<PAGE>
Filed pursuant to Rule 424(b)(1)
Registration No. 333-43941
PROSPECTUS
$110,000,000
LOGO
OFFER TO EXCHANGE UP TO $110,000,000 OF ITS
11 1/2% SERIES B FIRST MORTGAGE NOTES DUE 2005
FOR ANY AND ALL OF ITS OUTSTANDING
11 1/2% SERIES A FIRST MORTGAGE NOTES DUE 2005
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON MARCH 18,
1998 UNLESS EXTENDED.
Sheffield Steel Corporation (the "Company"), hereby offers, upon the terms
and subject to the conditions set forth in this Prospectus and the accompanying
Letter of Transmittal (which together constitute the "Exchange Offer"), to
exchange $1,000 face amount of 11 1/2% Series B First Mortgage Notes due 2005
(the "New First Mortgage Notes") of the Company for each $1,000 face amount of
the issued and outstanding 11 1/2% Series A First Mortgage Notes due 2005 (the
"Old First Mortgage Notes" and, together with the New First Mortgage Notes, the
"First Mortgage Notes") of the Company from the holders (the "Holders")
thereof. As of the date of this Prospectus, there was $110,000,000 aggregate
face amount of the Old First Mortgage Notes outstanding. The terms of the New
First Mortgage Notes are identical in all material respects to the Old First
Mortgage Notes, except that the New First Mortgage Notes have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), and,
therefore, will not bear legends restricting their transfer and will not
contain certain provisions relating to an increase in the interest rate which
were included in the Old First Mortgage Notes under certain circumstances
relating to the timing of the Exchange Offer.
The New First Mortgage Notes will be senior obligations of the Company,
secured by a first priority lien on substantially all existing and future
property, plant and equipment owned or leased by the Company. The New First
Mortgage Notes will rank pari passu in right of payment with all existing and
future unsubordinated indebtedness of the Company, if any, and senior in right
of payment to all existing and future subordinated indebtedness. The Company
and its subsidiaries are permitted to incur additional secured and unsecured
indebtedness under the indenture governing the First Mortgage Notes (including
indebtedness under the Revolving Credit Facility).
The New First Mortgage Notes are being offered hereunder in order to satisfy
certain obligations of the Company contained in the Registration Rights
Agreement (as defined). Based on interpretations by the staff of the Securities
and Exchange Commission (the "Commission") set forth in no-action letters
issued to third parties, the Company believes that the New First Mortgage Notes
issued pursuant to the Exchange Offer in exchange for Old First Mortgage Notes
may be offered for resale, resold and otherwise transferred by any Holder
thereof (other than any such Holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act), without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that such New First Mortgage Notes are acquired in the ordinary course
of such Holder's business and such Holder has no arrangement with any person to
participate in the distribution of such New First Mortgage Notes.
(cover page continued on next page)
-----------
SEE "RISK FACTORS," BEGINNING ON PAGE 10, FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR OLD FIRST
MORTGAGE NOTES IN
THE EXCHANGE OFFER.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JANUARY 28, 1998
<PAGE>
Each Holder will be required to acknowledge in the Letter of Transmittal
that it is not, and does not intend to engage in, a distribution of the New
First Mortgage Notes. Notwithstanding the foregoing, each broker-dealer that
receives New First Mortgage Notes for its own account pursuant to the Exchange
Offer will also be required to acknowledge in the Letter of Transmittal that
(i) Old First Mortgage Notes tendered by it in the Exchange Offer were
acquired in the ordinary course of its business as a result of market-making
or other trading activities and (ii) it will deliver a prospectus in
connection with any resale of New First Mortgage Notes received in the
Exchange Offer. The Letter of Transmittal will also state that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by such broker-dealer in connection with any resale
of the New First Mortgage Notes received in exchange for Old First Mortgage
Notes where such Old First Mortgage Notes were acquired by such broker-dealer
as a result of market-making or other trading activities (other than Old First
Mortgage Notes acquired directly from the Company). The Company has agreed
that, for a period of 180 days after the Expiration Date (as defined), it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution." Based on the above-mentioned
interpretations by the staff of the Commission, the Company believes that
broker-dealers who acquired the Old First Mortgage Notes directly from the
Company and not as a result of market-making activities or other trading
activities cannot rely on such interpretations by the staff of the Commission
and must, in the absence of an exemption, comply with the registration and
prospectus delivery requirements of the Securities Act in connection with
secondary resales of the New First Mortgage Notes. Such broker-dealers may not
use this Prospectus, as it may be amended or supplemented from time to time,
in connection with any resales of the New First Mortgage Notes.
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the costs incident to the Exchange Offer (which shall not
include the costs of any Holder in connection with resales of the New First
Mortgage Notes). Tenders of Old First Mortgage Notes pursuant to the Exchange
Offer may be withdrawn at any time prior to the Expiration Date. The Exchange
Offer is subject to certain customary conditions. In the event the Company
terminates the Exchange Offer and does not accept for exchange any Old First
Mortgage Notes, the Company will promptly return the Old First Mortgage Notes
to the Holders thereof. The Company will give oral or written notice of any
extension, amendment, non-acceptance or termination of the Exchange Offer to
the Holders of the Old First Mortgage Notes as promptly as practicable, such
notice in the case of any extension to be issued by means of a press release
or other public announcement no later than 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date. The
Company can, in its sole discretion, extend the Exchange Offer indefinitely,
subject to the Company's obligation to pay liquidated damages as described
herein if the Exchange Offer is not consummated by June 3, 1998 and, under
certain circumstances, file a shelf registration statement with respect to the
Old First Mortgage Notes. See "The Exchange Offer."
Prior to the Exchange Offer, there has been no public market for the Old
First Mortgage Notes. The Old First Mortgage Notes are eligible for trading in
the Private Offerings, Resales and Trading through Automation Linkages
("PORTAL") Market. There can be no assurance as to the development or
liquidity of any public market for the New First Mortgage Notes.
<PAGE>
ADDITIONAL INFORMATION
Although the Company is not subject to the reporting and other informational
requirements of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), the Company has filed and will continue to file reports
pursuant to such requirements. In addition, the Company intends to furnish to
its securityholders annual reports containing consolidated financial
statements audited by an independent accounting firm and quarterly reports
containing unaudited consolidated financial information for the first three
quarters of each fiscal year.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This Prospectus 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 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.
i
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus. Except where otherwise indicated in this
Prospectus (i) all references to a fiscal year refer to the fiscal year of the
Company which ends on April 30 (for example, references to "fiscal 1997" mean
the fiscal year ended April 30, 1997) and (ii) all references to the "Company"
refer to Sheffield Steel Corporation and its subsidiaries and all references to
"Sheffield" refer to Sheffield Steel Corporation.
THE COMPANY
The Company is a leading regional mini-mill producer of hot rolled steel bar
products ("hot rolled bar"), concrete reinforcing bar ("rebar"), fabricated
products, including fabricated and epoxy-coated rebar and steel fence posts,
and various types of semi-finished steel ("billets"). The Company and its
predecessors have been in the steelmaking business for over 68 years. The
Company believes that it is among the lowest cost producers of billets in the
United States as a result of its modern melt and cast operations, high labor
productivity levels, low energy costs and competitive steel scrap costs. The
Company's low cost billets serve as the feedstock for its downstream bar mill
operations and finished products. The Company shipped approximately 470,000
tons of steel in the 12-month period ended October 31, 1997, resulting in sales
of $175.1 million and EBITDA (as defined) of $20.7 million.
The Company's primary manufacturing facility is located in Sand Springs,
Oklahoma (the "Sand Springs Facility"), where it conducts a full range of
steelmaking activities, including the melting and casting of billets and the
processing of billets into rebar, steel fence posts and a range of hot rolled
bar products. The Company currently has 600,000 tons of steelmaking capacity.
The Company has recently completed construction, installation and final
commissioning of a new $22 million rolling mill (the "New Rolling Mill") at the
Sand Springs Facility which has increased productivity and efficiency in the
manufacturing of rebar and has enabled the Company to produce certain higher
quality hot rolled bar products that it was previously unable to produce. From
the Sand Springs Facility, the Company also transfers billets to its two
rolling mills in Joliet, Illinois (the "Joliet Facility"), where it produces
high-end specialty hot rolled bar products. The Company also operates a rebar
fabrication plant in Kansas City, Missouri (the "Kansas City Plant") and a
short line railroad (the "Railway Company"). The Sand Springs Facility and the
Joliet Facility received ISO 9002 quality certification in November 1995 and
June 1996, respectively.
Hot Rolled Bar. The Company sells a variety of specialty hot rolled bar
products, including flats, squares, rounds and channels for end use
applications that include farm equipment, auto parts, conveyor assemblies, pole
line hardware, wrench handles and construction machinery. The Company sells its
hot rolled bar products to original equipment manufacturers, cold drawn bar
finishers and, to a lesser extent, steel service centers. In the hot rolled bar
market, the Company differentiates itself from its competitors through the
Joliet Facility's focus on specialty products and by targeting customers with
special requirements as to bar shape, size and chemical composition and, in
many cases, small volume needs. The Company believes that its targeted customer
focus often allows it to act as the sole supplier of particular shapes, sizes
or steel chemistries to many customers. The Company believes that these niche
markets are unattractive to larger volume producers of hot rolled bar products.
The Company's Sand Springs Facility provides it with a competitive geographical
advantage in the south-central United States hot rolled bar market and enables
the Company's customers to benefit from lower freight costs, shorter lead times
and more timely deliveries. As a result of these competitive advantages and its
strong reputation for quality and service, the Company has built a number of
strong relationships with its hot rolled bar product customers. After the
completion of the Shear Line Project (as defined), the Company expects to
increase hot rolled bar product sales from its Sand Springs Facility as part of
its business strategy to improve finished product mix. See "--Business
Strategy--Improve Finished Goods Product Mix." For fiscal 1997, sales of hot
rolled bar products accounted for approximately 44% of the Company's total
sales.
1
<PAGE>
Rebar. The Company sells rebar to leading independent fabricators for end use
applications in the commercial construction and public infrastructure markets.
The Company has worked successfully to build and maintain long-term
relationships with fabricators located in the south-central United States by
providing them with competitive pricing, assured product availability and
reliable, prompt delivery and service. The Company believes that it is the
primary and, in most cases, the sole rebar supplier to its largest rebar
customers. Although rebar demand is driven by trends in commercial and
industrial construction and infrastructure investment, the levels of public and
private sector investment in buildings, plants, facilities and infrastructure
in the south-central United States market has helped the Company maintain
relatively stable rebar sales volume during periods of overall reduced steel
industry demand. For fiscal 1997, sales of rebar accounted for approximately
32% of the Company's total sales.
Fabricated Products. The Company manufactures and sells two fabricated steel
products: fence post and fabricated rebar, including epoxy-coated rebar. Fence
post sales are concentrated in the Oklahoma, Kansas, Missouri, Texas and
Arkansas market area. The Company believes that it is the primary supplier of
fence posts in this market area, with more than half of the market share. The
Company operates a rebar fabrication facility in Kansas City, the largest
facility in the market area, where it shears and bends rebar to meet
engineering or architectural specifications for construction projects. See
"Business--Recent Developments." For fiscal 1997, sales of fabricated products
accounted for approximately 14% of the Company's total sales.
Sales of billets to third parties and Railway Company sales accounted for the
remaining 10% of the Company's total sales for fiscal 1997.
BUSINESS STRATEGY
The Company has formulated an operating strategy to strengthen its market
position and maximize profitability which has four major components: (i)
improve finished goods product mix; (ii) continue to focus on and extend strong
customer relationships; (iii) modernize melt shop operations; and (iv)
streamline and strengthen organizational structure.
Improve Finished Goods Product Mix. With the addition of the New Rolling Mill
at the Sand Springs Facility, the Company has substantially increased its hot
rolled bar production capacity. Accordingly, shipments of finished products
have increased significantly as less profitable third party billet sales have
been intentionally reduced. Billet sales, which accounted for 23.6% of tons
shipped in fiscal 1994, accounted for only 7.3% of tons shipped for the 12-
month period ended October 31, 1997. Shifting away from third party billet
sales by increasing hot rolled bar production has also increased margins and
reduced sales volatility for the Company, since hot rolled bar products are
significantly more profitable than third party billet sales and demand is more
stable. As part of its strategy to further improve product mix, the Company
intends to remove a bottleneck at the Sand Springs Facility by improving the
efficiency of the cooling bed and increasing the capacity of the shear line
(the "Shear Line Project"). The completion of the Shear Line Project, scheduled
for the end of fiscal 1998, is expected to (i) increase hot rolled bar
production capacity by more than 100,000 tons per year; (ii) enable the Company
to more fully utilize its existing 600,000 tons of steelmaking capacity; (iii)
improve the quality of all mill products, especially hot rolled bar; and (iv)
improve product mix by further reducing billet sales to third parties. The
Shear Line Project is expected to have an aggregate capital cost of
approximately $4.5 million and, upon completion and achievement of full
operating capacity, is expected to result in an annual EBITDA (as defined)
increase of approximately $9 million.
Extend Strong Customer Relationships. The Company benefits from having a
number of long-standing customer relationships in each of its product markets.
The Company has built a reputation for providing consistent product quality,
reliable, prompt product delivery and service, product availability and
flexible scheduling to meet customer needs and a high level of follow up
technical assistance and service. The ISO 9002
2
<PAGE>
certification at both the Sand Springs Facility and the Joliet Facility is an
indication of the Company's commitment to producing quality products. The
Company believes that its business strategy to improve its finished product mix
will strengthen its existing customer relationships and will aid it in
developing new customer relationships.
Modernize Melt Shop. The Company believes that it is among the lowest cost
producers of billets in the United States as a result of its modern melt and
cast operations, high labor productivity levels, low energy costs and
competitive steel scrap costs. With the addition of the New Rolling Mill, which
can utilize a larger billet, together with improvements in general operating
practices, yields have improved, costs have been reduced and annual billet
production capacity has increased from 525,000 tons to 600,000 tons per year.
Through incremental capital investments, the Company intends to pursue
additional modernization measures, such as the installation of a ladle arc
furnace in the melt shop, which will further enhance production capability,
increase production capacity, reduce manufacturing costs and improve the
quality of finished products.
Streamline and Strengthen Organizational Structure. The Company has improved
strategic planning, strengthened financial reporting systems and aligned
organizational structure and management incentives with the Company's business
strategies and objectives. In accordance with the collective bargaining
agreement reached in February 1997 that resulted in a 15% workforce reduction
at the Sand Springs Facility, the Company has been able to implement multi-
craft training and use greater flexibility in job assignments. Additional
initiatives to streamline operations include the elimination of a centralized
maintenance structure and close coordination of the melt shop, casting and
rolling mill operations which have resulted in significant reductions in both
billet and finished goods inventory. The Company has also put in place a new
management team to manage the Sand Springs Facility manufacturing operations.
These initiatives have resulted in improving the organizational structure of
the Company, making it flexible and more responsive to customer needs and
positioning it to implement its business strategy of improving finished product
mix.
The Company's principal executive offices are located at 220 North Jefferson,
Sand Springs, Oklahoma 74063 and its telephone number is (918) 245-1335.
THE EXCHANGE OFFER
Registration Rights The Old First Mortgage Notes were sold by the
Agreement.................. Company on December 5, 1997 to BT Alex Brown (the
"Initial Purchaser"), who placed the Old First
Mortgage Notes with institutional investors. In
connection therewith, the Company executed and
delivered for the benefit of the Holders of the
Old First Mortgage Notes a registration rights
agreement (the "Registration Rights Agreement")
providing, among other things, for the Exchange
Offer.
The Exchange Offer.......... The New First Mortgage Notes are being offered in
exchange for a like face amount of Old First
Mortgage Notes. As of the date hereof,
$110,000,000 aggregate face amount of Old First
Mortgage Notes are outstanding. The Company will
issue the New First Mortgage Notes to Holders
promptly following the Expiration Date. See "Risk
Factors Consequences of Failure to Exchange."
Expiration Date............. 5:00 p.m., New York City time, on March 18, 1998,
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest
date and time to which the Exchange Offer is
extended.
3
<PAGE>
Accrued Interest on the New
First Mortgage Notes and
the Old First Mortgage
Notes......................
Each New First Mortgagee Note will bear interest
from its issuance date. Holders of Old First
Mortgage Notes that are accepted for exchange
will receive, in cash, accrued interest thereon
to, but not including, the issuance date of the
New First Mortgage Notes. Such interest will be
paid with the first interest payment on the New
First Mortgage Notes. Interest on the Old First
Mortgage Notes accepted for exchange will cease
to accrue upon issuance of the New First Mortgage
Notes.
Conditions to the Exchange The Exchange Offer is subject to certain
Offer...................... customary conditions, which may be waived by the
Company. See "The Exchange Offer--Conditions."
Procedures for Tendering
Old First Mortgage Notes...
Each Holder of Old First Mortgage Notes wishing
to accept the Exchange Offer must complete, sign
and date the Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein, and
mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with the
Old First Mortgage Notes and any other required
documentation to the exchange agent (the
"Exchange Agent") at the address set forth
herein. By executing the Letter of Transmittal,
each Holder will represent to the Company, among
other things, that (i) the New First Mortgage
Notes acquired pursuant to the Exchange Offer by
the Holder and any beneficial owners of Old First
Mortgage Notes are being obtained in the ordinary
course of business of the person receiving such
New First Mortgage Notes, (ii) neither the Holder
nor such beneficial owner is participating in,
intends to participate in or has an arrangement
or understanding with any person to participate
in the distribution of such New First Mortgage
Notes and (iii) neither the Holder nor such
beneficial owner is an "affiliate," as defined
under Rule 405 of the Securities Act, of the
Company. Each broker-dealer that receives New
First Mortgage Notes for its own account in
exchange for Old First Mortgage Notes, where such
Old First Mortgage Notes were acquired by such
broker or dealer as a result of market-making
activities or other trading activities (other
than Old First Mortgage Notes acquired directly
from the Company), may participate in the
Exchange Offer but may be deemed an "underwriter"
under the Securities Act and, therefore, must
acknowledge in the Letter of Transmittal that it
will deliver a prospectus in connection with any
resale of such New First Mortgage Notes. The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker or dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the
Securities Act. See "The Exchange Offer--
Procedures for Tendering" and "Plan of
Distribution."
4
<PAGE>
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Old First Mortgage
Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other
nominee and who wishes to tender should contact
such registered Holder promptly and instruct such
registered Holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to tender on such owner's own behalf, such owner
must, prior to completing and executing the
Letter of Transmittal and delivering his Old
First Mortgage Notes, either make appropriate
arrangements to register ownership of the Old
First Mortgage Notes in such owner's name or
obtain a properly completed bond power from the
registered Holder. The transfer of registered
ownership may take considerable time. See "The
Exchange Offer--Procedures for Tendering."
Guaranteed Delivery
Procedures................. Holders of Old First Mortgage Notes who wish to
tender their Old First Mortgage Notes and whose
Old First Mortgage Notes are not immediately
available or who cannot deliver their Old First
Mortgage Notes, the Letter of Transmittal or any
other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Old First
Mortgage Notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures."
Withdrawal Rights........... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration
Date. See "The Exchange Offer--Withdrawal of
Tenders."
Acceptance of Old First
Mortgage Notes and
Delivery of New First
Mortgage Notes............. The Company will accept for exchange any and all
Old First Mortgage Notes which are properly
tendered in the Exchange Offer prior to 5:00
p.m., New York City time, on the Expiration Date.
The New First Mortgage Notes issued pursuant to
the Exchange Offer will be delivered promptly
following the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Exchange Agent.............. State Street Bank and Trust Company is serving as
Exchange Agent in connection with the Exchange
Offer. See "The Exchange Offer--Exchange Agent."
5
<PAGE>
SUMMARY DESCRIPTION OF THE NEW FIRST MORTGAGE NOTES
The Exchange Offer applies to $110,000,000 aggregate face amount of Old First
Mortgage Notes. The terms of the New First Mortgage Notes are identical in all
material respects to the Old First Mortgage Notes, except that the New First
Mortgage Notes have been registered under the Securities Act and, therefore,
will not bear legends restricting their transfer and will not contain certain
provisions providing for an increase in the interest rate on the Old First
Mortgage Notes under certain circumstances relating to the timing of the
Exchange Offer, which rights will terminate when the Exchange Offer is
consummated. The New First Mortgage Notes will evidence the same debt as the
Old First Mortgage Notes and will be entitled to the benefits of the Indenture,
under which both the Old First Mortgage Notes were, and the New First Mortgage
Notes will be, issued. See "Description of the First Mortgage Notes."
The New First Mortgage
Notes...................... $110,000,000 aggregate principal amount of 11
1/2% Series B First Mortgage Notes due 2005.
Maturity Date............... December 1, 2005.
Interest Payment Dates...... Interest on the New First Mortgage Notes will
accrue from the Issue Date and will be payable
semi-annually in arrears on each June 1 and
December 1, commencing June 1, 1998.
Ranking..................... The New First Mortgage Notes will be senior
obligations of the Company and will rank pari
passu in right of payment with all existing and
future unsubordinated indebtedness of Sheffield,
including any indebtedness outstanding under the
Revolving Credit Facility, and senior in right of
payment to all existing and future subordinated
indebtedness of Sheffield.
Security.................... All of the obligations of the Company under the
New First Mortgage Notes will be secured by a
first priority lien on substantially all of the
existing and future property, including fee
interests in real property and improvements
constructed thereon, together with equipment,
intellectual property and related intangibles, of
the Company, subject to Permitted Liens (as
defined). See "Description of First Mortgage
Notes--Security."
Optional Redemption......... The New First Mortgage Notes will be redeemable
in whole or in part, at the option of the Company
on or after December 1, 2001, at the redemption
prices set forth herein plus interest to the date
of redemption. In addition, at any time on or
prior to December 1, 2000, the Company may, at
its option, redeem up to 35% of the aggregate
principal amount of the First Mortgage Notes
originally issued with the net cash proceeds of
one or more Public Equity Offerings, at a
redemption price equal to 111.5% of the aggregate
principal amount of the First Mortgage Notes to
be redeemed plus accrued interest to the date of
redemption; provided, however, that after giving
effect to any such redemption at least 65% of the
aggregate principal amount of the First Mortgage
Notes originally issued remains outstanding. See
"Description of First Mortgage Notes--Optional
Redemption."
Change of Control........... Upon a Change of Control, the Company will be
required to make an offer to repurchase the First
Mortgage Notes at a price equal to 101% of the
principal amount thereof, plus accrued interest,
to the
6
<PAGE>
date of repurchase. See "Description of First
Mortgage Notes--Change of Control."
Certain Covenants........... The Indenture governing the First Mortgage Notes
(the "Indenture") contains certain covenants that
limit the ability of the Company and its
restricted subsidiaries to, among other things,
incur additional indebtedness, pay dividends or
make certain other restricted payments,
consummate certain asset sales, enter into
certain transactions with affiliates, incur
liens, impose restrictions on the ability of a
restricted subsidiary to pay dividends or make
certain payments to the Company and its
restricted subsidiaries, merge or consolidate
with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or
substantially all of the assets of the Company.
In addition, under certain circumstances, the
Company will be required to offer to repurchase
the New First Mortgage Notes, in whole or in
part, at a purchase price equal to 100% of the
principal amount thereof plus accrued interest to
the date of repurchase, with the proceeds of
certain Asset Sales. See "Description of First
Mortgage Notes--Certain Covenants."
For additional information regarding the New First Mortgage Notes, see
"Description of First Mortgage Notes."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by Holders prior to tendering their Old First Mortgage Notes in the
Exchange Offer.
GLOSSARY
A glossary of certain technical terms used herein follows:
"mini-mill"................. A mini-mill steel producer uses an electric arc
furnace to melt steel scrap and to cast the
molten steel into long strands of various shapes
in a continuous casting process, in contrast to
an integrated steel producer, which produces
steel from coke and iron ore through the use of
blast furnaces and basic oxygen furnaces.
Although the definition of what constitutes a
mini-mill has evolved coincident with the
competitive position of mini-mills within the
steel industry, two constant factors apply to the
mini-mill industry: the minimization of costs and
a flexible approach to available technology.
"billets"................... Billets are long, square or rectangular strands
of steel that mini-mills cast from molten steel
in a continuous casting process. Billets are an
intermediate product of a type commonly referred
to as semi-finished steel.
"hot rolled bar"............ Hot rolled bars are bars of rolled steel of
varying shapes and size that are used in the
manufacturing processes of a broad cross section
of U.S. industry. Historically, a distinction has
been made in the hot
7
<PAGE>
rolled bar market between merchant bar quality
(MBQ) products, which is comprised of a group of
commodity steel shapes that consist of rounds,
squares, flats and channels that fabricators,
steel service centers and manufacturers cut, bend
and shape into products; and special bar quality
(SBQ) products, with SBQ products calling for
closer size tolerances, special shapes and/or
special chemical compositions.
"reinforcing bar" or
"rebar".................... Reinforcing bar is typically used in the
construction process to reinforce concrete and
other aggregate and cementing materials.
"fabricated rebar".......... Fabricated rebar is reinforcing bar that has been
sheared, bent and/or epoxy-coated to meet
engineering or architectural specifications for
use in all types of construction projects.
"fabricated products"....... Fabricated products are those products, including
fabricated rebar and steel fence posts, which the
Company fabricates from reinforcing bar or hot
rolled bars.
8
<PAGE>
SUMMARY FINANCIAL DATA
The information in the following table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Selected Historical Financial Data" and the Consolidated
Financial Statements of the Company and the notes thereto, included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED APRIL 30, ENDED OCTOBER 31
-------------------------------------- ------------------
1994 1995 1996 1997 1996 1997
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER TON DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Sales................... $165,920 $175,753 $172,317 $170,865 $ 89,925 $ 94,181
Gross profit............ 24,705 31,368 29,196 30,631 15,587 18,799
Operating income........ 4,834 10,129 8,116 8,260 4,188 7,335
Interest expense........ 7,147 8,049 11,733 11,769 5,854 5,768
Net income (loss)....... (5,370) 1,825 (3,091) (3,509) (1,666) 1,567
OTHER DATA:
EBITDA(1)............... $ 13,327 $ 18,582 $ 16,430 $ 17,627 $ 8,617 $ 11,671
Capital expenditures.... 11,667 24,220 4,978 3,695 1,762 1,849
Depreciation and
amortization........... 4,941 5,930 6,567 6,775 3,427 3,460
Non-cash post-retirement
expense charges........ 3,552 2,523 1,747 1,272 1,002 876
Ratio of earnings to
fixed charges(2)....... -- 1.2x -- -- -- 1.3x
Finished products tons
shipped................ 396,363 367,133 383,448 413,243 211,275 233,861
Billet tons shipped..... 122,680 133,017 93,557 60,512 47,120 20,795
-------- -------- -------- -------- -------- --------
Total tons shipped...... 519,043 500,150 477,005 473,755 258,395 254,656
Average price per ton
shipped................ $ 320 $ 351 $ 361 $ 361 $ 348 $ 370
Average production cost
per ton shipped........ 272 289 300 296 288 296
Employees at end of
period................. 708 718 705 670 674 614
PRO FORMA DATA:(3)
Interest expense........ $ 6,492
Ratio of EBITDA to
interest expense....... 1.8x
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31,
1997
---------------------
ACTUAL PRO FORMA(3)
-------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets.............................................. $132,788 $136,629
Long-term debt (including current portion)................ 91,191 114,540
Stockholders' equity...................................... 4,665 (13,408)
</TABLE>
- --------
(1) EBITDA is defined as operating income plus depreciation, amortization, non-
cash portion of post-retirement benefit expense, and the restructuring
charge related to the early retirement incentives in fiscal 1997. The
Company believes that EBITDA provides additional information for
determining its ability to meet debt service requirements. EBITDA does not
represent and should not be considered as an alternative to net income or
cash flow from operations as determined by generally accepted accounting
principles, and EBITDA does not necessarily indicate whether cash flow will
be sufficient for cash requirements.
(2) Ratio of earnings to fixed charges is defined as income before income taxes
and extraordinary item plus amortization of debt issuance cost and interest
expense divided by the sum of amortization of debt issuance costs plus
interest expense. Earnings were insufficient to cover fixed charges in
fiscal 1994, 1996, 1997 and the six months ended October 31, 1996 by
approximately $2,353, $3,091, $3,509 and $1,666 (unaudited), respectively.
(3) Pro forma data gives effect to the use of proceeds from the issuance of the
Old First Mortgage Notes with an interest rate of 11.5%.
9
<PAGE>
RISK FACTORS
In addition to the other information set forth in this Prospectus,
prospective investors should consider carefully the information set forth
below before making a decision to tender their Old First Mortgage Notes in the
Exchange Offer.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old First Mortgage Notes who do not exchange their Old First
Mortgage Notes for New First Mortgage Notes pursuant to the Exchange Offer
will continue to be subject to the restrictions on transfer of such Old First
Mortgage Notes as set forth in the legend thereon as a consequence of the
issuance of the Old First Mortgage Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old First Mortgage
Notes may not be offered or sold, unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old First Mortgage Notes under
the Securities Act. Based on interpretations by the staff of the Commission
set forth in no-action letters issued to third parties, the Company believes
that the New First Mortgage Notes issued pursuant to the Exchange Offer in
exchange for Old First Mortgage Notes may be offered for resale, resold or
otherwise transferred by any Holder thereof (other than any such Holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act provided that such New First
Mortgage Notes are acquired in the ordinary course of such Holder's business
and such Holder has no arrangement with any person to participate in the
distribution of such New First Mortgage Notes. Notwithstanding the foregoing,
each broker-dealer that receives New First Mortgage Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New First Mortgage Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with any resale of New First Mortgage Notes received in
exchange for Old First Mortgage Notes where such Old First Mortgage Notes were
acquired by such broker-dealer as a result of market-making activities or
other trading activities (other than Old First Mortgage Notes acquired
directly from the Company). The Company has agreed that, for a period of 180
days from the Expiration Date, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution." However, the ability of any Holder to resell the New First
Mortgage Notes is subject to applicable state securities laws as described in
"Blue Sky Restrictions on Resale of New First Mortgage Notes" below.
COMPLIANCE WITH EXCHANGE OFFER PROCEDURES
To participate in the Exchange Offer and avoid the restrictions on transfer
of the Old First Mortgage Notes, Holders of Old First Mortgage Notes must
transmit a properly completed Letter of Transmittal, including all other
documents required by such Letter of Transmittal, to the Exchange Agent at one
of the addresses set forth below under "The Exchange Offer--Exchange Agent" on
or prior to the Expiration Date. In addition, either (i) certificates for such
Old First Mortgage Notes must be received by the Exchange Agent along with the
Letter of Transmittal or (ii) a timely confirmation of a book-entry transfer
of such Old First Mortgage Notes, if such procedure is available, into the
Exchange Agent's account at The Depository Trust Company pursuant to the
procedure for book-entry transfer described herein, must be received by the
Exchange Agent prior to the Expiration Date, or (iii) the Holder must comply
with the guaranteed delivery procedures described herein. See "The Exchange
Offer."
BLUE SKY RESTRICTIONS ON RESALE OF NEW FIRST MORTGAGE NOTES
In order to comply with the securities laws of certain jurisdictions, the
New First Mortgage Notes may not be offered or resold by any Holder unless
they have been registered or qualified for sale in such jurisdictions or
10
<PAGE>
an exemption from registration or qualification is available and the
requirements of such exemption have been satisfied. The Company does not
currently intend to register or qualify the resale of the New First Mortgage
Notes in any such jurisdictions. However, an exemption is generally available
for sales to registered broker-dealers and certain institutional buyers. Other
exemptions under applicable state securities laws may also be available.
LEVERAGE AND CERTAIN RESTRICTIONS
The Company currently has significant amounts of outstanding indebtedness in
relation to its stockholders' equity. As of October 31, 1997, the Company had
approximately $114.5 million of indebtedness outstanding. The indebtedness of
the Company and the restrictive covenants and tests contained in its debt
instruments, including the Revolving Credit Facility and the Indenture
relating to the First Mortgage Notes, could significantly limit the Company's
operating and financial flexibility. These factors could also significantly
restrict the Company's ability to withstand competitive pressures or adverse
economic consequences, including its ability to obtain additional financing in
the future for working capital, acquisitions or general corporate or other
purposes, and may place the Company at a competitive disadvantage with respect
to less leveraged providers of similar steel products.
The Company's ability to borrow under the Revolving Credit Facility requires
continued compliance with covenants and tests which, if breached, could result
in termination of such ability to borrow or cause a default. Consequently,
under such circumstances, the Company's access to necessary operating and
capital funds would be restricted. The Company has from time to time entered
into amendments or obtained waivers relaxing certain of the covenants and
tests in the Revolving Credit Facility, and may be required to seek additional
amendments or waivers in the future. The Revolving Credit Facility is a
floating rate obligation and, therefore, is subject to changes in prevailing
interest rates.
The New First Mortgage Notes will rank pari passu in right of payment with
all future senior indebtedness of Sheffield. Borrowings under the Revolving
Credit Facility (or any successor facility) will be secured by a first
priority lien on the inventory and accounts receivable and proceeds thereof of
Sheffield. Borrowings under the revolving loan agreement (the "Railway
Revolving Credit Facility") and the term loan agreement (the "Railway Term
Loan") (the Railway Revolving Credit Facility and the Railway Term Loan
together, the "Railway Credit Facility") are secured by a first priority lien
on substantially all of the assets of Sheffield's subsidiary, the Sand Springs
Railway Company (the "Railway Company"), and by a pledge of the stock of the
Railway Company. The First Mortgage Notes will be effectively subordinated to
future borrowings by the Railway Company under the Railway Credit Facility.
The Revolving Credit Facility provides the Company with a revolving credit
commitment of $40 million, subject to levels of borrowing availability. The
Railway Revolving Credit Facility provides the Railway Company with a
revolving credit commitment of $1.5 million, subject to borrowing
restrictions, and the Railway Term Loan has an outstanding balance of $1.5
million.
SECURITY FOR THE NEW FIRST MORTGAGE NOTES
The New First Mortgage Notes will be secured by a first priority lien on
substantially all existing and future real property, equipment, intellectual
property and related intangible assets of Sheffield and the proceeds thereof,
but excluding inventory, accounts receivable, capital stock of the Railway
Company, Waddell (as defined) and Sheffield-Oklahoma City, certain non-
material leasehold interests, and property and equipment acquired by Sheffield
with the proceeds of purchase money indebtedness permitted to be incurred
under the Indenture (the "Collateral"). The Revolving Credit Facility is
secured by a first priority lien on inventory, accounts receivable, certain
related intangible assets and proceeds thereof, subject in each case to
certain permitted liens. No appraisals of the Collateral have been prepared by
or on behalf of the Company. At October 31, 1997, the net book value of the
Collateral was approximately $53 million. There can be no assurance that the
proceeds of any sale of the Collateral pursuant to the Indenture and the
related collateral documents following an acceleration after an Event of
Default (as defined) under the Indenture would not be substantially less than
that which would be required to satisfy payments due on the New First Mortgage
Notes. By its nature, some or all of the Collateral
11
<PAGE>
will be illiquid and may have no readily ascertainable market value.
Accordingly, there can be no assurance that the Collateral will be able to be
sold in a short period of time, if saleable.
The right of the Trustee under the Indenture (as the secured party under the
various collateral documents) to foreclose upon and sell the Collateral upon
an acceleration after an Event of Default is likely to be significantly
impaired by applicable bankruptcy laws if a bankruptcy proceeding were to be
commenced by or against the Company. Under applicable federal bankruptcy laws,
secured creditors are prohibited from foreclosing upon collateral held by a
debtor in a bankruptcy case, or from disposing of collateral repossessed from
such a debtor, without bankruptcy court approval. Moreover, applicable federal
bankruptcy laws generally permit a debtor to continue to retain and to use
collateral, including cash collateral, even if the debtor is in default under
the applicable debt instruments, provided that the secured creditor is given
"adequate protection". The interpretation of the term "adequate protection"
may vary according to the circumstances, but it is intended in general to
protect the value of the secured creditor's interest in collateral. Because
the term "adequate protection" is subject to varying interpretation and
because of the broad discretionary powers of a bankruptcy court, it is
impossible to predict (i) if payments under the New First Mortgage Notes would
be made following commencement of and during a bankruptcy case, (ii) whether
or when the Trustee could foreclose upon or sell the Collateral or (iii)
whether or to what extent holders of any New First Mortgage Notes would be
compensated for any delay in payment or loss of value of Collateral securing
the New First Mortgage Notes under the doctrine of "adequate protection".
Furthermore, in the event a bankruptcy court were to determine that the value
of the Collateral securing the New First Mortgage Notes is not sufficient to
repay all amounts due on the New First Mortgage Notes, the holders of the New
First Mortgage Notes would become holders of "undersecured claims". Applicable
federal bankruptcy laws do not permit the payment and/or accrual of interest,
costs and attorney's fees for "undersecured claims" during a debtor's
bankruptcy case.
RECENT LOSSES
In fiscal 1997, the Company reported net losses due primarily to (i) bad
weather in the Company's shipping region which hindered construction in that
region; (ii) a restructuring charge of $1.3 million in connection with
employee reductions; and (iii) the failure of the transformer and back-up
transformer supporting one of the two electric arc furnaces at the Sand
Springs Facility. In fiscal 1996, the Company reported a net loss due
primarily to reduced profitability of billet sales caused by weaker market
conditions and start up costs associated with the New Rolling Mill. Although
the Company did not sustain a net loss in fiscal 1995, the Company reported
losses in fiscal 1994 and 1993 due primarily to recessionary declines in steel
bar prices, and in fiscal 1993 due primarily to continuing losses from
operations at the Company's former rolling mill in Oklahoma City, Oklahoma
caused by poor yields, unreliable equipment and high costs. There can be no
assurances as to when the Company will be able to achieve sustained
profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CYCLICAL INDUSTRY AND ECONOMIC CONDITIONS
Demand for most of the Company's products is cyclical in nature and
sensitive to general economic conditions. The hot rolled bar product market is
influenced by trends primarily in the fabricated metal products, machinery and
construction and transportation equipment industries. The rebar market is
driven by trends in commercial and residential construction, industrial
investment in new plants and facilities, and government spending on
infrastructure projects and public sector buildings. The steel industry is
affected by economic conditions generally and future economic downturns may
adversely affect the Company.
COMPETITION
The Company competes with a number of domestic mini-mills in each of its
market segments. The domestic mini-mill steel industry is characterized by
vigorous competition with respect to price, quality and service. In addition,
the domestic mini-mill steel industry has from time to time experienced excess
production capacity, which reinforces competitive product pricing and results
in continued pressures on industry profit margins. The
12
<PAGE>
high fixed costs of operating a steel mini-mill encourage mini-mill operators
to maintain high levels of output, regardless of levels of demand, which
exacerbates the pressures on industry profit margins. Technological
advancements are also a feature of competition in the domestic mini-mill steel
industry, as mini-mills continuously strive to produce higher quality products
and to lower production costs by increasing the efficiency and productivity of
their plants and labor force. Several domestic mini-mills which are
competitors of the Company have financial resources substantially greater than
those available to the Company.
The U.S. steel industry has also historically faced competition from foreign
steel producers. Although domestic mini-mills have experienced little
competition from foreign producers in recent years due to declines in domestic
steel prices, there can be no assurance that foreign competition will not
increase in the future, which could adversely affect the Company's operating
results. See "Business--Competition."
FLUCTUATIONS IN RAW MATERIAL AND ENERGY COSTS
The market for steel scrap, the principal raw material used in the Company's
operations, is highly competitive and its price volatility is influenced by
periodic shortages, freight costs, speculation by scrap brokers and other
market conditions largely beyond the Company's control. Within the domestic
mini-mill industry, fluctuations in scrap costs influence the selling prices
of finished goods as operators seek to maintain profit margins. Generally,
increases in steel prices lag behind increases in steel scrap prices, and
competition has sometimes restricted the ability of mini-mill producers to
raise prices to recover higher raw material costs. Although the Company
purchases outside steel scrap requirements from a number of dealers and
sources in different markets and is not dependent on any single supplier, the
Company's profitability would be adversely affected to the extent it is unable
to pass on higher raw material costs to its customers. See "Business--Raw
Materials."
The Company's manufacturing process also consumes large amounts of
electricity and natural gas. A significant increase in the Company's
electricity costs or in the price of natural gas would have an adverse impact
on the Company's cost structure, and the Company's profitability would be
adversely affected to the extent it is unable to pass such higher energy costs
on to its customers. See "Business--Energy."
ENVIRONMENTAL COMPLIANCE AND ASSOCIATED COSTS
The Company is subject to Federal, state and local laws and regulations
governing the remediation of environmental contamination associated with
releases of hazardous materials and to Federal, state and local laws and
regulations governing discharges to the air and water as well as the handling
and disposal of wastes and employee health and safety (collectively,
"Environmental Laws"). Governmental authorities have the power to enforce
compliance with these requirements, and violators may be subject to civil or
criminal penalties, injunctions or both. Third parties also may have the right
to sue for damages to enforce compliance.
The electric arc furnace melting process used at the Company's Sand Springs
Facility generates dust that contains lead, cadmium and other heavy metals.
Classified as a hazardous waste ("K061") under the Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"), this dust is captured in baghouses
and subsequently transported to a High Temperature Metals Recovery processor,
Zinc Nacional, S.A., located in Monterrey, Mexico ("Zinc Nacional"). The
Company recently negotiated a three year contract with Zinc Nacional which
will expire in the year 2000. Although current law permits the export of K061,
there can be no assurance that new United States legislation prohibiting the
export of hazardous waste materials or new Mexican legislation prohibiting the
import of such materials, including K061, will not be enacted in the future.
In that event, the Company would have to find an alternative means of
treatment or disposal of the K061. The Company believes that it could properly
dispose of the K061 generated at the Sand Springs Facility by constructing an
on-site metals recovery or chemical stabilization process or by shipping the
K061 to a licensed domestic treatment facility. However, there can be no
assurance as to the availability of such alternatives or that their
construction and/or use would not result in significant cost increases.
13
<PAGE>
Moreover, Environmental Laws have been enacted, and may in the future be
enacted, to create liability for past actions that were lawful at the time
taken, but that have been found to affect the environment and to create rights
of action for environmental conditions and activities. Under some of these
Environmental Laws, a company that has sent waste to a third party disposal
site could be held liable for the entire cost of remediating such site
regardless of fault or the lawfulness of the original disposal activity and
also for related damages to natural resources.
There is currently no significant remediation activity at Company owned or
operated sites. Three former K061 landfill sites at the Company's Sand Springs
Facility were closed prior to 1980 before the Company's acquisition of the
Sand Springs Facility. Additionally, a K061 concrete storage tank was closed
by the Company prior to 1990, with a final certification of this closure being
issued by the State of Oklahoma in 1990. All underground storage tanks without
containment systems, cathodic protection or leak detection were excavated and
removed from the Sand Springs Facility with regulatory approval in 1997. In
April 1997, the Environmental Protection Agency ("EPA") Region VI conducted a
Compliance Evaluation Inspection pursuant to RCRA relating to hazardous and
solid waste management at the Sand Springs Facility and then submitted a
follow-up information request to the Company in August 1997. The Company
believes that it has provided all the information requested by EPA. It is
possible that EPA may, pursuant to its RCRA authority, seek corrective action
relating to Solid Waste Management Units identified at the Sand Springs
Facility and/or penalties for alleged violations of RCRA requirements
applicable to the Sand Springs Facility. If EPA does seek such corrective
action, it is possible that it may affect one or more of the three previously
closed K061 landfill sites at the Sand Springs Facility, and the costs
associated with such remedial activity cannot currently be predicted.
Moreover, there can be no assurance that all material environmental matters
involving remediation at either Company owned or operated sites or at sites
owned or operated by third parties which affect the Company have been
identified or that new enforcement policies or legal requirements will not
result in future material expenditures for environmental matters by the
Company.
Apart from the possibility that EPA may identify violations of RCRA
requirements as a result of the Compliance Evaluation Inspection conducted at
the Sand Springs Facility in April 1997, the Company believes that it is
currently in material compliance with all Environmental Laws. However, there
can be no assurance that material environmental liabilities will not be
incurred by the Company in the future or that future compliance with
Environmental Laws (whether those currently in effect or enacted in the
future) will not require additional expenditures by the Company or require
changes to the Company's current operations, any of which could have a
material adverse effect on the Company's results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Environmental Compliance."
UNIONIZED LABOR FORCE
The United Steelworkers of America represents approximately 68% of the
Company's employees as of October 31, 1997. Approximately 250 employees at the
Sand Springs Facility, and approximately 148 employees at the Joliet Facility,
are covered under collective bargaining agreements with the USWA that expire
on March 1, 2000 and March 1, 1999, respectively. The collective bargaining
agreement covering approximately 250 hourly-paid production and maintenance
employees at the Sand Springs Facility contains performance-based plans which
may result in higher labor costs during very profitable periods. A collective
bargaining agreement with the USWA covering approximately 20 employees at the
Kansas City Plant expires on October 31, 1999. The Railway Company also
employs approximately 19 people represented by various railway or
transportation unions. There can be no assurance that any future collective
bargaining agreements with any labor unions will contain terms comparable to
the terms contained in the existing collective bargaining agreements.
Since the last national, industry-wide strike of steelworkers in 1959, the
Company experienced a 5-day strike at the Sand Springs Facility in May 1988
and a work stoppage at the Kansas City Plant following the expiration of the
collective bargaining agreement in September 1991. There can be no assurance
that work
14
<PAGE>
stoppages will not occur in the future, in connection with labor negotiations
or otherwise. See "Business--Employees."
VOTING CONTROL OF THE COMPANY
Approximately ninety percent of the outstanding shares of the common stock,
$.01 par value (the "Common Stock"), is currently owned by HMK Enterprises,
Inc. ("HMK"), an affiliate of Watermill Ventures Ltd. HMK is a privately-held
holding company that is engaged in manufacturing and distribution businesses
and that has owned substantially all of the Common Stock since 1981. The
voting capital stock of HMK is 100% owned by members of the Karol family.
Consequently, certain members of the Karol family together beneficially own
substantially all of the outstanding shares of the Common Stock, have the
power to direct the affairs of the Company and are able to determine the
outcome of all matters required to be submitted to stockholders for approval,
including the election of directors and amendment of the Company's Certificate
of Incorporation. HMK is, and certain of the Company's officers, directors and
members of the Karol family are, party to various transactions and agreements
with the Company, including a Management Consulting Services Agreement and an
Income Tax Expense Allocation Policy and Tax Sharing Agreement. Risk
Management Solutions, Inc., a wholly-owned subsidiary of HMK, is a party to an
Insurance Services Agreement with the Company. See "Management--Executive
Officers and Directors", "Security Ownership of Certain Beneficial Owners and
Management" and "Certain Relationships and Related Transactions."
ABSENCE OF PUBLIC MARKET AND TRANSFER RESTRICTIONS
The Old First Mortgage Notes are eligible for trading in the Private
Offerings, Resale and Trading through Automated Linkages ("PORTAL") Market by
Qualified Institutional Buyers ("QIBs"). The New First Mortgage Notes will be
new securities for which there currently is no market. There can be no
assurance as to the liquidity of any markets that may develop for the New
First Mortgage Notes, the ability of holders of the New Firs Mortgage Notes to
sell their New First Mortgage Notes, or the price at which Holders would be
able to sell their New First Mortgage Notes. Future trading prices of the New
First Mortgage Notes will depend on many factors, including, among other
things, prevailing interest rates, the Company's operating results and the
market for similar securities. The Initial Purchaser has advised the Company
that it currently intends to make a market in the New First Mortgage Notes.
However, the Initial Purchaser is not obligated to do so and any market making
may be discontinued at any time without notice. Therefore, there can be no
assurance that any active market for the New First Mortgage Notes will
develop. The Company does not intend to apply for listing of the New First
Mortgage Notes on any securities exchange or for quotation through the
National Association of Securities Dealers Automated Quotation System.
15
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old First Mortgage Notes were sold by the Company on December 5, 1997 to
the Initial Purchaser, who placed the Old First Mortgage Notes with
institutional investors. In connection therewith, the Company and the Initial
Purchaser entered into the Registration Rights Agreement, pursuant to which
the Company agreed, for the benefit of the holders of the Old First Mortgage
Notes, that the Company would, at its sole cost, (i) within 45 days following
the original issuance of the Old First Mortgage Notes, file with the
Commission the Exchange Offer Registration Statement (of which this Prospectus
is a part) under the Securities Act with respect to an issue of a series of
new notes of the Company identical in all material respects to the series of
Old First Mortgage Notes, (ii) use its best efforts to cause such Exchange
Offer Registration Statement to become effective under the Securities Act
within 150 days following the original issuance of the Old First Mortgage
Notes and (iii) use its best efforts to consummate the Exchange Offer within
180 days following the original issuance of the Old First Mortgage Notes. Upon
the effectiveness of the Exchange Offer Registration Statement, the Company
will offer to the holders of the Old First Mortgage Notes the opportunity to
exchange their Old First Mortgage Notes for a like principal amount of New
First Mortgage Notes, to be issued without a restrictive legend and which
might be reoffered and resold by the holder without restrictions or
limitations under the Securities Act. The term "Holder" with respect to the
Exchange Offer means any person in whose name Old First Mortgage Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder.
Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, the Company believes that New First
Mortgage Notes issued pursuant to the Exchange Offer in exchange for Old First
Mortgage Notes may be offered for resale, resold and otherwise transferred by
any holder of such New First Mortgage Notes (other than any such holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New First
Mortgage Notes are acquired in the ordinary course of such holder's business
and such holder has no arrangement or understanding with any person to
participate in the distribution of such New First Mortgage Notes. Each Holder
will be required to acknowledge in the Letter of Transmittal that it is not
engaged in, and does not intend to engage in, a distribution of the New First
Mortgage Notes. Any Holder who tenders in the Exchange Offer for the purpose
of participating in a distribution of the New First Mortgage Notes must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with a secondary resale transaction.
Each broker-dealer that receives New First Mortgage Notes for its own
account pursuant to the Exchange Offer will also be required to acknowledge
that (i) Old First Mortgage Notes tendered by it in the Exchange Offer were
acquired in the ordinary course of its business as a result of market-making
or other trading activities and (ii) it will deliver a prospectus in
connection with any resale of New First Mortgage Notes received in the
Exchange Offer. The Letter of Transmittal will also state that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an 'underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
First Mortgage Notes received in exchange for Old First Mortgage Notes where
such Old First Mortgage Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities (other than Old First
Mortgage Notes acquired directly from the Company). The Company has agreed
that, for a period of 180 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution." Notwithstanding the foregoing, based on
the above-mentioned interpretations by the staff of the Commission, the
Company believes that broker-dealers who acquired the Old First Mortgage Notes
directly from the Company and not as a result of market-making activities or
other trading activities cannot rely on such interpretations by the staff of
the Commission and must, in the absence of an exemption, comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with secondary resales of the New First
16
<PAGE>
Mortgage Notes. Such broker-dealers may not use this Prospectus, as it may be
amended or supplemented from time to time, in connection with any such resales
of the New First Mortgage Notes.
In the event that applicable interpretations of the staff of the Commission
do not permit the Company to effect such an Exchange Offer, or if for any
other reason the Exchange Offer is not consummated within 180 days of the date
of original issue of the Old First Mortgage Notes, or if the Initial Purchaser
so requests with respect to Old First Mortgage Notes not eligible to be
exchanged for New First Mortgage Notes in the Exchange Offer, or if any holder
of Old First Mortgage Notes is not eligible to participate in the Exchange
Offer or does not receive freely tradeable New First Mortgage Notes in the
Exchange Offer, then in each case, the Company will at its sole expense, (a)
as promptly as practicable, file a shelf registration statement covering
resales of the Old First Mortgage Notes or the New First Mortgage Notes, as
the case may be (the "Shelf Registration Statement"), (b) use its reasonable
efforts to cause the Shelf Registration Statement to be declared effective
under the Securities Act and (c) use its reasonable efforts to keep effective
the Shelf Registration Statement until the earlier of two years after its
effective or such time as all of the applicable First Mortgage Notes have been
sold thereunder. The Company will, in the event that a Shelf Registration
Statement is filed, provide to each Holder copies of the Prospectus that is a
part of the Shelf Registration Statement, notify each such Holder when the
Shelf Registration Statement for the First Mortgage Notes has become effective
and take certain other actions as are required to permit unrestricted resales
of the First Mortgage Notes. A Holder that sells such First Mortgage Notes
pursuant to the Shelf Registration Statement will be required to be named as a
selling security holder in the related prospectus and to deliver a prospectus
to purchasers, will be subject to certain of the civil liability provisions
under the Securities Act in connection with such sales and will be bound by
the provisions of the Registration Rights Agreements that are applicable to
such a Holder (including certain indemnification rights and obligations).
If the Company fails to comply with the above provision or if the Exchange
Offer Registration Statement or the Shelf Registration Statement fails to
become effective, then, as liquidated damages, additional interest (the
"Additional Interest") shall become payable in respect of the Old First
Mortgage Notes as follows:
(1) if (A) neither the Exchange Offer Registration Statement nor a Shelf
Registration Statement is filed with the Commission on or prior to the
applicable filing date or (B) notwithstanding that the Company has
consummated or will consummate an Exchange Offer, the Company is required
to file a Shelf Registration Statement and such Shelf Registration
Statement is not filed on or prior to the date required by the Registration
Rights Agreement, then commencing on the day after either such required
filing date, Additional Interest shall accrue on the principal amount of
the Old First Mortgage Notes at a rate of 0.50% per annum for the first 90
days immediately following each such filing date, such Additional Interest
rate increasing by an additional 0.50% per annum at the beginning of each
subsequent 90-day period; or
(2) if (A) neither the Exchange Offer Registration Statement nor a Shelf
Registration Statement is declared effective by the Commission on or prior
to 150 days after the Issue Date or (B) notwithstanding that the Company
has consummated or will consummate an Exchange Offer, the Company is
required to file a Shelf Registration Statement and such Shelf Registration
Statement is not declared effective by the Commission on or prior to the
180th day following the date such Shelf Registration Statement was filed,
then, commencing on the day after either such required date of
effectiveness, Additional Interest shall accrue on the principal amount of
the Old First Mortgage Notes at a rate of 0.50% per annum for the first 90
days immediately following such date, such Additional Interest rate
increasing by an additional 0.50% per annum at the beginning of each
subsequent 90-day period; or
(3) if (A) the Company has not exchanged New First Mortgage Notes for all
Old First Mortgage Notes validly tendered in accordance with the terms of
the Exchange Offer on or prior to the 180th day after the date of original
issue of the Old First Mortgage Notes or (B) if applicable, the Shelf
Registration Statement has been declared effective and such Shelf
Registration Statement ceases to be effective at any time prior to the
second anniversary of its effective date (other than after such time as all
Old First Mortgage Notes have been disposed of thereunder), then Additional
Interest shall accrue on the principal amount of the Old First Mortgage
Notes at a rate of 0.50% per annum for the first 90 days commencing on (x)
the 180th day after
17
<PAGE>
the date of the original issuance of the Old First Mortgage Notes, in the
case of (A) above, or (y) the day such Shelf Registration Statement ceases
to be effective in the case of (B) above, such Additional Interest rate
increasing by an additional 0.50% per annum at the beginning of each
subsequent 90-day period;
provided, however, that the Additional Interest rate on the Old First Mortgage
Notes may not exceed in the aggregate 1.0% per annum; provided, further,
however, that (1) upon the filing of the Exchange Offer Registration Statement
or a Shelf Registration Statement (in the case of clause (i) above), (2) upon
the effectiveness of the Exchange Offer Registration Statement or a Shelf
Registration Statement (in the case of clause (ii) above), or (3) upon the
exchange of New First Mortgage Notes for all Old First Mortgage Notes tendered
(in the case of clause (iii)(A) above), or upon the effectiveness of the Shelf
Registration Statement which had ceased to remain effective (in the case of
clause (iii)(B) above), Additional Interest on the Old First Mortgage Notes as
a result of such clause (or relevant subclause thereof), as the case may be,
shall cease to accrue.
Any amounts of Additional Interest due pursuant to clause (i), (ii) or (iii)
above will be payable in cash on June 1 and December 1 of each year to the
Holders of record on the preceding May 15 or November 15, respectively.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by, all the provisions of the Registration Rights Agreement, a
copy of which has been filed as an exhibit to the Exchange Offer Registration
Statement of which this Prospectus forms a part.
The Old First Mortgage Notes were placed with a small number of
institutional investors on December 5, 1997 and there is no public market for
them at present. To the extent Old First Mortgage Notes are tendered and
accepted in the exchange, the principal amount of outstanding Old First
Mortgage Notes will decrease with a resulting decrease in the liquidity in the
market therefor. Following the consummation of the Exchange Offer, Holders of
Old First Mortgage Notes who were eligible to participate in the Exchange
Offer but who did not tender their Old First Mortgage Notes will not have any
further registration rights and such Old First Mortgage Notes will continue to
be subject to certain restrictions on transfer. Accordingly, the liquidity of
the market for the Old First mortgage Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old
First Mortgage Notes validly tendered and not withdrawn prior to 5:00 p.m.,
New York City time, on the Expiration Date. The Company will issue $1,000 face
amount of New First Mortgage Notes in exchange for each $1,000 face amount of
outstanding Old First Mortgage Notes accepted in the Exchange Offer. Holders
may tender some or all of their Old First Mortgage Notes pursuant to the
Exchange Offer. However, Old First Mortgage Notes may be tendered only in
integral multiples of $1,000.
The form and terms of the New First Mortgage Notes will be identical in all
material respects to the form and terms of the Old First Mortgage Notes,
except that (i) the New First Mortgage Notes will have been registered under
the Securities Act and hence will not bear legends restricting the transfer
thereof and (ii) the holders of the New First Mortgage Notes will not be
entitled to certain rights under the Registration Rights Agreement, including
the provisions providing for an increase in the interest rate on the Old First
Mortgage Notes under certain circumstances relating to the timing of the
Exchange Offer, all of which rights will terminate when the Exchange Offer is
terminated. The New First Mortgage Notes will evidence the same debt as the
Old First Mortgage Notes and will be entitled to the benefits of the Indenture
under which the Old First Mortgage Notes were, and the New First Mortgage
Notes will be, issued.
As of the date of this Prospectus, $110,000,000 aggregate face amount of the
Old First Mortgage Notes were outstanding. The Company has fixed the close of
business on January 22, 1998 as the record date for the
18
<PAGE>
Exchange Offer for purposes of determining the persons to whom this
Prospectus, together with the Letter of Transmittal, will initially be sent.
As of such date there was one registered Holder of the Old First Mortgage
Notes.
Holders of Old First Mortgage Notes do not have any appraisal or dissenters'
rights under the Delaware General Corporation Law or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the
Exchange Offer in accordance with the applicable requirements of the Exchange
Act and the rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old First
Mortgage Notes when, as and if the Company has given oral or written notice
thereof to the Exchange Agent. The Exchange Agent will act as agent for the
tendering Holders for the purpose of receiving the New First Mortgage Notes
from the Company.
If any tendered Old First Mortgage Notes are not accepted for exchange
because of an invalid tender, the occurrence of certain other events set forth
herein or otherwise, certificates for any such unaccepted Old First Mortgage
Notes will be returned, without expense, to the tendering Holder thereof as
promptly as practicable after the Expiration Date.
Holders who tender Old First Mortgage Notes in the Exchange Offer will not
be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of Old First Mortgage Notes pursuant to the Exchange Offer. The
Company will pay all charges and expenses, other than certain applicable
taxes, in connection with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
March 18, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof prior to 9:00 a.m., New York City time, on the next
business day after each previously scheduled expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old First Mortgage Notes, to extend the Exchange Offer or, if
any of the conditions set forth below under "--Conditions" shall not have been
satisfied, to terminate the Exchange Offer, by giving oral or written notice
of such delay, extension or termination to the Exchange Agent, or (ii) to
amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly
as practicable by a public announcement thereof. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered Holders, and the Company
will extend the Exchange Offer for a period of five to 10 business days,
depending upon the significance of the amendment and the manner of disclosure
to the registered Holders, if the Exchange Offer would otherwise expire during
such five to 10 business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, termination or amendment of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
INTEREST ON THE NEW FIRST MORTGAGE NOTES
The New First Mortgage Notes will bear interest from their date of issuance.
Holders of Old First Mortgage Notes that are accepted for exchange will
receive, in cash, accrued interest thereon to, but not including, the date
19
<PAGE>
of issuance of the New First Mortgage Notes. Such interest will be paid with
the first interest payment on the New First Mortgage Notes on June 1, 1998.
Interest on the Old First Mortgage Notes accepted for exchange will cease to
accrue upon issuance of the New First Mortgage Notes.
PROCEDURES FOR TENDERING
Only a Holder of Old First Mortgage Notes may tender such Old First Mortgage
Notes in the Exchange Offer. A Holder who wishes to tender Old First Mortgage
Notes for exchange pursuant to the Exchange Offer must transmit a properly
completed and duly executed Letter of Transmittal, or a facsimile thereof,
including any other required documents, to the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date. In addition, either (i)
certificates for such Old First Mortgage Notes must be received by the
Exchange Agent along with the Letter of Transmittal or (ii) the Holder must
comply with the guaranteed delivery procedures described below. To be tendered
effectively, the Old First Mortgage Notes, Letter of Transmittal and other
required documents must be received by the Exchange Agent at the address set
forth below under "Exchange Agent" prior to 5:00 p.m., New York City time, on
the Expiration Date.
The tender by a Holder will constitute an agreement between such Holder and
the Company in accordance with the terms and subject to the conditions set
forth herein and in the Letter of Transmittal.
The method of delivery of Old First Mortgage Notes and the Letter of
Transmittal and all other required documents to the Exchange Agent is at the
election and risk of the Holder. Instead of delivery by mail, it is
recommended that Holders use an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure delivery to the Exchange
Agent before the Expiration Date. No Letter of Transmittal or Old First
Mortgage Notes should be sent to the Company. Holders may request their
respective brokers, dealers, commercial banks, trust companies or nominees to
effect the above transactions for such Holders.
Any beneficial owner whose Old First Mortgage Notes are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender should contact the registered Holder promptly and
instruct such registered Holder to tender on such beneficial owner's behalf.
If such beneficial owner wishes to tender on such owner's own behalf, such
owner must, prior to completing and executing the Letter of Transmittal and
delivering such owner's Old First Mortgage Notes, either make appropriate
arrangements to register ownership of the Old First Mortgage Notes in such
owner's name or obtain a properly completed bond power from the registered
Holder. The transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old First Mortgage Notes tendered pursuant thereto are tendered (i)
by a registered Holder who has not completed the box entitled "Special
Registration Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be by a member
firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange
Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Old First Mortgage Notes listed therein, such Old First Mortgage
Notes must be endorsed or accompanied by a properly completed bond power,
signed by such registered Holder as such registered Holder's name appears on
such Old First Mortgage Notes.
If the Letter of Transmittal or any Old First Mortgage Notes or bond powers
are signed by trustees, executors, administrators, guardians, attorneys-in-
fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
unless waived by the Company, evidence satisfactory to the Company of their
authority to so act must be submitted with the Letter of Transmittal.
20
<PAGE>
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old First Mortgage Notes will
be determined by the Company in its sole discretion, which determination will
be final and binding. The Company reserves the absolute right to reject any
and all Old First Mortgage Notes not properly tendered or any Old First
Mortgage Notes the Company's acceptance of which would, in the opinion of
counsel for the Company, be unlawful. The Company also reserves the right to
waive any defects, irregularities or conditions of tender as to particular Old
First Mortgage Notes. The Company's interpretation of the terms and conditions
of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old First Mortgage
Notes must be cured within such time as the Company shall determine. Although
the Company intends to notify Holders of defects or irregularities with
respect to tenders of Old First Mortgage Notes, neither the Company, the
Exchange Agent nor any other person shall incur any liability for failure to
give such notification. Tenders of Old First Mortgage Notes will not be deemed
to have been made until such defects or irregularities have been cured or
waived. Any Old First Mortgage Notes received by the Exchange Agent that are
not properly tendered and as to which the defects or irregularities have not
been cured or waived will be returned by the Exchange Agent to the tendering
Holders, unless otherwise provided in the Letter of Transmittal, as soon as
practicable following the Expiration Date.
By tendering, each Holder will represent to the Company, among other things,
that (i) the New First Mortgage Notes to be acquired by the Holder and any
beneficial owners of Old First Mortgage Notes pursuant to the Exchange Offer
are being obtained in the ordinary course of business of the person receiving
such New First Mortgage Notes, (ii) the Holder and each such beneficial owner
are not participating, do not intend to participate and have no arrangement or
understanding with any person to participate in the distribution of such New
First Mortgage Notes and (iii) neither the Holder nor any such other person is
an "affiliate," as defined under Rule 405 of the Securities Act, of the
Company. Each broker or dealer that receives New First Mortgage Notes for its
own account in exchange for Old First Mortgage Notes, where such Old First
Mortgage Notes were acquired by such broker or dealer as a result of market-
making activities or other trading activities (other than Old First Mortgage
Notes acquired directly from the Company), must acknowledge that it will
deliver a prospectus in connection with any resale of such New First Mortgage
Notes. See "Plan of Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old First Mortgage Notes and (i) whose Old
First Mortgage Notes are not immediately available or (ii) who cannot deliver
their Old First Mortgage Notes, the Letter of Transmittal or any other
required documents to the Exchange Agent prior to the Expiration Date, may
effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Old First Mortgage Notes and the principal amount of Old First
Mortgage Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days after
the Expiration Date, the Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the Old First Mortgage Notes
and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old First Mortgage Notes in proper form for transfer and all other
documents required by the Letter of Transmittal are received by the
Exchange Agent within five New York Stock Exchange trading days after the
Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old First Mortgage Notes according to
the guaranteed delivery procedures set forth above.
21
<PAGE>
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old First Mortgage Notes may
be withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
To withdraw a tender of Old First Mortgage Notes in the Exchange Offer, a
written or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Old First Mortgage Notes
to be withdrawn (the "Depositor"), (ii) identify the Old First Mortgage Notes
to be withdrawn (including the certificate number or numbers and principal
amount of such Old First Mortgage Notes), (iii) be signed by the Holder in the
same manner as the original signature on the Letter of Transmittal by which
such Old First Mortgage Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Old First Mortgage Notes register the transfer of
such Old First Mortgage Notes into the name of the person withdrawing the
tender and (iv) specify the name in which any such Old First Mortgage Notes
are to be registered, if different from that of the Depositor. If certificates
for Old First Mortgage Notes have been delivered or otherwise identified to
the Exchange Agent, then, prior to the release of such certificates, the
withdrawing Holder must also submit the serial numbers of the particular
certificates to be withdrawn and a signed notice of withdrawal with signatures
guaranteed by an Eligible Institution unless such Holder is an Eligible
Institution. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company in its sole
discretion, which determination shall be final and binding on all parties. Any
Old First Mortgage Notes so withdrawn will be deemed not to have been validly
tendered for purposes of the Exchange Offer and no New First Mortgage Notes
will be issued with respect thereto unless the Old First Mortgage Notes so
withdrawn are validly retendered. Properly withdrawn Old First Mortgage Notes
may be retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the Expiration Date.
Any Old First Mortgage Notes which have been tendered but which are not
accepted for payment due to withdrawal, rejection of tender or termination of
the Exchange Offer will be returned as soon as practicable to the Holder
thereof without cost to such Holder.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange New First Mortgage Notes for,
any Old First Mortgage Notes, and may terminate the Exchange Offer as provided
herein before the acceptance of such Old First Mortgage Notes, if:
(a) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the Exchange Offer which, in
the reasonable judgment of the Company, might materially impair the ability of
the Company to proceed with the Exchange Offer or materially impair the
contemplated benefits of the Exchange Offer to the Company, or any material
adverse development has occurred in any existing action or proceeding with
respect to the Company or any of its subsidiaries; or
(b) any change, or any development involving a prospective change, in the
business or financial affairs of the Company or any of its subsidiaries has
occurred which, in the reasonable judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Company; or
(c) any law, statute, rule or regulation is proposed, adopted or enacted,
which, in the reasonable judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or materially impair
the contemplated benefits of the Exchange Offer to the Company; or
(d) any governmental approval has not been obtained, which approval the
Company shall, in its reasonable judgement, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
22
<PAGE>
If the Company determines in its reasonable judgement that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Old
First Mortgage Notes and return all tendered Old First Mortgage Notes to the
tendering Holders, (ii) extend the Exchange Offer and retain all Old First
Mortgage Notes tendered prior to the expiration of the Exchange Offer,
subject, however, to the rights of Holders to withdraw such Old First Mortgage
Notes (see 'Withdrawal of Tenders" above) or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old First Mortgage Notes which have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered Holders, and the Company will extend the
Exchange Offer for a period of five to 10 business days, depending upon the
significance of the waiver and the manner of disclosure to the registered
Holders, if the Exchange Offer would otherwise expire during such five to 10
business day period.
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
STATE STREET BANK AND TRUST COMPANY
<TABLE>
<CAPTION>
By Mail: By Overnight Courier or Hand Delivery: By Facsimile Transmission:
<S> <C> <C>
State Street Bank and Trust Company State Street Bank and Trust Company (for Eligible Institutions only)
Corporate Trust Department Corporate Trust Department
P.O. Box 778 Two International Plaza 4th Floor State Street Bank and Trust Company
Boston, Massachusetts 02102-0078 Boston, Massachusetts 02110 (617) 664-5232
Attention: Sandra Szczsponik Attention: Sandra Szczsponik Attention: Sandra Szczsponik
</TABLE>
For Information or Confirmation by Telephone:
(617) 664-5314
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraphy, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old First Mortgage Notes pursuant to the Exchange Offer. If, however,
certificates representing New First Mortgage Notes or Old First Mortgage Notes
for principal amounts not tendered or accepted for exchange are to be
delivered to, or are to be issued in the name of, any person other than the
registered Holder of the Old First Mortgage Notes tendered, or if tendered Old
First Mortgage Notes are registered in the name of any person other than the
person signing the
23
<PAGE>
Letter of Transmittal, or if a transfer tax is imposed for any reason other
than the exchange of Old First Mortgage Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
Holder or any other persons) will be payable by the tendering Holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes
will be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
The New First Mortgage Notes will be recorded at the same carrying value as
the Old First Mortgage Notes, which is face value, as reflected in the
Company's accounting records on the date of the exchange. Accordingly, no gain
or loss for accounting purposes will be recognized. The costs of the Exchange
Offer and the unamortized costs related to the issuance of the Old First
Mortgage Notes will be amortized over the term of the New First Mortgage
Notes.
24
<PAGE>
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the New First Mortgage Notes in
the Exchange Offer. The net proceeds received by the Company from the issuance
of the Old First Mortgage Notes were applied as follows: (i) $80.9 million to
redeem, at a redemption price of 106%, the Company's First Mortgage Notes due
2001 (the "2001 Notes"); (ii) $15.9 million to repay amounts under the
Company's credit facilities; (iii) $10 million to pay dividends to the
Company's shareholders; and (iv) the remainder for general corporate purposes.
25
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of October 31, 1997, and as adjusted to reflect the application of
the net proceeds of the issuance of the Old First Mortgage Notes on December
5, 1997 as described in "Use of Proceeds." This table should be read in
conjunction with the Consolidated Financial Statements of the Company and the
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
OCTOBER 31, 1997
-------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Cash.................................................... $ 741 $ 2,393
Long-term debt (including current portion):
2001 Notes............................................ 73,437 0
Old First Mortgage Notes.............................. -- 110,000
Revolving Credit Facility(1).......................... 11,614 0
Railway Credit Facility(1)............................ 2,630 1,030
Equipment notes....................................... 1,399 1,399
Notes payable......................................... 2,111 2,111
------- --------
Total long-term debt................................ 91,191 114,540
Stockholders' equity:
Common stock, par value $.01 per share, authorized
10,000,000 shares; issued 3,375,000 shares........... 34 34
Additional paid-in capital............................ 2,536 2,536
Retained earnings(2).................................. 2,095 (15,978)
------- --------
Total stockholders' equity.......................... 4,665 (13,408)
Less loans to stockholders.............................. 966 966
======= ========
3,699 (14,374)
------- --------
Total capitalization................................ $94,890 $100,166
======= ========
</TABLE>
- --------
(1) The Revolving Credit Facility provides a revolving credit commitment in
the amount of $40 million, with $26.5 million available as of October 31,
1997 ($35.3 million available as of October 31, 1997 on an as adjusted
basis). The exact amount which may be borrowed from time to time is
determined by a borrowing base formula. See "Description of Revolving
Credit Facility." The Railway Revolving Credit Facility provides a
revolving credit commitment in the amount of $1.5 million, with $0.4
million available as of October 31, 1997. The Railway Term Loan is for
$2.0 million (balance of $1.5 million as of October 31, 1997) and is
reduced by $0.5 million annually on July 31.
(2) The change in retained earnings reflects the redemption premium associated
with redemption of the 2001 Notes of approximately $4.5 million, the
write-off of the unamortized discount of approximately $1.6 million and
the unamortized debt issue costs related thereto of approximately $1.5
million, estimated interest expense paid during the period between the
issuance of the Old First Mortgage Notes and the call date on the 2001
Notes of approximately $0.5 million, and the payment of $10 million in
dividends to the Company's stockholders.
26
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data and operating data for the Company for the periods indicated. The
Company's selected historical consolidated financial data for, and as of the
end of, each of the years in the five year period ended April 30, 1997 were
derived from the consolidated financial statements of the Company, which have
been audited by KPMG Peat Marwick LLP, independent public accountants. The
selected historical consolidated financial data for, and as of the end of, the
six months ended October 31, 1996 and 1997 were derived from unaudited
financial statements of the Company which, in the opinion of management,
reflect all adjustments which are of a normal recurring nature necessary for a
fair presentation of the results of such periods. The results of operations
for the six months ended October 31, 1997 are not necessarily indicative of
the results to be expected for the entire fiscal year 1998 or any other
interim period. The information set forth in this table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED APRIL 30, ENDED OCTOBER 31,
-------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1996 1997
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER TON DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Sales................... $144,026 $165,920 $175,753 $172,317 $170,865 $ 89,925 $ 94,181
Cost of sales........... 125,705 141,215 144,385 143,121 140,234 74,338 75,382
-------- -------- -------- -------- -------- -------- --------
Gross profit............ 18,321 24,705 31,368 29,196 30,631 15,587 18,799
Selling, general and
administrative expense. 10,536 10,682 12,156 11,737 11,923 6,495 6,631
Post-retirement benefit
expense other than
pensions............... -- 4,248 3,153 2,776 2,353 1,477 1,373
Restructuring charge.... 6,764(1) -- -- -- 1,320(2) -- --
Operating income (loss). (4,693) 4,834 10,129 8,116 8,260 4,188 7,335
Interest expense........ (5,707) (7,147) (8,049) (11,733) (11,769) (5,854) (5,768)
Other income (expense).. (103) (40) (58) 526 -- -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary item..... (10,503) (2,353) 2,022 (3,091) (3,509) (1,666) 1,567
Income tax (expense)
benefit................ 2,975 949 (197) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations.. (7,528) (1,404) 1,825 (3,091) (3,509) (1,666) 1,567
Extraordinary item-loss
on retirement of long-
term debt, net of
income tax benefit of
$1,346................. -- (3,966) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ (7,528) $ (5,370) $ 1,825 $ (3,091) $ (3,509) $ (1,666) $ 1,567
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
EBITDA (3).............. $ 7,785 $ 13,327 $ 18,582 $ 16,430 $ 17,627 $ 8,617 $ 11,671
Capital expenditures.... 2,467 11,667 24,220 4,978 3,695 1,762 1,849
Depreciation and
amortization........... 5,714 4,941 5,930 6,567 6,775 3,427 3,460
Non-cash post-retirement
expense charges........ -- 3,552 2,523 1,747 1,272 1,002 876
Ratio of earnings to
fixed charges(4)....... -- -- 1.2x -- -- -- 1.3x
Finished products tons
shipped................ 398,783 396,363 367,133 383,448 413,243 211,275 233,861
Billet tons shipped..... 89,520 122,680 133,017 93,557 60,512 47,120 20,795
-------- -------- -------- -------- -------- -------- --------
Total tons shipped...... 488,303 519,043 500,150 477,005 473,755 258,395 254,656
Average price per ton
shipped................ $ 295 $ 320 $ 351 $ 361 $ 361 $ 348 $ 370
Average production cost
per ton shipped........ 257 272 289 300 296 288 296
Employees at end of
period................. 689 708 718 705 670 674 614
BALANCE SHEET DATA (AT
END OF PERIOD):
Total assets............ $ 94,643 $115,958 $146,459 $143,182 $136,574 $137,391 $132,788
Long-term debt
(including current
portion)............... 56,707 72,629 93,170 97,041 96,550 96,059 91,191
Stockholders' equity.... 15,098 11,683 12,596 7,662 3,098 4,941 4,665
</TABLE>
- -------
(1) In January 1993, the Company approved a restructuring plan which provided
for closure of the Oklahoma City Mill. In conjunction with this plan, the
Company recorded a nonrecurring charge aggregating $6,764. Of the total
charge, $6,330 relates to the estimated loss expected upon disposal of the
facility and plant protection, insurance and other expenses associated
with this plan. The remaining charge relates to operating losses incurred
from the date of approval through April 30, 1993.
(2) A restructuring charge of $1.3 million was recognized in fiscal 1997 as a
result of early retirement incentives included in a collective bargaining
agreement and salaried workforce reductions in Sand Springs.
27
<PAGE>
(3) EBITDA is defined as operating income (loss) plus depreciation,
amortization, non-cash portion of post-retirement benefit expense, non-
cash restructuring charges related to closure of the Oklahoma City Mill
(in fiscal 1993) and the restructuring charge related to the early
retirement incentives (in fiscal 1997). The Company believes that EBITDA
provides additional information for determining its ability to meet debt
service requirements. EBITDA does not represent and should not be
considered as an alternative to net income or cash flow from operations as
determined by generally accepted accounting principles, and EBITDA does
not necessarily indicate whether cash flow will be sufficient for cash
requirements.
(4) Ratio of earnings to fixed charges is defined as income before income
taxes and extraordinary item plus amortization of debt issuance cost and
interest expense divided by the sum of amortization of debt issuance costs
plus interest expense. Earnings were insufficient to cover fixed charges
in fiscal 1993, 1994, 1996, 1997 and the six months ended October 31, 1996
by approximately $10,503, $2,353, $3,091, $3,509 and $1,666 (unaudited),
respectively.
28
<PAGE>
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 included
elsewhere in this Prospectus.
GENERAL
The Company is a mini-mill producer of hot rolled steel bar products ("hot
rolled bar"), concrete reinforcing bar ("rebar"), fabricated products,
including fabricated and epoxy-coated rebar and steel fence posts, and various
types of semi-finished steel ("billets"). The Company and its predecessors
have been in the steelmaking business for over 68 years. The Company believes
that it is among the lowest cost producers of billets in the United States as
a result of its modern melt and cast operations, high labor productivity
levels, low energy costs and competitive steel scrap costs. The Company's low
cost billets serve as the feedstock for its downstream bar mill operations and
finished products. The Company shipped approximately 470,000 tons of steel in
the 12-month period ended October 31, 1997, resulting in sales of $175.1
million and EBITDA (as defined) of $20.7 million.
The Company's products are grouped into four categories: (i) hot rolled bar
products, which the Company produces in the form of flats, squares, rounds and
channels, typically to meet specified customer requirements; (ii) rebar, which
is principally sold to independent fabricators who shear and bend the rebar to
meet engineering or architectural specifications for construction projects;
(iii) fabricated products, consisting of fence post (sold principally to
distributors and farm cooperatives) and fabricated rebar, including epoxy-
coated rebar (typically sold to highway and construction contractors); and
(iv) billets, made by casting molten steel into square strands of various
lengths in a continuous casting process, which are either reheated, rolled and
sheared by the Company into various finished steel products described above or
sold to third parties. The Company's strategy is to improve its product mix by
utilizing billets internally to produce finished products instead of selling
billets to third parties. The Company's primary cost components are ferrous
scrap, energy and labor, the cost of warehousing and handling finished steel
products and freight costs. The following table gives summary operating data
for the Company by its principal product categories for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FISCAL YEAR ENDED APRIL 30, OCTOBER 31,
--------------------------------------- ---------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
TONS SHIPPED:
Hot Rolled Bars......... 155,555 154,362 157,610 159,688 174,290 80,736 93,828
Rebar................... 204,290 193,475 161,198 169,316 185,745 102,364 112,122
Fabricated Products..... 38,938 48,526 48,325 54,444 53,208 28,175 27,911
------- ------- ------- ------- ------- ------- -------
Total finished products. 398,783 396,363 367,133 383,448 413,243 211,275 233,861
Billets................. 89,520 122,680 133,017 93,557 60,512 47,120 20,795
------- ------- ------- ------- ------- ------- -------
Total tons shipped...... 488,303 519,043 500,150 477,005 473,755 258,395 254,656
======= ======= ======= ======= ======= ======= =======
PRICE PER TON:
Hot Rolled Bars......... $ 383 $ 424 $ 462 $ 461 $ 435 $ 441 $ 449
Rebar................... 244 263 290 293 292 291 296
Fabricated Products..... 408 407 447 461 460 458 456
Billets................. 188 218 236 225 214 215 227
Average price per ton
shipped................ 295 320 351 361 361 348 370
Average production cost
per ton................ 257 272 289 300 296 288 296
</TABLE>
On March 2, 1997, the Company completed negotiation of a collective
bargaining agreement with the United Steelworkers of America which covered
approximately 315 hourly-paid production and maintenance employees at the Sand
Springs Facility. The new contract is for a term of three years, expiring
March 1, 2000.
29
<PAGE>
This collective bargaining agreement included wage increases, certain benefit
increases and changes to local work rules allowing greater flexibility. The
contract also allowed the Company to reduce and reorganize its hourly
workforce by approximately 70 hourly positions, primarily maintenance related.
Of the 70 positions, 42 employees were eliminated through retirement offers
effective June 1, 1997 and the remaining positions have been eliminated
through attrition.
RESULTS OF OPERATIONS
SIX MONTHS ENDED OCTOBER 31, 1997 AS COMPARED TO SIX MONTHS ENDED OCTOBER 31,
1996
SALES. Sales for the Company for the six month period ended October 31, 1997
were approximately $94.2 million as compared to sales of approximately $89.9
million for the six month period ended October 31, 1996, an increase of
approximately $4.3 million or 4.7%. Shipping levels decreased 1.4% to 254,656
ton from 258,395 tons and the average price per ton shipped increased to $370
from $348. The decrease in tons shipped and the increase in average selling
price is primarily due to a change in product mix. The Company is implementing
its business strategy to produce and sell higher value added finished products
instead selling billets to third parties.
Hot Rolled Bar Products. Shipments for the six month period ended October
31, 1997 were 93,828 tons compared to 80,736 tons for the six month period
ended October 31, 1996, an increase of 13,092 tons or 16.2%. Shipments from
the Sand Springs Facility for the six month period ended October 31, 1997
increased 35.6% over the same period in the previous year due to continued
improvements in operations at the Sand springs Facility and implementation of
the Company's business strategy to improve finished goods product mix.
Shipments of hot rolled bar products from the Joliet Facility also increased
reflecting strong market conditions. The average price per ton of hot rolled
bar products for the six month period ended October 31, 1997 increased to $449
per ton compared to $441 per ton for the six month period ended October 31,
1996, reflecting improved selling prices at both the Sand Springs Facility and
the Joliet Facility.
Rebar. Rebar shipments for the six month period ended October 31, 1997 were
112,122 tons compared to 102,364 tons for the six month period ended October
31, 1996, an increase of 9,758 tons or 9.5%. This increase was primarily a
result of the continued improvements in operations at the Sand Springs
Facility and general market strength in the construction industry. The average
price per ton of rebar for the six month period ended October 31, 1997
increased to $296 from $291. The increase in average price per ton is
attributable to improved market conditions.
Fabricated Products. Shipments of fabricated products for the six month
period ended October 31, 1997 were 27,911 tons compared to 28,175 tons for the
six month period ended October 31, 1996, a decrease of 264 tons or .9%. The
average price per ton for fabricated products for the six months ended October
31, 1997 decreased to $456 from $458. The decrease in shipments and average
selling prices is attributable to production difficulties at the Sand Springs
fence post shop which have since been resolved.
Billets. Shipments of billets to third parties for the six month period
ended October 31, 1997 were 20,795 tons compared to 47,120 tons for the six
month period ended October 31, 1996, a decrease of 26,325 or 55.9%. This
decrease was due to the Company's implementation of its business strategy to
utilize more billets internally to produce higher value added finished
products instead of selling the billets to third parties. The average price
per ton for billets for the six month period ended October 31, 1997 increased
to $227 from $215. The increase in average price per ton is attributable to
improved product mix.
COST OF SALES. The cost of sales for the six month period ended October 31,
1997 were approximately $75.4 million as compared to approximately $74.3
million for the six month period ended October 31, 1996. On an average per ton
basis, cost of sales increased to $296 per ton for the six months ended
October 31, 1997 from $288 per ton for the six months ended October 31, 1996.
In the six month period ended October 31, 1997, billet shipments decreased and
rebar and hot rolled bar product increased resulting in the increase in
average cost per ton.
30
<PAGE>
GROSS PROFIT. Gross profit for the Company for the six month period ended
October 31, 1997 was approximately $18.8 million as compared to approximately
$15.6 million for the six month period ended October 31, 1996, an increase of
approximately $3.3 million or 21.0%. Gross profit for the Company as a
percentage of sales for the six month period ended October 31, 1997 was 20.0%
as compared to 17.3% for the six month period ended October 31, 1996. 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, 1997 was approximately $6.6 million as compared to approximately $6.5
million for the six months ended October 31, 1996. The slight increase was
primarily due to additional selling expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization remained
approximately the same for the six month period ended October 31, 1997, as
compared to the six month period ended October 31, 1996.
POST-RETIREMENT BENEFIT EXPENSE. Post-retirement benefit expense remained
approximately the same for the six month period ended October 31, 1997 as
compared to the six month period ended October 31, 1996.
OPERATING INCOME. Operating income for the Company for the six month period
ended October 31, 1997 was approximately $7.3 million as compared to
approximately $4.2 million for six month period ended October 31, 1996, an
increase of approximately $3.1 million or 75.1%. Operating income for the
Company as a percentage of sales for the six months ended October 31, 1997 was
7.8% as compared to 4.7% for the six months ended October 31, 1996. This
increase was primarily due to the increased gross profit as discussed above.
INTEREST EXPENSE. Interest expense remained approximately the same for the
six month period ended October 31, 1997 compared to the six month period ended
October 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1997, the Company's long-term indebtedness was
approximately $91.2 million, after giving effect to an unamortized discount
attributable to detachable stock warrants of approximately $1.6 million. The
Company had approximately $21 million of borrowing availability at October 31,
1997 under its revolving credit agreements and approximately $4 million
available under the equipment financing agreement.
Cash flow provided by operations was approximately $10.5 million for the six
month period ended October 31, 1997, as compared with cash flow provided by
operations of approximately $3.2 million for the six month period ended
October 31, 1996. The increase in cash provided by operations was primarily
due to reducing accounts receivable and inventories as well as improved
operating results. Cash used in investing activities in the three months ended
October 31, 1997 was approximately $4.2 million, consisting of required
replacement of plant equipment and the purchase of Waddell. For the six month
period ended October 31, 1997, cash used for financing activities consisted
primarily of payments on the revolving credit facility.
The Company's cash flow from operations and borrowings under the Revolving
Credit Facility, the Railway Credit Facility, and equipment financing
agreements are expected to be sufficient to fund the budget for capital
improvements, and meet near-term working capital requirements.
On a longer 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 industry, as
well as prevailing economic conditions, certain of which are beyond the
control of the Company.
31
<PAGE>
CAPITAL EXPENDITURES
Capital expenditures for the six month period ended October 31, 1997 were
approximately $1.8 million. Primarily all of the expenditures consisted of
normal capital projects required or deemed economically feasible, throughout
the Company. 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. The Company expects to
incur capital expenditures of approximately $8.5 million if fiscal 1998, which
includes the shear line project in the Sand Springs rolling mill.
FISCAL 1997 AS COMPARED TO FISCAL 1996
SALES. Sales for the Company for fiscal 1997 were approximately $170.9
million as compared to sales of approximately $172.3 million for fiscal 1996,
a decrease of approximately $1.5 million or 0.8%. This decrease was primarily
the result of a decrease in the tons shipped from 477,005 to 473,755, as the
average price per ton shipped remained unchanged at $361 per ton. This
decrease in sales was primarily a result of decreased shipments of billets.
Hot Rolled Bar Products. Shipments in fiscal 1997 were 174,290 tons compared
to 159,688 tons in fiscal 1996, an increase of 14,602 tons or 9.1%. Shipments
of hot rolled bars produced at the Sand Springs Facility were up approximately
66% in fiscal 1997 over the previous year due to continued improvements in
operation of the New Rolling Mill and the Company's implementation of its
business strategy to improve finished product mix. This increase was partially
offset by decreased sales of hot rolled bar products from the Joliet Facility
which were primarily due to weak market conditions encountered during the
first fiscal quarter. The average price per ton for hot rolled bar products
decreased to $435 per ton in fiscal 1997 from $461 per ton in fiscal 1996. The
decrease in average price per ton is due to the increased proportion of the
Company's hot rolled bar products being produced at the New Rolling Mill at
the Sand Springs Facility which have a lower selling price than the more
specialized products produced at the Joliet Facility.
Rebar. Rebar shipments for fiscal 1997 were 185,745 tons as compared to
169,316 tons in fiscal 1996, an increase of 16,429 tons or 9.7%. The increase
in tons shipped was primarily due to increased production. Rebar shipments in
the previous year were limited because mill time was allocated to the
development of new hot rolled bar business in accordance with the Company's
business strategy to improve product mix. The average price per ton for rebar
decreased to $292 for fiscal 1997 from $293 per ton in fiscal 1996.
Fabricated Products. Shipments of fabricated products in fiscal 1997 were
53,208 tons, down from 54,444 tons in fiscal 1996. Shipments of fabricated
products from the Kansas City Plant decreased from the prior year, primarily
due to weak market demand in the fourth quarter. Shipments of fence posts were
consistent with the prior year. The average price per ton for fabricated
products decreased slightly to $460 per ton in fiscal 1997 from $461 per ton
in fiscal 1996.
Billets. Shipments of billets to third parties for fiscal 1997 were 60,512
tons as compared to 93,557 tons in fiscal 1996. The decrease of 33,045 tons or
35.3% was due to the Company's implementation of its business strategy to
utilize billets internally for the production of higher value added finished
products instead of selling billets to third parties. The average price per
ton for billets decreased to $214 per ton in fiscal year 1997 from $225 per
ton in fiscal 1996. The decrease in the average price per ton of billets was
partially due to weak market demand and partially due to selling a higher
proportion of commodity grade steel.
COST OF SALES. The cost of sales for fiscal year 1997 was approximately
$140.2 million as compared to approximately $143.1 million for the fiscal year
ended 1996. Cost of sales on an average per-ton basis decreased slightly from
the prior year to $296 from $300. The decrease in cost of sales per ton is due
to improved production rates and a decrease in scrap raw material costs from
the prior year. The decrease was partially offset by slightly higher
conversion costs per ton in both the melt shop and the New Rolling Mill due to
an electric furnace transformer failure and higher energy costs in comparison
to the prior year. Although the electric furnace
32
<PAGE>
transformer failure curtailed melt shop operations by approximately 40% for a
four month period, the Company purchased billets from third party suppliers
and met its finished product requirements. The Company's relationships with
its customers were not disrupted and the Company's insurance policy covered
its costs of purchasing billets and repairing the transformer.
GROSS PROFIT. Gross profit for fiscal 1997 was approximately $30.6 million
as compared to approximately $29.2 million for fiscal 1996, an increase of
approximately $1.4 million or 4.9%. Gross profit as a percentage of net sales
for fiscal 1997 was 17.9% as compared to 16.9% for fiscal 1996. The increase
in gross profit in fiscal 1997 is due to the decrease in cost of sales and the
increase in sales as discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense for fiscal 1997 was approximately $11.9 million,
reflecting an increase of approximately $0.2 million from 1996 levels. This
increase is due to additional selling expenses related to the expanded sales
efforts for hot rolled bar products.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for 1997 was
approximately $6.8 million as compared to approximately $6.6 million for 1996,
an increase of approximately $0.2 million or 3.2%. The increase in
depreciation expense was primarily the result of depreciation on capital
expenditures made in both fiscal 1996 and 1997.
POST-RETIREMENT BENEFIT EXPENSE. Post-retirement benefit expense decreased
to approximately $2.4 million for fiscal 1997 from approximately $2.8 million
in 1996. The decrease is primarily due to a decrease in the health care cost
trend rates as determined by an independent actuary.
RESTRUCTURING EXPENSE. A restructuring charge of $1.3 million, $1.0 million
of which was non-cash, was recognized in fiscal 1997 as a result of early
retirement incentives included in a collective bargaining agreement and
salaried workforce reductions in Sand Springs.
OPERATING INCOME. Operating income was approximately $8.3 million for fiscal
1997 as compared to operating income of approximately $8.1 million for fiscal
1996, an increase of approximately $0.1 million or 1.8%. Operating income as a
percentage of sales for fiscal 1997 was 4.8% as compared to 4.7% for fiscal
1996. The slight increase is a result of higher gross profit as described
above, offset by higher administrative expenses and the restructuring charge
as explained above.
INTEREST EXPENSE. Interest expense for fiscal 1997 was approximately $11.8
million as compared to approximately $11.7 million for fiscal 1996.
FISCAL 1996 AS COMPARED TO FISCAL 1995
SALES. Sales for the Company for fiscal 1996 were approximately $172.3
million as compared to sales of approximately $175.8 million for fiscal 1995,
a decrease of approximately $3.4 million or 2.0%. This decrease was primarily
the result of a decrease in tons shipped from 500,150 tons to 477,005 tons and
was partially offset by an increase in the average price per ton shipped from
$351 to $361.
Hot Rolled Bar Products. Shipments in fiscal 1996 were 159,688 tons compared
to 157,610 tons in fiscal 1995, an increase of 2,078 tons or 1.3%. Hot rolled
bar product sales tons shipped from the Sand Springs Facility were up
approximately 74% in fiscal 1996 over the previous year due to continued
improvements in operation of the New Rolling Mill and the Company's
implementation of its business strategy to improve finished product mix.
Growth in hot rolled bar product shipments also were due to additional
production orders. Sales of hot rolled bar products from the Joliet Facility
decreased due primarily to weak market conditions encountered during the third
fiscal quarter. The average price per ton for hot rolled bar products remained
relatively constant at $461 per ton in fiscal 1996, as compared to $462 per
ton in fiscal 1995.
Rebar. Rebar shipments for fiscal 1996 were 169,316 tons as compared to
161,198 tons in fiscal 1995, an increase of 8,118 tons or 5.0%. The increase
in the tons shipped was related to additional tons being produced
33
<PAGE>
on the New Rolling Mill over the previous year. Rebar shipments were limited,
however, because during start up of the New Rolling Mill mill time was
allocated to the development of new hot rolled bar product business. The
average price per ton of rebar increased to $293 for fiscal 1996 from a fiscal
1995 price per ton of $290.
Fabricated Products. Shipments of fabricated products in fiscal 1996 were
54,444 tons, up from 48,325 tons in fiscal 1995, an increase of 6,119 tons or
12.7%. Shipments of fabricated products from the Kansas City Plant were
consistent with the prior year while shipments of fence post increased 5,786
tons. The average price per ton for fabricated products of $461 per ton in
fiscal 1996 was $14 per ton higher than the average price per ton of $447 in
fiscal 1995. This price per ton increase was due to improved market conditions
in both the fence post and the rebar fabrication businesses.
Billets. Shipments of billets to third parties for fiscal 1996 were 93,557
tons as compared to fiscal 1995 shipments of 133,017 tons. The decrease of
39,460 tons or 29.7% was primarily due to the Company's shift in emphasis to
the sale of finished products as well as decreased market demand for billets
industry-wide. Demand decreased during the summer of 1995 and did not return
to normal levels for six months. Average sales price per ton for billets
decreased from $236 per ton in fiscal year 1995 to $225 per ton in fiscal
1996. The decrease in the average price per ton of billets reflected the
weaker market encountered during the 1996 fiscal year.
COST OF SALES. The cost of sales for fiscal year 1996 was approximately
$143.1 million as compared to approximately $144.4 million for the fiscal year
ended 1995. Cost of sales on an average per-ton basis was consistent with the
prior year on a product by product comparison. The costs per ton in the
aggregate increased from $289 in fiscal year 1995 to $300 in fiscal 1996 due
to a higher percentage of finished steel product sales. In fiscal 1996 billet
shipments decreased by 39,460 tons and the decrease of these lower cost
products in the mix caused the average cost per ton to increase. Scrap prices
were fairly consistent between years.
GROSS PROFIT. Gross profit for fiscal 1996 was approximately $29.2 million
as compared to approximately $31.4 million for fiscal 1995, a decrease of
approximately $2.2 million or 6.9%. Gross profit as a percentage of net sales
for fiscal 1996 was 16.9% as compared to 17.8% for fiscal 1995. The decrease
in gross profit in fiscal 1996 was primarily due to reduced profitability of
billets compared to fiscal 1995 caused by weaker market conditions and start
up costs associated with the New Rolling Mill. While productivity and yields
improved over fiscal 1995, costs associated with the start up of the New
Rolling Mill reduced gross profit margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense for fiscal 1996 was approximately $11.7 million,
reflecting a decrease of approximately $0.4 million from 1995 levels. This
decrease is the direct result of the Company's efforts to control overhead
costs throughout the Company.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for 1996 was
approximately $6.6 million as compared to approximately $5.9 million for 1995,
an increase of approximately $0.6 million or 10.7%. The increase in
depreciation expense was primarily the result of capital expenditures related
to the New Rolling Mill.
OPERATING INCOME. Operating income was approximately $8.1 million for fiscal
1996 as compared to operating income of approximately $10.1 million for fiscal
1995, a decline of approximately $2.0 million. Operating income as a
percentage of sales for fiscal 1996 was 4.7% as compared to 5.8% for fiscal
1995. The decline was primarily due to expenses associated with the New
Rolling Mill start-up and the weaker market for billets.
INTEREST EXPENSE. Interest expense for fiscal 1996 was approximately $11.7
million as compared to approximately $8.0 million for fiscal 1995, an increase
of approximately $3.7 million or 45.8%. Interest expense in fiscal 1995
included $2.1 million interest capitalized in connection with the financing of
the New Rolling Mill construction. The remaining increase in financing costs
was primarily caused by a slightly higher lending rate in fiscal 1996 and the
build up of inventories to support the expanding hot rolled bar product
business.
34
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1997, the Company's long term indebtedness was $91.2
million, after giving effect to an unamortized discount attributable to common
stock warrants of approximately $1.6 million. After giving effect to the
issuance of the Old First Mortgage Notes and the application of the net
proceeds therefrom as of October 31, 1997, the Company's outstanding
indebtedness would have been approximately $114.5 million consisting of $110
million of Old First Mortgage Notes and $4.4 million of other indebtedness.
The Company will not be required to make any principal payments on the First
Mortgage Notes prior to maturity. See "Use of Proceeds" and "Capitalization."
The Revolving Credit Facility provides a revolving credit commitment in the
amount of $40 million. Pursuant to an amendment to the Revolving Credit
Facility dated as of the Issue Date, the exact amount the Company is eligible
to borrow on a revolving basis under the Revolving Credit Facility is based on
collateral availability consisting of 85% of eligible accounts receivable and
65% of eligible inventories. After giving effect to the issuance of the Old
First Mortgage Notes on an as adjusted basis as of October 31, 1997, $35.3
million would be available under the Revolving Credit Facility. Indebtedness
under the Revolving Credit Facility is secured by a first priority lien on
Sheffield's inventory and accounts receivable. The Revolving Credit Facility
matures on November 1, 2000. See "Description of Revolving Credit Facility."
Borrowings under the Revolving Credit Facility bear interest at a floating
rate. To the extent that such interest rate increases, and to the extent that
amounts outstanding under the Revolving Credit Facility increase, there will
be corresponding increases in the Company's interest obligations. The Company
intends to use a portion of the net proceeds of the issuance of the Old First
Mortgage Notes to repay amounts outstanding under the Company's credit
facilities, although it will retain these facilities for future borrowings.
See "Description of Revolving Credit Facility", "Use of Proceeds" and
"Capitalization."
In addition to borrowings under the Revolving Credit Facility, the Company
has historically used cash flow from operations and equipment financing
agreements to fund its investing activities, including capital expenditures.
The Company expects to incur capital expenditures of approximately $8.5
million in fiscal 1998, including $4.5 million for the Shear Line Project. The
Company estimates annual maintenance capital expenditures to be approximately
$3 million.
Cash flow from operating activities was $4.7 million in fiscal 1997,
compared with cash flow from operating activities of $3.1 million in fiscal
1996. Cash used in investing activities in fiscal 1997 was $3.7 million,
consisting principally of replacement and environmental expenditures and other
capital improvements. In fiscal 1997, approximately $1.1 million of cash flow
from operating activities was used in financing activities, principally to
repay long-term debt and make payments to retired executives of the Company in
respect of stock appreciation rights.
Cash flow from operating activities was $3.1 million in fiscal 1996,
compared with cash flow from operating activities of $0.5 million in fiscal
1995. This increase in cash flow resulted principally from decreases in
accounts receivable and billet inventory as compared with in fiscal 1995. Cash
used in investing activities in fiscal 1996 was $4.4 million, consisting
principally of normal capital expenditures. In fiscal 1996, approximately
$4.3 million of cash flow was generated from increases in long-term and
revolving credit facilities. Approximately $2.3 million was used for payments
in respect of stock appreciation rights, dividends and to repurchase common
stock warrants.
Cash flow from operating activities was $0.5 million in fiscal 1995. Cash
used in investing activities in fiscal 1995 was $24.2 million, consisting
principally of capital expenditures.
The Company's cash flow from operating activities and borrowings under the
Revolving Credit Facility are expected to be sufficient to fund the fiscal
1998 budget for capital improvements and meet any near-term working capital
requirements. On a longer term basis, the Company has significant future debt
service obligations. The
35
<PAGE>
Company's ability to satisfy these obligations and to secure adequate capital
resources in the future will be dependent on its ability to generate adequate
operating cash flow. The Company expects that its cash flow from operations
and borrowing availability under its revolving credit facilities will be
sufficient to fund the repayment of the First Mortgage Notes and other
investing activities. This will be dependent on its overall operating
performance and be subject to general business, financial and other factors
affecting the Company and the domestic steel industry, as well as prevailing
economic conditions, certain of which are beyond the control of the Company.
The leveraged position of the Company and the restrictive covenants contained
in the Indenture and the Revolving Credit Facility could significantly limit
the Company's ability to withstand competitive pressures or adverse economic
conditions.
The Company is subject to a broad range of federal, state and local
environmental regulations and requirements, including those governing air
emissions and discharges into water, and the handling and disposal of solid
and/or hazardous wastes. As part of its normal course of business, the Company
incurs expenses, primarily for the disposal of bag house dust, to comply with
these regulations and requirements. Expenses were approximately $2.1 million
in fiscal 1997, approximately $1.7 million in fiscal 1996, and approximately
$2.2 million in fiscal 1995. Capital expenditures incurred by the Company to
comply with these requirements were approximately $0.7 million in fiscal 1997
and approximately $0.4 million in fiscal 1996. In addition, in the event of a
release of a hazardous substance generated by the Company, the Company could
be responsible for the remediation of contamination associated with such a
release. The Company believes that it is currently in substantial compliance
with all known material and applicable environmental regulations.
The Company has not experienced any material adverse effects on operations
in recent years because of inflation, though margins can be affected by
inflationary conditions. The Company's primary cost components are ferrous
scrap, energy and labor, all of which are susceptible to domestic inflationary
pressures. Finished product prices, however, are influenced by general
economic conditions and competitive factors within the steel industry. While
the Company generally has been successful in passing on cost increases to its
customers through price adjustments, the effect of steel imports, severe
market price competition and under-utilized industry capacity has in the past,
and could in the future, limit the Company's ability to adjust pricing.
36
<PAGE>
BUSINESS
GENERAL
The Company is a leading regional mini-mill producer of hot rolled steel bar
products, concrete reinforcing bar, fabricated products, including fabricated
and epoxy-coated rebar and steel fence posts, and various types of billets.
The Company and its predecessors have been in the steelmaking business for
over 68 years. The Company believes that it is among the lowest cost producers
of billets in the United States as a result of its modern melt and cast
operations, high labor productivity levels, low energy costs and competitive
steel scrap costs. The Company's low cost billets serve as the feedstock for
its downstream bar mill operations and finished products. The Company shipped
approximately 470,000 tons of steel in the 12-month period ended October 31,
1997, resulting in sales of $175.1 million and EBITDA (as defined) of $20.7
million.
BUSINESS STRATEGY
The Company has formulated an operating strategy to strengthen its market
position and maximize profitability which has four major components: (i)
improve finished goods product mix; (ii) continue to focus on and extend
strong customer relationships; (iii) modernize melt shop operations; and (iv)
streamline and strengthen organizational structure.
Improve Finished Goods Product Mix. With the addition of the New Rolling
Mill at the Sand Springs Facility, the Company has substantially increased its
hot rolled bar production capacity. Accordingly, shipments of finished
products have increased significantly as less profitable third party billet
sales have been intentionally reduced. Billet sales, which accounted for 23.6%
of tons shipped in fiscal 1994, accounted for only 7.3% of tons shipped for
the 12-month period ended October 31, 1997. Shifting away from third party
billet sales by increasing hot rolled bar production has also increased
margins and reduced sales volatility for the Company, since hot rolled bar
products are significantly more profitable than third party billet sales and
demand is more stable. As part of its strategy to further improve product mix,
the Company intends to remove a bottleneck at the Sand Springs Facility by
improving the efficiency of the cooling bed and increasing the capacity of the
shear line (the "Shear Line Project"). The completion of the Shear Line
Project, scheduled for the end of fiscal 1998, is expected to (i) increase hot
rolled bar production capacity by more than 100,000 tons per year; (ii) enable
the Company to more fully utilize its existing 600,000 tons of steelmaking
capacity; (iii) improve the quality of all mill products, especially hot
rolled bar; and (iv) improve product mix by further reducing billet sales to
third parties. The Shear Line Project is expected to have an aggregate capital
cost of approximately $4.5 million and, upon completion and achieving full
operating capacity, is expected to result in an annual EBITDA (as defined)
increase of approximately $9 million.
Extend Strong Customer Relationships. The Company benefits from having a
number of long-standing customer relationships in each of its product markets.
The Company has built a reputation for providing consistent product quality,
reliable, prompt product delivery and service, product availability and
flexible scheduling to meet customer needs and a high level of follow up
technical assistance and service. The ISO 9002 certification at both the Sand
Springs Facility and the Joliet Facility is an indication of the Company's
commitment to producing quality products. The Company believes that its
business strategy to improve its finished product mix will strengthen its
existing customer relationships and will aid it in developing new customer
relationships.
Modernize Melt Shop. The Company believes that it is among the lowest cost
producers of billets in the United States as a result of its modern melt and
cast operations, high labor productivity levels, low energy costs and
competitive steel scrap costs. With the addition of the New Rolling Mill,
which can utilize a larger billet, together with improvements in general
operating practices, yields have improved, costs have been reduced and annual
billet production capacity has increased from 525,000 tons to 600,000 tons per
year. Through incremental capital investments, the Company intends to pursue
additional modernization measures, such as the installation of a ladle arc
furnace in the melt shop, which will further enhance production capability,
increase production capacity, reduce manufacturing costs and improve the
quality of finished products.
37
<PAGE>
Streamline and Strengthen Organizational Structure. The Company has improved
strategic planning, strengthened financial reporting systems and aligned
organizational structure and management incentives with the Company's business
strategies and objectives. In accordance with the collective bargaining
agreement reached in February 1997 that resulted in a 15% workforce reduction,
the Company has been able to implement multi-craft training and use greater
flexibility in job assignments. Additional initiatives to streamline
operations include the elimination of a centralized maintenance structure and
close coordination of the melt shop, casting and rolling mill operations which
have resulted in significant reductions in both billet and finished goods
inventory. The Company has also put in place a new management team to manage
the Sand Springs Facility manufacturing operations. These initiatives have
resulted in improving the organizational structure of the Company, making it
flexible and more responsive to customer needs and positioning it to implement
its business strategy of improving finished product mix.
PRODUCTS, CUSTOMERS AND MARKETS
Hot Rolled Bar. According to the American Iron and Steel Institute ("AISI"),
the size of the hot rolled bar product market in the United States was
approximately 7 million tons in 1996. The demand for consistent quality is
very significant in the hot rolled bar product market, where quality is
measured by the adherence to specifications related to chemical composition,
surface quality, product integrity and size tolerances. The Company sells a
variety of specialty hot rolled bar products, including flats, squares, rounds
and channels for end use applications that include farm equipment, auto parts,
conveyor assemblies, pole line hardware, wrench handles and construction
machinery. The majority of hot rolled bar products produced at the Joliet
Facility (approximately 81% in fiscal 1997) is sold directly to original
equipment manufacturers and cold drawn bar finishers, while the remainder
(approximately 19% in fiscal 1997) is sold to steel service centers. Hot
rolled bar products produced at the Sand Springs Facility are sold to both end
product manufacturers (approximately 62% in fiscal 1997) and steel service
centers (approximately 38% in fiscal 1997). For fiscal 1997, sales of hot
rolled bar products accounted for approximately 44% of the Company's total
revenues.
In the hot rolled bar market, the Company differentiates itself from its
competitors through the Joliet Facility's focus on specialty hot rolled bar
products and by targeting customers with special requirements as to bar shape,
size and chemical composition and, in many cases, small volume needs. The
Company believes that its targeted customer focus often allows it to act as
the sole supplier of particular shapes, sizes or steel chemistries to certain
customers, while in other cases it competes with a limited number of producers
of specialty hot rolled bar products. The Company believes that these niche
markets are unattractive to larger volume producers. The Company also believes
that there are significant opportunities to sell standard hot rolled bar
products to customers for whom the Joliet Facility currently satisfies
specialty hot rolled bar product requirements. The Company's Sand Springs
Facility provides it with a competitive geographical advantage in the south-
central United States hot rolled bar marked and enables the Company's
customers to benefit from lower freight costs, shorter lead times and more
timely deliveries. As a result of these competitive advantages and its strong
reputation for quality and service, the Company has developed a number of
strong relationships with the region's hot rolled bar product customers.
The Company also strives to provide its hot rolled bar product customers
with superior service. For fiscal 1997, the Company's largest specialty hot
rolled bar product customer accounted for approximately 11% of total hot
rolled bar product shipments, and the 10 largest specialty hot rolled bar
product customers accounted for approximately 41% of total hot rolled bar
product shipments. To permit a high level of service consistent with efficient
production scheduling, the Company carries a customer-designated finished
goods inventory of hot rolled bar products in excess of 10,000 tons at both
the Joliet and Sand Springs facilities. Both the Sand Springs Facility and the
Joliet Facility have implemented an internally developed bar-coded inventory
tracking system which permits quick and precise inventories to be taken at any
time. The Joliet Facility has also developed a customer query system which
provides agents and major customers with direct computer access to the status
of their production orders, the availability of inventory designated for them
and the Joliet Facility's production schedule for their products. See "--
Business Strategy--Extend Strong Customer Relationships."
38
<PAGE>
Rebar. According to the AISI, the size of the rebar market in the United
States was approximately 6.3 million tons in 1996. Rebar is a lower value,
higher volume commodity bar product for which price is often the customer's
decisive factor. Geographic proximity to customers, which in turn determines
both freight costs and delivery response time, is also an important factor in
the rebar market, where profit margins are particularly tight and independent
fabricators typically depend on quick mill response rather than their own
inventories to meet ever-changing construction schedules. The Company sells
rebar to leading independent fabricators located in the south-central United
States who then shear and bend the rebar to meet engineering or architectural
specifications for construction projects. The Company produces rebar at the
Sand Springs Facility rolling mill, where the bars are rolled in standard
diameters from #4 bar ( 1/2 inch or 13mm) to #18 bar (2 1/4 inches or 57mm)
and sheared to standard lengths from 20 feet to 60 feet. To provide rapid
response to customer needs, the Company usually maintains a finished goods
inventory of 25,000 to 35,000 tons of rebar. Sales of rebar constituted
approximately 32% of total Company revenues in fiscal 1997.
Rebar demand is driven by trends in commercial and industrial construction
and infrastructure investment. During periods of overall reduced steel
industry demand, the Company has maintained relatively stable rebar sales
volume due to the levels of public and private sector investment in buildings,
plants, facilities and infrastructure in the south-central United States. The
Company has worked successfully to build and maintain long-term relationships
with its customers by providing them with competitive pricing, assured product
availability and reliable, prompt delivery and service. This strategy permits
the fabricators to compete successfully in the construction and infrastructure
markets, thus reinforcing the Company's relationships with such fabricators.
The Company believes that it is the primary and, in most cases, the sole
supplier to substantially all of its customers. In fiscal 1997, the Company's
10 largest rebar customer accounts represented approximately 80% of total
rebar sales. Of the 10 largest rebar customers in fiscal 1997, eight were
among the Company's 10 largest rebar customer accounts for fiscal 1996, 1995,
1994 and 1993.
39
<PAGE>
Due to the importance of pricing, freight costs and delivery response time,
sales of rebar tend to be concentrated within close geographic proximity to a
rebar manufacturer's mini-mill. The following map depicts the Company's rebar
market in the geographic area surrounding the Sand Springs Facility.
[MAP OF SOUTH CENTRAL UNITED STATES SHOWING COMPANY'S REBAR MARKET BY A DOTTED
LINE FORMING A CIRCLE THROUGH THE STATES OF ARKANSAS, OKLAHOMA, TEXAS, KANSAS,
NEBRASKA AND MISSOURI]
In the Company's primary market area of Oklahoma, Kansas and portions of
Nebraska, Missouri, Arkansas and northern Texas, the Company enjoys a freight
advantage over its competitors and believes it has a market share in excess of
50%. Approximately half of the Company's rebar shipments are made in this
primary market area. The remaining rebar shipments are made in the adjacent
regions of Nebraska, Missouri, Arkansas and Texas and in Louisiana, New Mexico
and Colorado. Since pricing, freight costs and delivery response times are
important competitive factors in the rebar market, the Company believes that
efforts to penetrate more distant markets would be uneconomical or impractical.
Fabricated Products. The Company manufactures two fabricated steel products:
fence post and fabricated rebar, including epoxy-coated rebar, which are sold
to distributors and farm cooperatives. Fence post is produced
40
<PAGE>
in two weights (1.25 pounds per foot and 1.33 pounds per foot), in orange and
green colors and various lengths from 4 feet to 8 feet. The Company
manufactures approximately 24,000 tons of fence post annually on a five day,
one-shift basis at a post shop located adjacent to the New Rolling Mill. The
Company believes that its fence post is recognized as a quality leader in the
industry. Fabricated products sales constituted approximately 14% of total
Company revenues in fiscal 1997. The majority of the Company's fence post
sales are concentrated in the Oklahoma, Kansas, Missouri, Texas and Arkansas
market area, and the Company believes that it is the primary supplier of fence
post with more than half of the market in that area. The Company's 5 largest
customer accounts represented approximately 75% of total fence post shipments
in fiscal 1997.
Fabricated rebar is shipped from the Kansas City Plant to highway and
construction contractors in Missouri, Kansas, Nebraska and in contiguous
markets. In recent years, the Company has experienced increased demand from
contractors bidding on infrastructure projects for fabricated rebar which is
epoxy-coated prior to fabrication to protect against corrosion in the field.
This has provided the Kansas City Plant with a competitive advantage and
contributed to a growth in shipments. The Company believes that its epoxy
coating line, the only one located in the Kansas City, Missouri market,
provides a competitive advantage in securing contracts.
On October 28, 1997, the Company acquired (the "Acquisition") all of the
issued and outstanding capital stock of Waddell's Rebar Fabricators, Inc.
("Waddell"), pursuant to a Stock Purchase Agreement among the Company, Waddell
and the former stockholders of Waddell. The Acquisition purchase price
consisted of (i) $1,040,000 in cash, subject to post-closing adjustment based
upon the actual net worth of Waddell on the closing date, and (ii) secured,
subordinated promissory notes (the "Notes") in an aggregate principal amount
of $2,000,000, which Notes mature in four years and accrue interest at
NationsBank's prime rate minus 1/2 of one percent per annum. The Notes are
secured by the Company's pledge of the capital stock of Waddell. Waddell is a
rebar fabricator located in Independence, Missouri which specializes in
smaller volume, higher value added construction contracts. Although the
Company will maintain Waddell as a separate subsidiary for the foreseeable
future, the Company intends to integrate the management of Waddell with the
management of the Company's rebar fabrication plant in Kansas City, Missouri.
Billets. The Company sells billets to other steel mills or forgers for
conversion into finished products. Most sales are made to a single dedicated
account and a portion are sold in the "spot" market and later exported to
markets in Mexico, South America and the Caribbean. Sales volume potential and
pricing for billets, particularly in the spot market, is highly variable. The
dominant competitive factors are availability and price. To meet customer and
finished product specifications, the Company produced in excess of 100 grades
of billets during fiscal 1997. Billet sales to third parties are dependent on
the Company's own billet requirements and market conditions that vary widely.
In the past three fiscal years, billets sales to third parties have ranged
between 8% and 18% of the Company's total revenues. Billet sales constituted
approximately 8% of total Company revenues in fiscal 1997.
The Company's business strategy includes shifting away from selling billets
toward utilizing billets internally to produce higher value added finished
products. After completion of the Shear Line Project, the Company expects to
increase its production of hot rolled bar products which will increase its
need for billets and, accordingly, fewer billets will be available for sale to
third parties.
The Railway Company. The Railway Company operates approximately seven miles
of rail line between Sand Springs and Tulsa, Oklahoma, serving primarily the
operations of the Sand Springs Facility and, to a lesser extent, third
parties. The Railway Company's revenues from third parties constituted
approximately 2% of total Company revenues in fiscal 1997.
MANUFACTURING PROCESS
The Company's primary manufacturing facility is the Sand Springs Facility,
where it conducts a full range of steelmaking activities, including the
melting and casting of billets and the processing of billets into rebar, steel
fence posts and a range of hot rolled bar products. The Company has recently
completed construction,
41
<PAGE>
installation and final commissioning of the $22 million New Rolling Mill at
the Sand Springs Facility, which has increased productivity and efficiency in
the manufacturing of rebar and has enabled the Company to produce certain
higher quality hot rolled bar products that it was previously unable to
produce. From the Sand Springs Facility, the Company also transfers billets to
its two rolling mills at the Joliet Facility, where it produces high end
specialty hot rolled bar products. The Company also operates a rebar
fabrication plant in Kansas City, Missouri. The Sand Springs Facility and the
Joliet Facility received ISO 9002 quality certification in November 1995 and
June 1996, respectively.
At the Sand Springs Facility, steel scrap is conveyed by rail car from the
Company's scrap yard to the facility's melt shop, where the steel scrap is
melted with electricity in two 85-ton electric arc furnaces. During the scrap
melting process, impurities are removed from the molten steel. The molten
steel is then poured into a ladle, where metal alloys are added to obtain
desired chemical compositions. The molten steel is then conveyed to a six-
strand continuous caster which casts various types of billets. The continuous
caster is capable of forming billets up to 8 inches square and 50 feet long.
These billets are then reheated, rolled and shaped into various finished steel
products at the Sand Springs or Joliet rolling mills or, to a lesser extent
sold to third parties. The Sand Springs rolling mill produces rebar, "T"
sections which are further processed into fence posts and a range of hot
rolled bar products. The rolling mills at the Joliet Facility produce an
extensive range of hot rolled bar products.
The diagram below depicts the Company's steel manufacturing process as
currently conducted.
[CHART SHOWING STEPS OF MANUFACTURING PROCESS]
42
<PAGE>
SALES AND MARKETING
Hot rolled bar products produced at the Joliet Facility are sold regionally
by the Company's sales personnel and nationally through commissioned sales
representatives under exclusive agency agreements with the Company. Hot rolled
bar products produced at the Sand Springs Facility and rebar are sold through
the Company's own sales force and sales agencies which also service the Joliet
Facility. The Company markets fence post directly to farm cooperatives and to
fence post distributors. While some billets are sold through semi-finished
steel brokers on the "spot" market, most is sold through one dedicated
account. After completion of the Shear Line Project, the Company's internal
billet requirements will increase and the availability of billets for sale to
third parties will decrease accordingly. As a result of adverse weather
conditions which impact construction activities and a normal seasonal downturn
in manufacturing levels, the Company typically experiences lower sales volumes
in its third fiscal quarter.
RAW MATERIALS
The Company's primary raw material is steel scrap, which is generated
principally from industrial, automotive, demolition, railroad and other scrap
sources and is purchased by the Company in the open market through a limited
number of steel scrap brokers and dealers or by direct purchase. The cost of
steel scrap is subject to market forces, including demand by other steel
producers. The cost of steel scrap to the Company can vary significantly, and
product prices generally cannot be adjusted in the short-term to recover large
increases in steel scrap costs. Over longer periods of time, however, product
prices and steel scrap prices have tended to move in the same direction.
The long-term demand for steel scrap and its importance to the domestic
steel industry may be expected to increase as mini-mill producers continue to
expand steel scrap-based electric arc furnace capacity with additions to or
replacements of existing integrated facilities. For the foreseeable future,
however, the Company believes that supplies of steel scrap will continue to be
available in sufficient quantities. In addition, a number of technologies
exist for the processing of iron ore into forms which may be substituted for
steel scrap in electric arc furnace-based steelmaking. Such forms include
direct-reduced iron, iron carbide, hot-briquette iron and pig iron. A
sustained increase in the price of steel scrap could result in increased use
of these alternative materials. The Company has successfully employed scrap
substitutes in its manufacturing process to achieve quality characteristics
and expects to increase its usage of such substitutes in the future.
ENERGY
The Company's manufacturing process consumes large amounts of electricity.
The Company purchases its electrical needs at the Sand Springs Facility from
Public Service of Oklahoma ("PSO") under a real time pricing tariff which is
available only to PSO's largest customers. Under this tariff, the Company
purchases its base load at a contracted amount adjusted for fuel costs and
then purchases or sells power on an hour-by-hour basis at rates which
approximate PSO's incremental costs plus a small markup. Historically, the
Company has been adequately supplied with electricity and does not anticipate
any material curtailment in its operations resulting from energy shortages.
The Company believes that its utility rates are among the lowest in the
domestic mini-mill steel industry. As one of PSO's two largest customers, the
Company is able to obtain low rates from PSO. PSO is able to generate
electricity at relatively low rates, as its electric load is generated using
western coal and local natural gas as compared to the higher costs of electric
utilities that generate electric load using oil or nuclear power.
The Company also uses natural gas to reheat billets, but is not considered a
large natural gas user. Since deregulation of the natural gas industry,
natural gas requirements generally have been provided through negotiated
contract purchases of well-head gas with supplemental transportation through
local pipeline distribution networks. Although increases in the price of
natural gas might have an adverse impact on the Company's cost structure and
the Company's profitability, any such price increases would be likely to
similarly
43
<PAGE>
affect competitors using natural gas and/or electricity generated by natural
gas. The majority of the Company's natural gas needs (both to reheat billets
and as a consumer of the electricity generated by natural gas) are at the Sand
Springs Facility in Oklahoma, a state with excess natural gas supplies.
Historically, the Company has been adequately supplied with natural gas and an
adequate supply is expected to be available in the future.
COMPETITION
The Company competes with a number of domestic mini-mills in each of its
market segments. There are common competitive factors in the steel bar
business--price, proximity to market, quality and service, for example--
although their relative importance varies in the different market segments.
In the market for hot rolled bar products, the Joliet Facility occupies a
niche position at the specialty end of the product range. The Company believes
that it is the sole supplier of several particular shapes, sizes or steel
chemistries to certain customers. In other cases, the Company competes with a
limited number of other producers of specialty hot rolled bar products,
including Calumet Steel Company, Kentucky Electric Steel Co., Laclede Steel
Company and Northwestern Steel and Wire Company. From Sand Springs and to a
much lesser degree from Joliet, the Company competes with mini-mill producers
of standard hot rolled bar products, including Chaparral Steel Co., North Star
Steel Co. and Structural Metals, Inc. Competitors vary from customer to
customer depending on product specifications and requirements for order sizes
and inventory support.
Since pricing, freight costs and delivery times are the most important
competitive factors in the sale of rebar, sales tend to be concentrated within
about 350 miles of a mini-mill. In the south-central United States, the
Company believes it enjoys a competitive advantage as the closest mill serving
an area comprising Oklahoma, Kansas, western Missouri and Arkansas, and parts
of northern Texas. The majority of the Company's rebar tonnage was shipped to
this area in fiscal 1997, which the Company believes equated to in excess of
50% of the market share. In surrounding geographical areas, the Company
competes with a number of other mini-mills, principally Chaparral Steel Co.
and Structural Metals, Inc.
The Company is not in competition with foreign or integrated steel
producers. These mills have cost and freight disadvantages compared to the
Company and other domestic mini-mills which effectively preclude them from
competing in the relatively low priced hot rolled bar product and rebar
markets.
Competitive factors in fence post sales include product quality measured by
durability, price, appearance, workmanship, freight costs and delivery
response time. The Company believes that the high quality of its fence post
combined with a more aggressive sales effort has contributed to an increase in
market penetration in fiscal 1996 and fiscal 1997. Competitors include
Southern Post Co. and Chicago Heights Steel Co.
For fabricated rebar, primary competitors are independent fabrication shops
which are furnished with rebar from other mini-mills in the Midwest. In recent
years, the Company believes that increased demand for epoxy-coated product
from contractors bidding on infrastructure projects has provided the Kansas
City Plant with a competitive advantage and contributed to growth in
shipments. Other competitive factors include delivery performance, engineering
support, accurate fabrication and competitive pricing.
EMPLOYEES
As of October 31, 1997, there were approximately 614 employees of the
Company. Approximately 68% of the Company's employees are represented by one
of three bargaining units affiliated with the United Steelworkers of America.
The Company is party to a collective bargaining agreement covering
approximately 250 hourly-paid production and maintenance employees at the Sand
Springs Facility. This agreement, which was negotiated as of March 2, 1997, is
for a three year period expiring on March 1, 2000. The agreement included wage
increases, certain benefit increases and changes to local work rules. The
agreement also allowed the Company to reduce and reorganize its hourly
workforce by approximately 70 positions, primarily maintenance
44
<PAGE>
related. Of the 70 positions, 42 were eliminated through retirement offers
effective June 1, 1997 and the remaining positions have been eliminated
through attrition.
The Company is also party to a collective bargaining agreement covering
approximately 148 hourly-paid production and maintenance employees at the
Joliet Facility, which expires on March 1, 1999 and a collective bargaining
agreement covering approximately 20 employees at the Kansas City Plant which
expires on October 31, 1999. The Railway Company has approximately 19
employees who are represented by various labor unions. The Company believes
that it has maintained good relationships with its labor unions in the past,
but there can be no assurance that the terms of any future collective
bargaining agreements with any labor unions will contain terms comparable to
the terms contained in its existing collective bargaining agreements.
Since the last national, industry-wide strike of steelworkers in 1959, the
Company has experienced only a five-day strike at the Sand Springs Facility in
May 1988 and a work stoppage at the Kansas City Plant after the expiration of
its collective bargaining agreement in September 1991. The Company has not
experienced a protracted work stoppage at either the Sand Springs Facility or
the Joliet Facility, and believes that it has good relations with its
employees, but there can be no assurance that work stoppages will not occur in
the future, in connection with labor negotiations or otherwise.
ENVIRONMENTAL COMPLIANCE
The Company is subject to a broad range of Federal, state and local
environmental requirements, including those governing air emissions and
discharges into water, and the handling and disposal of wastes. The Company
has spent substantial amounts to comply with these requirements. In addition,
in the event of a release of hazardous materials generated by the Company, the
Company could potentially be responsible for the remediation of contamination
associated with such a release.
Primarily because the melting process at the Sand Springs Facility generates
emission dust that contains lead, cadmium and other heavy metals, the Company
is classified, in the same manner as other similar mini-mills in its industry,
as a generator of hazardous waste. The Resource Conservation and Recovery Act
of 1976, as amended ("RCRA"), regulates the management of emission control
sludge/dust from electric arc furnaces ("K061"), a waste stream generated in
significant quantities at the Sand Springs Facility. All of the K061 generated
at the Sand Springs Facility is shipped to Mexico, where a High Temperature
Metals Recovery processor, Zinc Nacional, S.A., recovers the zinc, lead and
cadmium and manufactures commercial and high purity zinc products. If a
release of K061 were to occur, the Company could be required to remediate such
release. Although current law permits the export of K061, there can be no
assurance that new United States legislation prohibiting the export of
hazardous waste materials or new Mexican legislation prohibiting the import of
such materials, including K061, will not be enacted. In that event, the
Company would have to find an alternative means of treatment or disposal of
the K061 in compliance with RCRA. The Company believes that it could properly
dispose of the K061 generated at the Sand Springs Facility by constructing an
on-site recovery or chemical stabilization process or by shipping the K061 to
a licensed domestic treatment facility. However, there can be no assurance as
to the availability of such alternatives or that their construction and/or use
would not result in significant cost increases.
In accordance with the Clean Air Act Amendments of 1990 ("CAAA") and
Oklahoma's State Implementation Plan, the Sand Springs Facility submitted a
Title V application for an operating permit in January 1997. Because this
application has been ruled administratively complete, the Company is
continuing to operate pending final approval, which it anticipates receiving
in calendar 1998. If approved, the CAAA operating permit would require neither
process modifications nor continuous emissions monitoring. Additional or new
air emission control regulations or requirements applicable to the Company's
operations may be promulgated under the Clean Air Act in the future. The
Company cannot at this time accurately estimate the costs, if any, of
compliance with such future Clean Air Act regulations or requirements.
45
<PAGE>
As discussed above under "Risk Factors--Environmental Compliance and
Associated Costs", it is possible that EPA may identify violations of RCRA
requirements as a result of the Compliance Evaluation Inspection conducted by
EPA at the Sand Springs Facility in April 1997, and that EPA may seek
penalties and/or corrective action relating to the Solid Waste Management
Units identified at the Sand Springs Facility, including the three previously
closed K061 landfills. While the Company believes that any such RCRA
violations that may be identified by EPA will not result in penalties which
will have a material adverse effect on the Company's results of operations or
financial condition, the costs of corrective action (if any is required)
cannot be predicted at this time and may be material. Apart from the issues
associated with the April 1997 RCRA inspection conducted by EPA, the Company
believes that it is currently in substantial compliance with applicable
environmental requirements and does not anticipate the need to make
substantial expenditures for environmental control or remediation measures
during the next three years. See "Risk Factors--Environmental Compliance and
Associated Costs."
PROPERTIES AND FACILITIES
The Company owns the properties comprising the Sand Springs Facility and the
Joliet Facility. The Sand Springs Facility is located on approximately 148
acres of land in Sand Springs, Oklahoma. The Joliet Facility is located on
approximately 30 acres of land in Joliet, Illinois. The Company leases 9 acres
of land adjacent to the Joliet Facility from the Metropolitan Water
Reclamation District of Greater Chicago under a long term lease expiring in
2053. The Company also leases the Kansas City Plant, containing approximately
77,100 square feet. In addition, the Company owns 4.5 acres of land in
Oklahoma City, Oklahoma that formerly comprised the Oklahoma City Mill.
The Sand Springs Facility comprises an aggregate of approximately 520,390
square feet of floor space and contains two 85-ton electric arc furnaces, a
six strand billet continuous caster, a rolling mill, two warehouses and a
fence post shop. The current total annual capacity of the Sand Springs
Facility is approximately 600,000 tons of billet, approximately 320,000 tons
of rebar and hot rolled bar and approximately 70,000 tons of fence post. After
completion of the Shear Line Project, the annual capacity of rebar and hot
rolled bar products is expected to increase to 450,000 tons.
The Joliet Facility comprises an aggregate of approximately 334,305 square
feet of floor space and contains a 12 inch merchant bar mill and a 10 inch
merchant bar mill. The total annual capacity of the Joliet Facility is
approximately 155,000 tons of hot rolled bar products.
The Railway Company provides freight service between Sand Springs and Tulsa
on seven miles of mainline track and 21 miles of spur line which connect
customer facilities with the main line. The Railway Company owns the mainline
track and three locomotives and operates a maintenance shop for normal repairs
and upkeep. The Railway Company also leases and operates a transload facility
and warehouse.
The Railway Company has granted a security interest in substantially all of
its assets to the Bank of Oklahoma as security for the Railway Company's
obligations under the Railway Revolving Credit Facility and the Railway Term
Loan.
The Company will grant a first priority lien on substantially all of
Sheffield's real property and equipment in favor of the Trustee for the
benefit of the holders of the First Mortgage Notes. See "Description of First
Mortgage Notes--Security" and "--Intercreditor Agreement."
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 or results of operations.
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.
46
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
December 15, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert W. Ackerman...... 59 President and Chief Executive Officer, Director
John F. Lovingfoss...... 60 Vice President--Sales and Marketing
Alton W. Davis.......... 49 Vice President--Operations
Dale S. Okonow.......... 41 Vice President and Secretary, Director
Stephen R. Johnson...... 46 Vice President, Chief Financial Officer and Assistant Secretary
Leslie L. Kelly......... 31 Controller
Steven E. Karol......... 43 Chairman of the Board, Director
Jane M. Karol........... 35 Director
Howard H. Stevenson..... 56 Director
John D. Lefler.......... 51 Director
</TABLE>
Robert W. Ackerman. Mr. Ackerman has been President and Chief Executive
Officer and a Director since 1992. From 1988 to 1992, Mr. Ackerman was the
President and Chief Executive Officer of Lincoln Pulp & Paper Co., Inc. From
1986 to 1988 Mr. Ackerman taught in the Advanced Management Program at the
Harvard University Graduate School of Business Administration. Mr. Ackerman
serves as a director of Gulf States Steel, Inc. of Alabama ("Gulf States") and
The Baupost Fund and Atlantic Investors, Inc.
John F. Lovingfoss. Mr. Lovingfoss has been Vice President-Sales and
Marketing since 1984. From 1958 to 1984, Mr. Lovingfoss held various positions
with the Company in sales, marketing and management.
Alton W. Davis. Mr. Davis has been Vice President-Operations since August
1996. From 1986 to 1996, he was Vice President and General Manager of
Ameristeel's Jacksonville, Florida location. Prior to that, he held various
management positions with both Bayou Steel and Chaparral Steel.
Dale S. Okonow. Mr. Okonow has been Vice President and Secretary since 1988
and a Director since 1990. Prior to 1988, Mr. Okonow was an associate with the
law firm of Proskauer Rose Goetz & Mendelsohn in New York City. Mr. Okonow was
Vice President and General Counsel of HMK Enterprises, Inc. ("HMK") from 1988
to 1990 and has been a Senior Vice President and Chief Financial Officer of
HMK since 1990. Mr. Okonow also serves as Vice President, Secretary and a
Director of Gulf States.
Stephen R. Johnson. Mr. Johnson has been Vice President-Chief Financial
Officer since 1995. From 1977 to 1995 Mr. Johnson held various other positions
with the Company, including the position of Vice President-Administration and
Treasurer and Vice President-MIS and Business Planning.
Leslie L. Kelly. Ms. Kelly has been Controller of the Company since 1996.
From 1993 to 1996, Ms. Kelly was the Assistant Controller of Integrity Music,
Inc. From 1988 to 1992, Ms. Kelly was employed by the accounting firm, KPMG
Peat Marwick LLP.
Steven E. Karol. Mr. Karol has been a Director of the Company since 1981 and
Chairman of the Board since 1983. Mr. Karol is also President and Chief
Executive Officer and Chairman of the Board of HMK. Mr. Karol also serves as
Chairman of the Board of Directors of Gulf States and is a Director of Stocker
and Yale. Mr. Karol is the brother of Jane M. Karol.
Jane M. Karol. Ms. Karol has been a Director since 1991. Ms. Karol is a
Director of HMK. Ms. Karol is also the sister of Steven E. Karol.
47
<PAGE>
Howard H. Stevenson. Dr. Stevenson has been a Director since 1993. Since
1982, Dr. Stevenson has been Sarofim-Rock Professor of Business Administration
at the Harvard University Graduate School of Business Administration. He is
also a Senior Associate Dean and Director of Financial and Information Systems
for Harvard Business School from 1991 to 1994. Dr. Stevenson also sits on the
boards of Harvard Business School Publishing Corporation, Camp Dresser &
McKee, Landmark Communications, Gulf States, The Baupost Group, Inc., The
Baupost Fund, Bessemer Securities Corporation, African Communications Group,
and Terry Hinge and Hardware.
John D. Lefler. Mr. Lefler has over 28 years of experience in the steel
industry and has been the President and Chief Executive Officer of Gulf States
since May 1993. Mr. Lefler has served Gulf States in various management
positions since 1986. Prior to joining Gulf States, he worked at USX for more
than 18 years in various management positions. Mr. Lefler serves as a Director
of Gulf States and First Alabama Bank.
BOARD COMMITTEES
Audit Committee. The Audit Committee, which met once during fiscal 1997, has
two members, Mr. Okonow and Mr. Ackerman. The Audit Committee reviews the
engagement of the Company's independent accountants, reviews annual financial
statements, considers matters relating to accounting policy and internal
controls and reviews the scope of annual audits. The findings of this
committee are reviewed by the Board of Directors.
Stock Compensation Committee. The Stock Compensation Committee has three
members, Mr. Karol, Mr. Okonow and Mr. Ackerman. The Stock Compensation
Committee did not meet during fiscal 1997. The Stock Compensation Committee
administers the Company's 1993 Employee, Director and Consultant Stock Option
Plan. See "--Stock Option Plan."
Compensation Committee. The Company does not have a standing Compensation
Committee. Recommendations concerning salaries and incentive compensation
(other than stock options) for employees of the Company (other than Mr.
Ackerman) are made by Mr. Ackerman and are reviewed by the Board of Directors.
Recommendations concerning Mr. Ackerman's salary and incentive compensation
(other than stock options) are made by Mr. Karol and are reviewed by the Board
of Directors.
ELECTION AND COMPENSATION OF DIRECTORS
Ninety percent of the outstanding shares of the Common Stock is currently
owned by HMK, an affiliate of Watermill Ventures Ltd., which is in turn 100%
owned by members of the Karol family. Consequently, certain members of the
Karol family together beneficially own substantially all of the outstanding
shares of the Company's common stock and are able to determine the outcome of
all matters required to be submitted to stockholders for approval, including
the election of directors. See "Security Ownership of Certain Beneficial
Owners and Management."
Dr. Stevenson and Mr. Lefler each receive an annual retainer of $4,000,
payable quarterly, and a meeting fee of $1,500 for each meeting of the Board
of Directors attended. The Company reimburses ordinary and necessary out-of-
pocket expenses incurred by any Director in connection with his or her
services. In addition, Directors of the Company are eligible to receive non-
qualified stock options under the Company's 1993 Employee, Director and
Consultant Stock Option Plan (the "Stock Option Plan"). As of October 31,
1997, no Director had been granted any stock options for services as a
Director of the Company. See "--Stock Option Plan."
48
<PAGE>
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table includes, for the fiscal year ended
1997, individual compensation information for: (i) the Company's Chief
Executive Officer (the "CEO") and (ii) each of the other most highly
compensated persons who were serving as executive officers of the Company
(other than the CEO) at the end of fiscal 1997 whose salary and bonus earned
during fiscal 1997 exceeded $100,000 (collectively, the "named executive
officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
FISCAL -------------------------- ------------
NAME AND PRINCIPAL POSITION YEAR(1) SALARY BONUS OTHER # OPTIONS
- --------------------------- ------- -------- ------- ------ ------------
<S> <C> <C> <C> <C> <C>
Steven E. Karol, Chairman of
the Board.................. 1997 $250,000 $70,000 $ -- --
Robert W. Ackerman,
President and
Chief Executive Officer.... 1997 275,000 10,000 -- 253,125.000
Dale S. Okonow, Vice
President and Secretary.... 1997 175,000 -- -- 56,953.125
Alton W. Davis, Vice
President--Operations...... 1997 127,000(2) 10,000 46,000(3) 25,000.000
John F. Lovingfoss, Vice
President--Sales........... 1997 150,000 10,000 -- 56,953.125
Stephen R. Johnson, Vice
President and
Chief Financial Officer.... 1997 150,000 10,000 -- 35,312.500
</TABLE>
- --------
(1) Pursuant to the Instructions to Item 402(b) of Regulation S-K, information
with respect to fiscal years prior to fiscal 1997 has not been included.
(2) Mr. Davis was hired on August 12, 1996.
(3) Represents moving and related expenses for Mr. Davis.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT
OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES FOR OPTION TERM
OPTIONS IN FISCAL EXERCISE OR ---------------------------
NAME GRANTED(1) YEAR BASE PRICE 5% 10%
- ---- ---------- ---------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Steven E. Karol......... -- -- % $ -- $ -- $ --
Robert W. Ackerman...... -- -- -- -- --
Dale S. Okonow.......... -- -- -- -- --
Alton W. Davis.......... 25,000 49 20.52 835,623 1,330,590
John F. Lovingfoss...... -- -- -- -- --
Stephen R. Johnson...... 10,000 20 20.52 334,239 532,236
</TABLE>
- --------
(1) All the options were granted under the Stock Option Plan. The options
granted to the named executive officers during 1997 are incentive and non-
qualified stock options and vest on April 30, 1999.
49
<PAGE>
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
During the fiscal year ended April 30, 1997, none of the named executive
officers exercised stock options. The following table provides information
regarding the number of exercisable stock options as of April 30, 1997 and the
value of "in-the-money" options, which values represent the positive spread
between the exercise price of any such option and the fiscal year-end value of
the Company's Common Stock.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF THE UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR END FISCAL YEAR END
----------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE(2) EXERCISABLE(1) UNEXERCISABLE(2)
- ---- ---------------- ------------------ -------------- ----------------
<S> <C> <C> <C> <C>
Steven E. Karol......... -- -- $ -- --
Robert W. Ackerman...... 253,125.000 -- 3,133,502 --
Dale S. Okonow.......... 56,953.125 -- 705,114 --
Alton W. Davis.......... -- 25,000.000 -- --
John F. Lovingfoss...... 56,953.125 -- 705,114 --
Stephen R. Johnson...... 25,312.500 10,000.000 313,384 --
</TABLE>
- --------
(1) The value of unexercised in-the-money options at fiscal year end assumes a
fair market value for the Company's Common Stock of $19.788, as determined
by the performance-based formula prescribed in the non-qualified and
incentive agreements entered into pursuant to the Stock Option Plan.
(2) The exercise price of Messrs. Davis and Johnson's unexercisable options
was higher than the fair market value and thus none of such options were
"in-the-money" as of such date.
STOCK OPTION PLAN
On September 15, 1993, the Board of Directors adopted, and the stockholders
of the Company approved, the Company's Stock Option Plan. The Stock Option
Plan provides for the grant of incentive stock options to key employees of the
Company and non-qualified stock options to key employees, directors and
consultants of the Company. A total of 580,000 shares of Common Stock, which
would represent approximately 13.4% of the Company's Common Stock on a fully
diluted basis, have been reserved for issuance under the Stock Option Plan
upon the exercise of options. During the year ended April 30, 1997, 51,000
options were granted, leaving 456,000 options outstanding at April 30, 1997.
The options granted on December 15, 1993 to the named executive officers are
incentive stock options and non-qualified stock options and vested on April
30, 1996. The options granted during the year ended April 30, 1997 to the
named executive officer are non-qualified and vest on April 30, 1999. The
Stock Option Plan is administered by the Stock Compensation Committee of the
Board of Directors. There were no stock options exercised during fiscal 1997.
EXECUTIVE INCENTIVE PLAN
Each of the named executive officers, excluding Mesrs. Karol and Okonow, is
eligible to receive bonus compensation under the Company's Executive Bonus
Plan (the "Incentive Plan"). The Incentive Plan provides that (i) in the event
that actual pre-tax profit for any fiscal year equals or exceeds budgeted pre-
tax profit for such year, participants in the Incentive Plan will be paid a
bonus ranging from 30% to 50% of such participant's base salary and (ii) in
the event that actual pre-tax profit for any fiscal year does not meet
budgeted pre-tax profit for such year, by less than 20%, the Company's Board
of Directors may, at its discretion, (A) establish a bonus pool of up to 20%
of the total base pay of all participants in the Incentive Plan and (B) award
bonus payments from such bonus pool, if any, to participants in the Incentive
Plan. Such bonus payments, if any, are to be based upon (x) the individual
performance of such participant, (y) the performance of such participant's
department and (z) such participant's contribution to the Company's overall
performance. Bonuses, if any, are required to be paid within 90 days after the
Company's fiscal year end.
50
<PAGE>
PENSION PLAN
The Company maintains a retirement plan that is an Internal Revenue Code
(the "Code") qualified defined benefit pension plan (the "Pension Plan"). At
normal retirement date (age 65 or completion of 30 years of service), a
participant is paid a pension equal to the sum of: (a) the product of the
participant's years of plan service from September 1, 1981 through December
31, 1984 and 1.25% of his average monthly compensation (up to $12,500),
determined over the participant's highest five consecutive years; and (b) the
product of the participant's years of plan service after January 1, 1985 and
0.9% of his average monthly compensation (up to $12,500) as defined above. The
normal form of pension is a lifetime annuity with a 50% survivor pension for
any surviving spouse. Optional forms of payment are available and are
actuarially equivalent to a lifetime annuity without surviving spouse
benefits. The Pension Plan also provides for early retirement benefits on an
actuarially reduced basis for participants who reach age 55 with at least 10
years of service. Vested retirement benefits are available for participants
who are terminated with at least five years of plan service. Although the
pension is reduced to the extent of any profit sharing retirement annuity
provided by discretionary contributions under the Sheffield Steel Corporation
Thrift and Profit Sharing Plan (the "Profit Sharing Plan"), no such
discretionary contributions have been made to the Profit Sharing Plan.
Years of service for purposes of the Pension Plan with respect to the named
executive officers are as follows: Mr. Ackerman, 5 years; Mr. Lovingfoss, 37
years; Mr. Johnson, 20 years; and Mr. Davis, 1 year. Messrs. Karol and Okonow
are excluded from the Pension Plan.
The following table shows the projected annual pension benefits payable
under the current pension plan at the normal retirement age of 65:
ANNUAL NORMAL PENSION BENEFITS
FOR YEARS OF SERVICE SHOWN
<TABLE>
<CAPTION>
YEARS OF SERVICE
---------------------------------------
ANNUAL BASE SALARY 15 20 25 30 35
------------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$100,000........................... $13,500 $18,000 $22,500 $27,000 $31,500
125,000........................... 16,875 22,500 28,125 33,750 39,375
150,000 and above................. 20,250 27,000 33,750 40,500 47,250
</TABLE>
THRIFT AND PROFIT SHARING PLAN
The Company's Profit Sharing Plan is a Code-qualified defined contribution
plan which permits its employees to elect "after-tax" payroll deductions
between 4% and 14% of compensation. The Profit Sharing Plan also provides for
additional discretionary contributions by the Company, which would be
allocated according to compensation ratios and, to the extent permitted by the
Code, according to compensation in excess of the FICA taxable wage base.
Discretionary Company contributions are forfeited by terminated employees with
less than five years of service. Discretionary contributions would offset
pensions under the Pension Plan described above, but no discretionary Company
contributions have been made to the Profit Sharing Plan.
401(K) RETIREMENT PLAN
The Company also sponsors a plan which permits eligible employees of the
Company to defer compensation to the extent permitted by Section 401(k) of the
Code (the "Retirement Plan"). The Retirement Plan permits, but does not
require, discretionary Company contributions. The Company made contributions
of approximately $81,000 to the Joliet Facility's 401(k) plan for the year
ended April 30, 1997.
51
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
HMK currently owns 90% of the issued and outstanding shares of the Common
Stock. HMK is a Massachusetts-based privately-owned holding company engaged in
manufacturing and distribution businesses through two principal operating
groups.
The table below sets forth certain information regarding beneficial
ownership of the Common Stock as of December 15, 1997 by (i) each current
director of the Company, (ii) each of the named executive officers, (iii) all
current directors and officers of the Company as a group and (iv) each person
or group of persons known by the Company to beneficially own more than 5% of
the outstanding shares of Common Stock.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP(A)(B)
--------------------
NUMBER OF
NAME AND ADDRESS** SHARES PERCENT
------------------ --------- -------
<S> <C> <C>
Steven E. Karol.................................. 1,614,397 40.62%(c)(e)
HMK Enterprises, Inc.
800 South Street
Waltham, MA 02154
Jane M. Karol.................................... 1,614,397 40.62%(d)(e)
HMK Enterprises, Inc.
800 South Street
Waltham, MA 02154
Robert W. Ackerman............................... 286,875(f) 7.22%
Sheffield Steel Corporation
220 N. Jefferson
Sand Springs, OK 74063
John F. Lovingfoss............................... 90,703(g) 2.28%
Dale S. Okonow................................... 74,078(h) 1.86%
Stephen R. Johnson............................... 25,313(i) *
Alton W. Davis................................... -- *
Howard H. Stevenson.............................. -- *
John D. Lefler................................... -- *
All current executive officers, directors and
nominees of the Company
as a group (9 persons).......................... 3,705,743(j) 93.24%
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the Company's
outstanding shares of Common Stock
** Addresses are given for beneficial owners of more than 5% of the
outstanding Common Stock only.
(a) The number of shares of Common Stock issued and outstanding on December
15, 1997 was 3,569,625. The calculation of percentage ownership of each
listed beneficial owner is based upon the number of shares of Common Stock
issued and outstanding at December 15, 1997, plus shares of Common Stock
subject to options or warrants held by such person at December 15, 1997
and exercisable within 60 days thereafter. The persons and entities named
in the table have sole voting and investment power with respect to all
shares shown as beneficially owned by them, except as otherwise noted.
(b) Beneficial ownership as reported in the table above has been determined in
accordance with Rule 13d-3 under the Exchange Act.
(c) Of the 1,614,397 shares of Common Stock beneficially owned by Mr. Karol,
11,272 shares, or .33%, are owned of record by him. Mr. Karol also owns
74.7634 shares of the Class A common stock, $1.00 par value, of HMK (the
"HMK Class A Common Stock"), which shares constitute 50% of the issued and
outstanding shares of HMK Class A Common Stock. Of the 1,614,397 shares of
Common Stock beneficially owned by Mr. Karol, 1,603,125 shares, or 47.5%,
are deemed to be beneficially owned by Mr. Karol by virtue of his
ownership of such shares of HMK Class A Common Stock.
52
<PAGE>
(d) Of the 1,614,364 shares of Common Stock beneficially owned by Ms. Karol,
11,239 shares, or .33%, are owned of record by her. Ms. Karol also owns
74.7634 shares of HMK Class A Common Stock, which shares constitute 50% of
the issued and outstanding shares of HMK Class A Common Stock. Of the
1,614,364 shares of Common Stock beneficially owned by Ms. Karol,
1,603,125 shares, or 47.5%, are deemed to be beneficially owned by Ms.
Karol by virtue of her ownership of such shares of HMK Class A Common
Stock.
(e) Each of Steven E. Karol and Jane M. Karol own 74.7634 shares of HMK Class
A Common Stock, constituting 50% of the issued and outstanding shares of
HMK Class A Common Stock and 100% of the issued and outstanding shares of
HMK Class A Common Stock in the aggregate. HMK Class A Common Stock is the
only class of voting stock of HMK issued and outstanding. For purposes of
determining beneficial ownership of Common Stock as reported in the table
above, ownership of any class of non-voting stock of HMK has not been
included.
(f) Includes 253,125 shares which Mr. Ackerman may acquire upon the exercise
of options within 60 days after December 15, 1997.
(g) Includes 56,953 shares which Mr. Lovingfoss may acquire upon exercise of
options within 60 days after December 15, 1997.
(h) Includes 56,953 shares which Mr. Okonow may acquire upon exercise of
options within 60 days after December 15, 1997.
(i) Includes 25,313 shares which Mr. Johnson may acquire upon the exercise of
options within 60 days after December 15, 1997.
(j) Includes an aggregate of 392,344 shares which may be acquired upon the
exercise of options within 60 days after December 15, 1997.
53
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN BUSINESS RELATIONSHIPS
HMK Management Consulting Services Agreement
Sheffield has entered into a Management Consulting Services Agreement with
HMK (the "Management Agreement"). The Management Agreement is terminable by
either party thereto upon 180 days' prior written notice to the other party.
Pursuant to the Management Agreement, HMK provides management and business
consulting services to Sheffield and its subsidiaries as Sheffield may from
time to time reasonably request, including, without limitation: financial and
accounting management services; marketing services; executive personnel
services; analyses and recommendations with respect to data processing systems
and services; corporate development services; contract administration and
limited legal services; representation and assistance in the audit process and
coordination of accounting functions; negotiation and maintenance of insurance
programs; and consultation and assistance in creating and maintaining deferred
compensation, pension and profit sharing plans and other human resource
related programs.
As compensation for the management and business consulting services provided
to the Company by HMK, Sheffield is obligated to pay to HMK a fee equal to 1/2
of 1% of the Company's consolidated sales, payable on a monthly basis. As
additional compensation, Sheffield has agreed that all employees and directors
(and their immediate family members) of HMK and its wholly-owned insurance
services subsidiary will be covered under Sheffield's group health insurance
plan, and that Sheffield is responsible for adjusting and paying all claims by
such employees and directors (and their immediate family members) under
Sheffield's group health insurance plan, without any cost or charge-back to,
or any reimbursement from, HMK. In addition to the foregoing compensation,
Sheffield is obligated to reimburse HMK for the cost of all travel,
entertainment, telephone and other expenses incurred by HMK in performing its
services under the Management Agreement.
Management fees paid by the Company pursuant to previous agreements with HMK
during fiscal 1995, 1996 and 1997 and for the six months ended October 31,
1997 were $598,000, $573,000, $569,000 and $314,000, respectively.
Risk Management Solutions, Inc. Insurance Agreement
The Company has entered into an Insurance Services Agreement (the "Insurance
Agreement") with Risk Management Solutions, Inc. ("Risk Management"), a
wholly-owned subsidiary of HMK. The Insurance Agreement is terminable by
either party thereto upon 180 days' prior written notice to the other party.
Pursuant to the Insurance Agreement, Risk Management provides insurance
services to the Company and its subsidiaries, including, without limitation:
procuring and maintaining property and casualty insurance coverage;
maintaining accounting records for all administered insurance programs;
reviewing and recommending alternative financing methods for insurance
coverages; identifying and evaluating risk exposures; reviewing claims and
expenses; budgeting for insurance expenses; and preparing and filing proof of
loss statements for insured claims. As compensation for the insurance services
provided to the Company and its subsidiaries, the Company is obligated to pay
to Risk Management a fee equal to 15% of the total annual cost of the
Company's insurance program, payable monthly. In addition to the foregoing
compensation, the Company is obligated to reimburse Risk Management for the
cost of all travel, entertainment, telephone and other expenses incurred by
Risk Management in performing its services under the Insurance Agreement.
HMK Income Tax Expense Allocation Policy and Tax Sharing Agreement
HMK is the common parent of an "affiliated group" of corporations (as
defined in the Code), which includes Sheffield and its subsidiaries, as well
as other corporations controlled directly or indirectly by HMK. Pursuant to an
Income Tax Expense Allocation Policy and Tax Sharing Agreement effective May
1, 1991 among HMK and Sheffield and its subsidiaries (the "Tax Sharing
Agreement"), the determination/allocation of income
54
<PAGE>
tax expense (current and deferred) among members of the affiliated group or
subgroup shall, for purposes of the separate financial statements of the
affiliated group or subgroup (or any member of the affiliated group or
subgroup), be determined on a separate company basis as if the member computed
its tax expense on a separate basis and, since the affiliated group has
adopted the provisions of FASB Statement of Accounting Standards No. 109--
"Accounting for Income Taxes" (SFAS 109), (i) deferred taxes are
allocated/recognized on a separate company basis for all affiliated group
members that have temporary differences at the end of the relevant period,
(ii) income tax expense (current and deferred) is allocated/recognized on a
separate company basis for all affiliated group members irrespective of the
fact that the affiliated group has no current or deferred tax expense and
(iii) the determination/allocation of current and deferred income tax expense
on a separate company basis is determined based on the principles of SFAS 109.
Pursuant to the Tax Sharing Agreement, the affiliated group has elected to
allocate the consolidated federal income tax liability of the affiliated group
among the group's members pursuant to the consolidated return regulations of
the Code. Notwithstanding such election, Sheffield and its subsidiaries will
collectively pay to HMK, or the subsidiaries will each pay to Sheffield and
Sheffield will pay to HMK, the members' share of their separately computed
current tax expense as determined on a separate company basis, and the payment
of such current tax expense will be determined irrespective of the fact that
the affiliated group has no current tax expense, but after such income tax
expense (current and deferred) has been allocated/recognized on a separate
company basis for all affiliated group members irrespective of the fact that
the affiliated group has no current or deferred tax expense. In the event that
a temporary taxable difference originates within one member of the affiliated
group and, as a result of the available elections, the temporary taxable
difference will reverse within another member of the affiliated group, the
member with whom the temporary taxable difference originated will reimburse
the member with whom the temporary taxable difference will reverse, for the
tax consequences resulting from the reversal of such differences. Such
reimbursement will be given effect when the liability (current or deferred) is
recognized by the member with whom the reversal will occur.
INDEBTEDNESS OF MANAGEMENT AND RELATED PARTIES
As of the end of fiscal 1997, HMK owed an aggregate of $2.7 million to the
Company. Of that amount, $2.2 million was related to certain tax attributes
allocated to the Company pursuant to the Tax Sharing Agreement with HMK. Under
that agreement, the receivable will be realized by reducing the future income
taxes otherwise payable by the Company to HMK. The remaining $0.5 million
relates to the Company's advance of funds to HMK to secure a letter of credit
needed for the insurance program of the Company's Joliet facility.
In September 1992, certain of the Company's officers, directors and members
of the Karol family purchased an aggregate of 5% of the issued and outstanding
shares of the Common Stock in exchange for an aggregate of $250,000 cash and
$1,000,000 in non-recourse promissory notes secured by pledges of such stock.
The non-recourse promissory notes evidencing each such shareholders'
indebtedness bear interest at a rate of 7.61% and become due on February 1,
2007 or on such earlier date upon the occurrence of certain events as stated
in the notes. During the year ended April 30, 1997, the Company signed an
agreement to repurchase 50,625 shares of Common Stock from two former officers
of the Company. Certain payments, including those to reacquire the Common
Stock, are currently not permitted under the terms of the 2001 Notes and
revolving credit agreements. As a result of this transaction, $300,000 of the
promissory notes plus interest of $93,000 was satisfied and the Company
recorded a note payable in the amount of $662,000 to the former shareholders.
The note payable will accrue simple interest at 6.02% and will be repaid in
five annual installments beginning when, and only when, the purchase of the
shares is permitted under the Indenture and the Company's credit agreements.
On December 12, 1997, the Company made the first installment on the notes.
Each of Robert W. Ackerman, President and Chief Executive Officer and a
Director of the Company and John F. Lovingfoss, Vice President-Sales and
Marketing of the Company, purchased 1% of the issued and outstanding shares of
Common Stock in exchange for $50,000 in cash and a non-recourse promissory
note with an original principal balance of $200,000. The aggregate amount of
indebtedness owed to the Company by each
55
<PAGE>
of such individuals as of April 30, 1997 is $270,596 ($200,000 principal
amount and $70,596 of accrued interest). The largest amount of indebtedness
outstanding during fiscal 1997 for each of Messrs. Ackerman and Lovingfoss was
$270,596.
Dale S. Okonow, Vice President, Secretary and a Director of the Company
purchased 0.5% of the issued and outstanding shares of Common Stock in
exchange for $25,000 in cash and a non-recourse promissory note with an
original principal balance of $100,000. The aggregate amount of indebtedness
owed to the Company by Mr. Okonow as of April 30, 1997 is $135,298 ($100,000
principal amount and $35,298 of accrued interest). The largest amount of
indebtedness outstanding during fiscal 1997 for Mr. Okonow was $135,298.
Each of Jane M. Karol, a Director of the Company and Joan L. Karol, mother
of each of Jane M. Karol and Steven E. Karol, Directors of the Company,
purchased 0.333% of the issued and outstanding shares of Common Stock in
exchange for $16,665 in cash and a non-recourse promissory note with an
original principal balance of $66,660. The aggregate amount of indebtedness
owed to the Company by each of such individuals as of April 30, 1997 is
$90,190 ($66,660 principal amount and $23,530 of accrued interest). The
largest amount of indebtedness outstanding during fiscal 1997 for each of Jane
M. Karol and Joan L. Karol was $90,190.
Steven E. Karol, Chairman of the Board of Directors of the Company,
purchased 0.334% of the issued and outstanding shares of Common Stock in
exchange for $16,670 in cash and a non-recourse promissory note with an
original principal balance of $66,680. The aggregate amount of indebtedness
owed to the Company by Mr. Karol as of April 30, 1997 is $90,215 ($66,680
principal amount and $23,535 of accrued interest). The largest amount of
indebtedness outstanding during fiscal 1997 for Mr. Karol was $90,215.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of the Company does
not purport to be complete and is qualified in its entirety by reference to
the Certificate of Incorporation and Bylaws of the Company and to the other
agreements referenced herein.
COMMON STOCK
As of December 15, 1997, there were 3,569,625 shares of Common Stock
outstanding and held of record by eight stockholders. All of such shares are
validly issued, fully-paid and nonassessable. The holders of Common Stock are
entitled to one vote for each share held of record on all matters submitted to
a vote of the stockholders and do not have cumulative voting rights.
Accordingly, holders of a majority of the shares of Common Stock entitled to
vote in any election of directors may elect all of the directors standing for
election. Holders of Common Stock are entitled to receive ratably such
dividends as are declared by the Board of Directors out of funds legally
available therefor. The instruments governing the Company's outstanding
indebtedness will require compliance with financial ratios and other related
covenants which may prohibit the Company from paying dividends. See
"Description of First Mortgage Notes." Holders of Common Stock have no
preemptive, subscription, redemption or conversion rights. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of all
debts and liabilities.
WARRANTS
Warrants to purchase 375,000 shares of Common Stock (the "Warrants") were
issued under a Warrant Agreement (the "Warrant Agreement") between the Company
and Shawmut Bank Connecticut, N.A., as Warrant Agent (the "Warrant Agent") in
November 1993. As of December 15, 1997, Warrants to purchase 245,250 shares of
Common Stock had been exercised.
Each Warrant entitles the registered holder thereof (the "holder"), subject
to and upon compliance with the provisions thereof and of the Warrant
Agreement, at such holder's option, prior to 5:00 P.M., New York City time, on
November 1, 2001, to purchase from the Company one (or such other number as
may result from adjustments as provided in the Warrant Agreement) share of
Common Stock (each, a "Warrant Share") at a purchase price of $.01 per share
(the "Exercise Price"). The number of shares of Common Stock for which a
Warrant may be exercised is subject to adjustment as set forth in the Warrant
Agreement.
Holders of Warrants will not be entitled, by virtue of being such holders,
to receive dividends, vote, receive notice of any meetings of stockholders or
otherwise have any right of stockholders of the Company.
The number of Warrant Shares issuable upon exercise of a Warrant (the
"Exercise Rate") is subject to adjustment from time to time upon the
occurrence of certain events, including (a) dividends or distributions on
Common Stock payable in Common Stock or other capital stock; (b) subdivisions,
combinations or certain reclassifications of Common Stock; (c) distributions
to all holders of Common Stock of rights, warrants or options to purchase
Common Stock at a price per share less than the Current Market Value of the
Common Stock; (d) certain sales of Common Stock by the Company at a price per
share less than the Current Market Value; provided, that no such adjustment
will be made with respect to any such sale effected pursuant to the exercise
of a stock option issued under the Company's 1993 Employee, Director and
Consultant Stock Option Plan if, (i) at the time of such sale, the aggregate
number of shares of Common Stock that shall have been issued pursuant to the
exercise of such options does not exceed 580,000 shares of Common Stock
(approximately 13.4% of the Company's outstanding Common Stock on a fully
diluted basis, including, for this purpose, shares reserved for issuance under
said stock option plan) and (ii) at the time of the grant of such stock
option, such stock option was issued with an exercise price not less than the
then Current Market Value for the underlying Common Stock; and (e)
distributions to stockholders of certain types of assets, debt securities or
certain rights, warrants or options to purchase securities of the Company.
57
<PAGE>
For purposes of the preceding paragraph, the term "Current Market Value" per
share of Common Stock at any date means (i) if more than 30% of the then
outstanding shares of Common Stock shall have been distributed through
registered public offerings, the average of the "immediate market price" of
the Common Stock for fifteen consecutive trading days immediately preceding
the date in question or (ii) if 30% or less of the then outstanding shares of
Common Stock shall have been distributed through registered public offerings,
the fair market value of the Common Stock as determined by the Company's Board
of Directors in good faith and in reliance on a valuation by an Independent
Financial Advisor (as defined in the Warrant Agreement) which valuation shall
have been given not earlier than twelve months prior to the date at which the
"Current Market Value" is being determined. The "immediate market price" of
the Common Stock will be the closing sale price of the Common Stock on the
principal trading market for the Common Stock on each such trading day or, if
there is no such sale price, the average of the closing bid and asked prices
for the Common Stock on such trading day on the principal trading market for
the Common Stock or, if there is no ascertainable market price for the Common
Stock, as determined in good faith by the Company's Board of Directors.
The authorized capital stock of the Company consists of 10,000,000 shares of
Common Stock, par value $.01 per share.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company's By-Laws provide that the number of directors of the Company
shall not be more than five or less than one, as fixed from time to time by
the Board of Directors. The By-Laws provide that any action required or
permitted to be taken at any annual or special meeting of stockholders may be
taken without a meeting, without prior notice and without a vote, if a consent
in writing, setting forth the actions so taken, is executed by the holders of
outstanding stock having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Special meetings of the
stockholders may be called by the Chairman, President, Secretary or a majority
of the Board of Directors.
The Company's Certificate of Incorporation limits the liability of Directors
to the maximum extent permitted by Delaware General Corporation Law. Delaware
law provides that the directors of a corporation will not be personally liable
to such corporation or its stockholders for monetary damages for breach of
their fiduciary duties as directors, except for liability (i) for any breach
of their duty of loyalty to the corporation or its stockholders; (ii) for acts
or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law; (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law; or (iv) for any transaction from which the director
derives an improper personal benefit. The effect of this provision is to
eliminate the rights of the Company and its stockholders (through
stockholders' derivative suits on behalf of the Company) to recover monetary
damages against a director for breach of the fiduciary duty of care as a
director (including breaches resulting from negligent or grossly negligent
behavior) except in the situations described in clauses (i) through (iv)
above. This provision does not limit or eliminate the rights of the Company or
any stockholder to seek non-monetary relief such as an injunction or
rescission in the event of a breach of a director's duty of care. The Company
believes that these provisions will assist the Company in attracting and
retaining qualified individuals to serve as directors.
The Delaware General Corporation Law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation or by-laws, unless the
corporation's certificate of incorporation or by-laws, as the case may be,
requires a greater percentage. Neither the Company's Certificate of
Incorporation nor its By-Laws impose a greater percentage stockholder vote for
any amendment to or repeal of the Certificate of Incorporation or By-Laws. The
By-Laws may also be amended or repealed by a majority vote of the whole Board
of Directors.
58
<PAGE>
DESCRIPTION OF REVOLVING CREDIT FACILITY
Sheffield is party to the Revolving Credit Facility with NationsBank, N.A.
("NationsBank"), pursuant to which NationsBank provides Sheffield with a
revolving credit facility (the "Revolving Credit Facility") of $40 million,
subject to levels of borrowing availability. Pursuant to an amendment
effective as of the Issue Date, borrowing availability is limited to an amount
equal to the sum of 85% of the face value of eligible accounts receivable plus
65% of the lower of fair market value or cost of eligible inventory. The total
loans outstanding at any one time against eligible inventory may not exceed
$27 million. The obligations of Sheffield under the Revolving Credit Facility
are secured by a first priority lien on Sheffield's inventory, accounts
receivable and general intangibles. Borrowings under the Revolving Credit
Facility bear interest at a fluctuating annual rate equal to between 0 and 1%
in 1/4% increments based on the Company's interest coverage plus the prime
rate as announced by NationsBank, payable monthly. The Company intends to use
a portion of the net proceeds of the issuance of the Old First Mortgage Notes
to pay down amounts outstanding under the Revolving Credit Facility, but will
retain the Revolving Credit Facility for future borrowings. See "Use of
Proceeds" and "Capitalization."
Pursuant to an amendment that became effective upon consummation of the
issuance of the Old First Mortgage Notes, the Revolving Credit Facility
requires the Company to maintain (i) a minimum availability of $5.0 million on
a formula basis and (ii) a ratio of EDITDA to cash interest expense of 1.1 to
1.0.
The following (among other events) constitute events of default, the
occurrence and continuance of which would entitle NationsBank to terminate the
Revolving Credit Facility and to declare all amounts outstanding thereunder to
be immediately due and payable: (1) non-payment when due of any amount payable
under the Revolving Credit Facility; (2) the attachment of any involuntary
lien (other than as permitted by NationsBank), or entry of any fixed judgment,
upon Sheffield in an amount in excess of $250,000 which has not been released
within 60 days; (3) violation of any covenants, or the material untruth of any
representation or warranty made by Sheffield; (4) bankruptcy or other
insolvency proceedings are instituted against Sheffield which are not
dismissed or vacated within 60 days; (5) change of ownership, suspension of
business, disposition of certain assets, certain mergers or consolidations of
Sheffield; (6) seizure of the collateral by any third party; and (7) an event
of default of the obligations under the First Mortgage Notes. Any event of
default gives NationsBank the right to possess and sell the collateral
securing Sheffield's obligations.
59
<PAGE>
DESCRIPTION OF FIRST MORTGAGE NOTES
GENERAL
As used below in this "Description of First Mortgage Notes" section,
references to the "First Mortgage Notes" refer to the Old First Mortgage Notes
and the New First Mortgage Notes.
The Old First Mortgage Notes were and the New First Mortgage Notes will be
issued under an indenture (the "Indenture"), dated as of December 1, 1997, by
and among the Company and State Street Bank and Trust Company, as Trustee (the
"Trustee"). The following summary of certain provisions of the Indenture does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, the Trust Indenture Act of 1939, as amended (the "TIA"), and
to all of the provisions of the Indenture, including the definitions of
certain terms therein and those terms made a part of the Indenture by
reference to the TIA as in effect on the date of the Indenture. A copy of the
Indenture has been filed as an Exhibit to the Exchange Offer Registration
Statement of which this Prospectus is a part. As used in this "Description of
First Mortgage Notes" section, the "Company" means Sheffield Steel
Corporation. The definitions of certain capitalized terms used in the
following summary are set forth below under "--Certain Definitions."
The First Mortgage Notes will be issued in fully registered form only,
without coupons, in denominations of $1,000 and integral multiples thereof.
Initially, the Trustee will act as Paying Agent and Registrar for the Notes.
The First Mortgage Notes may be presented for registration of transfer and
exchange at the offices of the Registrar, which initially will be the
Trustee's corporate trust office. The Company may change any Paying Agent and
Registrar without notice to holders of the First Mortgage Notes (the
"Holders"). The Company will pay principal (and premium, if any) on the First
Mortgage Notes at the Trustee's corporate office in New York, New York. At the
Company's option, interest may be paid at the Trustee's corporate trust office
or by check mailed to the registered address of Holders. Any Old First
Mortgage Notes that remain outstanding after the completion of the Exchange
Offer, together with the New First Mortgage Notes issued in connection with
the Exchange Offer, will be treated as a single class of securities under the
Indenture.
The First Mortgage Notes are senior obligations of the Company, secured by a
first priority lien on substantially all existing and future real property,
plant and equipment owned or leased by the Company and will rank pari passu in
right of payment with all existing and future unsubordinated indebtedness of
the Company, if any (including borrowings under the Revolving Credit
Facility), and senior in right of payment to all existing and future
subordinated indebtedness. See "--Security" and "Description of Revolving
Credit Facility."
PRINCIPAL, MATURITY AND INTEREST
The First Mortgage Notes are secured senior obligations of the Company and
are limited in aggregate principal amount to $150,000,000, of which
$110,000,000 will be exchanged in the Exchange Offer. The First Mortgage Notes
will mature on December 1, 2005. Interest on the First Mortgage Notes will
accrue at the rate of 11% per annum and will be payable semiannually in cash
on each June 1 and December 1, commencing on June 1, 1998, to the persons who
are registered Holders at the close of business on May 15 and November 15
immediately preceding the applicable interest payment date. Interest on the
First Mortgage Notes will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from and including the date of
issuance.
The First Mortgage Notes are not entitled to the benefit of any mandatory
sinking fund.
60
<PAGE>
REDEMPTION
Optional Redemption. The First Mortgage Notes will be redeemable, at the
Company's option, in whole at any time or in part from time to time, on and
after December 1, 2001, upon not less than 30 nor more than 60 days' notice,
at the following redemption prices (expressed as percentages of the principal
amount thereof) if redeemed during the twelve-month period commencing on
December 1 of the year set forth below, plus, in each case, accrued and unpaid
interest thereon, if any, to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001.......................................................... 105.750%
2002.......................................................... 102.875%
2003 and thereafter........................................... 100.000%
</TABLE>
Optional Redemption upon Public Equity Offerings. At any time, or from time
to time, on or prior to December 1, 2000, the Company may, at its option, use
the net cash proceeds of one or more Public Equity Offerings (as defined
below) to redeem up to 35% of the First Mortgage Notes at a redemption price
equal to 111.5% of the principal amount thereof plus accrued and unpaid
interest thereon, if any, to the date of redemption; provided that at least
65% of the principal amount of First Mortgage Notes originally issued remains
outstanding immediately after any such redemption. In order to effect the
foregoing redemption with the proceeds of any Public Equity Offering, the
Company shall make such redemption not more than 150 days after the
consummation of any such Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of the Company
pursuant to a registration statement filed with the Commission in accordance
with the Securities Act.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the First Mortgage Notes are to be
redeemed at any time, selection of such First Mortgage Notes for redemption
will be made by the Trustee in compliance with the requirements of the
principal national securities exchange, if any, on which such First Mortgage
Notes are listed or, if such First Mortgage Notes are not then listed on a
national securities exchange, on a pro rata basis, by lot or by such method as
the Trustee shall deem fair and appropriate; provided, however, that no First
Mortgage Notes of a principal amount of $1,000 or less shall be redeemed in
part; provided, further, that if a partial redemption is made with the
proceeds of a Public Equity Offering, selection of the First Mortgage Notes or
portions thereof for redemption shall be made by the Trustee only on a pro
rata basis or on as nearly a pro rata basis as is practicable (subject to DTC
procedures), unless such method is otherwise prohibited. Notice of redemption
shall be mailed by first-class mail at least 30 but not more than 60 days
before the redemption date to each Holder of First Mortgage Notes to be
redeemed at its registered address. If any First Mortgage Note is to be
redeemed in part only, the notice of redemption that relates to such First
Mortgage Note shall state the portion of the principal amount thereof to be
redeemed. A new First Mortgage Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original First Mortgage Note. On and after the
redemption date, interest will cease to accrue on First Mortgage Notes or
portions thereof called for redemption as long as the Company has deposited
with the Paying Agent funds in satisfaction of the applicable redemption price
pursuant to the Indenture.
SECURITY
The First Mortgage Notes will be secured by a first priority Lien on
substantially all existing and future real property, plant, equipment,
intellectual property and related intangibles of the Company, and the proceeds
thereof, but excluding inventory, accounts receivable, capital stock of the
Railway Company, Waddell and Sheffield-Oklahoma City, certain non-material
leasehold interests and property and equipment acquired by the Company with
the proceeds of purchase money Indebtedness permitted to be incurred under the
Indenture
61
<PAGE>
(collectively, the "Collateral"), subject to certain Permitted Liens, which
Permitted Liens, in the judgment of the Company, will not adversely affect the
value of the currently existing Collateral. Collateral consisting of real
property and fixtures will be mortgaged by the Company pursuant to mortgages
or deeds of trust (the "Mortgages"). Collateral constituting personal property
will be pledged by the Company pursuant to security agreements (the "Security
Agreements").
The collateral release provisions of the Indenture permit the release of
items of Collateral which are the subject of an Asset Sale (as defined below)
and in other circumstances upon compliance with certain conditions. See "--
Possession, Use and Release of Collateral." The Net Cash Proceeds (as defined
below) of any such Asset Disposition would be required to be applied to a Net
Cash Proceeds Offer (as defined in the Indenture) in the circumstances and
manner described under "--Certain Covenants--Limitation on Asset Sales." To
the extent a Net Cash Proceeds Offer is not subscribed to by Holders of First
Mortgage Notes or such Net Cash Proceeds are not required to be applied to
make a Net Cash Proceeds Offer pursuant to the penultimate sentence of the
first paragraph of the "Limitation on Asset Sales" covenant, the unutilized
Net Cash Proceeds may be retained by the Company, free and clear of the Lien
of the Indenture and the Security Documents. See "--Possession, Use and
Release of Collateral."
To the extent that Liens are granted to third parties pursuant to clauses
(xiv), (xv) or (xvi) of the definition of "Permitted Liens", such third
parties may have rights and remedies with respect to the Property subject to
such Lien that, if exercised, could adversely affect the value of the
Collateral.
No appraisals of the Collateral have been prepared by or on behalf of the
Company. At October 31, 1997, the net book value of the Collateral was
approximately $53 million. There can be no assurance that the proceeds of any
sale of the Collateral pursuant to the Indenture and the related collateral
documents following an acceleration after an Event of Default under the
Indenture would not be substantially less than that which would be required to
satisfy payments due on the First Mortgage Notes. By its nature, some or all
of the Collateral will be illiquid and may have no readily ascertainable
market value. Accordingly, there can be no assurance that the Collateral will
be able to be sold in a short period of time, if saleable.
For a discussion of certain risks associated with the ability of the Trustee
to foreclose upon and sell Collateral under applicable bankruptcy laws if a
bankruptcy proceeding were to be commenced by or against the Company, see
"Risk Factors--Security for the First Mortgage Notes."
INTERCREDITOR AGREEMENT
The Trustee, on behalf of the Holders of the First Mortgage Notes has
entered into an intercreditor agreement (the "Intercreditor Agreement") with
the Company, and NationsBank of Georgia, N.A., as the lender under the
Revolving Credit Facility (the "Revolver Lender"). The Intercreditor Agreement
provides, among other things, that (i) the Trustee and the Revolver Lender
will provide notices to each other with respect to the acceleration of the
First Mortgage Notes or the Indebtedness under the Revolving Credit Facility,
as the case may be, and the commencement of any action to enforce the rights
of the Holders of the First Mortgage Notes, the Trustee or the Revolver Lender
and (ii) for a period following the issuance of a notice of enforcement, the
Revolver Lender may enter upon all or any portion of the Company's premises,
use the Collateral to the extent necessary to complete the manufacture of
inventory, collect accounts and sell or otherwise dispose of the collateral
securing the Indebtedness under the Revolving Credit Facility.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control, each
Holder has the right to require that the Company purchase all or a portion of
such Holder's First Mortgage Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued interest to the date of purchase.
62
<PAGE>
Within 30 days following the date upon which the Change of Control occurred,
the Company must send, by first class mail, a notice to each Holder, with a
copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 60 days from the date
such notice is mailed, other than as may be required by law (the "Change of
Control Payment Date"). Holders electing to have a First Mortgage Note
purchased pursuant to a Change of Control Offer will be required to surrender
the First Mortgage Note, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the First Mortgage Note completed, to the Paying
Agent at the address specified in the notice prior to the close of business on
the third business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the First Mortgage Notes that might be delivered by
Holders seeking to accept the Change of Control Offer. In the event the
Company is required to purchase outstanding First Mortgage Notes pursuant to a
Change of Control Offer, the Company expects that it would seek third party
financing to the extent it does not have available funds to meet its purchase
obligations. However, there can be no assurance that the Company would be able
to obtain such financing. Failure by the Company to purchase the First
Mortgage Notes when required upon a Change of Control will result in an Event
of Default with respect to the First Mortgage Notes.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to repurchase upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company
and its Restricted Subsidiaries to incur additional Indebtedness, to grant
Liens on its property, to make Restricted Payments and to make Asset Sales may
also make more difficult or discourage a takeover of the Company, whether
favored or opposed by the management of the Company. Consummation of any such
transaction in certain circumstances may require redemption or repurchase of
the First Mortgage Notes, and there can be no assurance that the Company or
the acquiring party will have sufficient financial resources to effect such
redemption or repurchase. Such restrictions and the restrictions on
transactions with Affiliates may, in certain circumstances, make more
difficult or discourage any leveraged buyout of the Company or any of its
Subsidiaries by the management of the Company. While such restrictions cover a
wide variety of arrangements which have traditionally been used to effect
highly leveraged transactions, the Indenture may not afford the Holders of
First Mortgage Notes protection in all circumstances from the adverse aspects
of a highly leveraged transaction, reorganization, restructuring, merger or
similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of First Mortgage Notes pursuant to a Change of Control Offer. To
the extent that the provisions of any securities laws or regulations conflict
with the "Change of Control" provisions of the Indenture, the Company shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under the "Change of Control"
provisions of the Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any of the Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible
for payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company may incur Indebtedness
(including, without limitation, Acquired Indebtedness) if on the date of the
incurrence of such Indebtedness, after giving effect to the incurrence
thereof, the Consolidated Fixed Charge Coverage Ratio of the Company is
greater than 1.9 to 1.0 through October 31, 1999 and greater than 2.0 to 1.0
thereafter.
63
<PAGE>
The Company will not, directly or indirectly, in any event incur any
Indebtedness which by its terms (or by the terms of any agreement governing
such Indebtedness) is subordinated to any other Indebtedness of the Company
unless such Indebtedness is also by its terms (or by the terms of any
agreement governing such Indebtedness) made expressly subordinate to the First
Mortgage Notes to the same extent and in the same manner as such Indebtedness
is subordinated pursuant to subordination provisions that are most favorable
to the holders of any other Indebtedness of the Company.
Limitation on Restricted Payments. The Company will not, and will not cause
or permit any of the Restricted Subsidiaries to, directly or indirectly, (a)
declare or pay any dividend or make any distribution (other than dividends or
distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or any warrants, rights or options to purchase or
acquire shares of any class of such Capital Stock, (c) make any principal
payment on, purchase, defease, redeem, prepay or otherwise acquire or retire
for value, prior to any scheduled maturity, scheduled repayment or scheduled
sinking fund payment, any Indebtedness of the Company or its Subsidiaries that
is subordinate or junior in right of payment to the First Mortgage Notes, or
(d) make any Investment (other than Permitted Investments) (each of the
foregoing actions set forth in clauses (a), (b), (c) and (d) being referred to
as a "Restricted Payment"), if at the time of such Restricted Payment or
immediately after giving effect thereto, (i) a Default or an Event of Default
shall have occurred and be continuing or (ii) the Company is not able to incur
at least $1.00 of additional Indebtedness (other than Permitted Indebtedness)
in compliance with the covenant described under "--Limitation on Incurrence of
Additional Indebtedness" or (iii) the aggregate amount of Restricted Payments
(including such proposed Restricted Payment) made subsequent to the Issue Date
(the amount expended for such purposes, if other than in cash, being the fair
market value of such property as determined reasonably and in good faith by
the Board of Directors of the Company) shall exceed the sum of: (w) 50% of the
cumulative Consolidated Net Income (or if cumulative Consolidated Net Income
shall be a loss, minus 100% of such loss) of the Company from and including
the first full fiscal quarter of the Company commencing after the Issue Date
to the date the Restricted Payment occurs (the "Reference Date") (treating
such period as a single accounting period); plus (x) 100% of the aggregate net
cash proceeds received by the Company from any Person (other than a Subsidiary
of the Company) from the issuance and sale subsequent to the Issue Date and on
or prior to the Reference Date of Qualified Capital Stock of the Company; plus
(y) without duplication of any amounts included in clause (iii)(x) above, 100%
of the aggregate net cash proceeds of any equity contribution received by the
Company from a holder of the Company's Capital Stock (other than from a
Subsidiary of the Company).
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend or
redemption payment within 60 days after the date of declaration of such
dividend if the dividend or redemption payment, as the case may be, would have
been permitted on the date of declaration; (2) if no Default or Event of
Default shall have occurred and be continuing, the repurchase, redemption,
retirement or acquisition of any shares of Capital Stock of the Company,
either (i) solely in exchange for shares of Qualified Capital Stock of the
Company or (ii) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Subsidiary of the Company) of shares
of Qualified Capital Stock of the Company; (3) if no Default or Event of
Default shall have occurred and be continuing, the repurchase, redemption,
retirement or acquisition of any Indebtedness of the Company or a Subsidiary
of the Company that is subordinate or junior in right of payment to the First
Mortgage Notes either (i) solely in exchange for shares of Qualified Capital
Stock of the Company, or (ii) through the application of net proceeds of a
substantially concurrent sale for cash (other than to a Subsidiary of the
Company) of (A) shares of Qualified Capital Stock of the Company or (B)
Refinancing Indebtedness; (4) so long as no Default or Event of Default shall
have occurred and be continuing, pursuant to and in accordance with the Stock
Option Plan, the purchase of capital stock or options from members of
management or directors of the Company upon the terms set forth in the Stock
Option Plan for consideration consisting of cash and/or Subordinated
Management Notes; (5) the making of Restricted Payments in an aggregate amount
not to exceed $2.5 million; (6) the payment of a dividend as described in this
Prospectus under "Use of Proceeds" within 90 days of the Issue Date in an
aggregate amount not to exceed $10 million; and (7) the purchase of an
aggregate 50,625 shares of Common Stock from two former
64
<PAGE>
employees of the Company, for an aggregate purchase price (exclusive of
interest) not to exceed $700,000, pursuant to those certain letter agreements
dated September 10, 1996. In determining the aggregate amount of Restricted
Payments made subsequent to the Issue Date in accordance with clause (iii) of
the immediately preceding paragraph, amounts expended pursuant to clauses (1),
(2)(ii), (3)(ii)(A) and (5) above and clause (vi) of the definition of
Permitted Investments shall be included in such calculation.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment complies with the Indenture and setting forth in reasonable detail the
basis upon which the required calculations were computed, which calculations
may be based upon the Company's latest available internal quarterly financial
statements.
Limitation on Asset Sales. The Company will not, and will not permit any of
the Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 75% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash and/or Cash Equivalents and is
received at the time of such disposition, and (iii) to the extent such Asset
Sale involves Collateral, it shall be in compliance with the provisions
described under "Possession, Use and Release of Collateral." Upon the
consummation of an Asset Sale, the Company may apply, or may cause such
Restricted Subsidiary to apply, the Net Cash Proceeds relating to such Asset
Sale within 180 days of receipt thereof to make an investment in properties
and assets that replace the properties and assets that were the subject of
such Asset Sale or in properties and assets that will be used in the business
of the Company and the Restricted Subsidiaries as existing on the Issue Date
or in businesses reasonably related thereto ("Replacement Assets"); provided
that, to the extent the Net Cash Proceeds relate to an Asset Sale of
Collateral, the Replacement Assets, if any, relating to such Net Cash Proceeds
shall be of a type constituting Collateral and shall be subject to a first
priority Lien in favor of the Trustee pursuant to the Security Documents and
shall constitute Collateral. On the 180th day after an Asset Sale or such
earlier date, if any, as the Board of Directors of the Company or of such
Restricted Subsidiary determines not to apply the Net Cash Proceeds relating
to such Asset Sale as set forth in the next preceding sentence (each, a "Net
Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds
which have not been applied on or before such Net Proceeds Offer Trigger Date
as permitted in the next preceding sentence (each a "Net Proceeds Offer
Amount") shall be applied by the Company or such Restricted Subsidiary to make
an offer to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds
Offer Payment Date") not less than 30 nor more than 60 days following the
applicable Net Proceeds Offer Trigger Date, from all Holders on a pro rata
basis, that amount of First Mortgage Notes equal to the Net Proceeds Offer
Amount at a price equal to 100% of the principal amount of the First Mortgage
Notes to be purchased, plus accrued and unpaid interest thereon, if any, to
the date of purchase; provided, however, that if at any time any non-cash
consideration received by the Company or any Restricted Subsidiary, as the
case may be, in connection with any Asset Sale is converted into or sold or
otherwise disposed of for cash (other than interest received with respect to
any such non-cash consideration), then such conversion or disposition shall be
deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof
shall be applied in accordance with this covenant. The Company may defer the
Net Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer
Amount equal to or in excess of $5 million resulting from one or more Asset
Sales (at which time, the entire unutilized Net Proceeds Offer Amount, not
just the amount in excess of $5 million, shall be applied as required pursuant
to this paragraph). All Net Cash Proceeds in excess of $5 million from Asset
Sales not immediately applied to purchase Replacement Assets, pending their
application in accordance with this covenant or the release thereof in
accordance with the release provisions described under "Possession, Use and
Release of Collateral," shall be deposited in a cash collateral account under
the Indenture.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and the Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold
the properties and assets of the Company and the Restricted Subsidiaries not
so transferred for purposes of this covenant, and shall comply with
65
<PAGE>
the provisions of this covenant with respect to such deemed sale as if it were
an Asset Sale. In addition, the fair market value of such properties and
assets of the Company or the Restricted Subsidiaries deemed to be sold shall
be deemed to be Net Cash Proceeds for purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set
forth in the Indenture. Upon receiving notice of the Net Proceeds Offer,
Holders may elect to tender their First Mortgage Notes in whole or in part in
integral multiples of $1,000 in exchange for cash. To the extent Holders
properly tender First Mortgage Notes in an amount exceeding the Net Proceeds
Offer Amount, First Mortgage Notes of tendering Holders will be purchased on a
pro rata basis (based on amounts tendered). A Net Proceeds Offer shall remain
open for a period of 20 business days or such longer period as may be required
by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of First Mortgage Notes pursuant to a Net Proceeds Offer. To the
extent that the provisions of any securities laws or regulations conflict with
the "Asset Sale" provisions of the Indenture, the Company shall comply with
the applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
In the event that the Capital Stock of a Restricted Subsidiary of the
Company, which has entered into a supplemental indenture guaranteeing the
obligations of the Company under the First Mortgage Notes and the Indenture,
is sold or otherwise disposed of in a transaction with any Person that is not
an Affiliate of the Company, such Restricted Subsidiary shall be deemed
automatically and unconditionally released and discharged from any of its
obligations under the supplemental indenture without any further action on the
part of the Trustee or any holder of the First Mortgage Notes; provided that
the Net Cash Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not cause or permit any of the
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause
or permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock; (b) make loans or
advances or to pay any Indebtedness or other obligation owed to the Company or
any other Restricted Subsidiary; or (c) transfer any of its property or assets
to the Company or any other Restricted Subsidiary, except for such
encumbrances or restrictions existing under or by reason of: (1) applicable
law; (2) the Indenture and the Security Documents; (3) customary non-
assignment provisions of any contract or any lease governing a leasehold
interest of any Restricted Subsidiary; (4) any instrument governing Acquired
Indebtedness, which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person or
the properties or assets of the Person so acquired (including, but not limited
to, such Person's direct and indirect Subsidiaries); (5) agreements existing
on the Issue Date to the extent and in the manner such agreements are in
effect on the Issue Date; (6) Permitted Liens; or (7) an agreement governing
Indebtedness incurred to Refinance the Indebtedness issued, assumed or
incurred pursuant to an agreement referred to in clause (2), (4) or (5) above;
provided, however, that the provisions relating to such encumbrance or
restriction contained in any such Indebtedness are no less favorable to the
Company in any material respect as determined by the Board of Directors of the
Company in its reasonable and good faith judgment than the provisions relating
to such encumbrance or restriction contained in agreements referred to in such
clause (2), (4) or (5).
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any of the Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Subsidiary) or permit any
Person (other than the Company or a Wholly Owned Subsidiary) to own any
Preferred Stock of any Restricted Subsidiary.
Limitation on Liens. The Company will not, and will not cause or permit any
of the Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens upon any property or assets
66
<PAGE>
of the Company or any of the Restricted Subsidiaries whether owned on the
Issue Date or acquired after the Issue Date, or any proceeds therefrom, except
(i) in the case of Property not constituting Collateral, Permitted Liens, and
(ii) in the case of Property constituting Collateral, Liens permitted by the
Security Documents.
Merger, Consolidation and Sale of Assets. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or
into any Person, or sell, assign, transfer, lease, convey or otherwise dispose
of (or cause or permit any Restricted Subsidiary to sell, assign, transfer,
lease, convey or otherwise dispose of) all or substantially all of the
Company's assets (determined on a consolidated basis for the Company and the
Restricted Subsidiaries) whether as an entirety or substantially as an
entirety to any Person unless: (i) either (1) the Company shall be the
surviving or continuing corporation or (2) the Person (if other than the
Company) formed by such consolidation or into which the Company is merged or
the Person which acquires by sale, assignment, transfer, lease, conveyance or
other disposition the properties and assets of the Company and of the
Restricted Subsidiaries substantially as an entirety (the "Surviving Entity")
(x) shall be a corporation organized and validly existing under the laws of
the United States or any State thereof or the District of Columbia and (y)
shall expressly assume, by supplemental indenture (in form and substance
satisfactory to the Trustee), executed and delivered to the Trustee, the due
and punctual payment of the principal of, and premium, if any, and interest on
all of the First Mortgage Notes and the performance of every covenant of the
First Mortgage Notes, the Indenture and the Registration Rights Agreement on
the part of the Company to be performed or observed; (ii) immediately after
giving effect to such transaction and the assumption contemplated by clause
(i)(2)(y) above (including giving effect to any Indebtedness and Acquired
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction), the Company or such Surviving Entity, as the
case may be, (1) shall have a Consolidated Tangible Net Worth equal to or
greater than the Consolidated Tangible Net Worth of the Company immediately
prior to such transaction and (2) shall be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
covenant described under "--Limitation on Incurrence of Additional
Indebtedness"; (iii) immediately before and immediately after giving effect to
such transaction and the assumption contemplated by clause (i)(2)(y) above
(including, without limitation, giving effect to any Indebtedness and Acquired
Indebtedness incurred or anticipated to be incurred and any Lien granted in
connection with or in respect of the transaction), no Default or Event of
Default shall have occurred or be continuing; and (iv) the Company or the
Surviving Entity shall have delivered to the Trustee an officers' certificate
and an opinion of counsel, each stating that such consolidation, merger, sale,
assignment, transfer, lease, conveyance or other disposition and, if a
supplemental indenture is required in connection with such transaction, such
supplemental indenture comply with the applicable provisions of the Indenture
and that all conditions precedent in the Indenture relating to such
transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries the Capital Stock of which constitutes all or substantially all
of the properties and assets of the Company, shall be deemed to be the
transfer of all or substantially all of the properties and assets of the
Company.
The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the
Company in accordance with the foregoing, in which the Company is not the
continuing corporation, the successor Person formed by such consolidation or
into which the Company is merged or to which such conveyance, lease or
transfer is made shall succeed to, and be substituted for, and may exercise
every right and power of, the Company under the Indenture and the First
Mortgage Notes with the same effect as if such surviving entity had been named
as such.
Limitations on Transactions with Affiliates. (a) The Company will not, and
will not permit any of the Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related
transactions (including, without limitation, the purchase, sale, lease or
exchange of any property or the rendering of any service) with, or for the
benefit of, any of its Affiliates (each an "Affiliate Transaction"), other
than
67
<PAGE>
(x) Affiliate Transactions permitted under paragraph (b) below and (y)
Affiliate Transactions on terms that are no less favorable than those that
might reasonably have been obtained in a comparable transaction at such time
on an arm's-length basis from a Person that is not an Affiliate of the Company
or such Restricted Subsidiary. All Affiliate Transactions (and each series of
related Affiliate Transactions which are similar or part of a common plan)
involving aggregate payments or other property with a fair market value in
excess of $500,000 shall be approved by the Board of Directors of the Company
or such Restricted Subsidiary, as the case may be, such approval to be
evidenced by a Board Resolution stating that such Board of Directors has
determined that such transaction complies with the foregoing provisions. If
the Company or any Restricted Subsidiary enters into an Affiliate Transaction
(or a series of related Affiliate Transactions related to a common plan) that
involves an aggregate fair market value of more than $4 million, the Company
or such Restricted Subsidiary, as the case may be, shall, prior to the
consummation thereof, obtain an opinion stating that such transaction or
series of related transactions are fair to the Company or the relevant
Restricted Subsidiary, as the case may be, from a financial point of view,
from an Independent Financial Advisor and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary as determined in good faith by the Company's Board of Directors;
(ii) transactions exclusively between or among the Company and any of the
Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries, provided such transactions are not otherwise prohibited by the
Indenture; (iii) Restricted Payments permitted by the Indenture; (iv) advances
and loans to employees and officers in the ordinary course of business; and
(v) payments to HMK and/or its Affiliates required pursuant to the Management
Agreement or the Intercompany Agreements.
Reports to Holders. The Company will deliver to the Trustee within 15 days
after the filing of the same with the Commission, copies of the quarterly and
annual reports and of the information, documents and other reports, if any,
which the Company is required to file with the Commission pursuant to Section
13 or 15(d) of the Exchange Act. The Indenture further provides that,
notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company will file
with the Commission, to the extent permitted, and provide the Trustee and
Holders with such annual reports and such information, documents and other
reports specified in Sections 13 and 15(d) of the Exchange Act. The Company
will also comply with the other provisions of TIA (S)314(a).
Limitation on Designations of Unrestricted Subsidiaries. The Company may
designate any Subsidiary of the Company (other than a Subsidiary of the
Company which owns Capital Stock of a Restricted Subsidiary) as an
"Unrestricted Subsidiary" under the Indenture (a "Designation") only if:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(b) the Company would be permitted under the Indenture to make an
Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the sum of
(i) fair market value of the Capital Stock of such Subsidiary owned by the
Company and the Restricted Subsidiaries on such date and (ii) the aggregate
amount of other Investments of the Company and the Restricted Subsidiaries
in such Subsidiary on such date; and
(c) the Company would be permitted to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the covenant
described under "--Limitation on Incurrence of Additional Indebtedness" at
the time of Designation (assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "--Limitation on Restricted Payments" for all purposes of the
Indenture in the Designation Amount. The Indenture will further provide that
the Company shall not, and shall not permit any Restricted Subsidiary to, at
any time (x) provide direct or indirect credit support for or a guarantee of
any Indebtedness of any Unrestricted Subsidiary (including of any
68
<PAGE>
undertaking, agreement or instrument evidencing such Indebtedness), (y) be
directly or indirectly liable for any Indebtedness of any Unrestricted
Subsidiary or (z) be directly or indirectly liable for any Indebtedness which
provides that the holder thereof may (upon notice, lapse of time or both)
declare a default thereon or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity upon the occurrence of a default
with respect to any Indebtedness of any Unrestricted Subsidiary (including any
right to take enforcement action against such Unrestricted Subsidiary),
except, in the case of clause (x) or (y), to the extent permitted under the
covenant described under "--Limitation on Restricted Payments."
The Indenture further provides that the Company may revoke any Designation
of a Subsidiary as an Unrestricted Subsidiary (a "Revocation"), whereupon such
Subsidiary shall then constitute a Restricted Subsidiary, if:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee certifying compliance with the foregoing
provisions.
Limitations on Actions Affecting Security for the First Mortgage Notes. The
Company shall not, and shall not permit any Restricted Subsidiary of the
Company to, take or omit to take any action, which action or omission would
have the result of materially adversely affecting the security interests in
the Collateral in favor of the Collateral Agent for the benefit of the Trustee
and the holders of the First Mortgage Notes, nor shall the Company or any such
Subsidiary grant any interest whatsoever in the Collateral except as expressly
permitted by the Indenture and the Security Documents.
Limitation on Sale and Leaseback Transactions. The Company will not, and
will not permit any Restricted Subsidiary of the Company to, enter into any
Sale and Leaseback Transaction with respect to Property (whether now owned or
hereafter acquired) unless (i)(a) the Property that is the subject of the Sale
and Leaseback Transaction does not constitute Collateral or (b) the sale or
transfer of the Property to be leased complies with the requirements of the
"Limitation on Asset Sales" covenant and (ii) the Company or such Restricted
Subsidiary would be entitled under the "Limitation on Incurrence of Additional
Indebtedness" covenant to incur any Capitalized Lease Obligation in respect of
such Sale and Leaseback Transaction.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any First Mortgage Notes when the same
becomes due and payable and the default continues for a period of 30 days;
(ii) the failure to pay the principal on any First Mortgage Notes, when
such principal becomes due and payable, at maturity, upon redemption or
otherwise;
(iii) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period
of 30 days after the Company receives written notice specifying the default
(and demanding that such default be remedied) from the Trustee or the
Holders of at least 25% of the outstanding principal amount of the First
Mortgage Notes (except in the case of a default with respect to the
covenants described under "Change of Control" and "--Certain Covenants--
Merger, Consolidation and Sale of Assets," which will constitute an Event
of Default with such notice requirement but without such passage of time
requirement);
69
<PAGE>
(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness of the Company or any Restricted Subsidiary, or the
acceleration of the final stated maturity of any such Indebtedness, if the
aggregate principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure to
pay principal at final maturity or which has been accelerated, aggregates
$5 million or more at any time;
(v) one or more judgments in an aggregate amount in excess of $5 million
in the aggregate shall have been rendered against the Company or any of the
Restricted Subsidiaries and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments become
final and non-appealable; or
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries.
If an Event of Default (other than an Event of Default specified in clause
(vi) above) shall occur and be continuing, the Trustee or the Holders of at
least 25% in principal amount of outstanding First Mortgage Notes may declare
the principal of and accrued interest on all the First Mortgage Notes to be
due and payable by notice in writing to the Company and the Trustee specifying
the respective Event of Default, and the same shall become immediately due and
payable. If an Event of Default specified in clause (vi) above relating to the
Company occurs and is continuing, then all unpaid principal of, and premium,
if any, and accrued and unpaid interest on all of the outstanding First
Mortgage Notes shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of acceleration
with respect to the First Mortgage Notes as described in the preceding
paragraph, the Holders of a majority in principal amount of the First Mortgage
Notes may rescind and cancel such declaration and its consequences (i) if the
rescission would not conflict with any judgment or decree, (ii) if all
existing Events of Default have been cured or waived except nonpayment of
principal or interest that has become due solely because of the acceleration,
(iii) to the extent the payment of such interest is lawful, interest on
overdue installments of interest and overdue principal, which has become due
otherwise than by such declaration of acceleration, has been paid, (iv) if the
Company has paid the Trustee its reasonable compensation and reimbursed the
Trustee for its expenses, disbursements and advances and (v) in the event of
the cure or waiver of an Event of Default of the type described in clause (vi)
of the description above of Events of Default, the Trustee shall have received
an officers' certificate and an opinion of counsel that such Event of Default
has been cured or waived. No such rescission shall affect any subsequent
Default or impair any right consequent thereto.
The Holders of a majority in principal amount of the First Mortgage Notes
may waive any existing Default or Event of Default under the Indenture, and
its consequences, except a default in the payment of the principal of or
interest on any First Mortgage Notes.
Holders of the First Mortgage Notes may not enforce the Indenture or the
First Mortgage Notes except as provided in the Indenture and under the TIA.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, the Trustee is under no obligation to exercise any of its rights or
powers under the Indenture at the request, order or direction of any of the
Holders, unless such Holders have offered to the Trustee reasonable indemnity.
Subject to all provisions of the Indenture and applicable law, the Holders of
a majority in aggregate principal amount of the then outstanding First
Mortgage Notes have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge
of any Default or Event of Default (provided that such officers shall provide
such certification at least annually whether or not they know of any Default
or Event of Default) that has occurred and, if applicable, describe such
Default or Event of Default and the status thereof.
70
<PAGE>
POSSESSION, USE AND RELEASE OF COLLATERAL
Unless an Event of Default shall have occurred and be continuing, the
Company has the right to remain in possession and retain exclusive control of
the Collateral, to operate the Collateral and to collect, invest and dispose
of any income thereon (subject to applicable limitations in the Indenture).
Upon compliance by the Company with the conditions set forth below in
respect of any Asset Sale, the Trustee will release the Released Interests (as
hereinafter defined) from the Lien of the Security Documents and reconvey the
Released Interests to the Company.
The Company has the right to obtain a release of items of Collateral (the
"Released Interests") subject to an Asset Sale upon compliance with the
condition that the Company deliver to the Trustee the following:
(a) A notice from the Company requesting the release of Released
Interests, (i) describing the proposed Released Interests, (ii) specifying
the value of such Released Interests on a date within 60 days of such
Company notice (the "Valuation Date"), (iii) stating that the purchase
price to be received is at least equal to the fair market value of the
Released Interests, (iv) stating that the release of such Released
Interests will not interfere with the Trustee's ability to realize the
value of the remaining Collateral and will not impair the maintenance and
operation of the remaining Collateral, (v) confirming the sale of, or an
agreement to sell, such Released Interests in a bona fide sale to a person
that is not an Affiliate of the Company or, in the event that such sale is
to a person that is an Affiliate, confirming that such sale is made in
compliance with the provisions set forth in the "Limitation on Transactions
with Affiliates" covenant, (vi) certifying that such Asset Sale complies
with the terms and conditions of the Indenture with respect thereto, and
(vii) in the event there is to be a substitution of Property for the
Collateral subject to the Asset Sale, specifying the Property intended to
be substituted for the Collateral to be disposed of,
(b) An officers' certificate of the Company stating that (i) such Asset
Sale covers only the Released Interests and complies with the terms and
conditions of the Indenture with respect to Asset Sale, (ii) all Net Cash
Proceeds from the sale of any of the Released Interests will be applied
pursuant to the provisions of the Indenture in respect of Asset Sale, (iii)
there is no Default or Event of Default in effect or continuing on the date
thereof, the Valuation Date or the date of such Asset Sale, (iv) the
release of the Collateral will not result in a Default or Event of Default
under the Indenture, and (v) all conditions precedent in the Indenture
relating to the release in question have been complied with, and
(c) All documentation required by the Trust Indenture Act, if any, prior
to the release of Collateral by the Trustee and, in the event there is to
be a substitution of Property for the Collateral subject to the Asset Sale,
all documentation necessary to effect the substitution of such new
Collateral.
Notwithstanding the provisions above, so long as no Event of Default shall
have occurred and be continuing, the Company may, without any release or
consent by the Trustee, do any number of ordinary course activities in respect
of the Collateral, in limited dollar amounts specified by the TIA, upon
satisfaction of certain conditions. For example, among other things, subject
to such dollar limitations and conditions, the Company would be permitted to
sell or otherwise dispose of any property subject to the Lien of the Indenture
and the Security Documents, which may have become worn out or obsolete;
abandon, terminate, cancel, release or make alterations in or substitutions of
any leases or contracts subject to the Lien of the Indenture or any of the
Security Documents; surrender or modify any franchise, license or permit
subject to the Lien of the Indenture or any of the Security Documents which it
may own or under which it may be operating; alter, repair, replace, change the
location or position of and add to its structures, machinery, systems,
equipment, fixtures and appurtenances; demolish, dismantle, tear down or scrap
any Collateral or abandon any thereof; and grant leases in respect of real
property under certain circumstances.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding First Mortgage Notes
("Legal Defeasance"). Such Legal Defeasance means that the Company shall
71
<PAGE>
be deemed to have paid and discharged the entire indebtedness represented by
the outstanding First Mortgage Notes, except for (i) the rights of Holders to
receive payments in respect of the principal of, premium, if any, and interest
on the First Mortgage Notes when such payments are due, (ii) the Company's
obligations with respect to the First Mortgage Notes concerning issuing
temporary First Mortgage Notes, registration of First Mortgage Notes,
mutilated, destroyed, lost or stolen First Mortgage Notes and the maintenance
of an office or agency for payments, (iii) the rights, powers, trust, duties
and immunities of the Trustee and the Company's obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the First Mortgage Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, reorganization and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
First Mortgage Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in U.S. dollars, non-callable U.S. government obligations,
or a combination thereof, in such amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent public accountants, to
pay the principal of, premium, if any, and interest on the First Mortgage
Notes on the stated date for payment thereof or on the applicable redemption
date, as the case may be; (ii) in the case of Legal Defeasance, the Company
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders will not recognize income, gain or loss for federal income
tax purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit; (v) such Legal Defeasance or
Covenant Defeasance shall not result in a breach or violation of, or
constitute a default under the Indenture or any other material agreement or
instrument to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company shall
have delivered to the Trustee an officers' certificate stating that the
deposit was not made by the Company with the intent of preferring the Holders
over any other creditors of the Company or with the intent of defeating,
hindering, delaying or defrauding any other creditors of the Company or
others; (vii) the Company shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with; (viii) the Company shall have delivered to
the Trustee an opinion of counsel to the effect that after the 91st day
following the deposit, the trust funds will not be subject to the effect of
any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; and (ix) certain other customary
conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
First Mortgage Notes, as expressly provided for in the Indenture) as to all
outstanding First Mortgage Notes when (i) either (a) all the First Mortgage
Notes theretofore authenticated and delivered (except lost, stolen or
destroyed First Mortgage Notes which have been replaced or paid and First
72
<PAGE>
Mortgage Notes for whose payment money has theretofore been deposited in trust
or segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all First Mortgage Notes not theretofore delivered to the
Trustee for cancellation have become due and payable or will become due and
payable within one year and the Company has irrevocably deposited or caused to
be deposited with the Trustee funds in an amount sufficient to pay and
discharge the entire Indebtedness on the First Mortgage Notes not theretofore
delivered to the Trustee for cancellation, for principal of, premium, if any,
and interest on the First Mortgage Notes to the date of deposit (in the case
of First Mortgage Notes that have become due and payable) or the maturity or
the redemption date (in the case of First Mortgage Notes that will so become
due and payable), together with irrevocable instructions from the Company
directing the Trustee to apply such funds to the payment thereof at maturity
or redemption, as the case may be; (ii) the Company has paid all other sums
payable under the Indenture by the Company; and (iii) the Company has
delivered to the Trustee an officers' certificate and an opinion of counsel
stating that all conditions precedent under the Indenture relating to the
satisfaction and discharge of the Indenture have been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture for certain specified purposes, including
curing ambiguities, defects or inconsistencies, so long as such change does
not, in the opinion of the Trustee, adversely affect the rights of any of the
Holders in any material respect. Other modifications and amendments of the
Indenture may be made with the consent of the Holders of a majority in
principal amount of the then outstanding First Mortgage Notes issued under the
Indenture, except that, without the consent of each Holder affected thereby,
no amendment may: (i) reduce the amount of First Mortgage Notes whose Holders
must consent to an amendment; (ii) reduce the rate of or change or have the
effect of changing the time for payment of interest, including defaulted
interest, on any First Mortgage Notes; (iii) reduce the principal of or change
or have the effect of changing the fixed maturity of any First Mortgage Notes,
or change the date on which any First Mortgage Notes may be subject to
redemption or repurchase, or reduce the redemption or repurchase price
therefor; (iv) make any First Mortgage Notes payable in money other than that
stated in the First Mortgage Notes; (v) make any change in provisions of the
Indenture protecting the right of each Holder to receive payment of principal
of and interest on such Note on or after the due date thereof or to bring suit
to enforce such payment, or permitting Holders of a majority in principal
amount of First Mortgage Notes to waive Defaults or Events of Default; (vi)
amend, change or modify in any material respect the obligation of the Company
to make and consummate a Change of Control Offer in the event of a Change of
Control or make and consummate a Net Proceeds Offer with respect to any Asset
Sale that has been consummated or modify any of the provisions or definitions
with respect thereto; or (vii) modify or change any provision of the Indenture
or the related definitions affecting the ranking of the First Mortgage Notes
in a manner which adversely affects the Holders.
GOVERNING LAW
The Indenture provides that it and the First Mortgage Notes will be governed
by, and construed in accordance with, the laws of the State of New York but
without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be
required thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the
Trustee will exercise such rights and powers vested in it by the Indenture,
and use the same degree of care and skill in its exercise as a prudent man
would exercise or use under the circumstances in the conduct of his own
affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company or of a
Subsidiary of the Company, to obtain payments of claims in certain
73
<PAGE>
cases or to realize on certain property received in respect of any such claim
as security or otherwise. Subject to the TIA, the Trustee will be permitted to
engage in other transactions; provided that if the Trustee acquires any
conflicting interest as described in the TIA, it must eliminate such conflict
or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary
or at the time it merges or consolidates with the Company or any of the
Restricted Subsidiaries or assumed in connection with the acquisition of
assets from such Person and in each case not incurred by such Person in
connection with, or in anticipation or contemplation of, such Person becoming
a Restricted Subsidiary or such acquisition, merger or consolidation.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The
term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative of the
foregoing.
"Affiliate Transaction" has the meaning set forth under "--Certain
Covenants--Limitation on Transactions with Affiliates."
"Asset Acquisition" means (a) an Investment by the Company or any Restricted
Subsidiary in any other Person pursuant to which such Person shall become a
Restricted Subsidiary or shall be merged with or into the Company or any
Restricted Subsidiary, or (b) the acquisition by the Company or any Restricted
Subsidiary of the assets of any Person (other than a Restricted Subsidiary)
which constitute all or substantially all of the assets of such Person or
comprises any division or line of business of such Person or any other
properties or assets of such Person other than in the ordinary course of
business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary
course of business), assignment or other transfer for value by the Company or
any of the Restricted Subsidiaries (including any Sale and Leaseback
Transaction) to any Person other than the Company or a Restricted Subsidiary
of (a) any Capital Stock of any Restricted Subsidiary; or (b) any other
property or assets of the Company or any Restricted Subsidiary other than in
the ordinary course of business; provided, however, that Asset Sales shall not
include (i) the sale, lease, conveyance, disposition or other transfer of all
or substantially all of the assets of the Company as permitted under "--
Certain Covenants--Merger, Consolidation and Sale of Assets," (ii) disposals
or replacements of obsolete equipment in the ordinary course of business,
(iii) the sale, lease, conveyance, disposition or other transfer by the
Company or any Restricted Subsidiary of assets or property to the Company or
one or more Restricted Subsidiaries; provided, that, if such sale, conveyance,
transfer, lease, assignment or other transfer is to a Restricted Subsidiary
and the fair market value of Property subject to such transfer is $1 million
or greater, such Restricted Subsidiary shall, in order for such transaction
not to be an Asset Sale, enter into a supplemental indenture wherein such
Restricted Subsidiary unconditionally guarantees all of the obligations of the
Company under the Indenture and the First Mortgage Notes and (iv) any
Restricted Payment.
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have
been duly adopted by the Board of Directors of such Person and to be in full
force and effect on the date of such certification, and delivered to the
Trustee.
74
<PAGE>
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (ii) with respect to
any Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States,
in each case maturing within one year from the date of acquisition thereof;
(ii) marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of
acquisition, having a rating of at least A-1 from S&P or at least P-1 from
Moody's; (iv) certificates of deposit or bankers' acceptances maturing within
one year from the date of acquisition thereof issued by any bank organized
under the laws of the United States of America or any state thereof or the
District of Columbia or any U.S. branch of a foreign bank having at the date
of acquisition thereof combined capital and surplus of not less than
$250,000,000; (v) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clause (i) above
entered into with any bank meeting the qualifications specified in clause (iv)
above; and (vi) investments in money market funds which invest substantially
all their assets in securities of the types described in clauses (i) through
(v) above.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets of
the Company to any Person (other than a Restricted Subsidiary or any HMK
Affiliate) or group of related Persons (other than any Restricted Subsidiaries
or any HMK Affiliate) for purposes of Section 13(d) of the Exchange Act (a
"Group"), together with any Affiliates thereof (whether or not otherwise in
compliance with the provisions of the Indenture); (ii) the approval by the
holders of Capital Stock of the Company of any plan or proposal for the
liquidation or dissolution of the Company (whether or not otherwise in
compliance with the provisions of the Indenture); (iii) any Person or Group,
other than any HMK Affiliate or Affiliates, shall become the owner, directly
or indirectly, beneficially or of record, of shares representing (x) more than
50% of the aggregate ordinary voting power represented by the issued and
outstanding Capital Stock of the Company or (y) if the Company shall then have
a class of Capital Stock registered under Section 12(b) or 12(g) of the
Exchange Act, more than 40% of the aggregate ordinary voting power represented
by the issued and outstanding Capital Stock of the Company; or (iv) the
replacement of a majority of the Board of Directors of the Company over a two-
year period from the directors who constituted the Board of Directors of the
Company at the beginning of such period, and such replacement shall not have
been approved by a vote of at least a majority of the Board of Directors of
the Company then still in office who either were members of any such Board of
Directors at the beginning of such period or whose election as a member of any
such Board of Directors was previously so approved.
"Change of Control Offer" has the meaning set forth under "--Change of
Control."
"Change of Control Payment Date" has the meaning set forth under "--Change
of Control."
"Collateral" means, collectively, all of the property and assets that are
from time to time subject to the Security Documents.
"Commodity Agreement" of any Person means any option or futures contract or
similar agreement or arrangement designed to protect such Person or any of its
Subsidiaries against fluctuations in commodity prices.
75
<PAGE>
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether
voting or non-voting) of such Persons common stock, whether outstanding on the
Issue Date or issued after the Issue Date, and includes, without limitation,
all series and classes of such common stock.
"Company" means Sheffield Steel Corporation, a Delaware corporation.
"Consolidated EBITDA" means, for any period, the sum (without duplication)
of (i) Consolidated Net Income and (ii) to the extent Consolidated Net Income
has been reduced thereby, (A) all income taxes of the Company and the
Restricted Subsidiaries paid or accrued in accordance with GAAP for such
period (other than income taxes attributable to extraordinary, unusual or
nonrecurring gains or losses or taxes attributable to sales or dispositions
outside the ordinary course of business), (B) Consolidated Interest Expense
and (C) Consolidated Non-cash Charges less any non-cash items increasing
Consolidated Net Income for such period, all as determined on a consolidated
basis for the Company and the Restricted Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means the ratio of Consolidated
EBITDA during the four full fiscal quarters (the "Four Quarter Period") ending
on or prior to the date of the transaction giving rise to the need to
calculate the Consolidated Fixed Charge Coverage Ratio (the "Transaction
Date") to Consolidated Fixed Charges for the Four Quarter Period. In addition
to and without limitation of the foregoing, for purposes of this definition,
"Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated
after giving effect on a pro forma basis (including any pro forma expense and
cost reductions calculated on a basis consistent with Regulation S-X under the
Securities Act) for the period of such calculation to (i) the incurrence or
repayment of any Indebtedness of the Company or any of the Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of
the Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the
proceeds thereof), occurred on the first day of the Four Quarter Period and
(ii) any Asset Sales or Asset Acquisitions (including, without limitation, any
Asset Acquisition giving rise to the need to make such calculation as a result
of the Company or one of the Restricted Subsidiaries (including any Person who
becomes a Restricted Subsidiary as a result of the Asset Acquisition)
incurring, assuming or otherwise being liable for Acquired Indebtedness and
also including any Consolidated EBITDA attributable to the assets which are
the subject of the Asset Acquisition or Asset Sale during the Four Quarter
Period) occurring during the Four Quarter Period or at any time subsequent to
the last day of the Four Quarter Period and on or prior to the Transaction
Date, as if such Asset Sale or Asset Acquisition (including the incurrence,
assumption or liability for any such Acquired Indebtedness) occurred on the
first day of the Four Quarter Period. If the Company or any of the Restricted
Subsidiaries directly or indirectly guarantees Indebtedness of a third Person,
the preceding sentence shall give effect to the incurrence of such guaranteed
Indebtedness as if the Company or any such Restricted Subsidiary had directly
incurred or otherwise assumed such guaranteed Indebtedness. Furthermore, in
calculating "Consolidated Fixed Charges" for purposes of determining the
denominator (but not the numerator) of this "Consolidated Fixed Charge
Coverage Ratio," (1) interest on outstanding Indebtedness determined on a
fluctuating basis as of the Transaction Date and which will continue to be so
determined thereafter shall be deemed to have accrued at a fixed rate per
annum equal to the rate of interest on such Indebtedness in effect on the
Transaction Date; (2) if interest on any Indebtedness actually incurred on the
Transaction Date may optionally be determined at an interest rate based upon a
factor of a prime or similar rate, a eurocurrency interbank offered rate, or
other rates, then the interest rate in effect on the Transaction Date will be
deemed to have been in effect during the Four Quarter Period; and (3)
notwithstanding clause (1) above, interest on Indebtedness determined on a
fluctuating basis, to the extent such interest is covered by agreements
relating to Interest Swap Obligations, shall be deemed to accrue at the rate
per annum resulting after giving effect to the operation of such agreements.
76
<PAGE>
"Consolidated Fixed Charges" means, with respect to the Company for any
period, the sum, without duplication, of (i) Consolidated Interest Expense,
plus (ii) the product of (x) the amount of all dividend payments on any series
of Preferred Stock of the Company (other than dividends paid in Qualified
Capital Stock) paid, accrued or scheduled to be paid or accrued during such
period times (y) a fraction, the numerator of which is one and the denominator
of which is one minus the then current effective consolidated federal, state
and local tax rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to the Company for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of the Company and the Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (a) any amortization of debt discount, (b) the net costs under
Interest Swap Obligations, (c) all capitalized interest and (d) the interest
portion of any deferred payment obligation; and (ii) the interest component of
Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or
accrued by the Company and the Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to the Company, for any
period, the aggregate net income (or loss) of the Company and the Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom (a) after-tax gains
or losses from Asset Sales or abandonments or reserves relating thereto, (b)
after-tax items classified as extraordinary or nonrecurring gains or losses,
(c) the net income (or loss) of any Person acquired in a "pooling of
interests" transaction accrued prior to the date it becomes a Restricted
Subsidiary or is merged or consolidated with the Company or any Restricted
Subsidiary, (d) the net income (but not loss) of any Restricted Subsidiary to
the extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is restricted by a contract, operation of
law or otherwise, (e) the net income of any Person, other than a Restricted
Subsidiary, except to the extent of cash dividends or distributions paid to
the Company or to a Restricted Subsidiary by such Person, (f) income or loss
attributable to discontinued operations (including, without limitation,
operations disposed of during such period whether or not such operations were
classified as discontinued), (g) in the case of a successor to the Company by
consolidation or merger or as a transferee of the Company's assets, any net
income of the successor corporation prior to such consolidation, merger or
transfer of assets, (h) any non-cash charges incurred by the Company at any
time in connection with, and including at the time of, the adoption of
Statement of Financial Accounting Standards 106; and (i) any expenses related
to the refinancing of the 2001 Notes with the net proceeds from the issuance
and sale of the First Mortgage Notes including, without limitation, the
premium on redemption of the 2001 Notes, and the amortization of debt discount
and other debt issuance costs relating to the issuance of the First Mortgage
Notes.
"Consolidated Non-cash Charges" means, with respect to the Company, for any
period, the aggregate depreciation, amortization and other non-cash expenses
of the Company and the Restricted Subsidiaries reducing Consolidated Net
Income of the Company for such period, determined on a consolidated basis in
accordance with GAAP (excluding any such charges constituting an extraordinary
item or loss or any such charge which requires an accrual of or a reserve for
cash charges for any future period).
"Consolidated Tangible Net Worth" of any Person means the consolidated
stockholders' equity of such Person, determined on a consolidated basis in
accordance with GAAP, less (without duplication) amounts attributable to
Disqualified Capital Stock of such Person; less the book value of all
Intangible Assets reflected on the consolidated balance sheet of the Company
and its Restricted Subsidiaries as of such date.
"Covenant Defeasance" has the meaning set forth under "--Defeasance."
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary against fluctuations in currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of
Default.
77
<PAGE>
"Designation" has the meaning set forth under "--Certain Covenants--
Limitation on Designations of Unrestricted Subsidiaries."
"Designation Amount" has the meaning set forth under "--Certain Covenants--
Limitation on Designations of Unrestricted Subsidiaries."
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or
is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise,
or is redeemable at the sole option of the holder thereof on or prior to the
final maturity date of the First Mortgage Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for
cash, between a willing seller and a willing and able buyer, neither of whom
is under undue pressure or compulsion to complete the transaction. Fair market
value shall be determined by the Board of Directors of the Company acting
reasonably and in good faith and shall be evidenced by a Board Resolution of
the Board of Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"HMK Affiliates" means Steven E. Karol, Jane M. Karol, Joan L. Karol,
William S. Karol and Thomas D. Karol, or any of them (each a "Karol Family
Member"), any spouse of a Karol Family Member, any lineal descendants of a
Karol Family Member, any trust, estate or family limited partnership or
limited liability company the sole beneficiaries of which are Karol Family
Members, spouses of Karol Family Members or any lineal descendants of Karol
Family Members, or any entity owned or controlled by any of the foregoing.
"incur" has the meaning set forth under "--Certain Covenants--Limitation on
Incurrence of Additional Indebtedness."
"Indebtedness" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments, (iii) all Capitalized Lease Obligations of such Person, (iv) all
Obligations of such Person issued or assumed as the deferred purchase price of
property, all conditional sale obligations and all Obligations under any title
retention agreement (but excluding trade accounts payable and other accrued
liabilities arising in the ordinary course of business), (v) all Obligations
for the reimbursement of any obligor on any letter of credit, banker's
acceptance or similar credit transaction, (vi) guarantees and other contingent
obligations in respect of Indebtedness referred to in clauses (i) through (v)
above and clause (viii) below, (vii) all Obligations of any other Person of
the type referred to in clauses (i) through (vi) which are secured by any Lien
on any property or asset of such Person, the amount of such Obligation being
deemed to be the lesser of the fair market value of such property or asset or
the amount of the Obligation so secured, (viii) all Obligations under Currency
Agreements and all Interest Swap Obligations of such Person and (ix) all
Disqualified Capital Stock issued by such Person with the amount of
Indebtedness represented by such Disqualified Capital Stock being equal to the
greater of its voluntary or involuntary liquidation preference and its maximum
fixed repurchase price. For purposes hereof, the "maximum fixed repurchase
price" of any Disqualified Capital Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Disqualified Capital Stock as if such Disqualified Capital Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by,
the fair market value of such Disqualified Capital
78
<PAGE>
Stock, such fair market value shall be determined reasonably and in good faith
by the Board of Directors of the Company.
"Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified
to perform the task for which it is to be engaged.
"Initial Purchaser" means BT Alex. Brown Incorporated.
"Intangible Assets" of any Person means all unamortized debt discount and
expense, unamortized deferred charges, good will, patents, trademarks, service
marks, trade names, copyrights, write-ups of assets over their prior carrying
values (other than write-ups which occurred prior to the Issue Date and other
than, in connection with Asset Acquisitions, the write-up of the value of such
asset (within one year of its acquisition) to its fair market value in
accordance with GAAP), and all other items which would be treated as
intangibles on the consolidated balance sheet of the Company and its
Restricted Subsidiaries prepared in accordance with GAAP.
"Intercompany Agreements" means that certain letter agreement dated October
1, 1997 relating to insurance services between Risk Management Solutions, Inc.
and the Company and that certain Income Tax Expense Allocation Policy and Tax
Sharing Agreement effective May 1, 1991 among HMK, the Company and the
subsidiaries of the Company, in each case as in effect on the Issue Date with
such modifications subsequent thereto (other than modifications of fee and
expense reimbursement arrangements) which are not adverse to the interests of
Holders of the First Mortgage Notes.
"Intercreditor Agreement" means that certain intercreditor agreement, of
even date with the Indenture, by and between the Trustee on behalf of the
holders of First Mortgage Notes, on the one hand, and NationsBank, N.A. (and
any successor or successors thereto or assignee or assignees therefrom), on
the other hand.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated
by applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated
by applying a fixed or a floating rate of interest on the same notional amount
and shall include, without limitation, interest rate swaps, caps, floors,
collars and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness
issued by, any Person. "Investment" shall exclude extensions of trade credit
by the Company and the Restricted Subsidiaries on commercially reasonable
terms in accordance with normal trade practices of the Company or such
Restricted Subsidiary, as the case may be. If the Company or any Restricted
Subsidiary sells or otherwise disposes of any Common Stock of any direct or
indirect Restricted Subsidiary such that, after giving effect to any such sale
or disposition, it ceases to be a Subsidiary of the Company, the Company shall
be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Common Stock of such
Restricted Subsidiary not sold or disposed of.
"Issue Date" means the date of original issuance of the First Mortgage
Notes.
"Legal Defeasance" has the meaning set forth under "--Defeasance."
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other
title retention agreement, any lease in the nature thereof and any agreement
to give any security interest).
79
<PAGE>
"Management Agreement" means that certain letter agreement dated the Issue
Date relating to management consulting services by and between HMK and the
Company, as in effect on the Issue Date with such modifications subsequent
thereto (other than modifications of fee and expense reimbursement
arrangements) which are not adverse to the interests of Holders of the First
Mortgage Notes.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents
(other than the portion of any such deferred payment constituting interest)
received by the Company or any of the Restricted Subsidiaries from such Asset
Sale net of (a) reasonable out-of-pocket expenses and fees relating to such
Asset Sale (including, without limitation, legal, accounting and investment
banking fees and sales commissions), (b) taxes paid or payable after taking
into account any reduction in consolidated tax liability due to available tax
credits or deductions and any tax sharing arrangements, (c) repayment of
Indebtedness that is required to be repaid in connection with such Asset Sale
and (d) appropriate amounts to be provided by the Company or any Restricted
Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against
any liabilities associated with such Asset Sale and retained by the Company or
any Restricted Subsidiary, as the case may be, after such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities
under any indemnification obligations associated with such Asset Sale.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any Indebtedness.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the First Mortgage Notes and the Indenture
incurred as of the Issue Date together with any guarantees of the First
Mortgage Notes by Restricted Subsidiaries of the Company required by the
terms of the Indenture;
(ii) Indebtedness incurred pursuant to the Revolving Credit Facility in
an aggregate principal amount at any time outstanding not to exceed the
greater of (a) $40 million or (b) the aggregate of 85% of the Company's
Eligible Accounts Receivable (as defined in the Revolving Credit Facility
or the equivalent term defined in any facility which replaces such
Revolving Credit Facility) and 65% of the Company's Eligible Inventory (as
defined in the Revolving Credit Facility or the equivalent term defined in
any facility which replaces such Revolving Credit Facility) calculated in
accordance with GAAP;
(iii) other Indebtedness (including Capitalized Lease Obligations) of the
Company and the Restricted Subsidiaries outstanding on the Issue Date after
giving effect to the application of the proceeds from the issuance of the
Old First Mortgage Notes in the manner set forth under "Use of Proceeds";
(iv) purchase money indebtedness, Capitalized Lease Obligations and any
other Indebtedness in an aggregate amount for all Indebtedness incurred
pursuant to this subclause (iv) not to exceed $15 million outstanding at
any one time; provided, however, that not more than $5 million in aggregate
principal amount of such Indebtedness outstanding at any one time may be
incurred by Restricted Subsidiaries of the Company;
(v) Interest Swap Obligations of the Company or a Restricted Subsidiary
covering Indebtedness of the Company or any of the Restricted Subsidiaries
and Interest Swap Obligations of any Restricted Subsidiary covering
Indebtedness of such Restricted Subsidiary; provided, however, that such
Interest Swap Obligations are entered into to protect the Company and the
Restricted Subsidiaries from fluctuations in interest rates on Indebtedness
incurred in accordance with the Indenture to the extent the notional
principal amount of such Interest Swap Obligation does not exceed the
principal amount of the Indebtedness to which such Interest Swap Obligation
relates;
(vi) Indebtedness under Currency Agreements and Commodity Agreements;
provided that in the case of Currency Agreements which relate to
Indebtedness, such Currency Agreements do not increase the
80
<PAGE>
Indebtedness of the Company and the Restricted Subsidiaries outstanding
other than as a result of fluctuations in foreign currency exchange rates
or by reason of fees, indemnities and compensation payable thereunder;
(vii) Indebtedness of a Restricted Subsidiary to the Company or to a
Restricted Subsidiary for so long as such Indebtedness is held by the
Company or a Restricted Subsidiary, in each case subject to no Lien held by
a Person other than the Company or a Restricted Subsidiary; provided that
if as of any date any Person other than the Company or a Restricted
Subsidiary owns or holds any such Indebtedness or holds a Lien in respect
of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness by the issuer of such
Indebtedness;
(viii) Indebtedness of the Company to a Restricted Subsidiary for so long
as such Indebtedness is held by a Restricted Subsidiary, in each case
subject to no Lien; provided that (a) any Indebtedness of the Company to
any Restricted Subsidiary is unsecured and subordinated, pursuant to a
written agreement, to the Company's obligations under the Indenture and the
First Mortgage Notes and (b) if as of any date any Person other than a
Restricted Subsidiary owns or holds any such Indebtedness or any Person
holds a Lien in respect of such Indebtedness, such date shall be deemed the
incurrence of Indebtedness not constituting Permitted Indebtedness by the
Company;
(ix) Indebtedness arising under the Railway Credit Facility, or other
Indebtedness the primary obligor of which is the Railway Company
(including, without limitation, the related guarantee by the Company of
Indebtedness thereunder owed by the Railway Company), in an aggregate
principal amount not to exceed $5 million;
(x) Indebtedness of the Company or any of the Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with self-
insurance or similar requirements in the ordinary course of business;
(xi) Refinancing Indebtedness;
(xii) Indebtedness of the Company under the Subordinated Management
Notes; and
(xiii) additional Indebtedness of the Company in an aggregate principal
amount not to exceed $5 million at any one time outstanding.
"Permitted Investments" means (i) Investments by the Company or any
Restricted Subsidiary in any Person that is or will become immediately after
such Investment a Restricted Subsidiary or that will merge or consolidate into
the Company or a Restricted Subsidiary; (ii) Investments in the Company by any
Restricted Subsidiary; provided that any Indebtedness incurred by the Company
evidencing such Investment by a Restricted Subsidiary is unsecured and
subordinated, pursuant to a written agreement, to the Company's obligations
under the First Mortgage Notes and the Indenture; (iii) Investments in cash
and Cash Equivalents; (iv) loans and advances to employees and officers of the
Company and the Restricted Subsidiaries in the ordinary course of business;
(v) Currency Agreements and Interest Swap Obligations entered into in the
ordinary course of the Company's or a Restricted Subsidiary's businesses and
otherwise in compliance with the Indenture; (vi) other Investments, including
Investments in Unrestricted Subsidiaries not to exceed $2.5 million at any one
time outstanding; (vii) Investments in securities of trade creditors or
customers received pursuant to any plan of reorganization or similar
arrangement upon the bankruptcy or insolvency of such trade creditors or
customers; and (viii) Investments made by the Company or the Restricted
Subsidiaries as a result of consideration received in connection with an Asset
Sale made in compliance with the covenant described under "--Certain
Covenants--Limitation on Asset Sales."
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims either
(a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or the Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
81
<PAGE>
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of the Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
(vii) Liens securing any Indebtedness incurred under the Revolving Credit
Facility or described in clause (ix) of the definition of "Permitted
Indebtedness"; provided that such Liens extend solely to the categories of
Property which were the subject of Liens securing the Revolving Credit
Facility and the Railway Credit Facility, as the case may be, as of the
Issue Date other than, in the case of Indebtedness described in clause (ix)
of the definition "Permitted Indebtedness", for additional security
consisting of a mortgage on the real property of the Railway Company owned
or leased on the Issue Date;
(viii) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(ix) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of the Restricted Subsidiaries, including rights of offset and set-
off;
(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xii) Liens securing Indebtedness under Currency Agreements;
(xiii) Liens securing Acquired Indebtedness incurred in accordance with
the covenant described under "--Certain Covenants--Limitation on Incurrence
of Additional Indebtedness"; provided that (A) such Liens secured such
Acquired Indebtedness at the time of and prior to the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary and were
not granted in connection with, or in anticipation of, the incurrence of
such Acquired Indebtedness by the Company or a Restricted Subsidiary and
(B) such Liens do not extend to or cover any property or assets of the
Company or of any of the Restricted Subsidiaries other than the property or
assets that secured the Acquired Indebtedness prior to the time such
Indebtedness became Acquired Indebtedness of the Company or a Restricted
Subsidiary and are no more favorable to the lienholders than those securing
the Acquired Indebtedness prior to the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary;
(xiv) Liens on Property of the Company or any of its Subsidiaries
acquired after the Issue Date in favor of governmental bodies to secure
progress or advance payments relating to such Property;
82
<PAGE>
(xv) Liens on Property of the Company or any of its Subsidiaries acquired
after the Issue Date securing industrial revenue or pollution control bonds
issued in connection with the acquisition or refinancing of such Property;
(xvi) Liens to secure certain Indebtedness that is otherwise permitted
under the Indenture and that is used to finance the cost of Property of the
Company or any of its Subsidiaries acquired after the Issue Date; provided
that (a) any such Lien is created solely for the purpose of securing
Indebtedness representing, or incurred to finance, refinance or refund, the
cost (including sales and excise taxes, installation and delivery charges
and other direct costs of, and other direct expenses paid or charged in
connection with, such purchase or construction) of such Property, (b) the
principal amount of the Indebtedness secured by such Lien does not exceed
100% of such cost, (c) the Indebtedness secured by such Lien is incurred by
the Company or its Subsidiary within 180 days of the acquisition of such
Property by the Company or its Subsidiary, as the case may be, and (d) such
Lien does not extend to or cover any Collateral or other Property other
than such item of Property and any improvements on such item;
(xvii) Liens existing on the Issue Date to the extent and in the manner
existing on the Issue Date;
(xviii) Liens on the property or assets of a Person that becomes a
Restricted Subsidiary after the Issue Date to the extent that such Liens
are existing at the time such Person became a Restricted Subsidiary of the
Company and were not granted as a result of, in connection with or in
anticipation of such Person becoming a Restricted Subsidiary of the
Company; provided that (A) the Indebtedness (if any) secured thereby is
incurred in accordance with the Indenture and (B) such Liens do not extend
to or cover any property or assets of the Company or of any of its
Restricted Subsidiaries other than the property or assets so acquired; and
(xix) Liens in respect of Indebtedness incurred to Refinance any of the
Indebtedness set forth in clauses (vi), (xiii), (xvi), (xvii) and (xviii)
above; provided that such Liens in respect of such Refinancing Indebtedness
(A) are no less favorable to the Holders and are not more favorable to the
lienholders with respect to such Liens than the Liens in respect of the
Indebtedness being Refinanced and (B) do not extend to or cover any
properties or assets of the Company or of any of the Company's
Subsidiaries, other than the property or assets that secured the
Indebtedness being Refinanced.
"Person" means an individual, partnership, corporation, limited liability
company, unincorporated organization, trust or joint venture, or a
governmental agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Property" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included in
the most recent consolidated balance sheet of such Person and its Subsidiaries
under GAAP.
"Public Equity Offering" has the meaning set forth under "--Redemption--
Optional Redemption Upon Public Equity Offerings."
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Railway Credit Facility" means the revolving loan agreement and the term
loan agreement, each dated as of July 31, 1997, between the Company and Bank
of Oklahoma, N.A., together with the related documents thereto (including,
without limitation, any guarantee agreements and security documents), in each
case as such agreements may be amended (including any amendment and
restatement thereof), supplemented or otherwise modified from time to time,
including any agreement extending the maturity of, refinancing, replacing or
otherwise restructuring (including increasing the amount of available
borrowings thereunder (provided that such increase in borrowings is permitted
under clause (ix) of the definition of "Permitted Indebtedness") all or any
portion of the Indebtedness under such agreement or any successor or
replacement agreement and whether by the same or any other lender or group of
lenders.
83
<PAGE>
"Reference Date" has the meaning set forth under "--Certain Covenants--
Limitation on Restricted Payments."
"Refinance" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of Indebtedness incurred in accordance with the covenant
described under "--Certain Covenants--Limitation on Incurrence of Additional
Indebtedness" (other than pursuant to clause (ii), (iv), (v), (vi), (vii),
(viii), (ix), (x) or (xii) of the definition of Permitted Indebtedness), in
each case that does not (1) result in an increase in the aggregate principal
amount of Indebtedness of such Person as of the date of such proposed
Refinancing (plus the amount of any premium required to be paid under the
terms of the instrument governing such Indebtedness and plus the amount of
reasonable expenses incurred by the Company or any Restricted Subsidiary in
connection with such Refinancing) or (2) create Indebtedness with (A) a
Weighted Average Life to Maturity that is less than the Weighted Average Life
to Maturity of the Indebtedness being Refinanced or (B) a final maturity
earlier than the final maturity of the Indebtedness being Refinanced; provided
that (x) if such Indebtedness being Refinanced is Indebtedness of the Company,
then such Refinancing Indebtedness shall be Indebtedness solely of the Company
and (y) if such Indebtedness being Refinanced is subordinate or junior to the
First Mortgage Notes, then such Refinancing Indebtedness shall be subordinate
to the First Mortgage Notes at least to the same extent and in the same manner
as the Indebtedness being Refinanced.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the Issue Date between the Company and the Initial Purchaser.
"Replacement Assets" means assets of a kind used or usable in the business
of the Company and its Restricted Subsidiaries as conducted on the date of the
relevant Asset Sale.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a Board
Resolution delivered to the Trustee, as an Unrestricted Subsidiary pursuant to
and in compliance with the covenant described under "--Certain Covenants--
Limitation on Designations of Unrestricted Subsidiaries." Any such Designation
may be revoked by a Board Resolution of the Company delivered to the Trustee,
subject to the provisions of such covenant.
"Revocation" has the meaning set forth under "--Certain Covenants--
Limitation on Designations of Unrestricted Subsidiaries."
"Revolving Credit Facility" means the revolving credit facility under the
Credit Agreement dated as of January 16, 1992, as amended, between the Company
and NationsBank of Georgia N.A., as lender thereunder, together with the
related documents thereto (including, without limitation, any guarantee
agreements and security documents), in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring (including
increasing the amount of available borrowings thereunder (provided that such
increase in borrowings is permitted under clause (ii) of the definition of
"Permitted Indebtedness") or adding Subsidiaries of the Company as additional
borrowers or guarantors thereunder) all or any portion of the Indebtedness
under such agreement or any successor or replacement agreement and whether by
the same or any other lender or group of lenders.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether
owned by the Company or any Restricted Subsidiary at the Issue Date or later
acquired, which has been or is to be sold or transferred by the Company or
such Restricted Subsidiary to such Person or to any other Person from whom
funds have been or are to be advanced by such Person on the security of such
Property.
84
<PAGE>
"Security Documents" means, collectively, the Security Agreements and
Mortgages described under "--Security" above and the Intercreditor Agreement.
"Significant Subsidiary" shall have the meaning set forth in Rule 1.02(v) of
Regulation S-X under the Securities Act.
"Stock Option Plan" means the Company's 1993 Employee, Director and
Consultant Stock Option Plan as adopted by the Company's Board of Directors
and stockholders on September 15, 1993, as in effect on the Issue Date, with
such modifications subsequent thereto which are not adverse to the interests
of Holders of the First Mortgage Notes; provided, however, that any increase
in the number of shares of Common Stock reserved for issuance under the Stock
Option Plan in excess of the number reserved on the Issue Date shall be deemed
adverse to the interests of the Holders.
"Subordinated Management Notes" means notes payable issued by the Company
upon the terms set forth in the Stock Option Plan in respect of options or
Capital Stock issued to such Persons under the Stock Option Plan; provided
that such notes provide by their terms that holders thereof shall not be
entitled to receive any payments thereon upon an Event of Default under the
Indenture, except that if such an Event of Default is one described in clauses
(iii)-(vi) of the term "Event of Default" and the First Mortgage Notes shall
not have been accelerated within 270 days after such Event of Default, holders
of Subordinated Management Notes shall be entitled to resume receiving
payments thereof; provided, further, that any payments made to holders thereof
in violation of the provisions described in the preceding proviso shall be
deemed to be held in trust for the benefit of the Trustee on behalf of the
holder of the First Mortgage Notes and shall be required to be promptly turned
over to the Trustee.
"Subsidiary", with respect to any Person, means (i) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors under ordinary circumstances shall at
the time be owned, directly or indirectly, by such Person or (ii) any other
Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Surviving Entity" has the meaning set forth under "--Certain Covenants--
Merger, Consolidation and Sale of Assets."
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "--
Certain Covenants--Limitation on Designations of Unrestricted Subsidiaries."
Any such designation may be revoked by a Board Resolution of the Company
delivered to the Trustee, subject to the provisions of such covenant.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total
of the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Subsidiary" means any Restricted Subsidiary of which all the
outstanding voting securities (other than in the case of a foreign Restricted
Subsidiary, directors' qualifying shares or an immaterial amount of shares
required to be owned by other Persons pursuant to applicable law) are owned by
the Company or another Wholly Owned Subsidiary.
85
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary describes certain United States federal income tax
consequences of an exchange of Old First Mortgage Notes for New First Mortgage
Notes and the ownership of New First Mortgage Notes. Except where noted, it
deals only with Old First Mortgage Notes and New First Mortgage Notes held as
capital assets by initial purchasers of Old First Mortgage Notes that are
United States holders and does not deal with special situations, such as those
of foreign persons, dealers in securities, financial institutions, life
insurance companies or holders whose functional currency is not the U.S.
dollar. Furthermore, the discussion below is based upon the provisions of the
Code and regulations, rulings and judicial decisions thereunder as of the date
hereof, and such authorities may be repealed, revoked or modified so as to
result in federal income tax consequences different from those discussed
below. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS CONCERNING THE FEDERAL
TAX CONSIDERATIONS THAT MAY BE SPECIFIC TO THEM OF THE EXCHANGE OF OLD FIRST
MORTGAGE NOTES FOR NEW FIRST MORTGAGE NOTES AND THE OWNERSHIP OF NEW FIRST
MORTGAGE NOTES, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY
OTHER TAXING JURISDICTION.
EXCHANGE OF FIRST MORTGAGE NOTES
There will be no federal income tax consequences to holders exchanging Old
First Mortgage Notes for New First Mortgage Notes pursuant to the Exchange
Offer, and each such holder will have the same adjusted tax basis and holding
period in the New First Mortgage Notes as it had in the Old First Mortgage
Notes immediately before the exchange.
PAYMENTS OF INTEREST
Holders of New First Mortgage Notes will be required to include payments of
stated interest thereon in taxable ordinary income in accordance with their
respective method of accounting. In addition, because the Old First Mortgage
Notes were not issued with original issue discount ("OID") for federal income
tax purposes, the New First Mortgage Notes will also not bear OID.
Market Discount. A holder of a New First Mortgage Note should be aware that
the resale of the New First Mortgage Notes (as well as the original purchase
of such notes) may be affected by the "market discount" provisions of the
Code. The market discount rules generally provide that if a holder of a debt
instrument purchases a debt instrument at a market discount, any gain
recognized upon the disposition of the debt instrument by such holder will be
taxable as ordinary interest income, rather than as capital gain, to the
extent such gain does not exceed the accrued market discount on such debt
instrument at the time of such disposition. "Market discount" generally means
the excess, if any, of a debt instrument's adjusted issue price over the price
paid by the holder therefor, subject to a de minimis exception. A holder of a
debt instrument who acquires the debt instrument at a market discount also may
be required to defer the deduction of a portion of the amount of interest that
the holder pays or accrues during the taxable year on indebtedness incurred or
maintained to purchase or carry such debt instrument.
A holder of a debt instrument acquired at a market discount may elect to
include market discount in gross income, for federal income tax purposes, as
such market discount accrues, on either a straight-line or a constant yield-
to-maturity basis. This current inclusion election, once made, applies to all
market discount obligations acquired on or after the first day of the first
taxable year in which the election applies, and may not be revoked without the
consent of the IRS. If a holder of a debt instrument makes such an election,
the foregoing rules with respect to the recognition of ordinary interest
income on dispositions of such debt instruments, and with respect to the
deferral of interest deductions on indebtedness incurred or maintained to
purchase or carry such debt instruments, will not apply.
Interest Election. A holder of a New First Mortgage Note, subject to certain
limitations, may elect to include all interest that accrues on a New First
Mortgage Note in gross income under the constant yield-to-
86
<PAGE>
maturity method. For this purpose, interest includes stated and unstated
interest, acquisition discount, de minimis OID and OID, de minimis market
discount and market discount, as adjusted by any acquisition premium. Such
election, if made in respect of a market discount obligation, will constitute
an election to include market discount in income currently on all market
discount obligations acquired by such holder on or after the first taxable
year to which the election applies. See "Market Discount" above.
High-Yield Discount Obligations. The New First Mortgage Notes would
constitute high yield discount obligations ("HYDOs") if (i) the yield-to-
maturity of such New First Mortgage Notes is equal to or greater than the sum
of the relevant applicable federal rate (the "AFR") plus five percentage
points and (ii) such New First Mortgage Notes have "significant original issue
discount." The relevant AFR for debt instruments issued in December 1997 is
5.93%. If the New First Mortgage Notes constitute HYDOs, the Company will not
be entitled to deduct any original issue discount that accrues with respect to
the New First Mortgage Notes until such interest is actually paid. In
addition, if the yield of the New First Mortgage Notes is more than six
percentage points above the relevant AFR, then (a) a portion of such interest
corresponding to the yield in excess of six percentage points above the AFR
will not be deductible by the Company at any time and (b) a corporate holder
may be entitled to treat the portion of the interest that is not deductible by
the Company as a dividend, which may then qualify for the dividends received
deduction provided for by the Code. In such event, corporate holders of New
First Mortgage Notes should consult with their tax advisors as to the
applicability of the dividends received deduction. The New First Mortgage
Notes should not be treated as having "significant original issue discount"
and therefore should not constitute HYDOs.
Amortizable Bond Premium. A holder that acquires a New First Mortgage Note
at an "amortizable bond premium" may elect to deduct a portion of such premium
with respect to the New First Mortgage Note in each taxable year in which he
holds the New First Mortgage Note. Amortizable bond premium is generally
defined as the excess of the holder's tax basis in a bond over thestated
redemption price at maturity of the bond. The election to amortize bond
premium applies to all taxable bonds held by the holder at the beginning of
the first taxable year to which the election applies and to all taxable bonds
that the holder acquires thereafter, and is binding for all subsequent taxable
years for all taxable bonds of the holder unless the IRS consents to a
revocation of the election. A holder who elects to amortize bond premium must
reduce his tax basis in the related obligation by the amount of the aggregate
deduction allowable for amortizable bond premium.
Effect of Change of Control. Upon a Change of Control, the Company is
required to offer to redeem all outstanding New First Mortgage Notes for a
price equal to 101% of the principal amount thereof plus accrued interest to
the date of purchase. Under applicable regulations, such Change of Control
redemption requirement will not affect the yield or maturity date of the New
First Mortgage Notes unless, based on all facts and circumstances as of the
issue date of the New First Mortgage Notes, it is more likely than not that a
Change of Control giving rise to the redemption will occur. The Company does
nto believe a change in control is more likely then not to occur, and thus
will not treat the Change of Control redemption provisions of the New First
Mortgage Notes as affecting the calculation of the yield or maturity of any
New First Mortgage Note.
Disposition of New First Mortgage Notes. A holder will generally recognize
gain or loss upon the sale, exchange, retirement or other disposition of a New
First Mortgage Note equal to the difference between the amount realized on the
disposition (except to the extent attributable to accrued interest) and the
holder's adjusted tax basis in such New First Mortgage Note. A holder's
adjusted tax basis in a New First Mortgage Note will generally be the cost of
the Old First Mortgage Note, increased by any OID or market discount
previously included in income by such holder with respect to the Old First
Mortgage Note and New First Mortgage Note. Subject to the market discount
rules discussed above, such gain or loss generally would be capital gain or
loss, and would be long-term if the New First Mortgage Notes were held more
than one year.
BACKUP WITHHOLDING
A holder of a First Mortgage Note may be subject to backup withholding at
the rate of 31% with respect to interest paid on a First Mortgage Note and
gross proceeds upon sale or retirement of a First Mortgage Note unless
87
<PAGE>
such holder (i) is a corporation or other exempt recipient and, when required,
demonstrates that fact or (ii) provides, when required, a correct taxpayer
identification number, certifies that backup withholding is not in effect and
otherwise complies with applicable requirements of the backup withholding
rules. Furthermore, a holder of a First Mortgage Note that does not provide
the Company with the holder's correct taxpayer identification number may be
subject to penalties imposed by the IRS. Backup withholding will be made when
cash payments are made with respect to the First Mortgage Notes. Backup
withholding is not an additional tax; any amounts so withheld are creditable
against the holder's federal income tax liability, if any.
88
<PAGE>
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, the Company believes that the New
First Mortgage Notes issued pursuant to the Exchange Offer in exchange for Old
First Mortgage Notes may be offered for resale, resold and otherwise
transferred by any Holder thereof (other than any such Holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New First Mortgage Notes
are acquired in the ordinary course of such Holder's business and such Holder
has no arrangement with any person to participate in the distribution of such
New First Mortgage Notes. Each Holder will be required to acknowledge in the
Letter of Transmittal that it is not engaged in, and does not intend to engage
in, a distribution of the New First Mortgage Notes. Accordingly, any Holder
using the Exchange Offer to participate in a distribution of the New First
Mortgage notes will not be able to rely on such no-action letters.
Notwithstanding the foregoing, each broker-dealer that receives New First
Mortgage Notes for its own account pursuant to the Exchange Offer will be
required to acknowledge in the Letter of Transmittal that it will deliver a
prospectus in connection with any resale of such New First Mortgage Notes.
This Prospectus, as it may be amended or supplemented from time to time, may
be used by a broker-dealer in connection with any resale of New First Mortgage
Notes received in exchange for Old First Mortgage Notes where such Old First
Mortgage Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that for a period of 180 days from
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
However, based on the above-mentioned interpretations by the staff of the
Commission, the Company believes that broker-dealers who acquired the Old
First Mortgage Notes directly from the Company and not as a result of market-
making activities or other trading activities cannot rely on such
interpretations by the staff of the Commission and must, in the absence of an
exemption, comply with the registration and prospectus delivery requirements
of the Securities Act in connection with secondary resales of the New First
Mortgage Notes. Such broker-dealers may not use this Prospectus, as it may be
amended or supplemented from time to time, in connection with any such resales
of the New First Mortgage Notes. In addition, until April 28, 1998 (90 days
from the date of this Prospectus), all dealers effecting transactions in the
New First Mortgage Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New First
Mortgage Notes by broker-dealers. New First Mortgagee Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be
sold from time to time in one or more transactions in the over-the-counter
market, in negotiated transactions, through the writing of options on the New
First Mortgage Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such New First Mortgage Notes. Any broker-dealer that
resells New First Mortgage Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such New First Mortgage Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New First Mortgage Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation
under the Securities Act. The Letter of Transmittal states by acknowledging
that it will deliver, and by delivering, a prospectus as required, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 180 days from the Expiration Date the Company will send a
reasonable number of additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such
documents in the Letter of Transmittal. The Company will pay all the expenses
incident to the Exchange Offer (which shall not include the expenses of any
Holder in connection with resales of the New First Mortgage Notes). The
Company has agreed to indemnify the Initial Purchaser and any broker-dealers
participating in the Exchange Offer against certain liabilities, including
liabilities under the Securities Act.
89
<PAGE>
LEGAL MATTERS
The legality the New First Mortgage Notes will be passed upon for the
Company by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., One Financial
Center, Boston, Massachusetts 02111.
EXPERTS
The consolidated financial statements of the Company as of April 30, 1997
and 1996 and for each of the years in the three-year period ended April 30,
1997, have been included herein in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
90
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Stockholders' Equity.......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7-19
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Sheffield Steel Corporation:
We have audited the accompanying consolidated balance sheets of Sheffield
Steel Corporation and subsidiaries as of April 30, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended April 30, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sheffield
Steel Corporation and subsidiaries at April 30, 1996 and 1997, and the results
of their operations and their cash flows for each of the years in the three-
year period ended April 30, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Tulsa, Oklahoma
June 27, 1997
F-2
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
---------------- -----------
1996 1997 1997
-------- ------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents....................... $ 46 15 741
Accounts receivable, less allowance for doubtful
accounts of $658 at April 30, 1996 and 1997,
and $808 at October 31, 1997, respectively..... 21,607 20,856 19,383
Inventories..................................... 40,321 37,112 34,716
Prepaid expenses and other...................... 914 1,452 479
Deferred income tax asset....................... 2,716 2,689 2,456
-------- ------- -------
Total current assets.......................... 65,604 62,124 57,775
Property, plant and equipment, net................ 68,461 65,885 65,006
Property held for sale............................ 457 439 439
Intangible asset, less accumulated amortization of
$1,667, $2,171 and $2,397 at April 30, 1996 and
1997 and October 31, 1997, respectively.......... 3,818 3,314 4,450
Other assets...................................... 347 290 379
Receivable from parent............................ 2,705 2,705 2,705
Deferred income tax asset......................... 1,790 1,817 2,034
-------- ------- -------
$143,182 136,574 132,788
======== ======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Current portion of long-term debt............... $ 717 936 1,717
Accounts payable................................ 20,495 16,475 15,064
Accrued interest payable........................ 4,500 4,500 4,500
Accrued liabilities............................. 6,281 5,601 6,978
Due to affiliated company....................... 47 49 49
-------- ------- -------
Total current liabilities..................... 32,040 27,561 28,308
Long-term debt, excluding current portion, less
unamortized discount of $1,840, $1,696 and $1,563
at April 30, 1996 and 1997 and October 31, 1997,
respectively..................................... 96,324 95,614 89,474
Accrued post-retirement benefit costs............. 7,823 9,095 9,971
Other liabilities................................. 610 2,148 1,336
-------- ------- -------
Total liabilities............................. 136,797 134,418 129,089
-------- ------- -------
Stockholders' equity:
Common stock, $.01 par value, authorized
10,000,000 shares, issued and outstanding
3,375,000 shares............................... 34 34 34
Additional paid-in capital...................... 3,591 2,536 2,536
Retained earnings............................... 4,037 528 2,095
-------- ------- -------
Total stockholders' equity.................... 7,662 3,098 4,665
Less loans to stockholders...................... 1,277 942 966
-------- ------- -------
6,385 2,156 3,699
Commitments and contingencies ....................
-------- ------- -------
$143,182 136,574 132,788
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED APRIL 30 OCTOBER 31,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales................... $ 175,753 172,317 170,865 89,925 94,181
Cost of sales........... 144,385 l43,121 140,234 74,338 75,382
--------- --------- --------- --------- ---------
Gross profit......... 31,368 29,196 30,631 15,587 18,799
Selling, general and
administrative expense. 12,156 11,737 11,923 6,495 6,631
Depreciation and
amortization expense... 5,930 6,567 6,775 3,427 3,460
Postretirement benefit
expense other than
pensions............... 3,153 2,776 2,353 1,477 1,373
Restructuring expense... -- -- 1,320 -- --
--------- --------- --------- --------- ---------
Operating income...... 10,129 8,116 8,260 4,188 7,335
--------- --------- --------- --------- ---------
Other (expense) income:
Interest expense, net. (8,049) (11,733) (11,769) (5,854) (5,768)
Other................. (58) 526 -- -- --
--------- --------- --------- --------- ---------
(8,107) (11,207) (11,769) (5,854) (5,768)
--------- --------- --------- --------- ---------
Income (loss) from
operations before
income tax expense... 2,022 (3,091) (3,509) (1,666) 1,567
Income tax expense...... 197 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss)..... $ 1,825 (3,091) (3,509) (1,666) 1,567
========= ========= ========= ========= =========
Net income (loss) per
common and common $ .50 (.92) (1.04) (.49) .41
equivalent share....... ========= ========= ========= ========= =========
Dividends per common $ .18 .52 -- -- --
share.................. ========= ========= ========= ========= =========
Common and common equiv-
alent shares 3,649,588 3,375,000 3,375,000 3,375,000 3,840,767
outstanding............ ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
YEAR ENDED APRIL 30 ENDED OCTOBER 31
----------------------- ------------------
1995 1996 1997 1996 1997
------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
Common stock........................ $ 34 34 34 34 34
------- ------ ------ -------- -------
Additional paid-in capital:
Balance at beginning of year...... 3,997 3,685 3,591 3,591 2,536
Agreement to repurchase common
stock............................ -- -- (1,055) (1,055) --
Repurchase of common stock (312) (94) -- -- --
warrants......................... ------- ------ ------ -------- -------
Balance at end of year............ 3,685 3,591 2,536 2,536 2,536
------- ------ ------ -------- -------
Retained earnings:
Balance at beginning of year...... 7,652 8,877 4,037 4,037 528
Net income (loss)................. 1,825 (3,091) (3,509) (1,666) 1,567
Dividends......................... (600) (1,749) -- -- --
------- ------ ------ -------- -------
Balance at end of year............ 8,877 4,037 528 2,371 2,095
------- ------ ------ -------- -------
Total stockholders' equity.......... $12,596 7,662 3,098 4,941 4,665
======= ====== ====== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
YEAR ENDED APRIL 30, ENDED OCTOBER 31
----------------------- ------------------
1995 1996 1997 1996 1997
------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVI-
TIES:
Net income (loss)................ $ 1,825 (3,091) (3,509) (1,666) 1,567
Adjustments to reconcile net in-
come (loss) to net cash pro-
vided by operating activities:
Depreciation and amortization.. 6,317 6,711 6,919 3,499 3,593
Loss (gain) on sale or retire-
ment of assets................ 58 (526) -- -- 81
Accrual of postretirement bene-
fits other than pensions, net
of cash paid.................. 2,523 1,747 1,272 1,002 876
Deferred income taxes.......... 23 -- -- -- --
Changes in assets and liabili-
ties:
Accounts receivable.......... (5,515) 1,564 751 3,226 2,337
Inventories.................. (9,024) (303) 3,209 1,162 2,611
Prepaid expenses and other... (563) (301) (538) (150) 1,042
Other assets................. (115) 177 (54) (189) (96)
Accounts payable............. 4,806 (2,624) (4,020) (3,854) (1,782)
Accrued interest payable..... 100 -- -- -- --
Accrued liabilities.......... 74 (172) (680) (310) 1,078
Due to affiliated company.... 4 -- 2 2 --
Income taxes payable......... 123 (123) -- -- --
Other liabilities............ (121) 8 1,377 477 (812)
------- ------ ------ -------- --------
Total adjustments............ (1,310) 6,158 8,238 4,865 8,928
------- ------ ------ -------- --------
Net cash provided by (used 515 3,067 4,729 3,199 10,495
in) operating activities.... ------- ------ ------ -------- --------
CASH FLOWS FROM INVESTING ACTIVI-
TIES:
Capital expenditures............. (24,220) (4,978) (3,695) (1,762) (1,849)
Acquisition of business, net of
cash required................... -- -- -- -- (2,317)
Proceeds from sale of fixed as-
sets............................ 30 538 18 13 --
------- ------ ------ -------- --------
Net cash used in investing
activities ................. (24,190) (4,440) (3,677) (1,749) (4,166)
------- ------ ------ -------- --------
CASH FLOWS FROM FINANCING ACTIVI-
TIES:
Net increase (decrease) under
revolving lines of credit....... 19,553 2,081 (1,995) (694) (6,940)
Proceeds from issuance of long-
term debt....................... 659 2,195 2,075 -- 2,221
Repayment of long-term debt...... (58) (549) (715) (360) (884)
Payment of debt issuance costs... -- (75) -- -- --
Payments in respect of stock ap-
preciation rights............... (524) (416) (448) (424) --
Dividends paid................... (600) (1,749) -- -- --
Repurchase of common stock war- (312) (94) -- -- --
rants........................... ------- ------ ------ -------- --------
Net cash provided by (used 18,718 1,393 (1,083) (1,478) (5,603)
in) financing activities.... ------- ------ ------ -------- --------
Net (decrease) increase in cash
and cash equivalents............. (4,957) 20 (31) (28) 726
Cash and cash equivalents at be- 4,983 26 46 46 15
ginning of year.................. ------- ------ ------ -------- --------
Cash and cash equivalents at end $ 26 46 15 18 741
of year.......................... ======= ====== ====== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest......................... $ 9,675 11,611 11,625 5,782 5,635
======= ====== ====== ======== ========
Income taxes..................... $ 50 174 -- -- --
======= ====== ====== ======== ========
Noncash items:
Change in unfunded accumulated
benefit obligation included in
other assets and other $ 163 558 53 -- --
liabilities..................... ======= ====== ====== ======== ========
Adjustment of property, plant
and equipment to reflect
reclassification of idle assets $ 157 -- -- -- --
to property held for sale....... ======= ====== ====== ======== ========
Adjustment of property, plant
and equipment and accounts pay-
able representing amounts ac- $ 2,301 -- -- -- --
crued for fixed asset purchases ======= ====== ====== ======== ========
Decrease in paid-in capital for $ -- -- 1,055 1,055 --
stock repurchase agreement...... ======= ====== ====== ======== ========
Increase in other liabilities $ -- -- 662 662 --
for stock repurchase agreement.. ======= ====== ====== ======== ========
Decrease in loans to stockhold-
ers related to stock $ -- -- 393 393 --
repurchase agreement............ ======= ====== ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS
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, and Sand Springs Railway Company (the
Railway). HMK Enterprises, Inc. (HMK) owns approximately 96% 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 operates in an economic environment wherein the
commodity nature of both its products for sale and its primary raw materials
cause sales prices and purchase costs to fluctuate, often on a short-term
basis, due to the worldwide supply and demand situation for those commodities.
The supply and demand factors for its products for sale and the supply and
demand factors for its primary raw materials correlate to a degree, but are
not necessarily the same. Therefore, margins between sales price and
production costs can fluctuate significantly on a short-term basis.
The Company sells to customers located throughout the continental United
States. The Company had one customer that accounted for approximately 10% of
sales for the year ended April 30, 1996 and no customers that accounted for
greater than 10% of sales for the years ended April 30, 1997 and 1995. The
Company had one customer that accounted for approximately 12% and 11.5% of
sales for the six months ended October 31, 1996 and 1997, respectively
(unaudited). The Company grants credit to customers under normal industry
standards and terms. Policies and procedures have been established which allow
for proper evaluation of each customer's creditworthiness as well as general
economic conditions. Consequently, an adverse change in those factors could
effect the Company's estimate of its bad debts.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with a maturity of
three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (as determined by the first-in
first-out method) or market. The cost of work-in-process and finished goods
inventories is based on standards which approximate cost. Work-in-process and
finished goods include direct labor and allocated overhead.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill and debt issuance costs. The
cost of goodwill is being amortized on a straight-line basis over a period of
40 years. Debt issuance costs are amortized over the term of the related
indebtedness. It is the Company's policy to recognize an impairment of the
carrying value of goodwill when management's best estimate of undiscounted
future cash flows over the remaining amortization period is less than the
carrying amount.
F-7
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation is provided
over the estimated useful lives of the individual assets using the straight-
line method. The useful lives of the property and equipment range from three
to forty years. Significant renewals and betterments are capitalized; costs of
maintenance and repairs are charged to expense as incurred. Interest costs for
the construction of certain long-term assets are capitalized and amortized
over the estimated useful lives of the related assets.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
The Company is a member of a group that files a consolidated income tax return
with HMK (the Group). The Group's tax-sharing agreement provides that current
and deferred income taxes be determined as if each member of the Group were a
separate taxpayer. All income taxes payable or receivable are due to or from
HMK.
POSTRETIREMENT BENEFITS
The Company provides postretirement benefits to certain retirees and their
beneficiaries, generally for the remainder of their lives. The Company
measures the cost of its obligation based on an actuarially determined present
liability, the accumulated postretirement benefit obligation (APBO). The net
periodic costs are recognized as employees render the services necessary to
earn the postretirement benefits.
ENVIRONMENTAL COMPLIANCE COSTS
In October, 1996, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 96-1, Environmental Remediation
Liabilities. SOP 96-1 was adopted by the Company on May 1, 1997 and requires,
among other things, environmental remediation liabilities to be accrued when
the criteria of Statement of Financial Accounting Standards (SFAS) No. 5,
Accounting for Contingencies, have been met. The SOP also provides guidance
with respect to the measurement of the remediation liabilities. Such
accounting is consistent with the Company's current method of accounting for
environmental remediation costs and, therefore, adoption of this new Statement
will not have a material impact on the Company's financial position, results
of operations, or liquidity.
REVENUE RECOGNITION
Revenues from sales are recognized when products are shipped to customers,
except the Railway which recognizes revenues when services are performed.
INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Income (loss) per share is based on the weighted average number of common
shares and dilutive common stock equivalents outstanding each year.
Outstanding stock purchase warrants (see Note 5[a]) and stock options (see
Note 12) are common stock equivalents but were excluded from per-share
computations in the years ended April 30, 1996 and 1997 and the six months
ended October 31, 1996 since their effect on loss per common share was anti-
dilutive.
F-8
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
STOCK OPTION PLAN
Prior to May 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise price.
On May 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants as if
the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
(2)FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company defines the fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction between
willing parties. The carrying value of cash and cash equivalents, trade
accounts receivable and trade accounts payable approximates the fair value
because of the short maturity of those instruments. The carrying amounts of
notes payable to banks and an equipment financing company (see Note 5)
approximates the fair value due to these debt instruments having variable
interest rates similar to those that are currently available to the Company.
The fair value of the 2001 Notes (see Note 5) at April 30, 1997, based on the
currently offered market price, is approximately $71.6 million versus a
carrying value of approximately $73.3 million. The fair value of the 2001
Notes at October 31, 1997, is approximately $78.8 million versus a carrying
value of approximately $73.4 million (unaudited).
(3)INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
APRIL 30 (UNAUDITED)
-------------- OCTOBER 31,
1996 1997 1997
------- ------ -----------
<S> <C> <C> <C>
Raw materials and storeroom supplies................. $10,823 10,924 12,792
Work in process...................................... 15,640 10,978 8,178
Finished goods....................................... 13,858 15,210 13,746
------- ------ ------
$40,321 37,112 34,716
======= ====== ======
</TABLE>
F-9
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4)PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
APRIL 30 (UNAUDITED)
--------------- OCTOBER 31,
1996 1997 1997
------- ------- -----------
<S> <C> <C> <C>
Land and buildings.................................. $16,448 16,483 17,175
Machinery and equipment............................. 88,096 92,607 94,804
Roadbed and improvements............................ 5,129 5,197 5,297
Construction in process............................. 3,899 2,727 2,063
------- ------- -------
113,572 117,014 119,339
Less accumulated depreciation and amortization...... 45,111 51,129 54,333
------- ------- -------
$68,461 65,885 65,006
======= ======= =======
</TABLE>
Depreciation and amortization of property, plant and equipment charged to
operations in 1995, 1996 and 1997 was $5,388, $6,021 and $6,271, respectively.
Depreciation and amortization of property, plant and equipment charged to
operations for the six months ended October 31, 1996 and 1997 was $3,148 and
$3,234, respectively (unaudited). Included in depreciation expense for 1995 is
approximately $500 related to the write-down of mill equipment replaced during
1995. Approximately $2,078 and $25 of interest costs were capitalized as part
of property, plant and equipment in 1995 and 1996, respectively. No interest
costs were capitalized subsequent to April 30, 1996. Interest costs incurred
in 1995, 1996 and 1997 were $10,127, $11,758 and $11,769, respectively.
Interest costs incurred in the six months ended October 31, 1996 and 1997 were
$5,854 and $5,768, respectively (unaudited).
The range of estimated useful lives for determining depreciation and
amortization of the major classes of assets are:
<TABLE>
<S> <C>
Buildings.............................. 5-25 years
Machinery and equipment................ 3-25 years
Roadbed and improvements............... 3-40 years
</TABLE>
(5)LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
APRIL 30, (UNAUDITED)
-------------- OCTOBER 31,
1996 1997 1997
------- ------ -----------
<S> <C> <C> <C>
2001 Notes, net of unamortized discount, effective
rate 12.5% [a]..................................... $73,160 73,304 73,437
Revolving credit agreement [b]...................... 18,660 18,417 11,614
Railway term loan [c]............................... -- 2,000 1,500
Railway revolving credit agreement [c].............. 3,019 1,267 1,130
Equipment notes [d]................................. 2,202 1,562 1,399
Note Payable [e].................................... -- -- 2,111
------- ------ ------
97,041 96,550 91,191
Less current portion................................ 717 936 1,717
------- ------ ------
$96,324 95,614 89,474
======= ====== ======
</TABLE>
F-10
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
[a] On November 4, 1993, the Company issued $75 million of 12% first
mortgage notes due 2001 (2001 Notes) with warrants to purchase 10% of
the Company's common stock. The notes were sold in units consisting of
$1,000 principal amount and five warrants. Each warrant entitles the
holder to purchase one share of the Company's common stock through
November 1, 2001, at an exercise price of $.01 per share, subject to
adjustment. The notes are secured by a first priority lien on
substantially all existing and future real property and equipment and a
second priority lien on inventory and accounts receivable. Interest is
payable semi-annually on May 1 and November 1 of each year. Effective
November 26, 1997, the Company offered $110,000,000 of its First
Mortgage Notes to institutional investors pursuant to Rule 144A of the
Securities Act of 1933, as amended. The proceeds from the offering will
primarily be used to redeem the 2001 Notes, to pay dividends to
stockholders and to pay down outstanding indebtedness under the
Company's revolving credit facilities. The 2001 Notes were called on
November 26, 1997 at a redemption price of 106%. As a result of the
offering, the Company anticipates it will recognize an extraordinary
loss of approximately $8.1 million in the third fiscal quarter related
to extinguishment of debt.
[b] The revolving credit agreement with a bank provides for maximum
borrowings of $40 million based on a percentage of eligible accounts
receivable and inventory. Borrowings are secured by a first priority
lien on inventory, accounts receivable and related intangibles, and a
second priority lien on existing and future real property. Interest is
computed at prime plus a variable margin (based on the achievement of
certain interest coverage ratios) from 0 to 1% and is payable monthly.
At April 30, 1997, the interest rate was 9.5%. An annual commitment fee
of 1/4% is charged on the unused portion of the revolving credit
agreement. The agreement continues through November 1, 2000 and
thereafter on a year-to-year basis until terminated by the Company or
the lender.
[c] As of April 30, 1996, the Railway credit agreement with a bank provided
for a reducing revolving credit commitment with maximum borrowings of
$3 million. During 1997, the Railway credit agreement was restructured
and is now comprised of two notes; a $2 million term loan with $0.5
million principal payments each year with the final payment on July 31,
2000, and a $1.5 million line of credit maturing July 31, 1998.
Obligations under the notes are secured by all of the assets and
capital stock of the Railway. Interest is computed at prime plus a
variable margin (based on the achievement of certain interest coverage
ratios) from 0 to 1% and is payable quarterly. At April 30, 1997, the
interest rate was 9.5%.
[d] Equipment notes are notes payable to equipment financing companies and
vendors related primarily to the financing of equipment purchases. The
notes are payable in monthly principal installments of $63 plus
interest payable at variable rates. The notes mature on various dates
through 2002 and are secured by equipment.
[e] Notes payable consists of $2 million payable in quarterly installments
over four years to the former shareholders of Waddell (See Note 14).
The notes are secured by the capital stock of Waddell and bear interest
at NationsBank prime rate minus one half of one percent. In addition,
the Company assumed a $111 note payable to a bank in conjunction with
the purchase.
F-11
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The aggregate maturities of long-term debt for the years ended April 30,
are as follows:
<TABLE>
<S> <C>
1998............................................................. $ 936
1999............................................................. 2,613
2000............................................................. 689
2001............................................................. 18,933
2002............................................................. 75,075
-------
Total maturities............................................... 98,246
Less unamortized discount.................................... (1,696)
-------
$96,550
=======
</TABLE>
Various agreements contain restrictive covenants including limitations on
additional borrowings, dividends and other distributions and the retirement
of stock. Additionally, certain agreements require maintenance of specified
levels of tangible net worth, working capital, cash flow and performance
ratios. In the event of default of the restrictive covenants or failure to
maintain the specified performance measures, the commitments related to the
credit agreements can be withdrawn by the lender.
(6)INCOME TAXES
The Company had no income tax expense or benefit for the years ended April 30,
1996 and 1997 or the six months ended October 31, 1996 and 1997 (unaudited).
Income tax expense attributable to operations for the year ended April 30,
1995 consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Year ended April 30, 1995:
Federal.............................................. $(174) (20) (194)
State................................................ -- (3) (3)
----- --- ----
$(174) (23) (197)
===== === ====
</TABLE>
Income taxes attributable to operations differed from the amounts computed by
applying the U.S. federal income tax rate of 34% as a result of the following:
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
YEAR ENDED APRIL ENDED OCTOBER
30, 31,
--------------------- --------------
1995 1996 1997 1996 1997
----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Computed "expected" tax (expense) bene-
fit.................................... $(687) 1,050 1,193 566 (533)
State income taxes, net of federal bene-
fit.................................... (81) 124 140 67 (63)
Decrease (increase) in the valuation al-
lowance for deferred tax assets........ 659 (1,231) (1,032) (633) 610
Other, net.............................. (88) 57 (301) -- (14)
----- ------ ------ ------ ------
$(197) -- -- -- --
===== ====== ====== ====== ======
</TABLE>
F-12
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
APRIL 30, (UNAUDITED)
--------------- OCTOBER 31,
1996 1997 1997
------ ------- -----------
<S> <C> <C> <C>
Deductible temporary differences, excluding
postretirement benefit costs:
Inventories.................................... $1,066 1,338 1,343
Allowance for doubtful accounts................ 250 250 307
Accrued liabilities not deductible until paid.. 1,583 1,677 1,705
Restructuring charge........................... 559 560 560
Net operating loss carryforwards............... 8,805 10,848 10,703
Alternative minimum tax credit carryforwards... 962 962 962
Investment tax credit carryforwards............ 856 856 856
Other.......................................... 103 12 12
------ ------- -------
14,184 16,503 16,448
Less valuation allowance........................ 3,409 4,441 3,831
------ ------- -------
10,775 12,062 12,617
Taxable temporary difference--plant and equip-
ment............................................ (9,242) (11,012) (11,916)
------ ------- -------
Net deferred tax asset, excluding postretirement
benefit costs.................................. 1,533 1,050 701
Postretirement benefit costs..................... 2,973 3,456 3,789
------ ------- -------
Net deferred tax asset.......................... $4,506 4,506 4,490
====== ======= =======
</TABLE>
At April 30, 1997 the Company had available net operating loss (NOL)
carryforwards for regular federal tax purposes of approximately $28,800 which
will expire as follows: $1,400, $400, $3,700, $4,200, $5,600, $7,400 and
$6,100 in the years ended 2000, 2002, 2007, 2008, 2009, 2011 and 2012,
respectively. The Company has investment tax credit carryforwards for tax
purposes of $856 which the Company has fully reserved as it is likely that
those tax credits will not be utilized prior to their expiration. The credits
expire in various periods through 2004. Company also has available $962 of
alternative minimum tax (AMT) credit carryforwards which may be used
indefinitely to reduce future federal regular income tax obligations. A net
deferred tax liability of $16 was recorded in conjunction with the acquisition
of Waddell.
A valuation allowance is required when it is more likely than not that all or
a portion of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets is dependent upon future profitability.
Fiscal 1990 capped a three-year period in which the Company generated
approximately $19 million and $11.5 million in book and tax earnings,
respectively. During fiscal 1991 through fiscal 1994, the Company incurred
approximately $12.4 million in taxable losses as a result of steel bar prices,
significant losses from operations at Oklahoma City, and a $5.3 million loss
on the early retirement of debt. A recovery of steel bar prices which began in
fiscal 1994 and continued into 1995 resulted in the Company generating $3.6
million in taxable income. In 1995, the Company started up a new rolling mill
which passed the required performance tests and was accepted during fiscal
1997. Productivity expectations of the mill are linked to the future operating
performance of the Company. Management has introduced new mill products and
made progress toward achieving the full potential of the new mill. However,
there can be no assurance that the mill will reach the forecasted production
goals or that the Company will achieve future profitability. Accordingly, a
valuation allowance has been established to reduce the deferred tax assets to
a level which, more likely than not, will be realized.
Future annual postretirement benefit costs are expected to exceed deductible
amounts for many years and it is anticipated that all of the deferred tax
assets related thereto will be utilized as such amounts become deductible.
Accordingly, management did not establish a valuation allowance for the
deferred tax asset related to future
F-13
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
annual postretirement benefit costs. In order to fully realize the remaining
net deferred tax asset, the Company will need to generate future taxable
income of approximately $7,100 of which approximately $6,900 is required to
fully utilize existing AMT credit carryforwards. Based upon historical taxable
income trends and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it is more likely
than not that the Company will realize the benefits of the net deferred
assets, net of the existing valuation allowance.
(7)EMPLOYEE BENEFIT PLANS
Sand Springs and Joliet have defined benefit plans covering substantially all
of their employees. Benefits are generally based on years of service and the
employee's compensation during the last ten years of employment. The Company's
funding policy is to contribute annually at least the minimum amount necessary
to avoid a deficiency in the funding standard. The Company received a waiver
of the minimum funding standard in the amount of $776 for the plan year ended
December 31, 1984, which is being amortized over 15 years. Net periodic
pension expense for these plans included the following:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Service cost............................................ $ 619 653 747
Interest cost........................................... 1,201 1,306 1,462
Net amortization and deferral........................... 845 2,575 420
Actual return on plan assets............................ (1,550) (3,420) (l,483)
------ ------ ------
$1,115 1,114 1,146
====== ====== ======
</TABLE>
The following table sets forth the funded status of the Company's plans, as
determined by an independent actuary:
<TABLE>
<CAPTION>
APRIL 30, 1996 APRIL 30, 1997
----------------------- -----------------------
ACCUMULATED ASSETS ACCUMULATED ASSETS
BENEFITS EXCEED BENEFITS EXCEED
EXCEED ACCUMULATED EXCEED ACCUMULATED
ASSETS BENEFITS ASSETS BENEFITS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Actuarial present value of $ 2,741 13,691 2,527 15,658
vested benefit obligation..... ======= ====== ===== ======
Accumulated benefit obligation. $ 2,770 14,035 2,556 15,998
======= ====== ===== ======
Projected benefit obligation... $ 2,950 16,858 2,737 18,451
Plan assets at fair value...... 2,578 16,912 2,313 19,340
------- ------ ----- ------
Projected benefit obligation in
excess of plan assets......... 372 (54) 424 (889)
Unrecognized net gain.......... 114 2,732 151 2,371
Unrecognized prior service
cost.......................... (484) 101 (494) 94
Unrecognized net transition
liability..................... (35) (3,306) (11) (2,774)
Adjustment required to 225 -- 173 --
recognize minimum liability... ------- ------ ----- ------
Net pension liability (as- $ 192 (527) 243 (1,198)
set)....................... ======= ====== ===== ======
</TABLE>
Plan assets consist primarily of U.S. government obligations and marketable
equity securities. The unrecognized net transition obligations are being
amortized over periods of 14-15 years.
F-14
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Major assumptions used in the accounting for the pension plans were as
follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Discount rate..................................................... 7.25% 7.50%
Rate of increase in compensation levels........................... 0%-5% 0%-4%
Expected long-term rate of return on assets....................... 8.0% 8.0%
</TABLE>
Certain divisions of the Company maintain defined contribution plans in which
various groups of employees participate. Total Company contributions for these
plans amounted to $57, $85, and $81 in 1995, 1996, and 1997, respectively.
Company contributions for these plans for the six months ended October 31,
1996 and 1997 were $49 and $42, respectively (unaudited).
(8)POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides postretirement health and life insurance benefits to
certain retirees and their beneficiaries, generally for the remainder of their
lives. The Plan is contributory, with retiree contributions adjusted annually,
and contains other cost-sharing features such as deductibles, coinsurance, and
Medicare. The Company's policy is to fund accumulated postretirement benefits
on a "pay-as-you-go" basis. Net periodic postretirement benefit costs for
1995, 1996 and 1997 include the following components:
<TABLE>
<CAPTION>
YEAR ENDED APRIL
30,
------------------
1995 1996 1997
------ ----- -----
<S> <C> <C> <C>
Service cost............................................... $ 359 326 321
Interest cost.............................................. 1,825 1,690 1,372
Net amortization........................................... 969 760 660
------ ----- -----
$3,153 2,776 2,353
====== ===== =====
</TABLE>
The following table sets forth the APBO and the amount of the net
postretirement benefit liability as determined by an actuary and recognized in
the balance sheet at April 30, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Retirees................................................ $12,727 10,173
Fully eligible active plan participants................. 4,245 4,522
Other active plan participants.......................... 8,035 4,848
------- -------
Accumulated post retirement benefit obligation........ 25,007 19,543
Unrecognized transition obligation...................... (24,391) (22,956)
Unrecognized net gain................................... 7,207 12,508
------- -------
Accrued postretirement benefit cost................... $ 7,823 9,095
======= =======
</TABLE>
The annual discount rate used in determining the APBO was 7.25 and 7.5% at
April 30, 1996 and 1997, respectively. Also, for measurement purposes, HMO
trend rates of 8.5% and 6.3% and medical trend rates of 12.0% and 11.0% were
used for the hourly and salaried medical indemnity plans, respectively. The
medical and HMO trend rates are assumed to decline one-half percent per year
to an ultimate level of 5.5%. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year
would increase the APBO as of April 30, 1997, by $2,800 and the aggregate
service and interest cost components of net periodic postretirement benefit
costs by $268.
F-15
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(9)OPERATING LEASES
The Company is obligated under various noncancelable operating leases for
certain land and buildings. These leases generally contain inflationary rent
escalations and require the Company to pay all executory costs such as
maintenance and insurance. Rental expense for operating leases (except those
with lease terms of a month or less that were not renewed) was $260, $277 and
$313 for the years ended April 30, 1995, 1996 and 1997, respectively. Rental
expense for the six months ended October 31, 1996 and 1997 was $156 and $158,
respectively (unaudited).
Future minimum lease payments under noncancelable operating leases (with
initial lease terms in excess of one year) for the years ending April 30, are
as follows:
<TABLE>
<S> <C>
1998............................................................... $ 328
1999............................................................... 328
2000............................................................... 337
2001............................................................... 353
2002............................................................... 353
Later years........................................................ 570
------
Total............................................................ $2,269
======
</TABLE>
(10)COMMITMENTS AND CONTINGENCIES
The Company is partially self-insured for certain risks consisting primarily
of employee health insurance programs and workers' compensation. Probable
losses and claims are accrued as they become estimable. At April 30, 1997, the
Company maintained letters of credit totaling approximately $2,000 in
accordance with workers' compensation arrangements. At October 31, 1997, the
Company had approximately $3,200 in letters of credit related to workers
compensation and supplier agreements (unaudited).
The Company is involved in claims and legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's
financial position, results of operations, or liquidity.
On October 1, 1997, the Company entered into an agreement with an equipment
financing company whereby the Company may request advances totaling $4,000
through July 31, 1998, based on satisfactory documentation of the collateral
to be financed. In accordance with the agreement, the Company must maintain a
letter of credit in an amount equal to 25% of each advance which will be
reduced subject to the Company meeting certain ratio and earnings
requirements. At October 31, 1997, there were no outstanding advances related
to this agreement.
(11)RELATED PARTY TRANSACTIONS
An affiliated company provides management and business services to the
Company, including, but not limited to, financial, marketing, executive
personnel, corporate development, human resources, and limited legal services.
The Company believes that transactions with related parties are at costs that
could be obtained from third parties. Management fees charged during the years
ended April 30, 1995, 1996 and 1997, were approximately $598, $573 and $569,
respectively. Management fees charged during the six months ended October 31,
1996 and 1997, were approximately $299 and $314, respectively (unaudited). In
addition, the Company purchases general liability, workers' compensation and
other insurance through an affiliated company which provides risk management
services, including procuring and maintaining property and casualty insurance
coverage; reviewing and recommending alternative financing methods for
insurance coverage; identifying and
F-16
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
evaluating risk exposures, and preparing and filing proof of loss statements
for insured claims. Total fees paid for insurance services during the years
ended April 30, 1995, 1996 and 1997, were approximately $224, $115 and $115,
respectively. Total fees paid for insurance services during the six months
ended October 31, 1996 and 1997 were approximately $58 (unaudited).
During fiscal year 1993, certain minority shareholders issued $1,000 of notes
receivable to the Company. The notes bear interest at an annual rate of 7.61%
and are secured by common stock of the Company. Principal and interest are due
on February 1, 2007, unless extended at the Company's option until February 1,
2012. The principal balance outstanding as of April 30, 1996 and 1997 was
$1,000 and $700, respectively. The principal balance outstanding as of October
31, 1997 was $700 (unaudited).
On September 30, 1996, the Company signed an agreement to repurchase 50,625
shares of the Company's common stock from two minority shareholders who
formerly were officers of the Company. The stock repurchase is pursuant to the
Amended and Restated Stockholder's Agreement dated September 15, 1993 and the
stock purchase price was calculated in accordance with said agreement. Certain
payments, including those to reacquire the Company's common stock, are
currently not permitted under the terms of the Company's first mortgage notes
and revolving credit agreements. As a result of this transaction, $393 of
notes receivable from the former shareholders was satisfied, the Company
recorded a note payable in the amount of $662 and decreased paid-in capital by
$1,055. The note payable will accrue simple interest at 6.02% and will be
repaid in five annual installments beginning when, and only when, the purchase
of the shares is permitted under the Company's credit agreements.
The Company has a receivable of $2,205 from HMK related to certain tax
attributes allocated to the Company. Under an agreement with HMK, the
receivable will be realized by reducing future income taxes otherwise payable
by the Company to HMK. In addition, the Company advanced $500 to HMK to secure
a letter of credit for the Joliet insurance program.
(12) STOCK OPTIONS
On September 15, 1993, the Board of Directors adopted, and the stockholders of
the Company approved, the Company's 1993 Employee, Director and Consultant
Stock Option Plan (the Stock Option Plan). The Stock Option Plan provides for
the grant of incentive options to key employees of the Company and
nonqualified stock options to key employees, directors, and consultants of the
Company. A total of 580,000 shares of the Company's common stock, which would
represent approximately 13.4% of the Company's common stock on a fully diluted
basis, have been reserved for issuance under the Stock Option Plan. The
options vest in three years and may be exercised within 10 years from the
grant date at a price not less than the fair market value of the stock at the
time the options are granted. Fair market value for purposes of determining
the exercise price is determined by the performance-based formula prescribed
in the Stock Option Plan. At April 30, 1997, there were 124,000 additional
shares available for grant under the Plan. During the six months ended October
31, 1997, there were 5,000 options granted and 5,000 options forfeited
(unaudited).
F-17
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company continues to apply APB Opinion No. 25 in accounting for its Plan
and, accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
SFAS No. 123, the Company's net income would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED SIX MONTHS ENDED
APRIL 30, 1997 OCTOBER 31, 1997
-------------- ----------------
<S> <C> <C>
Net income
As reported................................... $(3,509) $1,567
======= ======
Pro forma..................................... $(3,578) $1,531
======= ======
Earnings per share:
As reported................................... $ (1.04) $ .41
======= ======
Pro forma..................................... $ (1.06) $ .40
======= ======
</TABLE>
The per share weighted-average fair value of stock options granted during 1997
and the six months ended October 31, 1997 was $4.83 and $4.78, respectively,
on the date of grant using the minimum value method with the following
assumptions: expected dividend yield of approximately 1.0%, risk-free interest
rate of 6.38% and 6.55% for 1997 and the six months ended October 31, 1997,
respectively, and an expected life of five years. Pro forma net income
reflects only options granted in 1997 and in the six month period ended
October 31, 1997. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro forma net
income amounts presented above because compensation cost is reflected over the
options' vesting period of three years and compensation cost for options
granted prior to May 1, 1994 is not considered.
The options outstanding and activity during the periods indicated is as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
<S> <C> <C>
At May 1, 1994........................................ 474,609 $7.41
Granted............................................. --
Exercised........................................... -- --
Canceled............................................ -- --
-------
At April 30, 1995..................................... 474,609 7.41
Granted............................................. -- --
Exercised........................................... -- --
Canceled............................................ (69,609) --
-------
At April 30, 1996..................................... 405,000 7.41
Granted............................................. 51,000 20.52
Exercised........................................... -- --
Canceled............................................ -- --
-------
At April 30, 1997..................................... 456,000 8.87
-------
Granted............................................. 5,000 19.88
Exercised........................................... -- --
Canceled............................................ (5,000) 20.52
-------
At October 31, 1997................................... 456,000 8.87
=======
</TABLE>
F-18
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Exercise prices for options outstanding as of October 31, 1997 ranged from
$7.41 to $20.52 (unaudited). The weighted-average remaining contractual life
of those options is 6.34 years. There were 405,000 shares exercisable as of
April 30, 1996 and 1997 and as of October 31, 1997. There were no shares
exercisable at April 30, 1995.
In connection with the adoption of the Stock Option Plan, the Company elected
to terminate its Stock Appreciation Rights Plan (SAR). Existing liabilities
under the SAR plan were frozen at their current level. All vested rights
become exercisable upon the participants' termination. The present value of
the SAR's, based on vesting and retirement dates, is included in accrued and
other liabilities. At April 30, 1996 and 1997, the amounts of the liability
were $873 and $368, respectively. The amount of the liability at October 31,
1997 was $368 (unaudited).
(13) RESTRUCTURING EXPENSE
During 1997, the Company recognized costs related to workforce reductions.
Approximately 42 hourly employees accepted early retirement incentives
resulting in costs of approximately $1,070 during the fourth quarter. In
addition, 14 salaried employees were involuntarily terminated in the third
quarter resulting in severance costs totaling approximately $250.
(14) ACQUISITION (UNAUDITED)
On October 28, 1997, the Company acquired all of the outstanding capital stock
of Waddell's Rebar Fabricators, Inc. The purchase price of the stock was
$3,040 subject to certain post-closing adjustments and potential performance
related payments. The Company incurred approximately $2,000 in debt related to
this acquisition. The acquisition notes mature quarterly over a four year
period and bear interest at NationsBank prime rate minus of one percent.
The acquisition was accounted for using the purchase method of accounting. The
fair value of tangible assets acquired and liabilities assumed was $3,861 and
$812, respectively. In addition, the Company recorded $1,362 as excess of cost
over net assets acquired (goodwill) which is being amortized over 40 years on
a straight-line basis.
F-19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO
WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION
OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF NOR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 10
The Exchange Offer........................................................ 16
Use of Proceeds........................................................... 25
Capitalization............................................................ 26
Selected Historical Financial Data........................................ 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 29
Business.................................................................. 37
Management................................................................ 47
Security Ownership of Certain Beneficial Owners and Management............ 52
Certain Relationships and Related Transactions............................ 54
Description of Capital Stock.............................................. 57
Description of Revolving Credit Facility.................................. 59
Description of First Mortgage Notes....................................... 60
Certain Federal Income Tax Consequences................................... 86
Plan of Distribution...................................................... 89
Legal Matters............................................................. 90
Experts................................................................... 90
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LOGO
$110,000,000
11 1/2% SERIES B
FIRST MORTGAGE NOTES DUE 2005
----------------
PROSPECTUS
----------------
JANUARY 28, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
