereof; and/or (vi) any liability of the
Company relating to its operations, assets, employees, contracts, agreements,
insurance plans, or employee benefit plans arising in whole or in part from any
event or act occurring or omissions occurring after the date hereof other than
acts, events or omissions that continued after the date hereof but began prior
to the date hereof.
7.3. Third Person Claims.
-------------------
(i) Except with respect to claims with respect to any Taxes which
are covered by SECTION 7.4, promptly after an Indemnitee has received notice of
or has knowledge of any claim by a person not a party to this Agreement ("Third
-----
Person") or the commencement of any action or proceeding by a Third Person, the
- ------
Indemnitee shall give the Indemnifying Party written notice of such claim or the
commencement of such action or proceeding. Such notice shall state the nature
and the basis of such claim and a reasonable estimate of the amount thereof.
The Indemnifying Party shall have right to defend and settle, at its own expense
and by its own counsel, any such matter so long as the Indemnifying Party
pursues the same in good faith and diligently. Such Third Person claims may
also be claims that are alleged but not proven and such claims (if any
allegation reflects an event or occurrence that pre-dates the date of this
Agreement) shall be included within the indemnification provided herein and, in
such event, the Indemnified Party shall have no obligation to reimburse the
Indemnifying Party for any successful defense of any such claims.
(ii) If the Indemnifying Party undertakes to defend or settle, it
shall promptly notify the Indemnitee of its intention to do so, and the
Indemnitee shall cooperate with the Indemnifying Party and its counsel in the
defense thereof and in any settlement thereof. Such cooperation shall include,
but shall not be limited to, furnishing the Indemnifying Party with any books,
records or information reasonably requested by the Indemnifying Party that are
in the Indemnitee's possession or control.
(iii) Notwithstanding the foregoing, the Indemnitee shall have the
right to participate in any matter through counsel of its own choosing at its
own expense unless there is a conflict of interest that prevents counsel for the
Indemnifying Party from representing Indemnitee, in which case the Indemnifying
Party will reimburse the Indemnitee for the expenses of its counsel; provided
that the Indemnifying Party's counsel shall always be lead counsel and shall
determine all litigation and settlement steps, strategy and the like after
consultation with the Indemnitee's counsel to the extent reasonable and
practicable. After the Indemnifying Party has notified the Indemnitee of its
intention to undertake to defend or settle any such asserted liability, and for
so long as the Indemnifying Party diligently pursues such defense, the
Indemnifying Party shall not be liable for any additional legal expenses
incurred by the Indemnitee in connection with any defense or settlement of such
asserted liability, except to the extent such participation is requested by the
Indemnifying Party or if there is a conflict of interest that entitles
Indemnitee to reimbursement as provided above, in which events the Indemnitee
shall be reimbursed by the Indemnifying Party for reasonable additional legal
expenses, out-of-pocket expenses and allocable share of employee compensation
incurred in connection with such participation for any employee whose
participation is so requested.
(iv) If the Indemnifying Party desires, at his, her or its own
expense, to accept a final and complete settlement of any such Third Person
claim and the Indemnitee refuses to consent to such settlement, then the
Indemnifying Party's
14
<PAGE>
Liability under this Section with respect to such Third Person claim shall be
limited to the amount so offered in settlement by said Third Person and the
Indemnitee shall reimburse the Indemnifying Party for any additional costs of
defense which it subsequently incurs with respect to such claim.
(v) If the Indemnifying Party does not undertake to defend such
matter to which the Indemnitee is entitled to indemnification hereunder, or
fails diligently to pursue such defense, the Indemnitee may undertake such
defense through counsel of its choice, at the cost and expense of the
Indemnifying Party, and the Indemnitee may settle such matter, and the
Indemnifying Party shall reimburse the Indemnitee for the amount paid in such
settlement and any other liabilities or expenses incurred by the Indemnitee in
connection therewith, provided, however, that under no circumstances shall the
Indemnitee settle any Third Person claim without the written consent of the
Indemnifying Party, which consent shall not be unreasonably withheld.
7.4. Procedure for Tax Claims. Whenever it is necessary to
------------------------
allocate an item of income, gain, deduction, loss or credit to either a Taxable
year or period that ends on or before the date hereof or a Taxable year or
period that begins after the date hereof, rules consistent with those in
Treasury Regulation Section 1-1502-76(b) shall be applied. Sheffield shall have
the sole right to represent the interests of any Indemnitee (as defined in
SECTION 7.1) in any Tax audit or administrative or court proceeding relating to
any Taxable period, including without limitation Taxable periods ending on or
before the date hereof, and to compromise, settle, or contest any Tax claims in
connection therewith in its sole discretion.
7.5. Non-exclusive Remedy. The rights and remedies of Sheffield,
--------------------
the Company, and the Stockholders under this SECTION 7 shall be non-exclusive
and in addition to any other rights or remedies permitted by law or otherwise
provided for herein.
7.6. No Circular Recovery. The Stockholders agree that they will
--------------------
not make any claim for indemnification against either Sheffield or the Company
by reason of the fact that he or she was a director, officer, employee, agent or
other representative of the Company (whether such claim is for Adverse
Consequences of any kind or otherwise and whether such claim is pursuant to any
statute, charter, by-law, contractual obligation or otherwise) with respect to
any claim for indemnification brought by Sheffield, the Company or their
respective subsidiaries, Affiliates, successors or permitted assigns.
7.7. Right of Offset. In addition to, and not in limitation of,
---------------
Sheffield's right to receive payment of any indemnification obligations of the
Stockholders and as set forth in SECTION 7.01, the Stockholders agree that, in
the event the Stockholders are obligated pursuant to the provisions of this
ARTICLE VII to make any indemnification payments to Sheffield, it may deduct the
amount of such indemnification payments from any amounts due from Sheffield to
any or all of the Stockholders under the Notes.
7.8. Minimum Threshold. No Indemnitee shall have the right to
-----------------
recover anything from an Indemnifying Party as otherwise provided in this
SECTION 7 until the aggregate amount of such claims exceeds $5,000; however,
once indemnified claims exceed $5,000 the Indemnitee shall be entitled to
recover all its indemnified claims (including the first $5,000) from the
Indemnifying Party as otherwise permitted in this SECTION 7, provided further
however, this minimum threshold shall not apply to expenses incurred by the
Company or Sheffield in connection with the litigation described in SECTION
7.1(VI) above.
8. Miscellaneous.
-------------
8.1. No Third Party Beneficiaries. This Agreement shall not confer
----------------------------
any rights or remedies upon any Person other than Sheffield, the Company, the
Stockholders and their respective heirs, legal representatives, successors and
permitted assigns.
8.2. Entire Agreement. This Agreement (including the documents
----------------
referred to herein) constitutes the entire agreement among Sheffield, the
Company and the Stockholders and supersede any prior understandings, agreements,
or representations by or among them, written or oral, to the extent they relate
in any way to the subject matter hereof.
8.3. Succession and Assignment. This Agreement shall be binding
-------------------------
upon and inure to the benefit of the parties named herein and their respective
heirs, legal representatives, successors and permitted assigns.
15
<PAGE>
8.4. Headings. The section headings contained in this Agreement
--------
are inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.5. Notices. All notices, requests, demands, claims, and other
-------
communications ("Notices") hereunder will be in writing. Any Notice shall be
-------
deemed duly given if (and then two business days after) it is sent by registered
or certified mail, return receipt requested, postage prepaid, and addressed to
the intended recipient as set forth on the signature page of this Agreement.
Any party may send any Notice, using any other means (including personal
delivery, expedited courier, messenger service, facsimile, ordinary mail, or
electronic mail), but no such Notice shall be deemed to have been duly given
unless and until it is actually is received by the intended recipient. Either
party may change the address to which Notices are to be delivered by giving the
other party notice in the manner herein set forth.
8.6. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the domestic laws of the State of Oklahoma without
giving effect to any choice or conflict of law provision or rule (whether of the
State of Oklahoma or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Oklahoma. To the extent
permitted by applicable law, any claim which results in a judgment in favor of
one party against another arising in connection with this Agreement shall bear
prejudgment interest at the prime rate of Citibank, N.A. from time to time in
effect from the date such judgment is entered until paid.
8.7. Amendments and Waivers. No amendment of any provision of this
----------------------
Agreement shall be valid unless the same shall be in writing and signed by the
parties hereto. No waiver by any party of any default, misrepresentation, or
breach of warranty or covenant hereunder, whether intentional or not, shall be
deemed to extend to any subsequent default, misrepresentation, or breach of
warranty or covenant.
8.8. Severability. Any term or provision of this Agreement that is
------------
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof.
8.9. Construction. The parties have participated jointly in the
------------
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties and no presumption or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local,
or foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation.
8.10. Legal Fees. If any legal proceeding is instituted to enforce
----------
or interpret the provisions of this Agreement, the prevailing party(s) shall be
entitled to recover its, his, her or their costs, including reasonable attorney
fees and expert witness fees, from the other non-prevailing party(s) hereto.
8.11. Publicity. No party shall issue any press release or
---------
otherwise make any public statement with respect to the execution of, or the
transactions contemplated by this Agreement without the prior written consent of
the other parties, provided, however, that any party may make any public
-------- -------
disclosure it believes in good faith is required by law, rule or regulation of
any governmental unit or agency or any stock exchange on which the securities of
such party may be listed (in which case the disclosing party shall advise the
other parties and provide them with a copy of the proposed disclosure and a
reasonable opportunity to comment thereon prior to making the disclosure).
8.12. Counterparts. This Agreement may be executed in one or more
------------
counterparts, and by different parties hereto on separate counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
9. Mediation. Should a dispute arise between the parties hereto regarding the
---------
terms and conditions of this Agreement or the intent thereof, all parties
hereto agree to submit the matter to mediation and further agree that any
agreements reached between the parties resulting from said mediation
efforts, if any, shall be binding on all parties who were subject to such
mediation. The Parties shall act in good faith in jointly agreeing on the
selection of a qualified mediator who shall be selected within 20 days from
the date of the notice from any Party hereto of the intent to pursue
mediation. The charges of the mediation, including fees of the mediator,
shall be borne 1/2 by Sheffield and 1/2 by the Stockholders, provided
however such costs shall not include the Parties' legal counsel or other
advisors. If the Parties
16
<PAGE>
are unable to locate a qualified mediator who can complete the mediation
process within 21 days of his or her engagement, then the Parties may
proceed to obtain such relief and avail themselves of such remedies as may
otherwise be provided by law or by this Agreement. Nothing stated in this
SECTION 9 shall limit or otherwise restrict any Parties' rights or remedies
under this Agreement to the extent such disputes are not resolved by
mediation as herein provided and nothing herein shall limit the right of
either party to obtain injunctive relief for attempted or actual violations
of obligations herein for which injunctive relief appears necessary.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
17
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement
on as of the date first above written.
Sheffield Steel Corporation Wellington Industries, Inc.
By: /s/ Robert W. Ackerman By: /s/ Dwain Marple
------------------------------ ----------------------------
Robert Ackerman, President Dwain Marple, President
Address for notices to Sheffield: Address for notices to Wellington:
P. O. Box 218 P. O. Box 280
Sand Springs, Oklahoma 74063 Sand Springs, Oklahoma 74063
/s/ Dwain Marple /s/ Brenda Marple
- ---------------------------------- -------------------------
Dwain Marple Brenda Marple
Address for notices to Mr. Marple: Address for notices to
Mrs. Marple:
R.R. #3, Box 354 R.R. #3, Box 354
Mannford, Oklahoma 74044 Mannford, Oklahoma 74044
/s/ Rebecca Stiles
- ----------------------------------
Rebecca Stiles
Address for notices to Ms. Stiles:
300 Utopia Circle
South Merritt Island, Florida 32952
18
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTERLY
REPORT AS OF AND FOR THE PERIOD ENDED OCTOBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 364
<SECURITIES> 0
<RECEIVABLES> 22,237
<ALLOWANCES> 808
<INVENTORY> 38,322
<CURRENT-ASSETS> 63,903
<PP&E> 69,366
<DEPRECIATION> 0
<TOTAL-ASSETS> 149,180
<CURRENT-LIABILITIES> 26,137
<BONDS> 123,899
0
0
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<OTHER-SE> (12,915)
<TOTAL-LIABILITY-AND-EQUITY> 149,180
<SALES> 83,669
<TOTAL-REVENUES> 83,669
<CGS> 64,916
<TOTAL-COSTS> 64,916
<OTHER-EXPENSES> 3,754
<LOSS-PROVISION> 150
<INTEREST-EXPENSE> 7,138
<INCOME-PRETAX> 1,133
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