<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission file number: 33-67532
SHEFFIELD STEEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-2191557
(State or other (I.R.S. Employer
jurisdiction of incorporation) identification No.)
220 North Jefferson Street
Sand Springs, OK 74063
(Address of principal executive offices)
(918) 245-1335
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
-----
At the date of this filing, there were 3,516,987 shares of the Registrant's
$.01 par value Common Stock outstanding. The aggregate market value of voting
stock held by nonaffiliates is unknown as the Registrant's stock is not traded
on an established public trading market.
<PAGE>
SHEFFIELD STEEL CORPORATION
FORM 10-Q
Index
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
April 30, 1999 and October 31, 1999 3
Consolidated Condensed Statements of Operations -
Three and six month periods ended October 31, 1998 and 1999 4
Consolidated Condensed Statements of Cash Flows -
Six months ended October 31, 1998 and 1999 5
Notes to Consolidated Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-14
Part II. Other Information
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
</TABLE>
2
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
October 31,
April 30, 1999
Assets 1999 Unaudited
------ ---- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 86 84
Accounts receivable, less allowance for doubtful accounts of $658
at April 30, 1999 and $808 at October 31, 1999 19,943 21,271
Inventories 44,034 44,752
Other current assets 4,839 4,449
-------- -------
Total current assets 68,902 70,556
Property, plant and equipment, net 68,310 67,697
Intangible assets, net 10,011 9,558
Other assets 3,626 4,466
Deferred income tax asset, net 1,712 1,792
-------- -------
$152,561 154,069
======== =======
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Current portion of long-term debt $ 2,885 2,628
Accounts payable 14,878 12,654
Accrued interest payable 5,362 5,305
Accrued liabilities 6,455 9,661
-------- -------
Total current liabilities 29,580 30,248
Long-term debt, excluding current portion 122,710 122,611
Accrued post-retirement benefit costs 12,380 13,170
Other liabilities 1,088 1,088
-------- -------
Total liabilities 165,758 167,117
-------- -------
Stockholders' deficit:
Common stock 35 35
Additional paid-in capital 2,024 2,451
Accumulated deficit (14,202) (14,458)
-------- -------
Total stockholders' deficit (12,143) (11,972)
Less loans to stockholders 1,054 1,076
-------- -------
(13,197) (13,048)
-------- -------
$152,561 154,069
======== =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
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SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
----------------------------- -------------------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $40,592 42,513 83,669 85,452
Cost of sales 31,068 32,789 64,916 64,610
------- ------ ------ ------
Gross profit 9,524 9,724 18,753 20,842
Selling, general and administrative expense 3,836 3,819 7,438 7,917
Depreciation and amortization expense 1,890 2,075 3,754 4,159
Postretirement benefit expense other than pensions 730 646 1,460 1,292
Litigation settlement (2,200) - (2,200) (2,326)
------- ------ ------ ------
Operating income 5,268 3,184 8,301 9,800
Other expense:
Interest expense, net 3,657 3,710 7,138 7,408
Other 15 15 30 148
------- ------ ------ ------
3,672 3,725 7,168 7,556
------- ------ ------ ------
Income (loss) from operations before
Income taxes 1,596 (541) 1,133 2,244
Income tax expense - - - -
------- ------ ------ ------
Net income (loss) $ 1,596 (541) 1,133 2,244
======= ====== ====== ======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
October 31,
---------------------------
1998 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,133 2,244
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 3,917 4,321
Loss (gain) on sale of assets held for sale (2) 118
Accrual of postretirement benefits other than pensions,
Net of cash paid 960 790
Changes in assets and liabilities, net of effects from
Acquisition of business (13,479) (4,473)
-------- ------
Net cash (used in) provided by operating activities (7,471) 3,000
-------- ------
Cash flows from investing activities:
Capital expenditures (3,641) (3,229)
Acquisition of business, net of cash acquired (2,635) -
Proceeds from sale of assets held for sale - 182
-------- ------
Net cash used in investing activities (6,276) (3,047)
-------- ------
Cash flows from financing activities:
Net increase (decrease) in long-term debt 12,530 (356)
Other (1,009) 401
-------- ------
Net cash provided by financing activities 11,521 45
-------- ------
Net decrease in cash (2,226) (2)
Cash and cash equivalents at beginning of period 2,590 86
-------- ------
Cash and cash equivalents at end of period $ 364 84
======== ======
Supplemental disclosure of cash flow information
- ------------------------------------------------
Cash paid during the period for interest $ 6,845 7,203
======== ======
Cash paid during the period for income taxes $ - 105
======== ======
Noncash item:
Dividend declared $ - 2,500
======== ======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
October 31, 1998 and 1999
(In thousands)
(Unaudited)
1) Basis of Presentation and Summary of Accounting Policies
The consolidated financial statements of Sheffield Steel Corporation (the
Company, which may be referred to as we, us or our) 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), Wellington Industries, Inc.
(Wellington) since October 7, 1998 and Sand Springs Railway Company (the
Railway). HMK Enterprises, Inc. (HMK) owns approximately 91% of our currently
issued and outstanding common stock. All material intercompany transactions and
balances have been eliminated in consolidation. Our primary business is the
production of concrete reinforcing bar, fence posts, and a range of hot rolled
bar products including rounds, flats and squares. Our products are sold
throughout the continental United States. We operate in a single operating
segment providing steel products and services to the steel manufacturing and
fabricating industry.
These condensed consolidated interim financial statements have been prepared by
us without audit, according to the rules and regulations of the Securities and
Exchange Commission and reflect all adjustments that we believe were necessary
for a fair statement of the results for the interim periods. All adjustments
made were normal recurring accruals. We suggest that these interim financial
statements are read in conjunction with the financial statements and notes
contained in our Form 10-K for the year ended April 30, 1999. Operating results
for the quarter and six months ended October 31, 1999 are not necessarily
indicative of the results that we expect for the year ending April 30, 2000.
2) Inventories
The components of inventories are as follows:
<TABLE>
<CAPTION>
October 31,
April 30, 1999
1999 (Unaudited)
---- -----------
<S> <C> <C>
Raw materials and storeroom supplies $12,408 10,550
Work in process 13,390 13,108
Finished goods 18,236 21,094
------- ------
$44,034 44,752
======= ======
</TABLE>
6
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
3) Long-term Debt
<TABLE>
<CAPTION>
Long-term debt is comprised of the following: October 31,
April 30, 1999
1999 (Unaudited)
---- -----------
<S> <C> <C>
First mortgage notes $110,000 110,000
Revolving credit agreement 6,285 8,527
Railway term loan 1,000 500
Railway revolving credit agreement 620 18
Equipment notes 4,931 4,199
Notes payable 2,759 1,995
-------- -------
125,595 125,239
Less current portion 2,885 2,628
-------- -------
$122,710 122,611
======== =======
</TABLE>
4) Litigation Settlement
We were party to a lawsuit with several other steel manufacturers against
certain manufacturers of graphite electrodes related to price fixing within the
electrode industry. We recognized approximately $2,326 related to settlements
reached this fiscal year ($2,200 in fiscal '99) with certain of the defendents.
With respect to the current fiscal year settlement, we have received
approximately $1,325 in cash and the remainder is secured by a letter of credit
and included in accounts receivable.
7
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
The following discussion should be read in conjunction with our
Consolidated Condensed Financial Statements and notes included in this Form 10-
Q.
Results of Operations
The results of operations are dependent on the level of construction,
infrastructure spending, oil and gas, agribusiness, and general economic
activity in the U.S. Our sales are seasonal with the third fiscal quarter
generally being weaker than the rest of the year. The major cost components of
our products are steel scrap and other raw materials, energy, labor, warehousing
and handling, and freight costs.
The following table provides information regarding the historical results
of operations (in thousands) for the quarters ended October 31, 1998 and 1999:
<TABLE>
<CAPTION>
Three Months Ended October 31,
---------------------------------------------------------------------
1998 1999
------------------------------------ --------------------------------
Operating Results: Net Sales % of Sales Net Sales % of Sales
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Sales $40,592 100.0% 42,513 100.0%
Cost of sales 31,068 76.5% 32,789 77.1%
------- ------
Gross Profit 9,524 23.5% 9,724 22.9%
Selling and administrative 3,836 9.5% 3,819 9.0%
Depreciation and amortization 1,890 4.7% 2,075 4.9%
Postretirement benefit expense 730 1.8% 646 1.5%
Litigation settlement (2,200) (5.4%) - -
------- ------
Operating income 5,268 12.98% 3,184 7.5%
Interest expense, net 3,657 9.0% 3,710 8.7%
Other 15 0.0% 15 0.0%
------- ------
Income (loss) from operations
before income taxes 1,596 3.9% (541) (1.3%)
Income tax expense - - - -
------- ------
Net income (loss) $ 1,596 3.9% (541) (1.3%)
======= ======
</TABLE>
8
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
The following table provides information regarding the historical shipment
levels and average selling prices per ton:
<TABLE>
<CAPTION>
Three Months Ended October 31,
------------------------------
1998 1999
-------- --------
<S> <C> <C>
Tons shipped:
Hot Rolled Bars 38,943 38,648
Rebar 47,372 47,795
Fabricated Products 12,511 17,106
-------- -------
Total finished products 98,826 103,549
Billets 2,969 14,618
-------- -------
Total tons shipped 101,795 118,167
======== =======
Price per ton:
Hot Rolled Bars $ 470 442
Rebar 306 288
Fabricated Products 522 494
Billets 214 181
Average price per ton shipped 399 360
Average production cost per ton 305 277
</TABLE>
Three Months Ended October 31, 1999 As Compared To Three Months Ended October
31, 1998
Sales. Sales for the second quarter of fiscal 2000 were $42.5 million.
Shipments increased in comparison to the same quarter in the prior year, while
pricing generally decreased as summarized below:
. In comparison to the second quarter of fiscal 1999, shipments and pricing of
our hot rolled bar products in Joliet have been impacted by market conditions
with pricing and shipments both decreasing approximately 5%. Hot rolled bar
shipments from Sand Springs increased 10% over the same period in the prior year
and excluding sales to Wellington (which we purchased October 6, 1998) from the
prior year number, the increase is approximately 50%. However, we continue to
experience lower sales of hot rolled bars that support certain industries such
as agricultural and oil field equipment.
. Finished goods prices are down in comparison to this quarter in fiscal 1999
in part due to reductions in steel scrap raw material costs. However, during the
second quarter of fiscal 2000, our scrap raw material costs began to increase
and this is having an adverse effect on cost of sales. In the short term, we may
be unable to increase sales prices by an amount sufficient to offset these cost
increases and margins may be affected.
. Billet shipments increased 392% over the same quarter in the prior year. This
was a non-recurring sale that caused total average selling prices to decrease.
Average selling prices decreased 10% including billets and only 5% excluding
billets. Billet pricing is related to scrap raw material costs.
. In October 1998, we purchased Wellington, a railroad track spike
manufacturer, which increased our sales of fabricated products. Railroad track
spike sales have lowered the average selling price for fabricated products but
have improved our overall average selling prices.
9
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Cost of Sales and Expenses. Average product cost per ton decreased to $277 in
the second quarter of fiscal 2000 from $305 in the second quarter of fiscal 1999
due to decreases in steel scrap raw material costs and a higher sales mix of
billets which have a low cost per ton in comparison with other finished goods.
This decrease was partially offset by higher costs associated with finished
goods product mix and higher operating costs. Sand Springs experienced several
power outages at the beginning of the quarter that affected melt shop production
and efficiency. We also produced a higher percentage of hot rolled bar product
in the Sand Springs rolling mill this quarter in comparison to the same quarter
in the prior year, which resulted in less production tons and higher costs per
ton.
Six Months Ended October 31, 1999 As Compared To Six Months Ended October 31,
1998
The following table provides information regarding the historical results of
operations (in thousands) for the six months ended October 31, 1998 and 1999:
<TABLE>
<CAPTION>
Six Months Ended October 31,
--------------------------------------------------------------
1998 1999
---------------------------- --------------------------
Operating Results: Net Sales % of Sales Net Sales % of Sales
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Sales $83,669 100.0% 85,452 100.0%
Cost of sales 64,916 77.6% 64,610 75.6%
------- ------
Gross Profit 18,753 22.4% 20,842 24.4%
Selling and administrative 7,438 8.9% 7,917 9.3%
Depreciation and amortization 3,754 4.5% 4,159 4.9%
Postretirement benefit expense 1,460 1.7% 1,292 1.5%
Litigation settlement (2,200) (2.6%) (2,326) (2.7%)
------- ------
Operating income 8,301 9.9% 9,800 11.5%
Interest expense, net 7,138 8.5% 7,408 8.7%
Other 30 0.0% 148 0.2%
------- ------
Income (loss) from operations
before income taxes 1,133 1.4% 2,244 2.6%
Income tax expense - - - -
------- ------
Net income (loss) $ 1,133 1.4% 2,244 2.6%
======= ======
</TABLE>
10
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
The following table provides information regarding the historical shipment
levels and average selling prices per ton:
<TABLE>
<CAPTION>
Six Months Ended October 31,
---------------------------
1998 1999
------- -------
<S> <C> <C>
Tons shipped:
Hot Rolled Bars 83,607 77,100
Rebar 89,041 98,693
Fabricated Products 27,049 34,679
-------- -------
Total finished products 199,697 210,472
Billets 12,416 23,011
-------- -------
Total tons shipped 212,113 233,483
======== =======
Price per ton:
Hot Rolled Bars $ 462 445
Rebar 304 288
Fabricated Products 508 499
Billets 221 181
Average price per ton shipped 394 366
Average production cost per ton 306 277
</TABLE>
Sales. Sales for the six months ended October 31, 1999 were $85.5 million.
Shipments increased in comparison to the same period in the prior year, while
pricing generally decreased as summarized below:
. In comparison to the six months ended October 31, 1998, shipments and pricing
of our hot rolled bar products in Joliet have been impacted by market conditions
with shipments decreasing approximately 9% and pricing decreasing 3%. Hot rolled
bar shipments from Sand Springs decreased 5% over the same period in the prior
year but excluding sales to Wellington from the prior year number, shipments
increased approximately 36%. We continue to experience lower sales of hot rolled
bars that support certain industries such as agricultural and oil field
equipment.
. Rebar shipments rebounded due to our favorable inventory position in
comparison to the six months ended October 31, 1998. In the prior year, we had
very low inventories due to the rolling mill outage at the Sand Springs Facility
in the fourth quarter of fiscal 1998. Rebar demand continues to be strong,
however, pricing has been impacted by imports and lower scrap raw material
costs.
. Finished goods prices are down in comparison to the six month period ended
October 31, 1998, in part due to reductions in steel scrap raw material costs.
However, during the second quarter of fiscal 2000, our scrap raw material costs
began to increase and this is having an adverse effect on cost of sales. In the
short term, we may be unable to increase sales prices by an amount sufficient to
offset these cost increases and margins may be affected.
. In October 1998, we purchased Wellington, a railroad track spike
manufacturer, which increased our sales of fabricated products and improved
overall average selling prices.
11
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SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Cost of Sales and Expenses. Average product cost per ton decreased to $277 in
the six month period ended October 31, 1999 from $306 in the same period in the
prior year due to decreases in steel scrap raw material costs and a higher sales
mix of billets which have a low cost per ton in comparison with other finished
goods. This decrease was partially offset by higher costs associated with
finished goods product mix.
Selling, general and administrative expenses increased approximately $0.5
million over the first six months of fiscal 1999, due to recruiting and
severance costs as well as the acquisition of Wellington in October 1998.
During fiscal 1999, we were parties in a lawsuit with several other steel
manufacturers against certain graphite electrodes manufacturers related to price
fixing within the electrode industry. During the second quarter of fiscal 1999,
we recorded approximately $2.2 million related to this lawsuit. In the first
quarter of fiscal 2000, we recorded an additional $2.3 million from different
defendants, of which $1.3 million was received during the first quarter of
fiscal 2000.
Liquidity and Capital Resources
As of October 31, 1999, we had long-term indebtedness of $125.2 million and
approximately $31.1 million of additional borrowing availability under our
revolving credit agreements. We continue to comply with all of our loan
covenants. Borrowings under our revolving credit agreements bear interest at a
floating rate. To the extent that interest rates increase, and to the extent
that amounts outstanding under the revolving credit agreements increase, there
will be corresponding increases in our interest obligations. In addition to
borrowings under the revolving credit agreements, we have historically used cash
flow from operations and equipment financing agreements to fund our investing
activities, including capital expenditures.
Cash flow provided by operating activities was approximately $3.0 million for
the six month period ended October 31, 1999, as compared with cash flow used in
operating activities of approximately $7.5 million for the six month period
ended October 31, 1998. Improvements in cash flow from operating activities is a
result of our improved operating performance, offset, in part, by increases to
accounts receivable and inventory and decreases in accounts payable. Cash used
in investing activities in the six months ended October 31, 1999 was
approximately $3.0 million, consisting of capital expenditures and proceeds from
the sale of assets held for sale. Primarily all of the capital expenditures
consisted of normal capital projects required or justified economically. For the
six month period ended October 31, 1999, cash provided by financing activities
consisted of payments on notes payable offset by increases to the revolving
credit agreement and other financing activities.
We have signed an agreement to enter into a $10 million operating lease for a
new reheat furnace for the Sand Springs rolling mill. The lease term is five
years and contains an option to purchase the equipment at fair market value at
the end of the lease term.
Earnings before interest, taxes, depreciation, amortization, and the non-cash
portion of the post-retirement expense (EBITDA) was approximately $5.7 million
for the quarter ended October 31, 1999 compared to approximately $5.4 million
for the same quarter in the prior year, excluding the electrode
12
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SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
litigation settlement. We believe that EBITDA is a valuable measure of our
operating cash flow and we consider it an indicator of our ability to meet
interest payments and fund capital expenditures. 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.
Our cash flow from operating activities and borrowings under our revolving
credit facilities are expected to be sufficient to fund capital improvements and
meet any near-term working capital requirements. We estimate that our annual
amount of necessary maintenance capital expenditures is approximately $3
million. On a long-term basis, we have significant future debt service
obligations. Our ability to satisfy these obligations and to secure adequate
capital resources in the future will be dependent on our ability to generate
adequate operating cash flow. We expect that our cash flow from operations and
borrowing availability under the revolving credit facilities will be sufficient
to service the First Mortgage Notes and other investing activities. This will be
dependent on our overall operating performance and is subject to general
business, financial and other factors affecting us and others in the domestic
steel industry, as well as prevailing economic conditions, certain of which are
beyond our control. The leveraged position we are in and the restrictive
covenants we have in our bond Indenture and the revolving credit facilities
could significantly limit our ability to withstand competitive pressures or
adverse economic conditions.
Year 2000 Compliance
State of Readiness. We recognized the Year 2000 (Y2K) Information Technology
issues in 1986 and began to address the problem with the re-design of our
internal information systems. We instituted a comprehensive Year 2000 strategy
in 1997. In early 1998, we created a formal Y2K Task Force with executive
oversight to examine Y2K issues as they pertain to areas outside internal
information systems including the following:
Information Systems Infrastructure. Hardware, networks and operating systems
that support our software.
Desktop Applications. Private user spreadsheets and data collection that may
have Y2K issues.
Facilities. Basic infrastructure items as well as backup power, fire control
systems, security systems, scales and phones.
Manufacturing/Distribution. Process control equipment and software and other
manufacturing operations that have personal computers, board level computers, or
PLC's (Programmable Logic Controllers) interfaced to them.
Product Compliance. Primarily testing equipment. Spectrometers, personal
computers interfaced to testing equipment, meters and gauges used by the quality
assurance department.
Supply Chain. Supply vendors, transportation and utilities, third party support
organizations, banking and finance.
The Task Force is responsible for taking an inventory of all systems software
and equipment to identify potential Y2K issues and for developing remediation
plans for problems identified. To date, the financial and commercial systems
have been converted to full Y2K compliance.
Only minor problems were identified with electronic equipment and third party
software. Our
13
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
rolling mill and shear line in Sand Springs were both installed in the last four
years. The rolling mill relies on a third party system that has been represented
to us as being Y2K compliant. All remaining third party software has been
examined and has been represented by the vendor as being Y2K compliant. The Task
Force has surveyed all vendors with invoices that total over $10,000 in the
previous calendar year in an attempt to ascertain the potential risks within the
supply chain, specifically in the areas of raw materials and utilities. We have
received responses from approximately 90% of the vendors surveyed and the Task
Force has recommended additional follow up for vendors failing to respond to the
survey. To date, we have not received any unfavorable responses from significant
vendors. It is anticipated that the vendor survey process will be completed by
December of 1999. Although others in the steel industry will be required to
spend significant amounts to become Y2K compliant, we identified problem areas
early and upgraded equipment and systems in the normal course of business. The
historical and estimated future costs related to Y2K issues have been and are
expected to remain insignificant. Costs incurred to date have been under
$100,000.
The Risks of Year 2000 Issues and Contingency Plans. While we believe we have
taken the necessary steps to identify and remediate our Y2K issues, the failure
to do so prior to January 1, 2000 could result in system/equipment failures
causing disruption in routine business activities including the production of
goods. We believe that our greatest risk of Y2K issues to be with third party
suppliers and customers. The failure of third parties upon whom we rely to
timely remediate their Y2K issues could result in disruption to our daily
operations including the production of steel products. As a result of our
reliance on third parties to resolve their Y2K issues, the overall risks
associated with the year 2000 remain difficult to accurately describe and
quantify. There can be no assurance that the Y2K issues will not have a material
adverse impact on us or on our operations. We have developed contingency plans
in areas where the risk of Y2K failures appears to be possible and where the
cost of a contingency plan is not prohibitive.
14
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any significant pending legal proceedings other than
litigation incidental to our business that we believe will not materially affect
our financial position or results of operations. Such claims against us are
ordinarily covered by insurance. We can give no assurance, however, that
insurance will be available in the future at reasonable rates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLERS
At the Annual Meeting of Stockholders held on September 3, 1999, for which
proxies for the meeting were solicited pursuant to Regulation 14A of the
Securities Exchange Act of 1934, the stockholders of the Company unanimously
elected Steven E. Karol, Robert W. Ackerman, Dale S. Okonow, Howard H.
Stevenson, Robert Schaal, and Jane M. Karol to serve as members of the Board of
Directors for a period of one year.
At the Annual Meeting of Stockholders, the stockholders also unanimously
approved the reappointment of KPMG LLP as independent auditors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
See exhibit index.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter ended October 31,
1999.
15
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SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
SHEFFIELD STEEL CORPORATION
Date: December 10, 1999 /s/ Robert W. Ackerman
--------------------- ---------------------------------
Robert W. Ackerman, Chairman
and Chief Executive Officer
Date: December 10, 1999 /s/ Stephen R. Johnson
--------------------- ---------------------------------
Stephen R. Johnson, Vice President
and Chief Financial Officer
16
<PAGE>
Exhibit Index
Exhibit No. Description Page No.
- ---------- ----------- -------
4.21 First Supplemental Indenture dated December 6, 1999
by Sheffield Steel Corporation and State Street Bank
and Trust Company, as Trustee.
10.37 Project Lease Agreement between TA Steel I, LLC,
as Lessor and Sheffield Steel Corporation, as Lessee
dated November 23, 1999.
<PAGE>
FIRST SUPPLEMENTAL INDENTURE
This FIRST SUPPLEMENTAL INDENTURE (the "Supplemental Indenture") is entered
into as of December 6, 1999 by SHEFFIELD STEEL CORPORATION ("Sheffield") and
STATE STREET BANK AND TRUST COMPANY, as Trustee (the "Trustee") pursuant to
Article 9 of the Indenture hereinafter referred to.
WHEREAS, this Supplemental Indenture supplements and amends the indenture
(the "Indenture") dated as of December 1, 1997 entered into by Sheffield and the
Trustee;
WHEREAS, Sheffield desires to enter into a Project Lease Agreement
(together with all schedules and exhibits thereto, all amendments and
modifications thereof, and all related documents and instruments, collectively
called the "Project Lease") with TA Steel I, LLC, a Delaware limited liability
-------------
company, as Lessor (together with its successors and assigns, the "Lessor"),
------
and Sheffield,as Lessee, pursuant to which Lessor would acquire, install and
equip a certain capital improvements project, which is more particularly
described on Exhibit A annexed hereto (together with the related property
---------
described on said Exhibit A, the "Project") on certain "Mortgaged Property"
--------- -------
(as defined in the Indenture);
WHEREAS, in connection with the Project, Sheffield desires to enter into
this Supplemental Indenture; and
WHEREAS, written consents to this Supplemental Indenture have been received
from holders of record as of October 15, 1999 of at least a majority in
Principal Amount of the Company's 11 1/2 % First Mortgage Notes ("Notes")
-----
issued under the Indenture
NOW, THEREFORE, in consideration of the mutual agreements contained in this
Supplemental Indenture and other good and valuable consideration, the receipt,
adequacy and sufficiency of which is hereby acknowledged, Sheffield and the
Trustee, intending to be legally bound, do hereby covenant and agree as
hereinafter set forth, for their own benefit and for the benefit of holders of
the Notes, as follows:
SECTION 1. Amendment to Section 1.01 of the Original Indenture.
---------------------------------------------------
(a) Clause (iv) of the definition of "Permitted Indebtedness" as set forth
in the Indenture is hereby deleted in its entirety and replaced by the
following:
"(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 (A) 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 and (B) for
purposes of determining the amount of Indebtedness outstanding at any one
time, there shall be included, at such time, an amount equal to fifty
percent (50%) of the present value (calculated using an 8% discount rate)
of the sum of (1) the amount of Rent (as such term is defined in the
Project Lease Agreement) remaining payable by the Company under the Project
Lease Agreement plus (2) the greater of the "End-of-Term Purchase Price"
and the "Early Buyout Purchase Price" (as each such term is defined in the
Project Lease Agreement).
(b) The following definition of "Project Lease Agreement" shall be added
to Section 1.01 of the Indenture and inserted in the appropriate alphabetic
order in Section 1.01:
"Project Lease Agreement" means that certain Project Lease Agreement
dated as of November 23, 1999 between TA Steel I, LLC, a Delaware limited
liability company, as Lessor and the Company, as Lessee, together with all
schedules and exhibits thereto, and all related documents and instruments,
in each case as amended, modified or supplemented from time to time."
SECTION 2. Miscellaneous.
-------------
<PAGE>
(a) Definition of Indenture. Whenever used in the Indenture or in this
-----------------------
Supplemental Indenture the term "Indenture" shall mean the Indenture as amended
and supplemented by this Supplemental Indenture and as the same may be amended
or supplemented from time to time, and the terms "hereby", "herein", "hereof",
"hereunder" or words of similar import shall mean the Indenture, unless the
context otherwise requires.
(b) Defined Terms. Unless otherwise defined in this Supplemental
-------------
Indenture, or unless the context otherwise requires, the terms defined in the
Indenture shall have the same meanings in this Supplemental Indenture.
(c) Successors. All agreements of Sheffield in this Supplemental Indenture
----------
shall bind its successors. All agreements of the Trustee in this Supplemental
Indenture shall bind its successor.
(d) Severability. In case any provision of this Supplemental Indenture
------------
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
(e) Duplicate Originals. The parties may sign any number of copies of this
-------------------
Supplemental Indenture. Each signed copy shall be an original, but all of them
together shall represent the same agreement. One signed copy shall be sufficient
to prove this Supplemental Indenture. A copy of this Supplemental Indenture
signed by a party shall, by such signature, be deemed also to have had the seal
of such party affixed thereto.
(f) Indenture Affirmed. Except as otherwise amended and supplemented by
------------------
this Supplemental Indenture, the provisions of the Indenture shall remain
unchanged, binding, and in full force and effect.
(g) Notes Affirmed. Except as otherwise amended and supplemented by this
--------------
Supplemental Indenture, the provisions of the Notes shall remain unchanged,
binding, and in full force and effect.
(i) Captions. The captions of this Supplemental Indenture are for
--------
convenience only and shall not affect the construction thereof.
(j) Governing Law. The law of the State of New York shall govern this
-------------
Supplemental Indenture.
(k) Regarding the Trustee. The Trustee shall not be responsible for the
---------------------
correctness of the recitals herein, and makes no representation as to the
validity or the sufficiency of this Supplemental Indenture. The Trustee shall,
in connection with this Supplemental Indenture, be entitled to all of the
benefits of all of the rights, privileges, immunities and indemnities of the
Trustee provided for in the Indenture.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed under seal all as of the date first above written.
Attest: SHEFFIELD STEEL CORPORATION
/s/ Stephen R. Johnson By: /s/ Robert W. Ackerman
- ------------------------------ -----------------------------
Assistant Secretary Name: Robert W. Ackerman
Stephen R. Johnson Chairman & CEO
Attest: STATE STREET BANK AND TRUST
COMPANY, as Trustee
By: /s/ Michael M. Hopkins
- ------------------------------ -----------------------------
Title: Vice President
<PAGE>
EXHIBIT 10.37
PROJECT LEASE AGREEMENT
Between
TA STEEL I, LLC,
as Lessor
and
SHEFFIELD STEEL CORPORATION,
as Lessee
Dated
November 23, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
1. DEFINITIONS...................................................................................... 1
2. LEASE............................................................................................ 5
3. ASSIGNMENT OF PROJECT DOCUMENTS; CREATION OF AGENCY.............................................. 5
4. RENT............................................................................................. 6
5. PROJECT COST REIMBURSEMENT....................................................................... 7
6. AGREEMENT NOT CANCELABLE; LESSEE'S OBLIGATIONS ABSOLUTE.......................................... 7
7. SELECTION AND USE OF PROJECT..................................................................... 7
8. NO WARRANTIES.................................................................................... 7
9. RENEWAL.......................................................................................... 8
10. OWNERSHIP; INSPECTION; MARKING; FINANCING STATEMENTS............................................. 8
11. PROJECT USE; COMPLIANCE WITH LAWS................................................................ 8
12. MAINTENANCE...................................................................................... 8
13. ALTERATION; MODIFICATIONS; PARTS................................................................. 8
14. CASUALTY INSURANCE; LOSS OR DAMAGE............................................................... 8
15. RISK OF LOSS..................................................................................... 9
16. LOSS OF INSURANCE COVERAGE....................................................................... 9
17. TAXES............................................................................................ 10
18. GENERAL INDEMNIFICATION.......................................................................... 10
19. SPECIAL TAX INDEMNIFICATION...................................................................... 10
20. PURCHASE OPTIONS................................................................................. 11
21. LEASE RETURN PROVISIONS.......................................................................... 11
22. ASSIGNMENT BY LESSEE............................................................................. 13
23. ASSIGNMENT BY LESSOR............................................................................. 13
24. LESSEE'S WAIVERS................................................................................. 14
25. FURTHER ASSURANCES............................................................................... 14
26. FINANCE LEASE.................................................................................... 14
27. NO AGENCY........................................................................................ 14
28. SECURITY INTEREST................................................................................ 14
29. GENERAL REPRESENTATIONS AND WARRANTIES........................................................... 14
30. YEAR 2000........................................................................................ 15
31. FINANCIAL AND COLLATERAL REPORTING............................................................... 15
32. FINANCIAL COVENANT............................................................................... 16
33. PROHIBITION ON MAKING OF RESTRICTED PAYMENTS..................................................... 16
34. EVENTS OF DEFAULT................................................................................ 16
35. REMEDIES AFTER DEFAULT........................................................................... 18
36. CONDITIONS PRECEDENT............................................................................. 18
37. CUMULATIVE EFFECT................................................................................ 19
38. GOVERNING LAW.................................................................................... 19
39. SURVIVAL......................................................................................... 19
40. COUNTERPARTS..................................................................................... 20
41. REIMBURSEMENTS................................................................................... 20
42. SUCCESSORS....................................................................................... 20
43. SEVERABILITY..................................................................................... 20
</TABLE>
<PAGE>
<TABLE>
<S> <C>
44. NOTICES.......................................................................................... 20
45. ENTIRE AGREEMENT................................................................................. 20
46. TIME OF ESSENCE.................................................................................. 20
47. CONSTRUCTION..................................................................................... 20
48. NO JOINT VENTURE................................................................................. 21
49. JURISDICTION..................................................................................... 21
50. ACCEPTANCE....................................................................................... 21
51. ATTORNEY-IN-FACT................................................................................. 21
52. NO THIRD PARTY BENEFICIARY....................................................................... 21
53. WAIVER OF JURY TRIAL............................................................................. 21
54. RULES OR INTERPRETATION.......................................................................... 21
55. CONTINUING AGREEMENT............................................................................. 22
56. ACKNOWLEDGMENT................................................................................... 22
57. SPECIFIC PERFORMANCE............................................................................. 22
58. LIMITED RECOURSE................................................................................. 22
</TABLE>
ii
<PAGE>
PROJECT LEASE AGREEMENT
-----------------------
THIS PROJECT LEASE AGREEMENT (this "Agreement"), dated as of November 23,
---------
1999 (the "Closing Date") is made between TA STEEL I, LLC, a Delaware limited
------------
liability company, as lessor ("Lessor"), and SHEFFIELD STEEL CORPORATION, a
------
Delaware corporation, as lessee ("Lessee");
------
W I T N E S S E T H:
-------------------
WHEREAS, Lessee has proposed to Lessor that Lessor acquire, install and
equip a certain capital improvements project on property owned by Lessee and
lease such project to Lessee, which Lessor has agreed to do subject to the terms
and conditions set forth below; and
WHEREAS, to facilitate the foregoing, Lessee has agreed to assign to
Lessor, and Lessor has agreed to assume from Lessee, certain contracts which
Lessee has let pertaining to the acquisition, installation and equipping of such
project and, thereafter, to act as Lessor's agent in the administration of such
contracts; and
WHEREAS, in furtherance of the foregoing, acting as Lessor's agent, Lessee
has agreed to pay all costs of acquiring, installing and equipping such project,
subject to subsequent reimbursement by Lessor; and
WHEREAS, Lessor and Lessee have agreed to enter into this Agreement in
order to set forth their respective understandings and agreements in respect of
the foregoing;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby mutually acknowledged, Lessor and Lessee, each
intending to be legally bound hereby, do hereby covenant and agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms shall
-----------
have the following meanings:
"Acceptance Date" shall mean that date on which Lessee accepts the Project
---------------
following Project Completion in conformity with the terms of the Project
Documents, as evidenced by its execution and delivery to Lessor of a Project
Delivery and Acceptance Certificate to such effect.
"Additional Rent" shall have the meaning given to such term in Section 19.
---------------
"Agreement" means this Agreement; together with and including all exhibits,
---------
schedules and addenda hereto.
"Authorized Officer" shall mean in respect of any Person which is a corporation,
------------------
its president, treasurer or any vice president, and any of the following
officers regardless of title: the chief executive officer, the chief operating
officer and the chief financial officer.
"Business Day" shall mean a day on which Lessor is open for the conduct of
------------
business in its offices in Chicago, Illinois and Atlanta, Georgia.
"Basic Rent" shall have the meaning given to such term in Section 3.
----------
"Basic Term" shall mean fifty-six (56) consecutive calendar months from the
----------
Commencement Date or such lesser number of consecutive calendar months from the
Commencement Date as will cause the "Basic Term" to end not later than May 31,
----------
2005.
<PAGE>
"Casualty Loss" shall have the meaning given to such term in Section 15.
-------------
"Closing Date" shall have the meaning given to such term in the initial recitals
------------
to this Agreement.
"Commencement Date" shall mean the first day of the first calendar month
-----------------
following the Acceptance Date.
"Compliance Certificate" has the meaning given to such term in Section 36.
----------------------
"Contractors" shall mean, collectively, each Person, other than Lessee, party to
-----------
any Project Document. The term "Contractors" includes, without limitation,
-----------
Stein, Stein France and Delta.
"Contractors' Certification" shall mean a certificate from a Contractor of
--------------------------
receipt of payment and completed work, to be substantially in the form of
Schedule "B" attached to the Project Cost Reimbursement Request.
- ------------
"Contractors' Consents" shall mean the collective consents of each Contractor to
---------------------
each Project Documents Assignment, to be substantially in the form of Exhibit
-------
"A".
- ---
"Control," "Controlled" or "Controlling" shall mean, with respect to any Person,
------- ---------- -----------
the power to direct the management and policies of such Person, directly,
indirectly, whether through the ownership of voting securities or otherwise;
provided, however, that, in any event, any Person which owns directly or
- ------------------
indirectly fifty percent (50%) or more of the securities having ordinary voting
power for the election of directors or other governing body of a Person shall be
deemed to "Control" such Person for purposes of this Agreement.
-------
"Default Condition" shall mean any event, circumstance or condition which, but
-----------------
for the giving of notice, or the passage of time, or both, would constitute an
Event of Default.
"Delta" shall mean Delta Fabrications & Machine Inc., a Texas corporation.
-----
"Event of Default" shall have the meaning given to such term in Section 34.
----------------
"Financing Agreement" shall have the meaning given to such term in Section 34.
-------------------
"GAAP" shall mean generally accepted accounting principles consistently applied.
----
"Index Rate" shall mean the offered rate on 30-day Treasury bills (adjusted for
----------
any discount), as determined from time to time by Lessor, changing with each
change in such offered rate, effective on the first Business Day on which such
change becomes effective.
"Interim Rent" shall have the meaning given to such term in Section 3.
------------
"Interim Term" shall mean the period beginning on the Closing Date and ending on
------------
the earlier of (i) the Commencement Date or (ii) the Project Completion Deadline
-------
Date.
"Lessee" shall have the meaning given to such term in the initial recitals to
------
this Agreement.
"Lessor" shall have the meaning given to such term in the initial recitals to
------
this Agreement. The term "Lessor" shall include Lessor's successors and
assigns, as provided in Section 23.
2
<PAGE>
"Lien" shall mean any deed to secure debt, deed of trust, mortgage or similar
----
instrument, and any lien, security interest, preferential arrangement which has
the practical effect of constituting a security interest, security title,
pledge, charge, encumbrance or servitude of any kind, whether by consensual
agreement or by operation of statute or other law, and whether voluntary or
involuntary, including, without limitation, any conditional sale or other title
retention agreement or lease in the nature thereof.
"Material Adverse Change" shall mean with respect to any event, act, condition
-----------------------
or occurrence of whatever nature (including any adverse determination in any
litigation, arbitration or governmental investigation or proceeding), whether
singly or in conjunction with any other event or events, act or acts, condition
or conditions, occurrence or occurrences, whether or not related, a material
adverse change in, or a material adverse effect upon, any of (a) the financial
condition, operations, business or properties of Lessee or, during the Interim
Term, any Contractor, (b) the rights and remedies of Lessor under any of the
Transaction Documents, (c) the ability of Lessee to perform its obligations
under any of the Transaction Documents, (d) the ability of any Contractor to
perform its obligations under any of the Project Documents or (e) the legality,
validity or enforceability of any of the Transaction Documents or Project
Documents.
"Maximum Project Cost" shall be the aggregate amount approved by Lessor, in its
--------------------
sole discretion, based on its review of invoices and other supporting material
presented to it by Lessee in respect of Project Cost Reimbursements, not to
exceed, however, $10,000,000.
"Monthly Rental Factor" shall mean 1.615335%; provided, however, that the
--------------------- -----------------
"Monthly Rental Factor" shall be subject to adjustment (up or down) by Lessor,
effective on the Commencement Date if: (i) the Basic Term is less than fifty-
six (56) consecutive calendar months, and (ii) the prevailing yield on U.S.
Treasury Notes with a five (5) year constant maturity on the Commencement Date
is less than, or more than, five percent (5%).
"Obligations" shall mean all debts, liabilities and obligations of Lessee to
-----------
Lessor arising hereunder or under any other Transaction Documents, whether now
or hereafter existing, and howsoever evidenced, created or incurred. The term
"Obligations," as used herein, includes, without limitation, all Rents, any late
charges, any Post-Default Interest, and all costs and expenses incurred by
Lessor pursuant hereto or under any Transaction Documents which are reimbursable
to Lessor by Lessee.
"Permitted Encumbrance" shall mean: (i) Liens for ad valorem property taxes not
---------------------
yet due and payable or being actively contested in good faith and by
appropriate, lawful proceedings; (ii) carriers', warehousemen's, mechanics',
materialmen's, repairmen's or other like Liens arising in the ordinary course of
business, payment for which is not yet due or which are being actively contested
in good faith and by appropriate, lawful proceedings, but only if such liens are
and remain junior to liens granted in favor of Lessor; (iii) typical
restrictions imposed by licenses and leases of software (including location and
transfer restrictions); and (iv) Liens in favor of Lessor.
"Person" shall mean any natural person, corporation, partnership, limited
------
liability company or other legal entity.
"Post-Default Interest" shall have the meaning given to such term in Section 35.
---------------------
"Project" shall mean a new 140 sht/h walking beam furnace with its handling
-------
equipment, a new building with an overhead crane to house the new furnace, the
indirect water system to supply cooling water to the new furnace and the
accompanying civil works for the installation of the foregoing, to be located on
the Project Site, all as more particularly described on Exhibit "B".
-----------
"Project Completion" shall mean completion of the Project and its
------------------
acceptance by Lessee in accordance with and pursuant to the terms and conditions
of the Project Documents, as evidenced and confirmed by Lessee's issuance and
delivery to Lessor of a Project Delivery and Acceptance Certificate to such
effect.
"Project Completion Deadline Date" shall mean the earlier of: (i) January 31,
-------------------------------- -------
2001 or (ii) forty-five (45) days after final completion of the Project.
3
<PAGE>
"Project Construction Contract" shall mean the Contract, dated October 5, 1999,
-----------------------------
between Stein, as "Contractor," and Lessee, as "Purchaser," in respect of the
Project; together with all schedules, exhibits, supplements and additions
thereto, and as it may be amended or modified from time to time, subject to
Section 3.
"Project Cost Reimbursement" shall mean the reimbursement by Lessor to Lessee of
--------------------------
any sums theretofore actually paid by Lessee to any Contractors in respect of
the Project pursuant to and in accordance with the terms of the Project
Documents relative thereto, including, without limitation, any such sums
actually paid by Lessee at or prior to the Closing Date.
"Project Cost Reimbursement Request" shall mean a writing, issued by an
----------------------------------
Authorized Officer of Lessee, in substantially the form of Exhibit "C".
-----------
"Project Cost Summary Sheet" shall mean a certification from Lessee of the
--------------------------
status of Project cost and completion, to be substantially in the form of
Schedule "A" attached to the Project Cost Reimbursement Request.
- ------------
"Project Delivery and Acceptance Certificate" shall mean a certificate executed
-------------------------------------------
by an Authorized Officer of Lessee, in substantially the form of Exhibit "D".
-----------
"Project Documents" shall mean, collectively, all those documents, instruments,
-----------------
certificates and agreements set forth and described on Exhibit "E"; together
-----------
with and including any and all documents, instruments, certificates and
agreements executed and/or delivered (or to be executed and/or delivered) in
connection with any of the foregoing or in furtherance thereof. The term
"Project Documents" includes any such documents, instruments, certificates and
agreements which hereafter come into existence, which are acceptable by Lessor
as "Project Documents" for purposes hereof, and which are assigned to Lessor
pursuant to a Project Documents Assignment (with Contractor's Consent appended
thereto).
"Project Documents Assignment" shall mean an assignment made by Lessee to Lessor
----------------------------
of its right, title and interest in, to and under any Project Documents
described therein, to be substantially in the form of Exhibit "F".
-----------
"Project Foundation Contract" shall mean the Contract, dated October 5, 1999,
---------------------------
between Delta, as "Contractor," and Lessee, as "Purchaser," in respect of the
Project; together with all schedules, exhibits, supplements and additions
thereto, and as it may be amended as modified from time to time, subject to
Section 3.
"Project Guaranty" shall mean the Guaranty Agreement, dated October 5, 1999,
----------------
issued by Stein France to Lessee in respect of the performance by Stein of its
obligations under the Project Documents to which it is part, as it may be
amended or modified from time to time, subject to Section 3.
"Project Interface Agreement" shall mean the Interface Agreement, dated October
---------------------------
5, 1999, among Delta, Stein, Stein France and Lessee concerning the Project;
together with all schedules, exhibits, supplements and additions thereto, and as
it may be amended or modified from time to time, subject to Section 3.
4
<PAGE>
"Project Secrecy Agreement" shall mean the Secrecy and Confidentiality
-------------------------
Agreement, dated October 5, 1999, between Stein and Lessee, as it may be amended
or modified from time to time, subject to Section 3.
"Project Site" shall mean that certain real property of Lessee known as 2300
------------
South Highway 97, Box 218, Sand Springs, Tulsa County, Oklahoma 74063, as more
particularly described on Exhibit "G".
-----------
"Renewal Rent" shall have the meaning given to such term in Section 3.
------------
"Renewal Term" shall mean such additional term, beyond the Basic Term, to which
------------
Lessor and Lessee may mutually agree hereafter pursuant to the operation of
Section 9.
"Rent" shall mean the sum of all Interim Rent, all Basic Rent and any Renewal
----
Rent, plus applicable taxes and Additional Rent.
"Senior Notes Indenture" shall have the meaning given to such term in Section
----------------------
34.
"Stein" shall mean Stein Heurtey Inc., a Pennsylvania corporation.
-----
"Stein France" shall mean Stein Heurtey, S.A.., a French corporation and the
------------
sole shareholder of Stein.
"Stipulated Loss Value," for any date or time, shall mean the amount specified
---------------------
on Exhibit "H" corresponding to such date or time.
-----------
"Term" shall mean the combination of the Interim Term, the Basic Term and any
----
Renewal Term.
"Transaction Documents" shall mean, collectively, this Agreement, the Project
---------------------
Documents Assignment, the Environmental Indemnity and Warranty Agreement
appended hereto as Exhibit "L"; and any and all other documents, instruments,
-----------
certificates or agreements now or hereafter executed by Lessee in favor of
Lessor or between Lessee and Lessor in respect of the foregoing. The term
"Transaction Documents" shall include, without limitation, all those documents,
instruments, certificates and agreements set forth and described in Section 36.
"UCC" shall mean the Uniform Commercial Code of the State of Illinois.
---
1. LEASE. Subject to and upon all of the terms and conditions of this
-----
Agreement and the other Transaction Documents, Lessor hereby agrees to lease to
Lessee, and Lessee hereby agrees to lease from Lessor, the Project for the Term.
2. ASSIGNMENT OF PROJECT DOCUMENTS; CREATION OF AGENCY. To facilitate
---------------------------------------------------
Lessor's lease of the Project to Lessee for the Term, Lessee shall assign all
Project Documents existing on the Closing Date to Lessor on the Closing Date
pursuant to a Project Documents Assignment, and obtain appropriate Contractors'
Consents thereto coincident therewith. In addition, to the extent any new,
additional or replacement Project Documents are proposed by Lessee to come into
existence subsequent to the Closing Date, Lessee, first, shall obtain Lessor's
consent to the terms thereof and, upon their execution, assign such Project
Documents to Lessor pursuant to a Project Documents Assignment, and obtain
appropriate Contractors' Consents thereto coincident therewith. Notwithstanding
each such assignment, however, Lessee acknowledges that Lessor is a leasing
company, that Lessor was approached by Lessee to acquire the Project and take
such assignment in furtherance thereof as part of a "finance lease" under
Article 2A of the UCC, as more particularly described in Section 28, and that
Lessee shall be and remain at all times hereafter solely and completely
responsible for the observance and performance of all duties and obligations
under the Project Documents herewith assigned including, generally, the
oversight of all
5
<PAGE>
aspects of the acquisition, installation and equipping of the Project. To
facilitate the foregoing, Lessee agrees to act as Lessor's agent in the
observance and performance of all such duties and obligations, subject,
--------
however, to the following conditions and limitations: (i) this agency may be
- -------
terminated by Lessor at any time, on thirty (30) days' notice to Lessee,
provided that, once an Event of Default exists, this agency shall be "at will,"
- --------
and may be discontinued at any time by Lessor, without prior notice; (ii) this
agency shall be limited at all times to the observance and performance on the
part of the "Purchaser" named therein (or like party) of its duties and
obligations under the Project Documents, including, particularly, but without
limitation, the receipting for any payment documentation for work performed, the
determination whether and how much payment shall be remitted for such work, and
the actual (out-of-pocket) remittance of such payment (subject to later
reimbursement pursuant hereto); (iii) Lessor, and Lessor alone, shall retain the
sole and exclusive right, power and authority to enter into, consent to and/or
approve any amendments, modifications or waivers to any terms, covenants or
conditions of any Project Documents, including, particularly, but without
limitation, any work change orders, to exercise any rights or remedies against
Contractors, to enforce performance thereunder and to terminate (or accept the
termination of) any Project Documents; provided, however, that it is the
-----------------
parties' understanding and intent that such consents, approvals, amendments,
modifications and waivers, if made by Lessor, shall be made only with, and after
Lessor's receipt of, Lessee's recommendation thereof, and without liability to
Lessor; and provided, further, that, notwithstanding the foregoing, the Lessee
-------- -------
shall be authorized and empowered, absent the occurrence and continuation of any
Event of Default, to initiate (or consent to) work change orders concerning the
Project not to exceed $20,000 as to all such work change orders and provided
--------
that such work change orders shall not, in any event, cause Maximum Project Cost
to be exceeded; (iv) any sums expended by Lessee in furtherance hereof or in
respect of the Project, regardless of derivation, shall not be subject to
reimbursement by Lessor except in accordance with, and subject to, the terms of
Section 5; and (v) Lessee shall provide Lessor with copies of any notices it
gives or receives in respect of any default under, breach of, or termination of
any Project Documents and, generally, keep Lessor informed as to the ongoing
status of the acquisition, installation and equipping of the Project.
3. RENT. Lessee shall pay Rent to Lessor, during the Term, as follows:
----
(i) During the Interim Term, Lessee shall pay Lessor rent
("Interim Rent"), equal in amount to the product of (i) the aggregate amount of
------------
Project Cost Reimbursements made available to Lessee by Lessor at any time or
from time to time times (ii) the sum of the Index Rate plus three percent (3%)
----- ----
per annum. Interim Rent shall be due and payable monthly, in arrears, on the
last day of each calendar month, beginning on the last day of the calendar month
containing the Closing Date (for the period from the Closing Date through such
date), and concluding on the last day of the calendar month containing the
Acceptance Date. Interim Rent shall be computed on the basis of a 360-day year
and actual days elapsed.
(ii) During the Basic Term, Lessee shall pay Lessor rent ("Basic
-----
Rent"), equal in amount to the product of the Monthly Rental Factor times the
- ----
Project Cost. Basic Rent shall be due and payable monthly in advance on the
first day of each calendar month, beginning on the first day of the calendar
month following the Acceptance Date and continuing thereafter until the end of
the Basic Term.
(iii) during any Renewal Term, Lessee shall pay Lessor rent ("Renewal
-------
Rent"), equal in amount to the fair market rental of the Project as then
- ----
mutually determined by Lessor and Lessee.
(iv) Rent payable by Lessee hereunder shall be increased by the
amount of applicable taxes, as provided in Section 17.
(v) Any Rent not paid within five (5) days after its due date shall
be subject, at Lessor's option, to the imposition of a late charge equal in
amount to five percent (5%) of such unpaid Rent.
(vi) All Rent shall be paid to Lessor in immediately available funds
deposited with Lessor not later than the due date for payment thereof to such
bank account of Lessor as Lessor may specify from time to time.
6
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4. PROJECT COST REIMBURSEMENT. During the Interim Term, Lessee shall have
--------------------------
the continuing right to obtain Project Cost Reimbursements from Lessor, subject,
--------
however, to the following limitations and conditions:
- -------
(i) each request for a Project Cost Reimbursement shall be
made pursuant to a Project Cost Reimbursement Request, duly completed and signed
by Lessee and delivered to Lessor not later than the 20th day of each calendar
month to which shall be attached, in each case, (i) a Project Cost Summary
Sheet, and (ii) a Contractor's Certification;
(ii) Project Cost Reimbursements shall be made by Lessor not
more frequently than monthly, on or prior to the last Business Day of each
calendar month, beginning on the last day of the calendar month containing the
Closing Date, based on the Project Cost Reimbursement Request received (if any)
by the 20th day of the current calendar month;
(iii) Project Cost Reimbursements shall be requested in minimum
amounts of $500,000;
(iv) total Project Cost Reimbursements shall not at any time
exceed Maximum Project Cost;
(v) no Project Cost Reimbursements shall be made if any
Default Condition or Event of Default then exists;
(vi) if Lessee should obtain knowledge or notice that actual
costs to acquire, install and equip the Project may or will exceed the Maximum
Project Price, Lessee will notify Lessor in writing promptly thereafter, but in
any event prior to its receipt of any further Project Cost Reimbursement and,
thereafter, Lessor shall have the right, in its sole discretion, to limit the
amount of its Project Cost Reimbursements or cause Lessee to absorb all or
portions thereof; it being understood and agreed that Lessee shall be solely
responsible for the payment of all Project Costs in excess of the Maximum
Project Price; and
(vii) Lessor reserves to itself the sole and absolute right to
reject or approve, in whole or in part, any Project Cost Reimbursement Request.
1. AGREEMENT NOT CANCELABLE; LESSEE'S OBLIGATIONS ABSOLUTE. This
-------------------------------------------------------
Agreement may not be canceled or terminated except as expressly provided herein.
Lessee's obligation to pay all Rent due or to become due hereunder shall be
absolute and unconditional and shall not be subject to any delay, reduction,
set-off, defense, counterclaim or recoupment for any reason whatsoever,
including, without limitation, any delay in the acquisition, installation or
equipping of the Project, the failure of the Project or any default by any
Contractor. If the Project is delayed or proves unsatisfactory for any reason,
Lessee shall make any claim solely against the Contractors and shall,
nevertheless, pay Lessor all Rent payable hereunder.
1. SELECTION AND USE OF PROJECT. Lessee agrees that it, and it alone,
----------------------------
shall be responsible for the selection, use of, and results obtained from, the
Project and any other associated equipment or services.
1. NO WARRANTIES. LESSOR MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR
-------------
IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE DESIGN
OR CONDITION OF THE PROJECT OR ITS MERCHANTABILITY, SUITABILITY, QUALITY OR
FITNESS FOR A PARTICULAR PURPOSE, AND HEREBY DISCLAIMS ANY SUCH WARRANTY.
LESSEE SPECIFICALLY WAIVES ALL RIGHTS TO MAKE A CLAIM AGAINST LESSOR FOR BREACH
OF ANY WARRANTY WHATSOEVER. LESSEE LEASES THE PROJECT "AS IS." IN NO EVENT
SHALL LESSOR HAVE ANY LIABILITY FOR, NOR SHALL LESSEE HAVE ANY REMEDY AGAINST
LESSOR FOR, ANY LIABILITY, CLAIM, LOSS, DAMAGE OR EXPENSE CAUSED DIRECTLY OR
INDIRECTLY BY THE PROJECT OR ANY DEFICIENCY OR DEFECT THEREOF OR THE OPERATION,
MAINTENANCE OR REPAIR THEREOF OR ANY "CONSEQUENTIAL DAMAGES," AS THAT TERM IS
USED IN SECTION 2-719(3) OF THE UCC.
7
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1. RENEWAL. So long as no Event of Default or Default Condition shall
-------
have occurred and then be continuing, Lessee shall have the right to request a
renewal of the term for lease of the Project by giving notice thereof in writing
to Lessor not less than one hundred eighty (180) days prior to the expiration of
the Basic Term. Lessor may, in its sole discretion, approve (or withhold its
approval of) such renewal request. If Lessor agrees to such renewal request, the
Renewal Term shall be for such term, and Renewal Rent shall be in such amount,
as Lessor and Lessee then shall mutually determine to be a fair market rental
using on a "in-place, in-use" basis as of the commencement of such Renewal Term.
1. OWNERSHIP; INSPECTION; MARKING; FINANCING STATEMENTS. Lessee shall
----------------------------------------------------
affix to the Project any labels supplied by Lessor indicating ownership of the
Project. The Project is and at all times shall be the sole property of Lessor,
and Lessee shall have no right, title or interest therein, except as Lessee. As
between Lessor and Lessee, the Project is and shall at all times be and remain
personal property and shall not become a fixture on the Project Site. Lessee
shall obtain and record such instruments and take such steps as may be necessary
to prevent any Person from acquiring any rights in the Project by reason of the
Project being claimed or deemed to be real property. Upon request by Lessor,
Lessee shall obtain and deliver to Lessor valid and effective waivers, in
recordable form, by the owners, landlords and mortgagees of the real property
upon which the Project is located or certificates of Lessee that it is the owner
of such real property or that such real property is neither leased nor
mortgaged. Lessee shall make the Project and its maintenance records available
for inspection by Lessor at any time and from time to time.
1. PROJECT USE; COMPLIANCE WITH LAWS. Lessee agrees that the Project
---------------------------------
will be operated by competent, qualified personnel selected and employed by
Lessee in connection with Lessee's business for the purpose for which the
Project was designed and in accordance with applicable operating instructions,
laws and government regulations; and that Lessee shall use every reasonable
precaution to prevent loss or damage to the Project from fire and other hazards.
Without limitation of the foregoing, Lessee shall procure and maintain in effect
all orders, licenses, certificates, permits, approvals and consents required by
federal, state or local laws or by any governmental body, agency or authority in
connection with the delivery, installation, use and operation of the Project.
1. MAINTENANCE. Lessee, at its sole cost and expense, shall keep the
-----------
Project in a suitable environment as specified by the manufacturer's guidelines
or the equivalent and meet all recertification requirements, and shall maintain
the Project in its original condition and working order, ordinary wear and tear
excepted. At the request of Lessor, Lessee shall furnish satisfactory proof of
such maintenance to Lessor.
1. ALTERATION; MODIFICATIONS; PARTS. Lessee may alter or modify the
--------------------------------
Project only at the direction of, with the prior written consent of, Lessor;
provided, however, that, notwithstanding the foregoing, Lessee may make
- -------- -------
alterations or modifications to the Project prior to Project Completion, to the
extent permitted in Section 3 above; and provided, further, that after Project
-----------------
Completion, so long as no Event of Default has occurred and is continuing,
Lessee may make alterations or modifications to the Project from its own funds;
i.e., without reimbursement by Lessor, with notice to, but without the necessity
- ----
of consent of, Lessor so long as any one alteration or modification does not
exceed $20,000 in actual cost, and the aggregate of all such alterations or
modifications does not exceed $200,000 in actual cost. Any such modification or
alteration shall be removed and the Project restored to its normal, unaltered
condition at Lessee's expense (without damaging the Project's originally
intended function or its value) upon expiration of the Term, unless and except
to the extent otherwise required or approved by Lessor. Any part installed in
connection with warranty or maintenance service and any modification or
alteration which cannot be removed in accordance with the preceding sentence
shall be the property of Lessor.
1. CASUALTY INSURANCE; LOSS OR DAMAGE. Lessee, at its own expense, shall
----------------------------------
insure the Project against all loss by fire (including extended coverage), theft
and other hazards, for the greater of (a) its full insurable value including
-------
replacement costs, or (b) its Stipulated Loss Value with a deductible not to
exceed $25,000, for loss by fire, or $100,000, for any other casualty, in each
instance, per occurrence and without co-insurance. As to other risks, Lessee
shall maintain insurance in such amounts and against such risks as is required
by the Lessor and otherwise as is customarily available to, and maintained by,
similar businesses operating in the same vicinity, including, but not limited
to, workers' compensation, business interruption and builders' risk insurance;
provided, however, that such insurance shall not be less, in terms of insurers,
- -----------------
amounts, coverages or limitations, than
8
<PAGE>
the insurance being maintained by Lessee on the date of this Agreement, which
insurance is scheduled, in summary form, on Exhibit "P" attached hereto;
-----------
provided, further, that such insurance shall include, in any event, at all
- -----------------
times, automobile and comprehensive general liability insurance (inclusive of
products liability coverage) covering liability for bodily injury, including
death and property damage, in an amount of at least $5,000,000.00 per occurrence
or such greater amount as may comply with general industry standards, or in such
other amounts as Lessor may otherwise require (the foregoing insurance, as it
applies to other than Casualty Loss, herein called "Liability Coverage"); and,
------------------
provided, finally, that such insurance shall not include in any event, unless
- -------- -------
subsequent hereto otherwise expressly required by Lessor, environmental or
pollution control insurance. All policies of insurance required hereunder shall
be in such form, amounts, and with such companies as Lessor may approve; shall
provide for at least thirty (30) days prior written notice to Lessor prior to
any modification or cancellation thereof; shall name Lessor as loss payee and
mortgagee, as to Casualty Loss, and additional insured, as to Liability
Coverage, and shall be payable to Lessee and Lessor as their interests may
appear; shall waive any claim for premium against Lessor; and shall provide that
no breach of warranty or representation or act or omission of Lessee shall
terminate, limit or affect the insurers' liability to Lessor. Lessee shall have
no right to cancel any such policy of insurance or any coverage thereunder,
unless Lessor has given its prior written consent thereto. Certificates of
insurance or policies evidencing the insurance required hereunder along with
satisfactory proof of the payment of the premiums therefor shall be delivered to
Lessor. Lessee shall give immediate written notice to Lessor and to insurers of
loss or damage to the Project, and shall promptly file proofs of loss with
insurers. Lessee hereby irrevocably appoints Lessor as Lessee's attorney-in-
fact, coupled with an interest, for the purpose of obtaining, or making claim
for, adjusting, receiving payment of, and executing and endorsing all documents
and settlement checks or drafts issued under any insurance policy relating to
the Project with respect to any Casualty Loss and, to the extent affecting
Lessor, any Liability Coverage; i.e., where any liability claim is made against
---
Lessor; provided, however, that, notwithstanding such appointment, unless an
-------- -------
Event of Default then exists or such insurance proceeds in respect of Casualty
Losses exceed $10,000 per occurrence or $100,000, in the aggregate, in any
event, Lessee may continue to obtain, or make claim for, adjust, receive payment
and execute and endorse documents and settlement checks issued with respect to
any Casualty Losses, subject to the terms of the last sentence of Section 15.
Lessee hereby assigns to Lessor, as additional security for its obligations
hereunder, all sums which may become payable under such insurance, to the extent
relating to the Project. All such insurance proceeds shall be applied as
provided in the last sentence of Section 15.
2. RISK OF LOSS. Lessee shall bear the entire risk of theft or
------------
destruction of, or damage to, the Project including, without limitation, any
condemnation, seizure or requisition of title or use ("Casualty Loss"). No
-------------
Casualty Loss shall relieve Lessee from its obligations to pay Rent except as
provided in clause (b) below. If any Casualty Loss occurs after the Closing
Date, Lessee shall immediately notify Lessor and, at the option of Lessor, shall
promptly (a) place the Project in good repair and working order; or (b) if
Lessor determines that the Project cannot be placed in good condition or repair
on a timely basis, pay Lessor an amount equal to the Stipulated Loss Value of
the Project and all other amounts (including any Rents then due) payable by
Lessee hereunder, whereupon Lessor shall transfer to Lessee, without recourse or
warranty (express or implied), all of Lessor's interest, if any, in and to such
Project on an "AS IS, WHERE IS" basis and re-assign all Project Documents,
likewise without recourse or warranty (express or implied) to Lessee. The
proceeds of any insurance payable with respect to any Casualty Loss in respect
of the Project, the Project shall be applied, at the option of Lessee, either
towards (i) repair of the Project or (ii) payment of any of Lessee's obligations
hereunder, unless an Event of Default then exists or such insurance proceeds
exceed $10,000 per occurrence or $100,000 in the aggregate, in either which
case, the application of such proceeds shall be, instead, at the option of
Lessor and, if applied by Lessor to the payment of any of Lessee's obligations
hereunder, shall be credited, first, as applicable, against the Stipulated Loss
Value then owing to Lessor in respect of the Casualty Loss giving rise to
receipt of such insurance proceeds; provided, however, that if upon by
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application of such proceeds to all obligations of Lessee hereunder all such
obligations are fully paid and satisfied, any remainder of such proceeds shall
be paid over to Lessee.
3. LOSS OF INSURANCE COVERAGE. In the event Lessee fails to provide
--------------------------
Lessor with evidence of the insurance coverage on the Project required by this
Agreement, Lessor may purchase (but is not required to purchase) insurance at
Lessee's expense to protect Lessor's interest in the Project. This insurance
may, but need not, protect Lessee's interests. The coverage purchased by Lessor
may not pay any claim made by Lessee or any claim that is made against Lessee in
connection with the Project. Lessee may later cancel any insurance purchased by
Lessor, but only after providing Lessor with evidence that Lessee has obtained
insurance as required by this
9
<PAGE>
Agreement. If Lessor purchases insurance for the Project, Lessee will be
responsible for all costs of that insurance, including interest and other
charges imposed by Lessor in connection with the placement of the insurance,
until the effective date of the cancellation or expiration of the insurance. The
costs of the insurance may be more than the cost of insurance Lessee is able to
obtain on its own.
1. TAXES. Lessee shall pay when due, and indemnify and hold Lessor
-----
harmless from, all property (ad valorem), sales, use, excise and other taxes,
charges, and fees (including, without limitation, income, franchise, business
and occupation, gross receipts, sales, use, licensing, registration, titling,
personal property, stamp and interest equalization taxes, levies, imposts,
duties, charges or withholdings of any nature), and any fines, penalties or
interest thereon, imposed or levied by any governmental body, agency or tax
authority upon or in connection with the Project, its purchase, ownership,
delivery, leasing, possession, use or relocation of the Project or otherwise in
connection with the transactions contemplated by each Agreement or any Rents
thereunder, excluding taxes on or measured by the net income of Lessor, and
Lessee will provide proof of payment of such taxes to Lessor at its request.
Lessee shall timely prepare and file all reports and returns which are required
to be made with respect to any obligation of Lessee under this Section. Lessee
shall, to the extent permitted by law, cause all billings of such fees, taxes,
levies, imposts, duties, withholdings and governmental charges to be made to
Lessor in care of Lessee. Upon request, Lessee will provide Lessor with copies
of all such billings. To the extent that, notwithstanding the foregoing
provisions, Lessor receives any billings of such fees, taxes, levies, imposts,
duties, withholdings or governmental charges, Lessor promptly will remit same
(or copies thereof) to Lessee for processing and payment.
1. GENERAL INDEMNIFICATION. This Agreement is a net lease. Accordingly,
-----------------------
Lessee shall indemnify Lessor and its successors and assigns against, and hold
Lessor and its successors and assigns harmless from, any and all claims,
actions, damages, obligations, liabilities and all costs and expenses,
including, without limitation, legal fees, incurred by Lessor or its agents,
successors and assigns arising out of this Agreement, the other Transaction
Documents, and any Project Document, including, without limitation, the
purchase, construction, installation, testing, ownership, delivery, lease,
possession, operation, maintenance, condition, use or return of the Project, or
any arising by operation of law; provided, however, that, notwithstanding the
-------- -------
foregoing, Lessee shall not indemnify or otherwise be responsible to Lessor or
its agents, successors or assigns for any losses, claims or damages incurred by
any of them as a result of their gross negligence or willful misconduct. Lessee
agrees that upon written notice by Lessor of the assertion of any claim, action,
damage, obligation, liability or lien, Lessee shall assume full responsibility
for the defense thereof. Any payment pursuant to this Section shall be of such
amount as shall be necessary so that, after payment of any taxes required to be
paid thereon by Lessor, including taxes on or measured by the net income of
Lessor, the balance will equal the amount due hereunder. The provisions of this
Section with regard to matters arising during the Term of this Agreement shall
survive the expiration or termination of this Agreement.
1. SPECIAL TAX INDEMNIFICATION. Lessee acknowledges that Lessor, in
---------------------------
determining the Rent due hereunder, has assumed that certain tax benefits as are
provided to an owner of property under the Internal Revenue Code of 1986, as
amended (the "Code"), and under applicable state tax law, including, without
limitation, depreciation deductions under Section 168 (j) of the Code,
including, particularly, as to the applicable recovery period provided in
Section 168(j)(2) of the Code for "qualified Indian reservation property"; i.e.,
----
four (4) year MACRS; and deductions under Section 163 of the Code in an amount
at least equal to the amount of interest paid or accrued by Lessor with respect
to any indebtedness incurred by Lessor in financing its purchase of the Project,
are available to Lessor as a result of its ownership and lease of the Project.
In the event Lessor is unable to obtain such tax benefits for any reason, is
required to include in income any amount other than the Rent or is required to
recognize income in respect of the Rent earlier than anticipated pursuant to
this Agreement, Lessee shall pay Lessor additional rent ("Additional Rent") in a
lump sum in an amount needed to provide Lessor with the same after-tax yield and
after-tax cash flow as would have been realized by Lessor had Lessor (i) been
able to obtain such tax benefits, (ii) not been required to include any amount
in income other than the Rent and (iii) not been required to recognize income in
respect of the Rent earlier than anticipated pursuant to this Agreement. The
Additional Rent shall be computed by Lessor, which computation shall be binding
on Lessee. The Additional Rent shall be due immediately upon written notice by
Lessor to Lessee of Lessor's inability to obtain tax benefits, the inclusion of
any amount in income other than the Rent or the recognition of income in respect
of the Rent earlier than anticipated pursuant to this Agreement. The provisions
of this Paragraph shall survive the expiration or termination of this Agreement.
The foregoing tax indemnification shall not apply, however, to, and the Lessee
shall not indemnify the
10
<PAGE>
Lessor against, any loss in tax benefits under a Agreement resulting from either
(i) changes to the Code or applicable state law occurring subsequent to the
execution of this Agreement (excepting therefrom only such changes as, by their
terms, are intended to have retroactive effect to a date prior to the aforesaid
execution date) or (ii) the gross negligence or wilful misconduct of Lessor, or
any breach by Lessor of any terms of this Agreement.
2. PURCHASE OPTIONS.
----------------
(i) Notwithstanding any provisions either express or implied
to the contrary in this Agreement, provided no Event of Default or Default
Condition then has occurred and is continuing, Lessee, upon written notice
received by Lessor from Lessee not less than one hundred eighty (180) days prior
to the expiration of the Basic Term, shall have the right, but not the
obligation, to purchase all of Lessor's right, title and interest in the Project
at the end of the Basic Term for an amount equal to the sum of (a) the Fair
Market Value (hereinafter defined) of the Project as of the end of the Basic
Term, but not less than 30%, nor more than 39%, of total Project Cost
Reimbursements, made by Lessor to Lessee, plus (b) any sales, use, property or
----
excise taxes on or measured by such sale and any other expenses of transfer (all
of the foregoing being collectively referred to herein as the "End-of-Term
Purchase Price"). Lessee shall pay the End-of-Term Purchase Price to Lessor not
later than the last day of the Basic Term. As used herein, the term "Fair Market
Value" shall mean, with respect to the Project, an amount as mutually agreed
upon in writing by Lessor and Lessee at least one hundred and twenty (120) days
before the expiration of the Basic Term, or, failing such agreement, the amount
at which the Project would be exchanged between a willing buyer and willing
seller on a retail basis, neither being under compulsion and each having
reasonable knowledge of all relevant facts, and assuming the Project is to be
used in-place and are in the physical condition in which they must be maintained
and returned pursuant to the Agreement, as determined by an appraisal, at
Lessee's expense, from an independent qualified appraiser selected by Lessor (or
an independent qualified appraiser selected by Lessee, but acceptable to Lessor)
and furnished not later than ninety (90) days prior the expiration of the Basic
Term.
(ii) In addition to the foregoing, end-of-term purchase option,
and notwithstanding any provisions either express or implied to the contrary in
this Agreement, provided no Event of Default or Default Condition then has
occurred and is continuing, Lessee, upon giving Lessor not less than sixty (60)
days advance written notice, may purchase the right, title and interest of
Lessor in and to the Project any time after the twelfth (12th) month prior to
the last day of the Basic Term for an amount equal to the sum of (a) 53.82% of
total Project Cost Reimbursements made by Lessor to Lessee, plus (b) any sales,
----
use, property or excise taxes on or measured by such sale and any other expenses
of transfer (all of the foregoing being collectively referred to herein as the
"Early Buyout Purchase Price). Lessee shall pay the Early Buyout Purchase Price
to Lessor on the date such purchase becomes effective.
(iii) Lessee agrees that any sale, conveyance or transfer by
Lessor pursuant hereto shall be of Lessor's right, title and interest, if any,
in and to the Project, and shall be AS IS, WHERE IS, WITHOUT WARRANTIES OF ANY
KIND, EXPRESSED OR IMPLIED, INCLUDING WARRANTY OF MERCHANTABILITY AND FITNESS
FOR PURPOSE, and Lessee shall hold harmless and indemnify Lessor from and
against all claims, liabilities, losses and costs alleged against or incurred by
Lessor, including claims for property damage, personal injury or death to Lessee
and/or third parties growing out of or resulting from the ownership, use or
possession of the Project, or imposed upon, inclined or directed against Lessor,
whatsoever levied on, on account of, or as a consequence of the sale and
purchase of the Project.
3. LEASE RETURN PROVISIONS. Unless and except to the extent otherwise
-----------------------
expressly provided herein, upon expiration or termination of the Term, Lessee
shall return the Project to Lessor in accordance with the following terms and
conditions:
(i) Lessee shall return the Project on the last day of the
Term or any earlier date on which this Agreement is terminated (the "Return
Date"), free and clear of any and all Liens.
(ii) at least one hundred eighty (180) days prior to the Return
Date, Lessee shall provide to Lessor a detailed inventory of all components of
the Project. The inventory shall include, but not be limited to, a listing of
model and serial numbers for all components comprising any part of Project as
well as the location of all
11
<PAGE>
such components and the name, phone number and contact person at the location
where such components are located;
(iii) at least one hundred eighty (180) days prior to the Return
Date, Lessee shall provide to Lessor the following documents (as appropriate):
(1) one set of service manuals, blue prints, process flow diagrams and operating
manuals including replacements and/or additions thereto, such that all
documentation is completely up-to-date and includes all materials received from
the manufacturer at and since the time of lease commencement; and (2) one set of
documents, detailing equipment configuration, operating requirements,
maintenance records, and other technical data concerning the set-up and
operation of the Project, including replacements and/or additions thereto, such
that all documentation is completely up-to-date;
(iv) at all reasonable times (which shall include, without
limitation, all normal business hours) prior to the actual return thereof,
Lessee shall make the Project available for on-site operational inspections by
potential purchasers; provided, that Lessor shall not unreasonably interfere
--------
with the normal operations of Lessee in connection therewith.
(v) not more than thirty (30) days prior to the Return Date, Lessee
shall cause the manufacturer's representative or a qualified equipment
maintenance provider acceptable to Lessor to perform a physical and operational
inspection of the Project, including testing all performance characteristics,
materials and workmanship thereof, and provide to Lessor a written report
detailing the results of such inspection and testing and necessary and
recommended replacements and repairs;
(vi) as of the time of return, Lessee shall make all necessary or
recommended replacements and proper repairs (using generally accepted
procedures) detailed in the manufacturer's representative's or qualified
equipment maintenance provider's report and otherwise to cause the Project to
conform to the condition required under this Agreement;
(vii) as of the time of return, Lessee shall cause the Project be
maintained in a clean and cosmetically acceptable condition, and otherwise in
such condition so that the Project may be immediately placed in service by a new
operator, buyer or lessee;
(viii) as of the time of return, Lessee shall properly remove and
treat all rust and corrosion from the Project and remove all identification of
Lessee thereon;
(ix) as of the time of return, Lessee shall ensure that the Project
has all component parts in good operating condition, that all of those component
parts meet or exceed the manufacturer's minimum recommended performance and
operational specifications (unless improved or updated during the Term), and
that the Project complies with all federal, state or local governmental rules,
regulations and other requirements, and industry standards then in effect;
(x) if any component of the Project has a predictable or scheduled
replacement or overhaul life, as of the time of return, Lessee shall ensure that
such components shall have not less than 50% of its useful life remaining before
the next scheduled replacement or overhaul;
(xi) Lessee shall cause all components of the Project to be
deinstalled, disassembled, packed, transported, and certified as follows: (1)
the manufacturer's representative or the qualified maintenance provider shall
deinstall all the components of the Project (including all wire, cable and
mounting hardware) in accordance with the specifications of the manufacturer;
(2) each component shall be returned with a certificate supplied by the
manufacturer's representative or the qualified maintenance provider certifying
that such components of the Project are in good condition and, where applicable,
eligible for the manufacturer's maintenance plan, which certificate of
eligibility shall be transferable to another operator of such components; (3)
each component shall be packed properly and in accordance with the
manufacturer's recommendations; and (4) Lessee shall transport all of the
components of the Project in a manner consistent with the manufacturer's
recommendations and practices;
12
<PAGE>
(xii) on or before the Return Date, cause all of the
components of the Project to be transported, reassembled and reinstalled at such
locations in the continental United States as Lessor may select at Lessee's cost
and expense (unless and except to the extent, if any, that the costs and
expenses thereof are paid for by a new operator, buyer or lessee);
(xiii) upon Lessor's request, cause to be provide to Lessor
storage suitable to Lessor, for the period between the Return Date and the date
the components of the Project are transported, reassembled and reinstalled at
the locations selected by Lessor, which period shall not exceed two (2) years;
(xiv) upon completion of such reassembly and reinstallation,
warrant that each component of the Project will function in accordance with all
manufacturer's specifications when new for a period of at least one hundred and
twenty (120) days, pay for all parts and labor necessary to comply with that
warranty, and, during the warranty period, make available, at the new location
of each respective component of the Project, such technical, engineering and
operating personnel as may be requested by Lessor to ensure proper operation of
the components of the Project and compliance with the warranty;
(xv) during any period that Lessee remains in possession of
any components of the Project and during any storage period as described above,
cooperate with Lessor in attempting to remarket any such components to
prospective third party purchasers or lessees and permit Lessor, during normal
business hours, to display and demonstrate the components of the Project to the
prospective purchasers or lessees on Lessee's premises or at the storage
facility, as applicable, and keep each such component fully operational with all
required power and/or fuel supplies available to allow such demonstration. (In
the event that any auction or other public sale of any component of the Project
is deemed necessary or advisable by Lessor, Lessee agrees that such auction or
public sale may be held on Lessee's premises or at the storage facility, as
applicable);
(xvi) all costs of the foregoing shall be the sole and
complete responsibility of the Lessee;
(xvii) during any period of time from the Return Date until all
components of the Project are actually returned to Lessor in accordance with the
provisions hereof (the "Holdover Term"), Lessee agrees to pay Lessor monthly
-------------
rent, in advance for each month or any part of a month of the Holdover Term, in
an amount equal to one hundred twenty-five percent (125%) of the highest
periodic Basic Rent during the Term;
(xviii) Upon the early termination or cancellation of the Term,
provided Lessee has not exercised any option to purchase the Project, Lessee
shall return the Project to Lessor in accordance with the foregoing provisions,
provided, however, the time for complying with those provisions shall be the
- -------- -------
earlier of (1) as soon as practicable following such termination or cancellation
or (2) thirty (30) days after the termination or cancellation; and
(xix) Without in any way limiting anything in this Agreement,
in addition to any other right or remedy Lessor may have under the Agreement or
otherwise, if Lessee fails for any reason to comply with any of its obligations
hereunder respecting the return of the Project, then Lessor shall have the
right, but not the obligation, to take or cause to be taken any actions it deems
necessary or appropriate to cause the Project to be returned to Lessor in the
conditions specified herein and Lessor may charge Lessee for any and all costs
and expenses in connection therewith. Lessee, upon demand by Lessor, shall
immediately pay and reimburse Lessor any Reconditioning Expense incurred by
Lessor, after receiving proof of payment of such expenses.
4. ASSIGNMENT BY LESSEE. Lessee shall not, without the prior written
--------------------
consent of Lessor, (a) assign, transfer, pledge or otherwise dispose of any
Transaction Document or the Project, or any interest herein or therein; (b)
sublease the Project or permit it to be used by any one other than Lessee (or
its affiliates or related companies) and its employees and, during construction
and installation of the Project, the Contractors and their respective
subcontractors, employees and agents; or (c) move the Project from the Project
Site.
5. ASSIGNMENT BY LESSOR. Lessor may assign its interest or grant a
--------------------
security interest in any Transaction Document and the Project individually or
together, in whole or in part, in which case Lessee, upon
13
<PAGE>
notice, shall attorn fully to such assignee, including as to the making of all
payments of Rent and other amounts hereunder directly to such assignee. Each
such assignee shall have all of the rights of Lessor under each Agreement
assigned to it. Lessee shall not assert against any such assignee any set-off,
defense or counterclaim that Lessee may have against Lessor or any other person.
Notwithstanding the foregoing, however, Lessee shall not be responsible for any
additional taxes that may be due solely as a result of such assignment.
1. LESSEE'S WAIVERS. To the extent permitted by applicable law, Lessee
----------------
hereby waives any and all rights and remedies conferred upon a lessee by
Sections 2A-508 through 2A-522 of the UCC. To the extent permitted by applicable
law, Lessee also hereby waives any rights now or hereafter conferred by statute
or otherwise which may require Lessor to sell, lease or otherwise use the
Project in mitigation of Lessor's damages or which may otherwise limit or modify
any of Lessor's rights or remedies hereunder.
2. FURTHER ASSURANCES. Lessee, upon the request of Lessor, will execute,
------------------
acknowledge, record or file, as the case may be, such further documents and do
such further acts as may be reasonably necessary, desirable or proper to carry
out more effectively the purposes of this Agreement. If Lessee fails to do so,
Lessee hereby appoints Lessor as its attorney-in-fact to execute on behalf of
Lessee and authorizes Lessor to file without Lessee's signature any UCC
financing statements and amendments Lessor deems advisable.
1. FINANCE LEASE. Lessee and Lessor agree that this Agreement is a
-------------
"finance lease" as defined by Section 2A-103(g) of the UCC. Lessee acknowledges
that Lessee has reviewed and approved each written "supply contract" (as defined
by UCC 2A-103 (y)) covering the Project purchased from each "supplier" (as
defined by UCC 2A-103 (x)) thereof.
1. NO AGENCY. Lessee acknowledges and agrees that no Contract or, no
---------
manufacturer or supplier, nor any salesman, representative or other agent of any
Contractor, manufacturer or supplier, is an agent of Lessor. No salesman,
representative or agent of any Contractor, manufacturer or supplier is
authorized to waive or alter any term or condition of this Agreement and no
representation as to the Project or any other matter by the manufacturer or
supplier shall in any way affect Lessee's duty to pay Rent and perform its other
obligations as set forth in this Agreement.
2. SECURITY INTEREST. It is the mutual intent of Lessor and Lessee that
-----------------
at all times Lessor shall be considered the owner of the Project and that this
Agreement shall constitute an operating lease between Lessor and Lessee. If,
however, notwithstanding the foregoing, in the event that it should ever be
determined that the relationship of Lessor and Lessee hereunder is that of
lender or other creditor and debtor, then, in order to secure payment and
performance by Lessee of all Obligations, Lessee does hereby grant to Lessor a
security interest in, and make a collateral assignment to Lessor of, all right,
title and interest of Lessor in, to and under the following property, or
interests in property, of Lessee (collectively the "Collateral"): (i) the
----------
Project, together with all attachments, replacements, parts, spare parts,
substitutions, upgrades, repairs, accessions and accessories incorporated
therein and/or affixed thereto, (ii) the Project Documents, including,
specifically, but without limitation, all warranty and indemnification
provisions favoring Lessee contained therein, and any and all rights of Lessee
to compel performance thereunder, (iii) all books and records of Lessee
concerning the Project, including engineering drawings, blueprints, manuals,
schematics and diagram; and (iv) all proceeds of the foregoing.
3. GENERAL REPRESENTATIONS AND WARRANTIES. In order to induce Lessor to
--------------------------------------
enter into, or accept, this Agreement and the other Transaction Documents,
Lessee hereby represents and warrants to Lessor (which representations and
warranties, together with any other representations and warranties of Lessee
contained elsewhere in this Agreement, shall be deemed to be renewed as of the
date of each Project Cost Reimbursement), as set forth below:
(i) Lessee is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware, with its principal
place of business, chief executive office and office where it keeps all of its
books and records concerning the Project being located at the Project Site, and
is duly qualified as a foreign corporation in good standing in the State of
Oklahoma.
14
<PAGE>
(ii) Lessee has the corporate power to make, deliver and
perform under the Transaction Documents, and has taken all necessary and
appropriate corporate action to authorize the execution, delivery and
performance of the Transaction Documents. This Agreement constitutes, and the
remainder of the Transaction Documents, as and when executed and delivered for
value received, will constitute, the valid obligations of Lessee, legally
binding upon it and enforceable against it in accordance with their respective
terms.
(iii) The undersigned officers of Lessee hold the offices
specified hereinbelow and, in such capacities, are duly authorized and empowered
to execute, attest and deliver this Agreement and the remainder of the
Transaction Documents for and on behalf of Lessee, and to bind Lessee
accordingly thereby.
(iv) There are no legal proceedings pending (or, so far as
Lessee or its officers know, threatened), before any court or administrative
agency which, if adversely determined, could reasonably be expected to delay or
impair materially the construction, installation or operation of the Project or,
in any event, to result in a Material Adverse Change.
(v) The execution, delivery and performance by Lessee of this
Agreement and approval of the shareholders of Lessee, violate any provision of
any law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award presently in effect having applicability to Lessee or of
the articles (or certificates) of incorporation or bylaws of Lessee, or result
in a breach of or constitute a default under any indenture or loan or credit
agreement or any other agreement, lease or instrument to which Lessee is a party
or by which it or its properties may be bound or affected; and Lessee is not in
default under any such law, rule, regulation, order, writ, judgment, injunction,
decree, determination or award or any such indenture, agreement, lease or
instrument.
(vi) The financial statements of Lessee and for its most
recently completed fiscal year and for that portion of its current fiscal year
ended with that fiscal month of Lessee ended closest to the Closing Date for
which financial statements have been prepared, including balance sheet, income
statement and, if available, statement of changes in cash flow, copies of which
heretofore have been furnished to Lessor, are complete and accurately and fairly
represent the financial condition of Lessee, the results of its operations and
the transactions in its equity accounts as of the dates and for the periods
referred to therein, and have been prepared in accordance with GAAP. There are
no material liabilities, direct or indirect, fixed or contingent, of Lessee as
of the date of such financial statements which are not reflected therein or in
the notes thereto. No Material Adverse Change has occurred since the date of the
balance sheet contained in the annual financial statement described hereinabove.
(vii) Lessee has obtained all permits, licenses and other
authorizations which are required under, and is in material compliance with, all
Environmental Laws, in respect of the Project and the Project Site.
(viii) Lessee possesses all franchises, certificates, licenses,
permits and other authorizations from governmental political subdivisions or
regulatory authorities, and all patents, trademarks, service marks, trade names,
copyrights, licenses and other, similar rights, free from burdensome
restrictions, that are necessary for the construction, installation, maintenance
and operation of the Project.
4. YEAR 2000. Lessee has made an assessment of the microchip and
---------
computer-based systems and the software used in its business, including,
particularly, in relation to the Project, and based upon such assessment (as
completed to date) believes that it will be "Year 2000 Compliant" (as
hereinafter defined) by January 1, 2000. For purposes of this paragraph, "Year
2000 Compliant" means that all software, embedded microchips and other
processing capabilities utilized by, and material to the business operations or
financial condition of, Lessee, including, particularly, in relation to the
Project, will be able to interpret, store, transmit, receive and manipulate data
on and involving all calendar dates correctly and without causing any abnormal
ending scenarios in relation to dates in and after the Year 2000. From time to
time, at the request of Lessor, Lessee shall provide to Lessor such updated
information as is requested regarding the status of its efforts to become "Year
2000 Compliant."
5. FINANCIAL AND COLLATERAL REPORTING. So long as this Agreement shall
----------------------------------
remain effective, Lessee shall deliver to Lessor:
15
<PAGE>
(i) annually, within 120 days after each of its fiscal years,
the balance sheet, income statement and statements of cash flow and
shareholders' equity for Lessee and its consolidated Subsidiaries (herein,
"financial statements") for such fiscal year, prepared in accordance with GAAP
--------------------
as audited by Lessee's independent certified public accountants without an
adverse qualification, together with a comparison of such financial results to
those in Lessee's preceding fiscal year and a Compliance Certificate;
(ii) quarterly, within 60 days after each of its first three
fiscal quarters in each fiscal year, financial statements for such fiscal
quarter and fiscal year-to-date, certified by an Authorized Officer of Lessee as
having been prepared in accordance with GAAP and fairly stated in all material
respects (subject to normal year-end audit adjustments), together with a
Compliance Certificate;
(iii) within ten (10) days after their delivery to the
Securities and Exchange Commission, as applicable, copies of Lessee's quarterly
(10-Q) and annual (10-K) reports;
(iv) promptly, upon receipt or delivery thereof, copies of any
notices given or received in respect of any Project Documents;
(v) promptly, upon receipt of knowledge or notice thereof, of
the existence of any Default Condition or Event of Default;
(vi) promptly, after request therefor by Lessor, of such other
information concerning the Project or Lessee's or, if available to Lessee, any
Contractor's financial condition as Lessor may reasonably request from time to
time.
6. FINANCIAL COVENANT. So long as this Agreement shall remain effective,
------------------
Lessee shall maintain a "Fixed Charge Coverage Ratio" (as defined below) of at
least 1:00:1, as of the end of each fiscal quarter hereafter, for the four (4)
preceding fiscal quarters ending with such fiscal quarter where "Fixed Charge
Coverage Ratio" shall be used herein as defined in the Financing Agreement (by
virtue of the Ninth Amendment, dated as of July 31, 1999 thereto), as in effect
on the Closing Date, without regard to any subsequent amendment, modification or
waiver thereof, or whether the Financing Agreement is terminated. In
furtherance of the foregoing, there is attached hereto as Exhibit "N" a true,
-----------
correct and complete copy of the Financing Agreement (including the aforesaid
Ninth Amendment to the Financing Agreement) as in effect on the Closing Date.
7. PROHIBITION ON MAKING OF RESTRICTED PAYMENTS. So long as this
--------------------------------------------
Agreement shall remain effective, Lessee shall not, and shall not cause or
permit any Restricted Subsidiaries (as defined in the Senior Notes Indenture, as
provided below) to, directly or indirectly, make any Restricted Payment (as
defined in the Senior Notes Indenture, as provided below) unless and except to
the extent then permitted to be made under the express terms of Section 4.03 of
the Senior Notes Indenture as in effect on the Closing Date, without regard to
any subsequent amendment, modification or waiver thereof, or whether the Senior
Notes Indenture is terminated. In furtherance of the foregoing, there is
attached hereto as Exhibit "O" a true, correct and complete copy of the Senior
-----------
Notes Indenture as in effect on the Closing Date.
8. EVENTS OF DEFAULT. The occurrence of any events or conditions set
forth below shall constitute an "Event of Default" hereunder ("Event of
--------
Default" ), provided that any requirement for the giving of notice or the lapse
- -------- --------
of time, or both, as may be prescribed hereinbelow, has been satisfied:
(i) Lessee shall fail to make any payment on any of its
Obligations, when due.
(ii) Lessee shall make any representations or warranties in any
of the Transaction Documents or in any certificate or statement furnished at any
time hereunder or in connection with any of the Transaction Documents which
proves to have been untrue or misleading in any material respect when made or
furnished.
(iii) Lessee shall default in the observance or performance of
any covenant or agreement contained herein or in any of the other Transaction
Documents (other than a default the performance or observance
16
<PAGE>
of which is dealt with specifically elsewhere in this Section) unless such
default is cured to Lessor's satisfaction within ten (10) days after the sooner
to occur of receipt of notice of such default from Lessor or the date on which
such default first becomes known to Lessee.
(iv) There shall occur (A) any "Event of Default" (as that term
is defined therein) under that certain Receivable and Inventory Financing
Agreement, dated as of January 16, 1992, between Lessee, as borrower, and Bank
of America, N.A., as lender (among others), as such agreement may be amended,
modified or restated from time to time, and including any such successor
agreement (the "Financing Agreement"); or (B) any "Event of Default" (as
-------------------
that term is defined therein) under that certain Indenture, dated as of December
1, 1997, between Lessee, as issuer, and State Street Bank and Trust Company as
trustee, concerning, among other things, $150,000,000 in certain first mortgage
notes of Lessee, as such agreement may be amended, modified or restated from
time to time, and including any such successor agreement (herein called the
"Senior Notes Indenture"); or (C) any "event of default," "default" or similar
----------------------
event or occurrence under any other credit, lease or other financing agreement
of Lessee with (i) Lessor, or any of its affiliates, or (ii) any other Person,
provided that, in the case of this subclause (ii) the amount of financing made
- --------
available to Lessee by such Person thereunder equals or exceeds $1,000,000.
(v) There shall occur any default by Lessee or any Contractor
in its observance or performance of any term or condition of any Project
Document;
(vi) Lessee shall file a voluntary petition in bankruptcy or a
voluntary petition or answer seeking liquidation, reorganization, arrangement,
readjustment of its debts, or for any other relief under the Bankruptcy Code, or
under any other act or law pertaining to insolvency or debtor relief, whether
state, federal, or foreign, now or hereafter existing; Lessee shall enter into
any agreement indicating its consent to, approval of, or acquiescence in, any
such petition or proceeding; Lessee shall apply for or permit the appointment by
consent or acquiescence of a receiver, custodian or trustee of Lessee, for all
or a substantial part of its property; Lessee shall make an assignment for the
benefit of creditors; or Lessee shall be unable or shall fail to pay its debts
generally as such debts become due, or Lessee, any Subsidiary shall admit, in
writing, its inability or failure to pay its debts generally as such debts
become due.
(vii) There shall have been filed against Lessee an involuntary
petition in bankruptcy or seeking liquidation, reorganization, arrangement,
readjustment of its debts or for any other relief under the Bankruptcy Code, or
under any other act or law pertaining to insolvency or debtor relief, whether
state, federal or foreign, now or hereafter existing; Lessee shall suffer or
permit the involuntary appointment of a receiver, custodian or trustee of Lessee
or for all or a substantial part of its property; or Lessee shall suffer or
permit the issuance of a warrant of attachment, execution or similar process
against all or any substantial part of the property of Lessee; or any motion,
complaint or other pleading is filed in any bankruptcy case of any person or
entity other than Lessee and such motion, complaint or pleading seeks the
consolidation of Lessee's assets and liabilities with the assets and liabilities
of such person or entity.
(viii) There shall have occurred material uninsured damage to, or
loss, theft or destruction of, the Project having a value, based on the lower of
its depreciated cost or market value, exceeding One Hundred Thousand Dollars
($100,000).
(ix) A final judgment or order for the payment of money is
rendered against Lessee in the amount of One Million Dollars ($1,000,000) or
more (exclusive of amounts covered by insurance) and either (x) enforcement
proceedings shall have been commenced by any creditor upon such judgment or
order, or (y) a stay of enforcement of such judgment or order, by reason of a
pending appeal or otherwise, shall not be in effect for any period of thirty
(30) consecutive days;
(x) There shall occur any Material Adverse Change;
(xi) There shall occur any change in Control of Lessee; OR
17
<PAGE>
(xii) The Project shall not have been accepted by Lessee, as
evidenced by its execution and delivery to Lessee of a Project Delivery and
Acceptance Certificate by the Project Completion Deadline Date.
9. REMEDIES AFTER DEFAULT. Upon the occurrence and continuation of an
---------------------
Event of Default, Lessor shall have the right, in its sole discretion, to
exercise any one or more or all of the following remedies: (a) terminate this
Agreement (and this Agreement shall be deemed terminated automatically if any
Event of Default of the types described in clauses (vi) or (vii) shall occur;
(b) declare any and all Rents and other Obligations then due and any and all
Rents and other Obligations to become due immediately due and payable; (c)
charge interest on all Rents and other Obligations until paid in full at 1-1/2%
per month not to exceed the maximum rate permitted by law (the "Post-Default
------------
Rate"); (d) take possession of the Project, wherever located, without demand,
- ----
notice, court order or other process of law, and without liability for entry to
Lessee's premises, for damage to Lessee's property or otherwise; (e) demand that
Lessee return the Project to Lessor in accordance with Section 21; provided,
--------
however, that if the foregoing occurs prior to Project Completion, Lessor shall
- -------
be entitled to return of so much of the Project as then exists (including any
component parts thereof then awaiting construction or completion) and the
provisions of Section 21 shall be adjusted accordingly; (f) lease, sell or
otherwise dispose of the Project in a commercially reasonable manner, with or
without notice and on public or private bid (unless and except to the extent
otherwise required under applicable law); (g) recover the following amounts from
the Lessee (as damages, including reimbursement of costs and expenses,
liquidated for all purposes and not as a penalty): (i) all costs and expenses of
Lessor reimbursable to it hereunder, including, without limitation, expenses of
disposition of the Project, legal fees and all other amounts specified
hereinbelow; (ii) an amount equal to the sum of (A) any accrued and unpaid Rents
through the later of (1) the date of the applicable default or (2) the date that
-----
Lessor has obtained possession of the Project or such other date as Lessee has
made an effective tender of possession of the Project to Lessor (the "Default
Date") and (B) if Lessor resells or re-lets the Project, Rent at the highest
rate charged for the additional period that it takes Lessor to resell or re-let
all of the Project; (iii) the greater of (A) the aggregate amount of Project
-------
Cost Reimbursements theretofore made available by Lessor to Lessee (less any
Rents then paid) or (B) the present value of all future Rent reserved in this
Agreement and contracted to be paid over the unexpired Term discounted at five
percent (5%) simple interest per annum; (iv) the residual value of the Project
as of the expiration of the Term, plus a late charge at the rate specified in
----
Paragraph 3 above, less the amount received by Lessor, if any, upon sale or
re-let of the Project; and (h) exercise any other right or remedy to recover
damages or enforce the terms of this Agreement. Lessor may also pursue any other
rights or remedies available at law or in equity, including, without limitation,
rights or remedies seeking damages, specific performance and injunctive relief.
10. CONDITIONS PRECEDENT.
--------------------
(i) The conditions set forth below shall constitute express
conditions precedent to any obligation of Lessor hereunder or under any
Transaction Document.
(a) Receipt by Lessor of a certificate from the Secretary
(or Assistant Secretary) of Lessee, to be in form and substance substantially
similar to the secretary's certificate set forth on Exhibit "I", certifying to
-----------
Lessor (i) that appropriate resolutions have been entered into by the Board of
Directors of Lessee incident hereto and that the officers of Lessee whose
signatures appear hereinbelow, on the other Transaction Documents, and on any
and all other documents, instruments and agreements executed in connection
herewith, are duly authorized by the Board of Directors of Lessee for and on
behalf of Lessee to execute and deliver this Agreement, the other Transaction
Documents and such other documents, instruments and agreements, and to bind
Lessee accordingly thereby, and (ii) as to the existence and status of Lessee's
articles of incorporation and by-laws.
(b) Receipt by Lessor of a certificate of good standing
with respect to Lessee from the secretaries of state of the state of
incorporation of Lessee and of any state in which a Collateral Location is
situated, dated within thirty (30) days of the Closing Date.
(c) Receipt by Lessor of a certificate respecting all
insurance required to be maintained hereunder, together with appropriate loss
payee and additional insured endorsements thereto, favoring Lessor, all in form
acceptable to Lessor.
18
<PAGE>
(d) Receipt by Lessor of Uniform Commercial Code financing
statements respecting the Collateral, duly executed by Lessee in form and
substance acceptable to Lessor.
(e) Receipt by Lessor of an opinion of counsel from
independent legal counsel to Lessee in substantially the form of Exhibit "J".
-----------
(f) Receipt by Lessor of a satisfactory opinion of special
tax counsel to Lessee, selected by Lessee, but satisfactory to Lessor, in
respect of the treatment of the transactions contemplated by the Master
Agreement, including, particularly, accelerated depreciation.
(g) No Default Condition or Event of Default shall exist,
no Material Adverse Change shall have occurred and Lessee shall in all respects
be in compliance with all of the terms of the Transaction Documents, as
evidenced by its delivery of a compliance certificate to such effect, to be
substantially in the form of Exhibit "K" attached hereto (a "Compliance
----------- ----------
Certificate").
- -----------
(h) Satisfactory review of existing environmental
assessments and/or reviews by Lessor in respect of the Project Site, and receipt
by Lessor of an environmental indemnity and agreement from Lessee in
substantially the form
of Exhibit "L".
-----------
(i) Receipt by Lessor of Lien searches reflecting the
existence (or non-existence) of any existing Liens on the Collateral (including
"blanket" liens covering the Project as part of any equipment or real estate
financing), together with evidence of the termination of any conflicting Liens
(excepting Permitted Encumbrances).
(j) Receipt by Lessor of a mortgagee's waiver and consent
in substantially the form of Exhibit "M" from any existing mortgagee of the
----------
Project Site.
(k) Receipt by Lessor of evidence satisfactory to it that
each of the Contractors has consented to the grant by Lessee to Lessor of a
security interest in and the collateral assignment by Lessee to Lessor of its
right, title and interest in the Collateral on the terms set forth herein and in
the Transaction Documents, as evidenced by the Contractor's Consents.
(l) Receipt by Lessor of this Agreement and all other
Transaction Documents delivered on the Closing Date, duly completed and signed;
11. CUMULATIVE EFFECT. Each and every right granted to Lessor under this
-----------------
Agreement, or any of the other Transaction Documents, or any other document
delivered hereunder or in connection herewith or allowed it by law or in equity,
shall be cumulative and may be exercised from time to time. No failure on the
part of Lessor to exercise, and no delay in exercising, any right shall operate
as a waiver thereof, nor shall any single or partial exercise by Lessor of any
right preclude any other or future exercise thereof or the exercise of any other
right. No waiver by Lessor of any Default Condition or Event of Default shall
constitute a waiver of any subsequent Default Condition or Event of Default. Any
failure of Lessor to require strict performance by Lessee, or any waiver by
Lessor of any provision hereunder, shall not be construed as a consent or waiver
of any other breach of the same or of any other provision. Any amendment or
waiver of any provision hereof or consent to any departure by Lessee herefrom or
therefrom shall be in writing and signed by Lessor.
12. GOVERNING LAW. THIS AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS, AND
-------------
THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER, SHALL BE
GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF ILLINOIS.
13. SURVIVAL. All representations, warranties and covenants made herein
--------
and in the Transaction Documents shall survive the execution and delivery hereof
and thereof. The terms and provisions of this Agreement shall continue in full
force and effect until all of the Obligations have been paid in full and Lessor
has terminated this Agreement in writing.
19
<PAGE>
14. COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which when fully executed shall be an original, and all of
said counterparts taken together shall be deemed to constitute one and the same
agreement.
15. REIMBURSEMENTS. Lessee shall pay to Lessor on demand all out-of-pocket
--------------
costs and expenses that Lessor pays or actually incurs in connection with the
negotiation, preparation, consummation, enforcement and termination of this
Agreement and the other Transaction Documents, including, without limitation:
(a) attorneys' fees and paralegals' fees and disbursements of outside counsel;
(b) costs and expenses (including outside attorneys' and paralegals' fees and
disbursements) for any amendment, supplement, waiver, consent or subsequent
closing in connection with the Transaction Documents and the transactions
contemplated thereby; (c) costs and expenses of lien and title searches and
title insurance; (d) taxes, fees and other charges for recording any deeds to
secure debt, deeds of trust, mortgages, filing financing statements and
continuations, and other actions to perfect, protect and continue the Lien of
Lessor in the Collateral; (e) sums paid or incurred to pay for any amount or to
take any action required of Lessee under the Transaction Documents that Lessee
fails to pay or take; (f) costs of appraisals, inspections, field audits and
verifications of the Collateral, including, without limitation, costs of travel,
for inspections of the Collateral and Lessee's operations by Lessor; (g) costs
and expenses of preserving and protecting the Collateral; and (h) after an Event
of Default, costs and expenses (including attorneys' and paralegals' fees and
disbursements) paid or incurred to obtain payment of the Obligations, enforce
the Lien in the Collateral, sell or otherwise realize upon the Collateral, and
otherwise enforce the provisions of the Transaction Documents or to defend any
claim made or threatened against Lessor arising out of the transactions
contemplated hereby (including, without limitation, preparations for and
consultations concerning any such matters). The foregoing shall not be
construed to limit any other provisions of the Transaction Documents regarding
costs and expenses to be paid to Lessee. Lessee will pay all expenses incurred
by it in the transaction. In the event Lessee becomes a debtor under the
Bankruptcy Code, Lessor's secured claim in such case shall include interest on
the Obligations and all fees, costs and charges provided for herein (including,
without limitation, reasonable attorneys' fees actually incurred) all for the
extent allowed by the Bankruptcy Code.
16. SUCCESSORS. This Agreement and Transaction Documents shall be binding
----------
upon and inure to the benefit of the successors and permitted assigns of the
parties hereto and thereto.
17. SEVERABILITY. If any provision this Agreement or of any of the
------------
Transaction Documents or the application thereof to any party thereto or
circumstances shall be invalid or unenforceable to any extent, the remainder of
such Transaction Documents and the application of such provisions to any other
party thereto or circumstance shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
18. NOTICES. All notices, requests and demands to or upon the respective
-------
parties hereto shall be deemed to have been given or made when personally
delivered or deposited in the U.S. mail, registered or certified mail, postage
prepaid, or when sent by a nationally recognized private overnight delivery
services; e.g., Federal Express, addressed as follows: (i) for Lessor, care of
----
the address of Lessor inscribed beneath its signature hereinbelow and (ii) for
Lessee, care of the Project Site (or to such other address as may be designated
hereafter in writing by the respective parties hereto) except in cases where it
is expressly provided herein or by applicable law that such notice, demand or
request is not effective until received by the party to whom it is addressed.
19. ENTIRE AGREEMENT. This Agreement, together with the remaining
----------------
Transaction Documents, constitute the entire agreement between the parties
hereto with respect to the subject matter hereof. Neither this Agreement nor any
Transaction Document may be changed, waived, discharged, modified or terminated
orally, but only by an instrument in writing signed by the party against whom
enforcement is sought.
20. TIME OF ESSENCE. Time is of the essence in this Agreement and in all
---------------
other Transaction Documents.
21. CONSTRUCTION. No provision of this Agreement or any Transaction
------------
Document shall be construed against or interpreted to the disadvantage of any
party hereto by any court or other governmental or judicial authority by reason
of such party having or being deemed to have structured or dictated such
provision.
20
<PAGE>
22. NO JOINT VENTURE. Neither this Agreement nor any Transaction Document
----------------
shall in any respect be interpreted, deemed or construed as making Lessor a
partner or joint venturer with Lessee or as creating any similar relationship or
entity in respect of the Project, and Lessee agrees that it will not make any
contrary assertion, contention, claim or counterclaim in any action, suit or
other legal proceeding involving either Lessor or Lessee.
23. JURISDICTION. LESSEE AGREES THAT ANY LEGAL ACTION OR PROCEEDING WITH
------------
RESPECT TO THIS AGREEMENT OR ANY TRANSACTION DOCUMENT MAY BE BROUGHT IN THE
COURTS OF THE STATE OF ILLINOIS OR THE UNITED STATES OF AMERICA SITTING IN
CHICAGO, ILLINOIS, ALL AS LESSOR MAY ELECT. BY EXECUTION OF THIS AGREEMENT,
LESSEE HEREBY SUBMITS TO EACH SUCH JURISDICTION, HEREBY EXPRESSLY WAIVING
WHATEVER RIGHTS MAY CORRESPOND TO IT BY REASON OF ITS PRESENT OR FUTURE
DOMICILE. NOTHING HEREIN SHALL AFFECT THE RIGHT OF LESSOR TO COMMENCE LEGAL
PROCEEDINGS OR OTHERWISE PROCEED AGAINST SHEFFIELD IN ANY OTHER JURISDICTION OR
TO SERVE PROCESS IN ANY MANNER PERMITTED OR REQUIRED BY LAW.
24. ACCEPTANCE. This Agreement, together with the other Transaction
----------
Documents, shall not become effective unless and until delivered to Lessor at
its office in either Chicago, Illinois or Atlanta, Georgia and accepted in
writing by Lessor at such office as evidenced by its execution hereof (notice of
which delivery and acceptance hereby being waived by Lessee).
25. ATTORNEY-IN-FACT. Lessee hereby designates, appoints and empowers
----------------
Lessor irrevocably as its attorney-in-fact, effective during any time that an
Event of Default exists, either in the name of Lessee or the name of Lessor, at
Lessee's cost and expense, (i) to do any and all actions which Lessor may deem
necessary or advisable to carry out the terms of this Agreement or any other
Transaction Document upon the failure, refusal or inability of Lessee to do so
and (ii) to ask for, demand, sue for, collect, compromise, compound, receive,
receipt for and give acquittances for any and all sums owing or which may become
due upon any of the Collateral and, in connection therewith, to take any and all
actions as Lessor may deem necessary or desirable to realize upon any
Collateral; and Lessee hereby agrees to indemnify and hold Lessor harmless from
any costs, damages, expenses or liabilities arising against or incurred by
Lessor in connection therewith.
26. NO THIRD PARTY BENEFICIARY. The rights and benefits set forth in this
--------------------------
Agreement and the other Transaction Documents are for the sole and exclusive
benefit of the parties hereto and thereto and may be relied upon only by them.
27. WAIVER OF JURY TRIAL. EACH OF LESSEE AND LESSOR HEREBY WAIVES, TO THE
--------------------
EXTENT PERMITTED BY APPLICABLE LAW, THE RIGHT TO TRIAL BY JURY IN ANY ACTION,
SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF
THE TRANSACTION DOCUMENTS, OBLIGATIONS OR THE COLLATERAL.
28. RULES OR INTERPRETATION. All personal pronouns used in this Agreement,
-----------------------
whether used in the masculine, feminine or neuter gender, shall include all
other genders; the singular shall include the plural, and the plural shall
include the singular. Titles of Articles and Sections in this Agreement are for
convenience only, and neither limit nor amplify the provisions of this
Agreement, and all references in this Agreement to Articles, Sections,
Subsections, paragraphs, clauses, subclasses or Exhibits shall refer to the
corresponding Article, Section, Subsection, paragraph, clause, subclause of, or
Exhibit attached to, this Agreement, unless specific reference is made to the
articles, sections or other subdivisions divisions of or Exhibit to, another
document or instrument. Wherever in this Agreement reference is made to any
instrument, agreement or other document, including, without limitation, any of
the Transaction Documents, such reference shall be understood to mean and
include any and all amendments thereto or modifications, restatements, renewals
or extensions thereof. Wherever in this Agreement reference is made to any
statute, such reference shall be understood to mean and include any and all
amendments thereof and all regulations promulgated pursuant thereto. Whenever
any matter set forth herein or in any Loan Document is to be consented to or be
satisfactory to Lessor, or is to be determined, calculated or approved by
Lessor, then, unless otherwise expressly set forth herein or in any such Loan
Document, such consent, satisfaction, determination, calculation or approval
shall be in Lessor's sole discretion, exercised in good faith and, where
required by law, in a commercially reasonable manner, and shall be conclusive
absent manifest error.
21
<PAGE>
29. CONTINUING AGREEMENT. This Agreement shall continue in effect,
--------------------
notwithstanding payment in full of the Obligations until such time as all other
Transaction Documents have ceased to be effective and Lessor has terminated this
Agreement in writing.
30. ACKNOWLEDGMENT. LESSEE ACKNOWLEDGES THAT LESSEE HAS READ THIS
--------------
AGREEMENT AND THE SCHEDULES AND OTHER AGREEMENTS ATTACHED HERETO, OR
INCORPORATED HEREIN BY REFERENCE, UNDERSTANDS THEM, AND AGREES TO BE BOUND BY
THEIR TERMS AND CONDITIONS.
31. SPECIFIC PERFORMANCE. The provisions of this Agreement are of the
-------------------
essence, and upon application to any court of equity having jurisdiction in the
premises, Lessor shall be entitled to a decree against Lessee requiring specific
performance of any covenants of Lessee set forth in this Agreement.
32. LIMITED RECOURSE. Notwithstanding any term of this Agreement or any
----------------
Transaction Document to the contrary, with respect to any claim made or asserted
against Lessor hereunder or thereunder, the liability of Lessor in respect
thereof shall not include any special or consequential damages and in any event
shall be limited to Lessor's right, title and interest in and to the Project and
the Project Documents, and not otherwise to Lessor personally.
IN WITNESS WHEREOF, the parties hereto have executed or caused this Project
Lease Agreement to be duly executed by their duly authorized officers as of
November 23, 1999.
<TABLE>
<CAPTION>
"LESSOR" "LESSEE"
TA STEEL I, LLC SHEFFIELD STEEL CORPORATION
<S> <C>
By: /s/ David West By: /s/ Stephen R. Johnson
-------------------------------------------------- --------------------------------------------------
Name: David West Name: Stephen R. Johnson
------------------------------------------------ ------------------------------------------------
Title: Vice President Title: Vice President and Chief Financial Officer
----------------------------------------------- -----------------------------------------------
Address: Address:
c/o Transamerica Equipment Financial Sheffield Steel Corporation
Services Corporation 2300 South Highway 97
Structured Finance Division P.O. Box 218
210 Interstate North Parkway, Suite 315 Sand Springs, Oklahoma 74063
Atlanta, Georgia 30339
Attn: Region Credit Manager
Telecopy No. (678) 686-2801 Attn: Stephen R. Johnson and Robert W. Ackerman
Telecopy No. (918) 245-9343
</TABLE>
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTERLY
REPORT AS OF AND FOR THE SIX MONTHS ENDED OCTOBER 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-START> MAY-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 84
<SECURITIES> 0
<RECEIVABLES> 22,079
<ALLOWANCES> 808
<INVENTORY> 44,752
<CURRENT-ASSETS> 70,556
<PP&E> 67,697
<DEPRECIATION> 0
<TOTAL-ASSETS> 154,069
<CURRENT-LIABILITIES> 30,248
<BONDS> 122,611
0
0
<COMMON> 35
<OTHER-SE> (12,007)
<TOTAL-LIABILITY-AND-EQUITY> 154,069
<SALES> 85,452
<TOTAL-REVENUES> 85,452
<CGS> 64,610
<TOTAL-COSTS> 64,610
<OTHER-EXPENSES> 4,159
<LOSS-PROVISION> 150
<INTEREST-EXPENSE> 7,408
<INCOME-PRETAX> 2,244
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,244
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,244
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
