<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
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)
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act: None
----
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 ____ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K[ ]
As of July 17, 2000, there were 3,584,112 shares of the Registrants $.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.
Documents Incorporated by Reference
1) Portions of the Registrants Proxy Statement dated July 31, 2000 are
incorporated by reference into Part III of this Report on Form 10-K.
<PAGE>
SHEFFIELD STEEL CORPORATION
FORM 10-K
Table of Contents
<TABLE>
<CAPTION>
Item Page
---- ----
<S> <C>
Part I
1. Business 1-10
2. Properties 11
3. Legal Proceedings 11
4. Submission of Matters to a Vote of Security Holders 11
Part II
5. Market for the Registrant's Common Equity and Related Stockholder Matters 12
6. Selected Financial Data 13
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-19
8. Financial Statements and Supplementary Data 20-37
9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 38
Part III
10. Directors and Executive Officers of the Registrant 38
11. Executive Compensation 38
12. Security Ownership of Certain Beneficial Owners and Management 38
13. Certain Relationships and Related Transactions 38
Part IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 39
</TABLE>
<PAGE>
PART I
------
ITEM 1. BUSINESS
------- --------
Overview
Sheffield Steel Corporation (the Company, which may be referred to as we,
us, or our) is a leading regional mini-mill producer of steel products
including:
. Hot rolled steel bar products (hot rolled bar), which includes rounds,
flats, squares and other shapes.
. Concrete reinforcing bar (rebar), which includes #4 bar (1/2 inch or 13mm)
to #18 bar (2 1/4 inches or 57mm) which is sheared to standard lengths from
20 feet to 60 feet.
. Fabricated products, including fabricated and epoxy-coated rebar, steel
fence posts and railroad track spikes.
. Various types of semi-finished steel (billets).
Our home page on the Internet is at www.sheffieldsteel.com. You can learn
----------------------
about us by visiting that site.
Our Company and its predecessors have been in the steelmaking business for
over 69 years. We believe that we are among the lowest cost producers of billets
in the United States because of our modern and efficient melt and cast
operation, high labor productivity levels, low gas and electric costs and
competitive steel scrap costs. Our low cost billets feed our downstream bar mill
operations and fabricated products operations. We shipped approximately 469,000
tons of steel in fiscal 2000, resulting in sales of $172.1 million.
Our primary manufacturing facility is located in Sand Springs, Oklahoma
(Sand Springs), where we conduct a full range of steelmaking activities,
including the melting and casting of billets and the rolling of billets into
rebar, T-section (for subsequent fabrication into steel fence posts), and a
range of hot rolled bar products. We currently have 600,000 tons of steelmaking
capacity. We installed a new rolling mill (Rolling Mill) in Sand Springs in 1995
which has increased productivity and efficiency in the manufacturing of rebar
and has enabled us to produce certain higher quality hot rolled bar products
than we were previously able to produce. In the fourth quarter of fiscal 1998,
we completed a project (the Shear Line Project) to eliminate a production
bottleneck in the Rolling Mill that further increased our production and
improved quality. We are currently in the process of installing a new reheat
furnace (the Reheat Furnace Project) in the Rolling Mill that will decrease
natural gas usage as well as improve quality, product yields, and productivity.
We anticipate installation to be completed during the third quarter of fiscal
2001. From Sand Springs, we also transfer billets to our rolling mill in Joliet,
Illinois (Joliet), where we produce specialty hot rolled bar products. We also
operate two rebar fabrication plants, one in Kansas City, Missouri (Kansas City)
and one in Independence, Missouri (Waddell), a railroad spike fabrication plant
in Sand Springs (Wellington) and a short line railroad (the Railway).
1
<PAGE>
Business Strategy
We believe our strategy serves to strengthen our market position and
maximize profitability. There are three major components to our strategy: (i)
improve our finished goods product mix; (ii) continue to focus on and extend our
strong customer relationships; and (iii) further modernize our melt shop
operations.
Improve Finished Goods Product Mix. With the addition of the Rolling Mill
in Sand Springs, we substantially increased our hot rolled bar production
capacity. Accordingly, shipments of finished products have increased
significantly as less profitable third party billet sales have been diverted to
the production of hot rolled bars. Billet sales, which accounted for 23.6% of
tons shipped in fiscal 1994, accounted for only 9.1% of tons shipped in fiscal
2000. By shifting away from third party billet sales and increasing hot rolled
bar production, we have increased margins and reduced sales volatility, since
hot rolled bar products are significantly more profitable than third party
billet sales and demand is more stable. As part of our strategy to further
improve product mix, in the fourth quarter of fiscal 1998, we completed the
Shear Line Project which we ultimately expect will (i) increase hot rolled bar
production capacity by more than 100,000 tons per year; (ii) increase
utilization of our existing 600,000 tons of steelmaking capacity; (iii) improve
the quality of all mill products, especially hot rolled bar; and (iv) improve
product mix by further reducing billet sales to third parties. To date, we have
had partial success in achieving our expectations of the new shear line and we
continue our efforts to achieve its anticipated potential. In addition, the
Reheat Furnace Project, which is expected to be completed in the third quarter
of fiscal 2001, will (i) decrease natural gas consumption, (ii) improve quality,
product yields, and productivity and, as a result, (iii) improve product mix.
Extend Strong Customer Relationships. We have a number of long-standing
customer relationships in each of our product markets. We have built a
reputation for providing consistent product quality, reliable, prompt product
delivery and service, product availability and flexible scheduling to meet our
customers needs. We also provide a high level of follow up technical assistance
and service. The ISO 9002 certification at both Sand Springs and Joliet is an
indication of our commitment to producing quality products. We believe that our
business strategy to improve finished product mix will strengthen our existing
customer relationships and aid us in developing new customer relationships.
Modernize Melt Shop. We believe that we are among the lowest cost producers
of billets in the United States as a result of our efficient melt and cast
operation, high labor productivity level, low natural gas and electricity costs
and competitive steel scrap costs. Over the last three years, we have made
improvements to general operating practices, improved yields, and reduced costs.
Annual billet production capacity has increased from 525,000 tons to 600,000
tons per year. Through incremental capital investments, we intend to pursue
additional modernization measures, such as the installation of a ladle arc
furnace in the melt shop, which will further enhance production capability,
increase production capacity, reduce manufacturing costs and improve the quality
of finished products.
2
<PAGE>
Products, Customers and Markets
Our purchases of Wellington and Waddell have resulted in conversion of a portion
of rebar and hot rolled bar sales into sales of fabricated products. The
following table shows the percentage of revenues derived from each product
category for the last three years:
<TABLE>
<CAPTION>
Fiscal Year Ended April 30,
----------------------------
<S> <C> <C> <C>
1998 1999 2000
---- ---- ----
Hot Rolled Bar 45.8% 43.6% 41.7%
Rebar 34.1% 31.3% 31.4%
Fabricated Products 14.0% 19.5% 20.7%
Billets 4.5% 3.8% 4.8%
Other 1.6% 1.8% 1.4%
---- ---- ----
Total 100% 100% 100%
==== ==== ====
</TABLE>
Hot Rolled Bar. According to the American Iron and Steel Institute (AISI),
the size of the hot rolled bar product market in the United States was
approximately 8.2 million tons in 1998. The demand for consistent quality is
very significant in this market, where quality is measured by the adherence to
specifications related to chemical composition, surface quality, product
integrity and size tolerances. We sell a variety of specialty hot rolled bar
products, including flats, squares, rounds and special shapes for end use
applications that include auto parts, conveyor assemblies, pole line hardware,
wrenches, farm equipment and construction machinery. The majority of hot rolled
bar products produced in Joliet are sold directly to original equipment
manufacturers and cold drawn bar finishers, while the remainder is sold to steel
service centers. Hot rolled bar products produced in Sand Springs are sold
primarily to end product manufacturers.
We strive to differentiate ourselves from our competitors in the hot rolled
bar market. In Joliet, we focus on specialty products and target customers with
special requirements as to bar shape, size and chemical composition and, in many
cases, small volume needs. We believe that our target customer focus often
allows us to act as the sole supplier of particular shapes, sizes or steel
chemistries to certain customers. In some cases we compete with a limited number
of producers of specialty hot rolled bar products. We believe that these niche
markets are unattractive to larger volume producers. In Sand Springs, we provide
a competitive geographical advantage in the south-central United States hot
rolled bar market. This enables our customers to benefit from lower freight
costs, shorter lead times and more timely deliveries. As a result of these
competitive advantages and our strong reputation for quality and service, we
have developed a number of close relationships with hot rolled bar product
customers in our region. We believe that there are significant opportunities for
Sand Springs to sell standard hot rolled bar products to customers that Joliet
is currently selling specialty products.
We also endeavor to provide our hot rolled bar product customers with
superior service. To provide a high level of service, we carry substantial
customer-designated finished goods inventories of hot rolled bar products in
both Joliet and Sand Springs. Joliet has a customer query system that provides
agents and major customers with direct computer access to the status of their
production orders, the availability of inventory designated for them and our
production schedule for their products.
3
<PAGE>
During fiscal 2000, business on the Joliet 10" mill continued to decline.
Tonnage on this mill has been minimal for several years. The loss of additional
tonnage made the mill financially unprofitable. Therefore, we decommissioned the
mill at the end of May 2000. We were able to convert a significant portion of
the products rolled on the 10" mill to the Joliet 12" mill and to the Rolling
Mill in Sand Springs. The shut-down of the 10" mill will not have a material
write-off associated with it and we believe that it will slightly improve
profitability at both Joliet and Sand Springs.
Rebar. According to the AISI, the size of the rebar market in the United
States was approximately 5.9 million tons in 1998. Rebar is a lower value,
higher volume commodity bar product for which price is an important competitive
factor. Geographic proximity to customers, which in turn determines both freight
costs and delivery times, is also a critical element in the rebar market, where
profit margins are tight and independent fabricators typically depend on quick
mill response rather than their own inventories to meet ever-changing
construction schedules. We sell rebar to leading independent fabricators located
in the south-central United States who then shear and bend the rebar to meet
engineering or architectural specifications for construction projects. We
produce rebar in Sand Springs, where the bars are rolled in standard diameters
from #4 bar (1/2 inch or 13mm) to #18 bar (2 1/4 inches or 57mm) and sheared to
standard lengths from 20 feet to 60 feet. To provide rapid response to customer
needs, we usually maintain a finished goods inventory of 25,000 to 35,000 tons
of rebar.
Rebar demand is driven by trends in commercial and industrial construction
and infrastructure investment. During periods of overall reduced steel industry
demand, we have maintained relatively stable rebar sales volume due to the level
of public sector investment in roads, bridges, water projects, airports and
public facilities in the south-central United States. We have successfully built
and we strive to maintain long-term relationships with our customers by
providing them with competitive pricing, assured product availability and
reliable, prompt delivery and service. This strategy permits the fabricators to
compete successfully in the construction and infrastructure markets, thus
reinforcing our relationships with such fabricators.
Due to the importance of pricing, freight costs and delivery response time,
sales of rebar tend to be concentrated within close geographic proximity to a
rebar manufacturer's mini-mill. Our rebar market is concentrated in the
geographic area surrounding Sand Springs. In the Company's primary market area
of Oklahoma, Kansas and portions of Nebraska, Missouri, Arkansas, and northern
Texas, we enjoy a freight advantage over our competitors and believe we have a
market share in excess of 50%. Approximately 80% of our rebar shipments are
made in this primary market area. The remaining rebar shipments are made in the
adjacent regions of Nebraska, Missouri, Arkansas, Texas, Louisiana, New Mexico,
and Colorado.
Fabricated Products. We manufacture three fabricated steel products: fence
posts, which are sold to distributors and farm cooperatives, fabricated rebar,
including epoxy-coated rebar, and railroad track spikes.
Fence posts are produced in a post fabrication shop located adjacent to the
Rolling Mill in two weights (1.25 pounds per foot and 1.33 pounds per foot), in
orange and green colors and various lengths from 4 feet to 8 feet. The majority
of our fence post sales are concentrated in the Oklahoma, Kansas, Missouri,
Texas and Arkansas market area.
4
<PAGE>
Fabricated rebar is shipped from Kansas City and Waddell to highway and
construction contractors in Missouri, Kansas, Nebraska and contiguous markets.
In recent years, we have experienced increased demand from contractors bidding
on infrastructure projects for fabricated rebar which is epoxy-coated prior to
fabrication to protect against corrosion in the field. This has provided Kansas
City with a competitive advantage and contributed to a growth in shipments. Our
epoxy coating line, which is certified by the Concrete Reinforcing Steel
Institute, is the only one located in the Kansas City market. This provides us
with a competitive advantage in securing contracts. Since the acquisition of
Waddell in October 1997, we have been successful at integrating the management
of these two companies. With Waddell handling smaller, higher value added jobs
and Kansas City able to handle larger volume jobs, we believe we have
significantly strengthened our position in this market.
On October 6, 1998, we purchased Wellington Industries, Inc., a railroad
track spike manufacturer located in Sand Springs. We believe that the purchase
of Wellington secured a downstream market for our Rolling Mill products (square
hot rolled bar) and it enhances our fabrication capabilities.
Billets. We sell billets to other steel mills and forgers for conversion
into finished products. Sales volume potential and pricing for billets,
particularly in the spot market, is highly variable. The dominant competitive
factors are availability and price. Although our sales to forgers are fairly
consistent, billet sales to third parties are dependent on our own billet
requirements and market conditions that vary widely.
The Railway Company. We operate approximately seven miles of mainline rail
line between Sand Springs and Tulsa, Oklahoma, primarily serving the operations
of Sand Springs and, to a lesser extent, third parties. Revenues from third
parties are immaterial to our financial results.
Manufacturing Process
In Sand Springs, steel scrap is conveyed by rail car from our scrap yard to
the melt shop, where the steel scrap is melted in two 85-ton electric arc
furnaces. During the scrap melting process, impurities are removed from the
molten steel. The molten steel is then poured into a ladle, where metal alloys
are added to obtain desired chemical compositions. The molten steel is then
conveyed to a six-strand continuous caster that casts various types of billets.
The continuous caster is capable of casting billets up to 6 inches square and 50
feet long. These billets are then reheated, rolled and shaped into various
finished steel products at the rolling mills in Sand Springs or Joliet or, to a
lesser extent, sold to third parties. The rolling mill in Sand Springs produces
rebar, ''T'' sections (which are further processed into fence posts), and a
range of hot rolled bar products, including squares (which are forged into track
spikes at Wellington). The rolling mill in Joliet produces an extensive range of
hot rolled bar products. A portion of the rebar produced in Sand Springs is
epoxy coated and/or fabricated at either Kansas City or Waddell.
5
<PAGE>
Sales and Marketing
Hot rolled bar products produced in Joliet are sold by our sales personnel
and through commissioned sales representatives under exclusive agency agreements
with us. Rebar and hot rolled bar products produced in Sand Springs are sold
through our own sales force and sales agencies which also service Joliet. We
market fence post directly to farm cooperatives and to fence post distributors.
While some billets are sold through semi-finished steel brokers on the ''spot''
market, most are sold directly by us. As a result of adverse weather conditions
that can impact construction activities and a normal seasonal downturn in
manufacturing levels, we typically experience lower sales volumes in the third
fiscal quarter.
Raw Materials
Our primary raw material is steel scrap, which is generated principally
from industrial, automotive, demolition, railroad, obsolete, and other sources.
We purchase scrap in the open market by direct purchase and through a limited
number of steel scrap brokers and dealers. The cost of steel scrap is subject to
market forces, including demand by other steel producers, export/import volumes,
and utilization of scrap substitutes such as pig iron and hot-briquette iron.
Our cost of scrap can vary significantly, and we may not be able to adjust
product prices in the short-term to recover large increases in scrap costs. Over
longer periods of time, however, product prices and steel scrap prices have
tended to move in the same direction.
The long-term demand for steel scrap and its importance to the domestic
steel industry may be expected to increase as mini-mill producers continue to
expand steel scrap-based electric arc furnace capacity and capture market share
from existing integrated facilities. For the foreseeable future, however, we
believe that supplies of steel scrap will continue to be available in sufficient
quantities. In addition, a number of technologies exist for the processing of
iron ore into forms which may be substituted for steel scrap in electric arc
furnace-based steelmaking. Such forms include direct-reduced iron, hot-briquette
iron and pig iron. A sustained increase in the price of steel scrap could result
in increased use of these alternative materials. We have successfully employed
scrap substitutes in our manufacturing process to achieve quality
characteristics.
Energy
Our manufacturing process in Sand Springs consumes large amounts of
electricity. We purchase our electrical needs for Sand Springs from Public
Service of Oklahoma (PSO) under a real time pricing tariff which is available
only to PSO's largest customers. Under this tariff, we purchase a base load at a
contracted price adjusted for fuel costs and then purchase or sell power on an
hour-by-hour basis at rates which approximate PSO's incremental costs plus a
small markup. During the summer months, we may elect to shut-down our melt shop
during peak periods of power costs, however, we typically do not experience
power interruptions to the same extent as others in our industry. Historically,
we have been adequately supplied with electricity and we do not anticipate any
material curtailment in our operations resulting from energy shortages.
6
<PAGE>
We believe that our utility rates from PSO are among the lowest in the
domestic mini-mill steel industry. PSO is able to generate electricity at
relatively low rates, as its electric load is generated using western coal and
local natural gas as compared to the higher costs of electric utilities that
generate electric load using oil or nuclear power.
We also use natural gas to reheat billets, but we are not considered a
large natural gas user in Oklahoma. Since deregulation of the natural gas
industry, we have negotiated and purchased well-head gas with supplemental
transportation through local pipeline distribution networks. Although increases
in the price of natural gas might have an adverse impact on our cost structure,
any such price increase would likely have a similar effect on competitors using
natural gas and/or electricity generated by natural gas. The majority of our
natural gas needs (both to reheat billets and as a consumer of the electricity
generated by natural gas) stem from use in Sand Springs, Oklahoma, a state with
excess natural gas supplies. Historically, we have been adequately supplied with
natural gas and we expect an adequate supply to be available in the future.
Competition
We compete with a number of domestic mini-mills in each of our markets.
There are common competitive factors in the steel bar business--price, proximity
to market, quality and service, for example--although their relative importance
varies in the different market segments.
In the market for hot rolled bar products, Joliet occupies a niche position
at the specialty end of the product range. We believe we are the sole supplier
to certain customers because of their requirements for particular shapes, sizes
or steel chemistries. In other cases, we compete with a limited number of other
producers of specialty hot rolled bar products, including Kentucky Electric
Steel Incorporated, Calumet Steel Company, North Star Steel Company, Laclede
Steel Company and Northwestern Steel and Wire Company. From Sand Springs and to
a much lesser degree from Joliet, we compete with mini-mill producers of
standard hot rolled bar products, including Chaparral Steel Company, North Star
Steel Company, Laclede Steel Company and Structural Metals, Incorporated.
Competitors vary from customer to customer depending on product specifications
and requirements for order sizes and inventory support.
Since pricing, freight costs and delivery times are the most important
competitive factors in the sale of rebar, sales tend to be concentrated within
about 350 miles of a mini-mill. In the south-central United States, we enjoy a
competitive advantage as the closest mill serving an area comprising Oklahoma,
Kansas, western Missouri and Arkansas, and parts of northern Texas. The majority
of our rebar tonnage was shipped to this area in fiscal 2000. We compete in the
rebar market with a number of other mini-mills, principally Structural Metals,
Incorporated and Chaparral Steel Company.
We are not in competition on a regular basis with foreign or integrated
steel producers. Our strategy is to focus on end-users and to provide our
customers with exceptional services. Because of our customer focus and the fact
that the foreign and integrated mills have cost and freight disadvantages
compared to us and other domestic mini-mills, we have effectively precluded them
from competing with us in the relatively low priced hot rolled bar product and
graded rebar markets. However, the twenty-foot length rebar and no-grade rebar
markets have
7
<PAGE>
been impacted by foreign imports which has significantly reduced selling prices
in the past two years.
Competitive factors in fence post sales include product quality measured by
durability, appearance, workmanship, delivery response time, price, and freight
costs. Competitors include Structural Metals, Incorporated and Chicago Heights
Steel Company.
For fabricated rebar, primary competitors are independent fabrication shops
that are furnished with rebar from other mini-mills in the Midwest. In recent
years, we believe that increased demand for epoxy-coated product from
contractors bidding on infrastructure projects has provided Kansas City with a
competitive advantage and contributed to growth in shipments. Other competitive
factors include delivery performance, engineering support, accurate fabrication
and competitive pricing. Waddell's focus is on small rebar projects, generally
under 200 tons each. These two fabricators complement each other and allow for
most efficient production at both locations.
In the railroad track spike market competitive factors include quality,
service and price. Our primary competitors are Ameristeel and Birmingham Rail.
Employees
As of April 30, 2000, we had approximately 690 employees. Approximately 66%
of our employees are represented by one of three bargaining units affiliated
with the United Steelworkers of America (Sand Springs, Joliet and Kansas City).
Sand Springs is party to a collective bargaining agreement covering
approximately 295 hourly-paid production and maintenance employees. This
agreement, which was negotiated as of March 2, 2000, is for a four-year period
expiring on March 2, 2004. The agreement included wage increases, minor changes
to certain benefits and changes to local work rules.
Joliet is also party to a collective bargaining agreement covering
approximately 139 hourly-paid production and maintenance employees that expires
on March 1, 2002. Kansas City has a collective bargaining agreement covering
approximately 18 employees that was negotiated on November 1, 1999 and expires
on October 31, 2003. The Railway has approximately 19 employees of which 16 are
represented by various labor unions. We believe that we have maintained good
relationships with our labor unions in the past, but we are unable to provide
assurance that the terms of any future collective bargaining agreements with any
labor unions will contain terms comparable to the terms contained in its
existing collective bargaining agreements.
Since the last national, industry-wide strike of steelworkers in 1959, the
Company has experienced only a five-day strike in Sand Springs in May 1988 and a
work stoppage in Kansas City after the expiration of its collective bargaining
agreement in September 1991. We have not experienced a protracted work stoppage
in Sand Springs or Joliet, and we believe that we have good relations with our
employees. However, we can give no assurance that work stoppages will not occur
in the future, in connection with labor negotiations or otherwise.
8
<PAGE>
Environmental Compliance
We are subject to a broad range of federal, state and local environmental
requirements, including those governing air emissions, stormwater discharges,
and the handling and disposal of wastes. We have spent substantial amounts to
comply with these requirements. In addition, in the event that we release
hazardous materials, we could potentially be responsible for the remediation of
contamination associated with such a release.
Primarily because the melting process in Sand Springs generates emission
dust that contains lead, cadmium and other heavy metals, we are classified, in
the same manner as other electric arc furnace operators in this industry, as a
generator of hazardous waste. The Resource Conservation and Recovery Act of
1976, as amended (RCRA), regulates the management of emission control
sludge/dust from electric arc furnaces (KO61), a waste stream generated in
significant quantities in Sand Springs. All of the KO61 generated in Sand
Springs is shipped to Mexico, where a High Temperature Metals Recovery
processor, Zinc Nacional, S.A., recovers the zinc, lead and cadmium and
manufactures commercial and high purity zinc products. Zinc Nacional, S.A. is in
compliance with the Mexican agency, Office of Environmental Protection, which is
similar to the EPA in the United States. If a release of KO61 were to occur, we
could be required to remediate such a release. Although current law permits the
export of KO61, we can provide no assurance that new United States legislation
prohibiting the export of hazardous waste materials or new Mexican legislation
prohibiting the import of such materials, including KO61, will not be enacted.
In that event, we would have to find an alternative means of treatment or
disposal of the KO61 in compliance with RCRA. We believe that we could properly
dispose of the KO61 generated in Sand Springs by constructing an on-site
recovery or chemical stabilization process or by shipping the KO61 to a licensed
domestic treatment facility. However, we can give no assurance that such an
alternative would be available or that their construction and/or use would not
result in significant cost increases.
In accordance with the Clean Air Act Amendments of 1990 (CAAA) and
Oklahoma's State Implementation Plan, we submitted a Title V application for an
operating permit in January of 1997 and received the permit in March, 1998. We
have been routinely audited and have had no resulting violations, outstanding
issues or questions that were not resolved. Additional or new air emission
control regulations or requirements applicable to our operations may be
promulgated under the Clean Air Act in the future. We cannot at this time
accurately estimate the costs, if any, of compliance with such future Clean Air
Act regulations or requirements.
We are finalizing work with the EPA in concluding their RCRA Compliance
Evaluation Inspection, which was conducted by Region 6 officials in April of
1997. While we have addressed all of the EPA's concerns and they have indicated
(verbally) over a year ago that no penalties should be imposed, the final
written release has not been issued. The EPA was comfortable enough with our
responses that they allowed our consultants to write the final report, or "Risk
Assessment" in 1999. We received some additional questions from the EPA after
issuing that report. We have responded to those questions and are awaiting the
EPA's response. We feel that any remediation work on the site (if any is
required) will be minimal in nature and
9
<PAGE>
will not require us to make any substantial expenditures for either remediation
or environmental control during the next three years.
Cautionary Factors That May Affect Future Results
Our disclosure and analysis in this report to shareholders contain some
forward-looking statements. Forward-looking statements give our current
expectations or forecasts of future events. You can identify these statements by
the fact that they do not relate strictly to historical or current facts. They
use words such as "anticipate", "estimate", "expect", "project", "intend",
"plan", "believe", or other words and terms of similar meaning in connection
with any discussion of future operating or financial performance. Specifically,
these include statements relating to future actions, prospective products,
future performance or results of current and anticipated new products, sales
efforts, availability of raw materials, expenses such as energy costs, the
outcome of contingencies, the cost of environmental compliance and financial
results. From time to time, we also may provide oral or written forward-looking
statements in other materials we release to the public.
Any or all of our forward-looking statements in this report and in any
other public statements we make may turn out to be wrong. They can be affected
by inaccurate assumptions we might make or by known or unknown risks and
uncertainties. Many factors mentioned in the discussion above--for example,
competition--will be important in determining future results. Consequently, no
forward-looking statement can be guaranteed. Actual future results may vary
materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our other reports to the SEC. Also note that we provide the
following cautionary discussion of risks, uncertainties, and possibly inaccurate
assumptions relevant to our businesses. These are factors that we think could
cause our actual results to differ materially from expected and historical
results. Other factors besides those listed here could also adversely affect us.
This discussion is provided as permitted by the Private Securities Litigation
Reform Act of 1995.
. The steel industry is highly cyclical and seasonal in nature.
. There is the possibility of increased competition from other mini-mills.
. The risk of our ability to expand our product lines and increase sales
of existing product lines.
. The risk of our ability to successfully produce quality products.
. There is risk regarding the availability of raw materials such as steel
scrap.
. There is risk in cost and availability of energy, specifically natural gas
and electricity.
. There are costs of environmental compliance and the impact of government
regulations.
. Our relationship with our workforce, including the United Steelworkers of
America Union.
. There are restrictive covenants and tests contained in our debt instruments
could limit our operating and financial flexibility.
10
<PAGE>
. There have been imports into the United States that have affected the steel
market.
. General economic conditions in the United States.
ITEM 2. PROPERTIES AND FACILITIES
------- -------------------------
We own the properties that are the operations for Sand Springs, Joliet, and
Waddell. The facility in Sand Springs is located on approximately 148 acres of
land in Sand Springs, Oklahoma. The facility in Joliet is located on
approximately 30 acres of land in Joliet, Illinois. Waddell's 33,000 square foot
building is located on approximately 2.1 acres of land in Independence,
Missouri. We lease 9 acres of land adjacent to the facility in Joliet from the
Metropolitan Water Reclamation District of Greater Chicago under a long-term
lease expiring in 2053. We also lease the plant in Kansas City, which contains
approximately 77,100 square feet. We lease the Wellington facility which is
approximately 26,000 square foot building located on three acres in Sand
Springs, Oklahoma.
The facility in Sand Springs comprises an aggregate of approximately
520,390 square feet of floor space and contains two 85-ton electric arc
furnaces, a six strand billet continuous caster, a rolling mill, two warehouses
and a fence post shop. The current total annual capacity in Sand Springs is
approximately 600,000 tons of billet, approximately 450,000 tons of rebar and
hot rolled bar and approximately 70,000 tons of fence post.
The facility in Joliet comprises an aggregate of approximately 334,305
square feet of floor space and contains a 12 inch merchant bar mill and a
decommissioned 10 inch merchant bar mill. The total annual capacity in Joliet is
approximately 145,000 tons of hot rolled bar products.
The Railway provides freight service between Sand Springs and Tulsa on
seven miles of yard track and 21 miles of spur line which connect customer
facilities with the main line. The Railway owns the 28 miles of railroad track
plus three locomotives, 28 gondolas and 4 flat cars. The Railway operates a
maintenance shop for normal repairs and upkeep of locomotives and railcars. The
Railway owns approximately 10 acres and leases and operates a transload facility
and ware house.
We have granted a security interest in substantially all of the Railway
assets to the Bank of Oklahoma as security for the Railway's obligations under
the Railway Revolving Credit Facility and the Railway Term Loan.
We have granted a first priority lien on substantially all of our real
property and equipment (excluding the Railway, Waddell and Wellington) in favor
of the Trustee for the benefit of the holders of the First Mortgage Notes.
ITEM 3. 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.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------- ---------------------------------------------------
Not applicable.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
------- --------------------------------------------------------------------
Our Common Stock, par value $.01 per share, is not traded on an established
public trading market. As of the date of this filing, there were ten
stockholders of record. We paid dividends of $10,000,000, or $2.80 per share, to
stockholders in fiscal 1998 and $2,500,000, or $.71 per share in fiscal 2000.
There were no dividends paid during the year ended April 30, 1999. We have loan
agreements that contain limitations on our ability to pay cash dividends on
Common Stock.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
------ -----------------------
The following selected consolidated financial data for the five years ended
April 30, 2000 has been derived from our financial statements audited by KPMG
LLP, independent auditors. Our financial statements for fiscal 2000, 1999 and
1998 and the report thereon are included elsewhere in this Annual Report on Form
10-K. The information below should be read in conjunction with our financial
statements and the related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," included in Item 7.
<TABLE>
<CAPTION>
(Dollars in thousands except per share and per ton data)
Fiscal Year Ended April 30,
-----------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Earnings Data:
Sales..................................................... $172,317 $170,865 $185,077 $163,444 $172,114
Cost of sales............................................. 143,121 140,234 148,496 125,013 133,273
-------- -------- -------- -------- --------
Gross profit.............................................. 29,196 30,631 36,581 38,431 38,841
Selling, general and administrative expense............... 11,737 11,923 13,006 14,470 15,083
Depreciation and amortization............................. 6,567 6,775 7,112 7,726 8,343
Postretirement benefit expense other than pensions........ 2,776 2,353 2,681 2,411 2,302
Restructuring charge [a].................................. - 1,320 - - -
Litigation Settlement [b]................................. - - - (2,256) (2,379)
-------- -------- -------- -------- --------
Operating income (loss)................................... 8,116 8,260 13,782 16,080 15,492
Interest expense.......................................... (11,733) (11,769) (12,300) (14,599) (15,167)
Other income (expense).................................... 526 - (180) 15 (132)
-------- -------- -------- -------- --------
Income (loss) before income taxes and extraordinary item.. (3,091) (3,509) 1,302 1,496 193
Income tax (expense) benefit.............................. - - 495 - -
-------- -------- -------- -------- --------
Income (loss) from continuing operations.................. (3,091) (3,509) 1,797 1,496 193
Extraordinary item - loss on retirement of
long-term debt, net of income tax benefit of
$0 in 1998 [c]........................................ - - (8,023) - -
-------- -------- -------- -------- --------
Net income (loss)......................................... $ (3,091) $ (3,509) $ (6,226) $ 1,496 $ 193
======== ======== ======== ======== ========
Dividends per common share................................. $ .52 $ - $ 2.80 $ - $ .71
Balance Sheet Data (at end of period):
Total assets.............................................. $143,182 $136,627 $143,618 $152,561 $160,453
Long-term debt (including current portion)................ 97,041 96,550 114,384 125,595 132,742
Stockholders' equity (deficit)............................ 6,385 2,156 (14,126) (13,197) (19,213)
Other Data:
Capital expenditures...................................... $ 4,978 $ 3,695 $ 9,023 $ 6,248 $ 5,668
Net tons shipped.......................................... 477,005 473,755 490,128 420,353 469,429
Average price per ton shipped............................. $ 361 $ 361 $ 378 $ 389 $ 367
Average production cost per ton shipped................... 300 296 303 297 284
Number of active employees at end of period............... 705 670 623 673 690
Ratio of earnings to fixed charges [d].................... - - 1.10 1.10 1.01
</TABLE>
-----------------------------
[a] A restructuring charge of $1.3 million was recognized in fiscal 1997 as a
result of early retirement incentives included in a collective bargaining
agreement and salaried workforce reductions in Sand Springs.
[b] Litigation settlement income of $2.3 million in fiscal 1999 and $2.4
million in fiscal 2000 was recorded as a result of a lawsuit against
certain graphite electrode manufacturers.
[c] Extraordinary loss of $8.0 million was recorded in fiscal 1998 related to
the First Mortgage Note offering. The extraordinary charge related to a
redemption premium, unamortized discount and debt issue costs associated
with the retirement of our old First Mortgage Notes that were due in fiscal
2001.
[d] Ratio of earnings to fixed charges is defined as income before income taxes
and extraordinary item plus amortization of debt issuance cost and interest
expense divided by the sum of interest expense plus amortization of debt
issuance costs. Earnings were insufficient to cover fixed charges by
approximately $3,091 in fiscal 1996 and $3,509 in fiscal 1997.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
The following discussion should be read in conjunction with our
Consolidated Financial Statements and notes included in Item 8 of this Form
10-K.
General
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):
<TABLE>
<CAPTION>
Fiscal Year Ended April 30,
---------------------------------------------------------------------------
1998 1999 2000
----------------------- ---------------------- ---------------------
Operating Results: Net Sales % of Sales Net Sales % of Sales Net Sales % of Sales
---------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sales $185,007 100.0% 163,444 100.0% 172,114 100.0%
Cost of sales 148,496 80.2% 125,013 76.5% 133,273 77.4%
-------- ------- -------
Gross profit 36,581 19.8% 38,431 23.5% 38,841 22.6%
Selling and administrative 13,006 7.0% 14,470 8.9% 15,083 8.8%
Depreciation and amortization 7,112 3.8% 7,726 4.7% 8,343 4.8%
Postretirement benefit expense 2,681 1.4% 2,411 1.5% 2,302 1.3%
Litigation settlement - - (2,256) (1.4%) (2,379) (1.4)%
-------- ------- -------
Operating income 13,782 7.4% 16,080 9.8% 15,492 9.0%
Interest expense, net 12,300 6.6% 14,599 8.9% 15,167 8.8%
Other Expense (income) 180 0.1% (15) (0.0)% 132 (0.0)%
-------- ------- -------
Income from operations
before taxes and
extraordinary item 1,302 0.7% 1,496 0.9% 193 0.11%
Income tax benefit 495 0.3% - - - -
-------- ------- -------
Income from
operations before 1,797 1.0% 1,496 0.9% 193 0.11%
extraordinary item
Extraordinary item-loss
on retirement of debt (8,023) (4.3)% - - - -
-------- ------- -------
Net income (loss) $ (6,226) (3.4)% 1,496 0.9% 193 0.11%
======== ======= =======
</TABLE>
14
<PAGE>
The following table provides information regarding the historical shipment
levels and average selling prices per ton:
Fiscal Year Ended April 30,
--------------------------------------
1998 1999 2000
--------- -------- --------
Tons shipped:
Hot Rolled Bars 185,700 154,397 164,407
Rebar 212,159 171,075 189,434
Fabricated Products 55,511 63,757 73,012
------- ------- -------
Total finished products 453,370 389,229 426,853
Billets 36,758 31,124 42,576
------- ------- -------
Total tons shipped 490,128 420,353 469,429
======= ======= =======
Average price per ton shipped 378 389 367
Average production cost per ton 303 297 284
Results of Operations
Fiscal 2000 As Compared To Fiscal 1999
Sales. Sales in fiscal 2000 were approximately $8.7 million or 5.3% more
than sales in fiscal 1999. Shipments increased in comparison to the prior year,
while pricing generally decreased as summarized below:
. Our shipments of hot rolled bar from Sand Springs increased 61% over fiscal
1999 (excluding sales to Wellington). The Sand Springs mill increased
production of hot rolled bar products and experienced higher productivity
rates than in the prior year contributing to the increased sales volume.
Shipments and pricing of our hot rolled bar products in Joliet have been
impacted by market conditions with shipments decreasing 2% and pricing
decreasing 3%. We have seen improvement in hot rolled bar sales that
support certain industries such as oil field equipment; however,
agricultural equipment sales continue to lag.
. Rebar shipments rebounded in 2000 due to our favorable inventory position
in comparison to fiscal 1999. In the prior year, we had very low
inventories due to the rolling mill outage at the Sand Springs Facility
related to the Shear Line Project completed in the fourth quarter of fiscal
1998.
. Finished goods prices are down in comparison to fiscal 1999, in part due to
reductions in steel scrap raw material costs. During the second quarter of
fiscal 2000, our scrap raw material costs began to increase which had an
adverse effect on cost of sales for the remainder of the year. However,
scrap prices have moderated since year-end and we expect our margins will
not be negatively impacted any further.
. Although not as significant, rebar imports impacted our sales and pricing
of twenty-foot rebar and no-grade rebar.
. Wellington, a railroad track spike manufacturer which we purchased in
October 1998, was included in operations for a full year in fiscal 2000 and
approximately half a year in fiscal 1999.
15
<PAGE>
Cost of Sales and Expenses. Average product costs decreased to $284 in
fiscal 2000 from $297 in fiscal 1999 due to decreases in steel scrap raw
material costs. This decrease was partially offset by higher costs associated
with finished goods product mix and higher operating costs.
Selling, general and administrative expenses increased over the prior
fiscal year due primarily to employment costs as well as the acquisition of
Wellington.
Depreciation increased because of additional capital expenditures primarily
in Sand Springs. Amortization increased compared to the prior year due to
increased amortization of intangible assets associated with the acquisition of
Wellington.
During fiscal 1999 and 2000, 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 received approximately $2.4
million related to the settlements reached this fiscal year ($2.3 million in
fiscal 1999) with certain of the defendents.
Interest expense increased due to the level of outstanding debt during the
fiscal year. Additions to debt were due to working capital and capital
expenditure requirements.
Fiscal 1999 As Compared To Fiscal 1998
Sales. Sales in fiscal 1999 were approximately $21.6 million or 11.7% less
than sales in fiscal 1998. There were several factors that contributed to this
fluctuation in sales:
. We had unusually low rebar inventories at the beginning of the 1999 fiscal
year due to the shutdown for the installation of a more efficient, higher
capacity shear line in the fourth quarter of fiscal 1998 (the Shear Line
Project). Consequently, we produced more rebar during the first two
quarters in order to satisfy customer demands which took some time away
from production of hot rolled bar products. We believe that we were able to
retain our customers during this low inventory period and that there is no
lasting impact on our customer relationships.
. In the third quarter of fiscal 1999, we were negatively impacted by
unsettled market conditions caused by the Asian economic crisis. We had
lower sales of hot rolled bars that support certain industries such as oil
field and agricultural equipment manufacturers. We believe that the Asian
economic crisis prompted inventory reductions among service centers and
certain original equipment manufacturers and created pricing pressure.
. Although not as significant, rebar imports impacted our sales and pricing
of no-grade rebar.
. In October 1998, we purchased Wellington, a railroad track spike
manufacturer which increased sales of fabricated products.
. During the first two fiscal quarters of 1999, we curtailed billet sales to
third parties due to maintenance problems and summer power outages that we
had in the Sand Springs melt shop.
16
<PAGE>
. Steel scrap raw material costs decreased during fiscal 1999 affecting cost
of sales and billet pricing.
Cost of Sales and Expenses. Average product costs decreased to $297 in
fiscal 1999 from $303 in fiscal 1998 due to decreases in steel scrap raw
material costs, partially offset by the higher costs associated with finished
goods product mix. Gross profit as a percentage of net sales increased from
fiscal 1998 to fiscal 1999 due to increases in sales prices, sales mix of higher
margin finished goods, and lower steel scrap raw material costs.
Selling, general and administrative expenses increased over the prior
fiscal year due to the acquisitions of Waddell and Wellington, additional
property taxes assessed and environmental expenditures related to the RCRA
Compliance Evaluation Inspection.
Depreciation increased because of additional capital expenditures primarily
in Sand Springs. Amortization increased compared to the prior year due to
increased amortization of intangible assets associated with the acquisitions of
Waddell and Wellington.
Postretirement benefit expense, which is calculated by an independent
actuary, decreased compared to last year because of favorable retiree health
claim experience.
Interest expense increased due to the level of outstanding debt during the
fiscal year. Additions to debt were due to working capital and capital
expenditure requirements.
Liquidity and Capital Resources
As of April 30, 2000, we had long-term indebtedness of $132.7 million and
approximately $26.1 million of additional borrowing availability under our
revolving credit agreements. We were in compliance with all of our debt
covenants under our long-term debt instruments as of April 30, 2000.
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 $4.9 million in fiscal 2000,
compared with cash flow used in operating activities of $3.7 million in fiscal
1999. Cash provided by operations was negatively impacted in the prior year by
payments made on the shear line project. In addition, raw material pricing
increased accounts payable balances at fiscal 2000 year-end.
In fiscal 2000, we entered 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, extraordinary
item and the non-cash portion of the post-retirement expense (EBITDA) was
approximately $22.4 million for the year ended April 30, 2000 as compared to
$22.9 million in the prior year. We have excluded the electrode
17
<PAGE>
litigation settlement in all EBITDA calculations. 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. We exclude restructuring expense,
extraordinary items and gain or loss on retirements from EBITDA due to the non-
recurring nature of these items.
Cash used in investing activities in fiscal 2000 was $5.5 million
consisting of capital improvements partially offset by the sale of assets held
for sale. Capital expenditures consisted of normal capital projects to sustain
and improve existing operations. Cash flow provided by financing activities
consisted of increased borrowings under the revolving credit agreement and the
Railway Credit Agreement offset by dividends paid, debt payments, and repurchase
of common stock.
Cash flow used by operating activities was $3.7 million in fiscal 1999,
compared with cash flow provided by operating activities of $14.0 million in
fiscal 1998. The decrease in cash provided by operations is due primarily to
the re-building of inventories and decreases in accounts payable as a result of
paying for the Shear Line Project that was included in accounts payable at the
end of fiscal 1998.
Cash used in investing activities in fiscal 1999 was $8.9 million,
consisting principally of the purchase of Wellington and capital improvements of
$6.2 million including $0.7 million related to last years Shear Line Project. In
fiscal 1999, cash provided by financing activities consisted of increases in the
revolving line of credit, proceeds from equipment financing and the debt related
to the purchase of Wellington. Cash used in financing activities included
payments on the revolving credit facilities and other equipment loans and the
repurchase of common stock.
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
level 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, borrowing availability
under the revolving credit facilities, and potential refinancing of our First
Mortgage Notes will be sufficient to fund the repayment of 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.
Compliance with Environmental Laws and Regulations
18
<PAGE>
We are subject to a broad range of federal, state and local environmental
regulations and requirements, including those governing air emissions and
discharges into water, and the handling and disposal of solid and/or hazardous
wastes. As part of the normal course of business, we incur expenses, primarily
for the disposal of bag house dust generated in the meltshop, to comply with
these regulations and requirements. Expenses were approximately $2.0 million in
fiscal 1998, $2.2 million in fiscal 1999, and $2.0 million in fiscal 2000.
Capital expenditures incurred to comply with these requirements were
approximately $1.1 million in fiscal 1999 and $205 thousand in fiscal 2000. In
addition, in the event that we release a hazardous substance, we could be
responsible for the remediation of contamination associated with such a release.
We believe that we are currently in substantial compliance with all known
material and applicable environmental regulations.
Inflation
We have not experienced any material adverse effects on operations in
recent years because of inflation, though margins can be affected by
inflationary conditions. Our primary cost components are ferrous scrap and other
raw materials, energy and labor, all of which are susceptible to domestic
inflationary pressures. Pricing of finished products, however, can be influenced
by general economic conditions and competitive factors in the steel industry.
While we have been successful in passing on cost increases to our customers
through price adjustments, the effect of steel imports, severe market price
competition and under-utilized industry capacity has in the past, and could in
the future, limit our ability to adjust pricing.
Year 2000 Compliance
We recognized the Year 2000 (Y2K) Information Technology issue in 1986 and
began to address the problem with the re-design of our internal information
systems. In early 1998, we created a formal Y2K Task Force with executive
oversight to examine Y2K issues as they pertained to areas outside internal
information systems including information systems infrastructure, desktop
applications, manufacturing and distribution, product compliance and supply
chain. To date, we have not experienced any significant problems and we do not
anticipate any significant problems in the future related to the Y2K issue.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings are affected by changes in interest rates (primarily the prime
rate). At April 30, 2000, we had approximately $22.7 million of long-term debt
with variable rates. Interest risk can be estimated by measuring the impact of a
10% increase in interest rates. We would incur an additional $200 thousand of
interest expense per year on our variable rate borrowing if our debt levels
remained approximately the same as at April 30, 2000. Because we experience
changes in our debt levels due to operating requirements or changes in the
general economic environment that we are unable to predict, this estimate
assumes no changes in our financial structure.
The fair value of the First Mortgage Notes at April 30, 2000, based on the
currently offered market price was $91.3 million versus a carrying value of
approximately $110 million.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
------- ---------------------
Independent Auditors' Report
The Board of Directors and Stockholders
Sheffield Steel Corporation:
We have audited the accompanying consolidated balance sheets of Sheffield Steel
Corporation and subsidiaries as of April 30, 1999 and 2000, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended April 30, 2000. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule listed in the index at Item
14(a)2. These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sheffield Steel
Corporation and subsidiaries at April 30, 1999 and 2000, and the results of
their operations and their cash flows for each of the years in the three-year
period ended April 30, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Tulsa, Oklahoma
June 23, 2000
20
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
April 30,
--------------------------
Assets 1999 2000
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 86 79
Accounts receivable, less allowance for doubtful accounts of
$658 and $541 at April 30, 1999 and 2000, respectively 19,943 25,320
Inventories 44,034 49,333
Prepaid expenses and other 1,486 1,375
Deferred income tax asset 3,353 3,352
-------- -------
Total current assets 68,902 79,459
Property, plant and equipment, net 68,310 66,245
Property held for sale 439 139
Intangible asset, less accumulated amortization of $2,249
and $3,204 at April 30, 1999 and 2000, respectively 10,011 9,346
Other assets 482 716
Receivable from parent 2,705 2,705
Deferred income tax asset 1,712 1,843
-------- -------
$152,561 160,453
======== =======
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Current portion of long-term debt $ 2,885 2,607
Accounts payable 14,803 20,645
Accrued interest payable 5,362 5,385
Accrued liabilities 6,455 6,701
Due to affiliated company 75 77
-------- -------
Total current liabilities 29,580 35,415
Long-term debt, excluding current portion 122,710 130,135
Accrued postretirement benefit costs 12,380 13,374
Other liabilities 1,088 742
-------- -------
Total liabilities 165,758 179,666
-------- -------
Stockholders' deficit:
Common stock, $.01 par value, authorized 10,000,000
shares, issued and outstanding 3,459,300 and
3,458,828 at April 30, 1999 and 2000, respectively 35 35
Additional paid-in capital 2,024 -
Retained deficit (14,202) (18,141)
-------- -------
(12,143) (18,106)
Less loans to stockholders 1,054 1,107
-------- -------
Total stockholders' deficit (13,197) (19,213)
-------- -------
Commitments and contingencies - -
$152,561 160,453
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands)
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Sales $185,077 163,444 172,114
Cost of sales 148,496 125,013 133,273
-------- ------- -------
Gross profit 36,581 38,431 38,841
Selling, general and administrative expense 13,006 14,470 15,083
Depreciation and amortization expense 7,112 7,726 8,343
Postretirement benefit expense other than pensions 2,681 2,411 2,302
Litigation settlement - (2,256) (2,379)
-------- ------- -------
Operating income 13,782 16,080 15,492
-------- ------- -------
Other (expense) income:
Interest expense, net (12,300) (14,599) (15,167)
Other (180) 15 (132)
-------- ------- -------
(12,480) (14,584) (15,299)
-------- ------- -------
Income from operations before
income taxes and extraordinary item 1,302 1,496 193
Income tax benefit 495 - -
-------- ------- -------
Income from operations before
extraordinary item 1,797 1,496 193
Extraordinary item - loss on retirement of debt (8,023) - -
-------- ------- -------
Net income (loss) $ (6,226) 1,496 193
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
(In thousands, except share data)
<TABLE>
<CAPTION>
Year Ended April 30,
--------------------------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Common stock:
Balance at beginning of year $ 34 36 35
Common stock warrants
Exercised (245,250 shares) 2 - -
Common stock retired (161,450 and 118,112
shares in 1999 and 2000, respectively) - (2) (1)
Stock options exercised (50,625 and 117,640
shares in 1999 and 2000, respectively) - 1 1
-------- ------- -------
Balance at end of year 36 35 35
======== ======== =======
Additional paid-in capital:
Balance at beginning of year 2,536 2,536 2,024
Common stock retired - (886) (2,934)
Stock options exercised - 374 910
-------- ------- -------
Balance at end of year 2,536 2,024 -
======== ======== =======
Retained earnings (deficit):
Balance at beginning of year 528 (15,698) (14,202)
Net income (loss) (6,226) 1,496 193
Common stock retired - - (1,632)
Dividends (10,000) - (2,500)
-------- ------- -------
Balance at end of year (15,698) (14,202) (18,141)
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year Ended April 30,
------------------------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6,226) 1,496 193
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,409 8,052 8,670
Loss (gain) on sale or retirement of assets 160 (15) 132
Accrual of postretirement benefits other than
pensions, net of cash paid 1,893 1,392 999
Non-cash portion of extraordinary item 2,995 - -
Deferred income taxes (495) (80) (130)
Changes in assets and liabilities, net of effects
of acquisition of business':
Accounts receivable 726 1,520 (5,377)
Inventories 3,779 (10,065) (5,299)
Prepaid expenses and other 677 (241) 259
Other assets (16) (441) (493)
Accounts payable 2,899 (5,610) 5,842
Accrued interest payable 651 211 23
Accrued liabilities 373 122 246
Due to affiliated company 36 (10) 2
Other liabilities (875) (13) (140)
-------- ------- ------
Total adjustments 20,212 (5,178) 4,734
-------- ------- ------
Net cash provided by (used in) operating
activities 13,986 (3,682) 4,927
-------- ------- ------
Cash flows from investing activities:
Capital expenditures (9,023) (6,248) (5,668)
Acquisition of business, net of cash acquired (2,414) (2,635) -
Proceeds from sale of equipment - 18 212
-------- ------- ------
Net cash used in investing activities (11,437) (8,865) (5,456)
-------- ------- ------
</TABLE>
(Continued)
24
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(In thousands)
<TABLE>
<CAPTION>
Year Ended April 30,
---------------------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) under revolving lines of credit $(19,684) 6,875 8,567
Proceeds from issuance of long-term debt 112,213 7,091 1,500
Repayment of long-term debt (76,502) (2,990) (2,920)
Payment of debt issuance costs (6,001) (45) (308)
Dividends paid (10,000) - (2,500)
Payments to retire stock - (888) (4,566)
Stock Options exercised - - 749
-------- ------ ------
Net cash provided by financing activities 26 10,043 522
-------- ------ ------
Net (decrease) increase in cash and cash equivalents 2,575 (2,504) ( 7)
Cash and cash equivalents at beginning of year 15 2,590 86
-------- ------ ------
Cash and cash equivalents at end of year $ 2,590 86 79
======== ====== ======
Supplemental Disclosure of Cash Flow Information
------------------------------------------------
Cash paid during the year for:
Interest $ 11,352 14,062 14,820
======== ====== ======
Income taxes $ - 80 143
======== ====== ======
Noncash items:
Change in unfunded accumulated benefit obligation
included in other assets and other liabilities $ 172 206 (206)
======== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 1998, 1999 and 2000
(In thousands, except share data)
(1) Summary of Significant Accounting Policies
Organization and Nature of Business
The consolidated financial statements of Sheffield Steel Corporation (the
Company, 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) since October 28, 1997, Wellington
Industries, Inc. (Wellington) since October 7, 1998 and Sand Springs Railway
Company (the Railway). HMK Enterprises, Inc. (HMK) owns approximately 93% 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. We
operate in an economic environment wherein the commodity nature of both our
products for sale and our primary raw materials cause sales prices and purchase
costs to fluctuate, often on a short-term basis, due to the worldwide supply and
demand situation for those commodities. The supply and demand factors for our
products for sale and the supply and demand factors for our primary raw
materials correlate to a degree, but are not necessarily the same. Therefore,
margins between sales price and production costs can fluctuate significantly on
a short-term basis. We grant credit to customers under normal industry standards
and terms. We have established policies and procedures that allow for proper
evaluation of each customer's creditworthiness as well as general economic
conditions. Consequently, an adverse change in those factors could affect our
estimate of bad debts.
Cash Equivalents
We consider all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (as determined by the first-in
first-out method) or market. The cost of work-in-process and finished goods
inventories is based on standards, which approximate cost. Work-in-process and
finished goods include direct labor and allocated overhead.
Intangible Assets
Intangible assets consist primarily of goodwill and debt issuance costs. The
cost of goodwill is being amortized on a straight-line basis over a period of 40
years. Debt issuance costs are amortized over the term of the related
indebtedness. Our policy is to recognize an impairment of the carrying value of
goodwill when our best estimate of undiscounted future cash flows over the
remaining amortization period is less than the carrying amount.
26
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
Property, Plant and Equipment
Property, plant and equipment, which includes capitalized leases, is stated at
cost. Depreciation and amortization of leased equipment is provided over the
estimated useful lives of the individual assets using the straight-line method.
The useful lives of the property and equipment range from three to forty years.
Significant renewals and betterments are capitalized; costs of maintenance and
repairs are charged to expense as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
We are members of a group that files a consolidated income tax return with HMK
(the Group). The Group's tax-sharing agreement provides that current and
deferred income taxes are determined as if each member of the Group were a
separate taxpayer. All income taxes payable or receivable are due to or from
HMK.
Pension and Other Postretirement Plans
We have defined benefit pension plans covering the hourly employees at Sand
Springs and Joliet and the salary employees at Sand Springs. The benefits are
based on years of service and the employee's compensation during the highest
five out of the last ten years before retirement. The cost of this program is
being funded currently.
We also sponsor a defined benefit health care plan for the retirees and
employees in Sand Springs. We measure the costs of this obligation based on our
best estimate. The net periodic costs are recognized as employees render the
services necessary to earn the postretirement benefits.
Environmental Compliance Costs
We accrue for losses associated with environmental remediation obligations when
such losses are probable and reasonably estimable. Accruals for estimated losses
from environmental remediation obligations generally are recognized no later
than completion of the remedial feasibility study. Such accruals are adjusted as
further information develops or circumstances change. Environmental remediation
costs have not had a material impact on our financial position, results of
operations, or liquidity.
Revenue Recognition
Revenues from sales are recognized when products are shipped to customers,
except the Railway which recognizes revenues when services are performed.
27
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect
the amounts reported. We believe that these estimates are reasonable and proper,
however, actual results could differ from our estimates.
Stock Option Plan
We adopted SFAS No. 123, "Accounting for Stock-Based Compensation" which
permits, but does not require, a fair value based method of accounting for
stock-based employee compensation. Alternatively, SFAS No. 123 allows companies
to continue applying the provisions of Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees", however, such companies are
required to disclose pro forma net income as if the fair value based method had
been applied. We have elected to continue to apply the provisions of APB Opinion
No. 25 for puposes of computing compensation expense and we have provided the
pro forma disclosure provisions of SFAS No. 123 herein.
Segment Information
We operate in a single operating segment providing steel products and services
to the steel manufacturing and fabricating industry. We had sales of $172,114 in
2000, of which $171,222 were sales in the United States and $892 were sales
outside the United States. We sell our products in the United States and
internationally through our own sales force and to a limited extent, sales
agencies. Our assets are all located in the United States. We have one customer
that accounted for approximately 12% of sales in 1998 and 14% of sales in 1999
and 2000.
(2) Fair Value of Financial Instruments
We define the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying value of cash and cash equivalents, trade accounts receivable and
trade accounts payable approximates the fair value because of the short maturity
of those instruments. The carrying amounts of notes payable to banks and
equipment financing companies (see Note 5) approximates the fair value due to
these debt instruments having variable interest rates similar to those that are
currently available to us. The fair value of the first mortgage notes (see Note
5) at April 30, 2000, based on the currently offered market price, is
approximately $91,300 ($107,800 at April 30, 1999) versus a carrying value of
approximately $110,000.
(3) Inventories
The components of inventories are as follows:
April 30,
---------------------
1999 2000
---- ----
Raw materials and storeroom supplies $12,408 11,419
Work in process 13,390 16,357
Finished goods 18,236 21,557
------- ------
$44,034 49,333
======= ======
28
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(4) Property, Plant and Equipment
The components of property, plant and equipment are as
follows:
April 30,
-------------------------
1999 2000
---- ----
Land and buildings $ 17,561 18,510
Machinery and equipment 106,327 109,916
Roadbed and improvements 5,492 5,674
Construction in process 2,181 2,348
-------- -------
131,561 136,448
Less accumulated depreciation and amortization 63,251 70,203
-------- -------
$ 68,310 66,245
======== =======
Depreciation and amortization of property, plant and equipment charged to
operations was $6,605 in 1998, $7,119 in 1999 and $7,697 in 2000.
The range of estimated useful lives for determining depreciation and
amortization of the major classes of assets are:
Buildings 5-25 years
Machinery and equipment 3-25 years
Roadbed and improvements 3-40 years
(5) Long-term Debt
Long-term debt is comprised of the following:
April 30,
------------------------
1999 2000
---- ----
First mortgage notes [a] $110,000 110,000
Revolving credit agreement [b] 6,285 15,380
Railway term loan [c] 1,000 2,000
Railway revolving credit agreement [c] 620 92
Equipment notes [d] 4,931 3,543
Notes payable [e] 2,759 1,727
-------- -------
125,595 132,742
Less current portion 2,885 2,607
-------- -------
$122,710 130,135
======== =======
[a] On November 26, 1997, we issued $110,000 of 11.5% First Mortgage Notes due
2005. Interest on the First Mortgage Notes is payable semi-annually on June
1/st/ and December 1/st/ of each year at the rate of 11.5% per year. The
First Mortgage Notes are secured by a first priority lien on substantially
all existing and future real property and equipment. We are subject to
certain covenants including certain limitations on additional indebtedness
and restricted payments, such as dividends and purchases of stock.
29
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
[b] The revolving credit agreement with a bank provides for maximum borrowings
of $50,000 based on a percentage of eligible accounts receivable and
inventory. Borrowings are secured by a first priority lien on inventory
and accounts receivable. Interest is computed at prime plus a variable
margin (based on the achievement of certain interest coverage ratios) from
0% to 1/2% and is payable monthly. At April 30, 2000, the interest rate
was 9% (prime). An annual commitment fee of .5% is charged on the unused
portion of the revolving credit agreement. The agreement will continue
through November 1, 2002 and thereafter on a year-to-year basis until
terminated by us or the lender.
[c] The Railway credit agreement with a bank is comprised of two notes; a
$2,000 term loan with $500 principal payments each year with the final
payment on February 4, 2004, and a $1,000 line of credit maturing February
1, 2002. The notes are secured by all of the assets and capital stock of
the Railway. Interest is computed at prime plus 3/4 % and is payable
quarterly. At April 30, 2000, the interest rate was 9.75%.
[d] Equipment notes are notes payable to equipment financing companies and
vendors related primarily to the financing of equipment purchases. The
notes are payable in monthly principal installments of $93 plus interest
payable at variable rates. The notes mature in fiscal year 2004 and are
secured by equipment.
[e] Notes payable consists of various notes issued and assumed in conjunction
with the acquisition of Waddell and Wellington and are secured by the stock
of these two companies. The notes, which mature over the next two years,
bear interest at varying rates based on the prime rate of interest as
determined by Bank of America.
The aggregate maturities of long-term debt for the years ending April 30, are as
follows:
2001 $ 2,607
2002 2,449
2003 16,999
2004 687
2005 -
Thereafter 110,000
--------
Total Maturities $132,742
========
Interest costs were $12,300 in 1998, $14,599 in 1999 and $15,167 in 2000.
Various agreements contain restrictive covenants including limitations on
additional borrowings, dividends and other distributions and the retirement of
stock. Additionally, certain agreements require maintenance of specified
performance ratios. In the event of default of the restrictive covenants or
failure to maintain the specified performance measures, the lender may withdraw
the credit agreements.
30
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(6) Income Taxes
Income tax benefit for the years ended April 30, 1998, 1999, and 2000 consists
of:
Current Deferred Total
------- -------- -----
Year ended April 30, 1998:
U.S. federal tax benefit (expense) $ - 421 $421
State tax benefit (expense) - 74 74
----- --- ----
$ - 495 $495
===== === ====
Year ended April 30, 1999:
U.S. federal tax benefit (expense) $ (80) 80 $ -
State tax benefit (expense) - - -
----- --- ----
$ (80) 80 $ -
===== === ====
Year ended April 30, 2000:
U.S. federal tax benefit (expense) $(130) 130 $ -
State tax benefit (expense) - - -
----- --- ----
$(130) 130 $ -
===== === ====
Income taxes attributable to operations differed from the amounts computed by
applying the U.S. federal income tax rate of 34% as a result of the following:
Year Ended April 30,
------------------------
1998 1999 2000
----- ----- ----
Computed "expected" tax benefit (expense) $(443) (509) (66)
State income taxes, net of federal benefit (52) (60) (8)
Change in valuation allowance 872 (429) (290)
Utilization of net operating loss carryforwards - 1,026 -
Other, net 118 (28) 364
----- ----- ----
$ 495 - -
===== ===== ====
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
April 30,
-------------------
1999 2000
---- ----
Deductible temporary differences:
Inventories $ 1,355 1,371
Allowance for doubtful accounts 250 250
Accrued liabilities not deductible until paid 1,636 1,602
Postretirement benefit costs 4,704 5,082
Restructuring charge 513 514
Net operating loss carryforwards 13,159 13,190
Alternative minimum tax credit carryforwards 1,042 1,142
Investment tax credit carryforwards 3,523 3,580
-------- -------
26,182 26,731
Less valuation allowance 8,886 9,176
-------- -------
17,296 17,555
Taxable temporary difference - plant and equipment (12,231) (12,360)
-------- -------
Net deferred tax asset $ 5,065 5,195
======== =======
31
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
At April 30, 2000, we had available net operating loss (NOL) carryforwards for
regular federal tax purposes of approximately $34,710 which will expire as
follows: $64 in 2005, $2,653 in 2007, $4,374 in 2008, $5,797 in 2009, $7,447 in
2011, $6,264 in 2012, $7,754 in 2013 and $357 in 2015. We have investment tax
credit carryforwards of $328 for federal tax purposes and $3,252 for state tax
purposes. We have fully reserved for the investment tax credit carryforwards as
it is likely that they will not be utilized prior to their expiration. The
credits expire in various periods through 2007. We also have available $1,142 of
alternative minimum tax (AMT) credit carryforwards which may be used
indefinitely to reduce future federal regular income tax obligations. Of the
amounts noted above, approximately $810 of NOL carryforwards and $152 of
investment tax credit carryforwards were added due to the purchase of
Wellington; these amounts were fully reserved at the date of acquisition. If
ever recognized, the benefit will be recorded as a reduction to goodwill.
A valuation allowance is required when it is more likely than not that all or a
portion of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets is dependent upon future profitability.
The steel industry has historically experienced cyclical earnings patterns and
we have normally utilized all NOL's generated during the down cycle.
Substantially all of our NOL's have been generated since 1992 and can be
attributed to a down cycle in the industry in 1992 through 1995, losses incurred
in the closing of our Oklahoma City facility and losses on the early retirement
of debt. The latter two events have accounted for $6,800 and $13,300 in losses,
respectively. During this latest upward cycle, which began in 1995, we have
installed a new rolling mill and shear line which has increased the productivity
and efficiency in the production of rebar and has enabled us to produce certain
higher quality hot rolled bar products. Delays in the installation, testing and
acceptance of these projects have negatively impacted earnings during this
period. We continue to introduce new mill products and make progress toward
achieving the anticipated potential of the mill. However, we can give no
assurance that the mill will reach the forecasted production goals or that we
will achieve future profitability.
Accordingly, we adjusted the valuation allowance at April 30, 2000, to reduce
the deferred tax assets to a level which, based on historical taxable income
trends and our projections for future taxable income, will more likely than not,
be realized. In order to fully realize the remaining net deferred tax asset, we
will need to generate future taxable income, exclusive of reversals of deferred
tax liabilities, of approximately $13,700.
(7) Employee Benefit Plans
We have defined benefit plans that cover the hourly employees at Sand Springs
and Joliet and the salaried employees at Sand Springs. Benefits are generally
based on years of service and the employee's compensation during the last ten
years of employment. Our funding policy is to contribute annually at least the
minimum amount necessary to avoid a deficiency in the funding standard.
In addition to the defined benefit pension plan, we also provide postretirement
health and life insurance benefits to certain retirees and their beneficiaries,
generally for the remainder of their lives. The Plan is contributory, with
retiree contributions adjusted annually, and contains other cost-sharing
features such as deductibles, co-insurance, and Medicare. Our policy is to fund
accumulated postretirement benefits on a "pay-as-you-go" basis.
The following tables set forth the plans' benefit obligations, fair value of
plan assets, and funded status at April 30, 1999 and 2000 as determined by an
independent actuary:
32
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------------------- -------------------------------
1999 2000 1999 2000
------- ------ ------ ------
<S> <C> <C> <C> <C>
Change in benefit obligation:
-----------------------------
Benefit obligation at beginning of year $25,220 28,289 22,983 21,013
Service cost 792 769 264 271
Interest costs 1,831 1,898 1,396 1,332
Amendments 147 300 - -
Actuarial loss/(gain) 1,856 (3,288) (2,444) (3,412)
Benefits paid (1,557) (1,695) (1,186) (1,303)
------- ------ ------ ------
Benefit obligation at end of year 28,289 26,273 21,013 17,902
------- ------ ------ ------
Change in plan assets:
----------------------
Fair value of plan assets at beginning of year 26,527 29,676 - -
Actual return on plan assets 3,441 2,763 - -
Employer contributions 1,265 312 1,186 1,303
Benefits paid (1,557) (1,695) (1,186) (1,303)
------- ------ ------- -------
Fair value of plan assets at end of year 29,676 31,056 - -
------- ------ ------- -------
Funded status 1,387 4,783 (21,013) (17,902)
-------------
Unrecognized actuarial gain (3,211) (6,575) (11,453) (14,124)
Unrecognized prior service cost 711 927 - -
Unrecognized transition obligation 1,570 1,047 20,086 18,651
------- ------ ------- -------
Net amount recognized $ 457 182 (12,380) (13,374)
======= ====== ======= =======
Amount recognized in the statement of
-------------------------------------
Financial position consist of:
Prepaid/(accrued) benefit cost $ 457 182 (12,380) (13,374)
Accrued benefit liability (206) - - -
Intangible asset 206 - - -
Accumulated other comprehensive income - - - -
------- ------ ------- -------
Net amount recognized $ 457 182 (12,380) (13,374)
======= ====== ======= =======
Weighted-average assumptions as of
April 30:
Discount rate 7.00% 8.00% 7.00% 8.00%
Rate of compensation increase 0-4% 0-4% - -
Expected rate of return on plan assets 8.50% 9.00% - -
</TABLE>
For measurement purposes, the medical trend rates used for HMO and PPO/indemnity
plans were 5.8% and 8.75%, respectively. The medical and HMO trend rates are
assumed to decrease gradually to 5.0% by 2005 and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported.
33
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
The following table presents the components of the net periodic benefit cost:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------ -------------------------------
1998 1999 2000 1998 1999 2000
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost:
----------------------------------------
Service cost $ 735 792 769 292 264 271
Interest cost 1,591 1,831 1,899 1,539 1,396 1,332
Expected return on plan assets (1,842) (2,218) (2,601) - - -
Amortization of unrecognized transition obligation 522 522 522 1,435 1,435 1,435
Amortization of prior service cost 1 34 61 - - -
Recognized actuarial gain 7 (8) (64) (585) (684) (737)
------- ------ ----- ----- ----- -----
Net periodic benefit cost $ 1,014 953 586 2,681 2,411 2,302
======= ====== ===== ===== ===== =====
</TABLE>
At April 30, 1999, we had one pension plan that had a projected benefit
obligation in excess of plan assets. For this plan, the projected benefit
obligation was $3,659, the accumulated benefit obligation was $3,659, and the
fair value of plan assets was $3,170. At April 30, 2000, there were no pension
plans that had a projected benefit obligation in excess of plan assets.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
Point Increase Point Decrease
--------------------- ---------------------
<S> <C> <C>
Effect of total of service and interest on cost $ 233 $ (191)
components
Effect on postretirement benefit obligation $2,119 $(1,779)
</TABLE>
We have certain divisions of the Company that maintain defined contribution
plans in which various groups of employees participate. We made contributions to
these plans of $89 in 1998, $132 in 1999, and $131 in 2000.
(8) Operating Leases
We are obligated under various noncancelable operating leases for certain land
and buildings. These leases generally contain inflationary rent escalations and
require us to pay all executory costs such as maintenance and insurance. Rental
expense for operating leases (except those with lease terms of a month or less
that were not renewed) was $315 in 1998, $345 in 1999 and $370 in 2000. Future
minimum lease payments under noncancelable operating leases (with initial or
remaining lease terms in excess of one year) for the years ending April 30, are
as follows:
2001 $ 410
2002 411
2003 275
2004 120
2005 120
Later years 55
------
Total $1,391
======
34
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
In addition to the noted operating leases, during 2000, we entered into an
operating lease for equipment that is currently under construction. We estimate
that the lease amount will be approximately $10,000 over five years.
(9) Commitments and Contingencies
We are partially self-insured for certain risks consisting primarily of employee
health insurance programs and workers' compensation. Probable losses and claims
are accrued as they become estimable. We maintain letters of credit totaling
approximately $2 million in accordance with workers' compensation arrangements.
We are involved in claims and legal actions arising in the ordinary course of
business. We believe that the ultimate disposition of these matters will not
have a material adverse effect on our financial position, results of operations,
or liquidity.
(10) Related Party Transactions
An affiliated company provides management and business services to us,
including, but not limited to, financial, marketing, executive personnel,
corporate development, human resources, and limited legal services. Management
fees charged were $720 in 1998, $817 in 1999, and $861 in 2000. In addition, we
purchase general liability, workers' compensation and other insurance through an
affiliated company that provides risk management services. These risk management
services include; procuring and maintaining property and casualty insurance
coverage; reviewing and recommending alternative financing methods for insurance
coverage; identifying and evaluating risk exposures, and preparing and filing
proof of loss statements for insured claims. Total fees paid for insurance
services were $142 in 1998, $204 in 1999 and $213 in 2000.
During fiscal year 1993, certain minority shareholders issued $1,000 of notes
receivable to us. The notes bear interest at an annual rate of 7.61% and are
secured by common stock of the Company owned by those shareholders. Principal
and interest are due on February 1, 2007, unless extended at our option until
February 1, 2012. The principal balance outstanding was $700 as of April 30,
1999 and 2000.
On September 30, 1996, we signed an agreement to repurchase 50,625 shares of our
common stock from two minority shareholders who were former officers of the
Company. The stock repurchase is pursuant to the Amended and Restated
Stockholder's Agreement dated September 15, 1993 and the stock purchase price
was calculated in accordance with the agreement. As a result of this
transaction, $393 of notes receivable from the former shareholders was
satisfied, we recorded a note payable in the amount of $662 and decreased paid-
in capital by $1,055. The notes payable accrue simple interest at 6.02% and are
being repaid in five annual installments that began December 12, 1997. The
principal balance outstanding was $397 at April 30, 1999 and $265 at April 30,
2000.
During fiscal 2000, one employee and two former employees of the Company issued
$535 of full recourse notes receivable to us for stock options exercised in
2000. The notes mature at various dates through January of 2001.
We have a receivable of $2,205 from HMK related to certain tax attributes
allocated to us. In addition, we advanced $500 to HMK to secure a letter of
credit for the Joliet insurance program.
35
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(11) Stock Options
On September 15, 1993, the Board of Directors adopted, and the stockholders
approved, our 1993 Employee, Director and Consultant Stock Option Plan (the
Stock Option Plan). The Stock Option Plan provides for the grant of incentive
options to key employees and nonqualified stock options to key employees,
directors, and consultants. A total of 580,000 shares of our common stock, which
would represent approximately 14.9% of the common stock on a fully diluted
basis, have been reserved for issuance under the Stock Option Plan. The options
vest three years from the date of grant and may be exercised within 10 years
from the grant date for incentive stock options or 20 years from the grant date
for non-qualified stock options at a price not less than the fair value of the
stock at the time the options are granted. Fair value for purposes of
determining the exercise price is determined by appraisal as prescribed in the
Stock Option Plan. At April 30, 2000, there were 125,112 additional shares
available for grant under the Stock Option Plan.
We apply APB Opinion No. 25 in accounting for the Stock Option Plan and,
accordingly, no compensation cost has been recognized for our stock options in
the financial statements. If we had determined compensation cost based on the
fair value at the grant date for our stock options under SFAS No. 123, our
results would have been reduced to a loss of $6,303 in 1998, income of $1,409 in
1999, and a loss of $97 in 2000.
The per share weighted-average fair value of stock options granted was $4.66 in
1998, $7.48 in 1999 and $8.70 in 2000 on the date of grant using the minimum
value method with the following assumptions: expected dividend yield of
approximately 1.0%, risk-free interest rate of 6.38%, and an expected life of
five years.
The options outstanding and activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price
------- --------------
<S> <C> <C>
At April 30, 1997 456,000 $ 8.87
Granted 5,000 19.88
Canceled (5,000) 20.52
--------
At April 30, 1998 456,000 8.87
Granted 18,000 30.48
Excercised (50,625) 7.41
--------
At April 30, 1999 423,375 9.96
Granted 99,000 35.25
Exercised (117,640) 7.74
--------
At April 30, 2000 404,735 16.79
========
</TABLE>
Exercise prices for options outstanding as of April 30, 2000 ranged from $7.41
to $38.67. The weighted-average remaining contractual life of those options is
13.5 years. Exercisable shares at April 30 were 405,000 in 1998, 354,375 in 1999
and 282,735 in 2000.
In connection with the adoption of the Stock Option Plan, we elected to
terminate our Stock Appreciation Rights Plan (SAR). Existing liabilities under
the SAR plan were frozen at their current level. All vested rights become
exercisable upon the participants' termination. Included in other liabilities at
April 30, 1999 and 2000 is $368 which is the liability for the SAR's based on
vesting and retirement dates.
36
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(12) 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 $2,256 in 1999 and $2,379 in
2000 related to settlements with certain of the defendents.
(13) Extraordinary Item
We incurred a $8,023 extraordinary loss related to the First Mortgage Note
offering completed during the third quarter of 1998. The extraordinary charge
related primarily to a redemption premium, unamortized discount and debt issue
costs associated with the retirement of our First Mortgage Notes that were due
2001.
(14) Acquisitions
On October 28, 1997, we acquired all of the outstanding capital stock of
Waddell's Rebar Fabricators, Inc. The purchase price of the stock was $3,137,
subject to certain potential performance related payments. We paid approximately
$1,100 in cash and incurred $2,000 in debt related to this acquisition. The
acquisition was accounted for in accordance with the purchase method. The fair
value of tangible assets acquired was $2,490 including $1,902 of current assets
and $588 of fixed assets. The amount of liabilities assumed was $812 including
$701 of accounts payable and other accrued liabilities and $111 of long-term
debt. In addition, we recorded $1,459 as excess of cost over net assets acquired
(goodwill).
On October 6, 1998, we acquired all of the outstanding capital stock of
Wellington Industries, Inc. The acquisition price consisted of $1,500 in cash,
subject to performance related contingency payments, and unsecured, subordinated
promissory notes in an aggregate principal amount of $1,464. The acquisition was
accounted for in accordance with the purchase method. The fair value of tangible
assets acquired was $1,683 including $1,229 of current assets and $454 of fixed
assets. The amount of liabilities assumed was $947 including $711 of accounts
payable and accrued liabilities and $236 of long-term debt. In addition, we
recorded $2,228 as excess cost over net assets acquired (goodwill).
37
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
-------- --------------------------------
The information included under the caption entitled "Management" in our
Proxy Statement dated July 31, 2000, with respect to directors and executive
officers is incorporated herein by reference in response to this item.
Because we do not have a class of securities registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), none of
our directors, executive officers or ten percent or greater securityholders are
subject to the reporting requirements of Section 16(a) of the Exchange Act.
Accordingly, disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not applicable.
ITEM 11. EXECUTIVE COMPENSATION
-------- -----------------------
The information regarding compensation of our executive officers is
included under the caption entitled "Executive Compensation" in our Proxy
Statement dated July 31, 2000, and is incorporated herein by reference in
response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-------- ---------------------------------------------------------------
The information regarding beneficial ownership of our Common Stock by
certain beneficial owners and by management is included under the caption
entitled "Share Ownership" in our Proxy Statement dated July 31, 2000, and is
incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------- ----------------------------------------------
The information regarding certain relationships and related transactions
with management and others is included under the caption entitled "Certain
Transactions" in our Proxy Statement dated July 31, 2000, and is incorporated
herein by reference in response to this item.
38
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
-------- ---------------------------------------------------------------
ITEM 14(a)1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS COVERED BY REPORT
------------ -----------------------------------------------------
OF INDEPENDENT AUDITORS
-----------------------
The Consolidated Financial Statements of Sheffield Steel Corporation are
included in Item 8:
Independent Auditors' Report
Consolidated Balance Sheets - April 30, 1999 and 2000
Consolidated Statements of Operations - Years ended April 30, 1998, 1999
and 2000
Consolidated Statements of Stockholders' Equity (Deficit) - Years Ended
April 30, 1998,
1999 and 2000
Consolidated Statements of Cash Flows - Years Ended April 30, 1998, 1999
and 2000
Notes to Consolidated Financial Statements - April 30, 1998, 1999 and
2000
ITEM 14(a)2. INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
------------ ---------------------------------------------------
The following consolidated financial statement schedules of Sheffield Steel
Corporation are included in Item 14(d):
Form 10-K Schedules Description Page
------------------- ----------- ----
Number
------
II Valuation and Qualifying 45
Accounts
Schedules other than those listed above have been omitted because they are
not applicable. Columns omitted from schedules filed have been omitted because
the information is not applicable.
39
<PAGE>
ITEM 14(a)3. EXHIBITS
------------ --------
The exhibits listed on the Exhibit Index below are filed or incorporated by
reference as part of this report and such Exhibit Index is hereby incorporated
herein by reference.
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Sequentially
No. Description numbered page
-------- ------------------------------------------------------------------------------------------------ ------------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Registrant, as amended (Incorporated by reference to Exhibit
3.1 to Amendment No. 2 to the Registrant's Registration Statement on Form S-1 filed on October
21, 1993).
3.2 By-Laws of the Registrant (Incorporated by reference to Exhibit 3.2 to Amendment No. 2 to the
Registrant's Registration Statement on Form S-1 filed on October 21, 1993).
4.1 Indenture for First Mortgage Notes (including form of First Mortgage Note issued thereunder),
dated as of December 1, 1997, between Sheffield Steel Corporation and State Street Bank and
Trust Company, as Trustee (Incorporated by reference to Exhibit 4.1 to the Registrant's
Regristration Statement on Form S-1 filed on January 9, 1998).
4.2 Form of New First Mortgage Note (Incorporated by reference to Exhibit 4.2 to the Registrant's
Regristration Statement on Form S-1 filed on January 9, 1998).
4.3 Intercreditor Agreement, dated December 1, 1997, among Sheffield Steel Corporation, NationsBank,
N.A. and State Street Bank and Trust Company, as Trustee (Incorporated by reference to Exhibit
4.3 to the Registrant's Registration Statement on Form S-1 filed on January 9, 1998).
4.4 Receivable and Inventory Financing Agreement, dated as of January 16, 1992, between HMK
Industries of Oklahoma, Inc., Sheffield Steel Corporation, Sheffield Steel Corporation-Joliet,
Sheffield Steel Corporation-Oklahoma City and NationsBank of Georgia, N.A. (Incorporated by
reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-1 filed on August
17, 1993).
4.5 Guaranty, dated January 16, 1992, from HMK Industries of Oklahoma, Inc. to NationsBank of
Georgia, N.A. (Incorporated by reference to Exhibit 4.3 to the Registrant's Registration
Statement on Form S-1 filed on August 17, 1993).
4.6 Mortgage and Security Agreement, dated January 16, 1992, between Sheffield Steel Corporation and
NationsBank of Georgia, N.A. (Incorporated by reference to Exhibit 4.4 to the Registrant's
Registration Statement on Form S-1 filed on August 17, 1993).
4.7 Mortgage and Security Agreement, dated January 16, 1992, between Sheffield Steel
Corporation-Joliet and NationsBank of Georgia, N.A. (Incorporated by reference to Exhibit 4.5 to
the Registrant's Registration Statement on Form S-1 filed on August 17, 1993).
4.8 Stock Pledge Agreement, dated January 16, 1992, between HMK Industries of Oklahoma, Inc. and
NationsBank of Georgia, N.A. (Incorporated by reference to Exhibit 4.6 to the Registrant's
Registration Statement on Form S-1 filed on August 17, 1993).
4.9 First Amendment to Receivable and Inventory Financing Agreement, dated August 13, 1993 between
HMK Industries of Oklahoma, Inc., Sheffield Steel Corporation, Sheffield Steel
Corporation-Joliet, Sheffield Steel Corporation-Oklahoma City and NationsBank of Georgia, N.A.
(Incorporated by reference to Exhibit 4.24 to the Registrant's Registration Statement on Form
S-1 filed on October 6, 1993).
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C>
4.10 Warrant Agreement, dated November 1, 1993, between Sheffield Steel Corporation and Shawmut Bank
Connecticut, N.A., as Warrant Agent (Incorporated by reference to Exhibit 4.8 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1993).
4.13 Second Amendment to Receivable and Inventory Financing Agreement, dated November 1, 1993 between
Sheffield Steel Corporation-Oklahoma City, Sheffield Steel Corporation, and NationsBank of
Georgia, N.A. (Incorporated by reference to Exhibit 4.13 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended October 31, 1993).
4.14 Third Amendment to Receivable and Inventory Financing Agreement, dated December 13, 1994 between
Sheffield Steel Corporation and NationsBank of Georgia, N.A. (Incorporated by reference to
Exhibit 4.14 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31,
1993).
4.15 Fourth Amendment to Receivable and Inventory Financing Agreement, dated October 30, 1995 between
Sheffield Steel Corporation and NationsBank of Georgia, N.A. (Incorporated by reference to
Exhibit 4.15 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31,
1995).
4.16 Fifth Amendment to Receivable and Inventory Financing Agreement, dated April 19, 1996 between
Sheffield Steel Corporation and NationsBank of Georgia, N.A. (Incorporated by reference to
Exhibit 4.16 of the Registrant's Annual Report on Form 10-K for the fiscal year ended April 30,
1996).
4.17 Sixth Amendment to Receivable and Inventory Financing Agreement, dated December 1, 1997 between
Sheffield Steel Corporation and NationsBank, N.A. (Incorporated by reference to Exhibit 4.17 to
the Registrant's Regristration Statement on Form S-1 filed on January 9, 1998).
4.18 Seventh Amendment to Receivable and Inventory Financing Agreement, dated December 1, 1997
between Sheffield Steel Corporation and NationsBank, N.A. (Incorporated by reference to Exhibit
4.18 of the Registrant's Annual Report on Form 10K for the fiscal year ended April 30, 1999).
4.19 Eighth Amendment to Receivable and Inventory Financing Agreement, dated April 13, 1999 between
Sheffield Steel Corporation and NationsBank, N.A. (Incorporated by reference to Exhibit 4.19 of
the Registrant's Annual Report on Form 10K for the fiscal year ended April 30, 1999).
4.20 Ninth Amendment to Receivable and Inventory Financing Agreement, dated July 31, 1999 between
Sheffield Steel Corporation and Bank of America, N.A. (Incorporated by reference to Exhibit 4.20
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1999).
4.21 First Supplemental Indenture dated December 6, 1999 by Sheffield Steel Corporation and State
Street Bank and Trust Company, as Trustee (Incorporated by reference to Exhibit 4.21 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1999).
10.1 Income Tax Expense Allocation Policy and Tax Sharing Agreement, effective May 1, 1991 between
HMK Enterprises, Inc. and Sheffield Steel Corporation, Sheffield Steel Corporation-Joliet,
Sheffield Steel Corporation-Oklahoma City and Sand Springs Railway Company (Incorporated by
reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 filed on August
17, 1993).
</TABLE>
41
<PAGE>
<TABLE>
<S> <C>
10.2 Form of Master Loan and Security Agreement between Sheffield Steel Corporation and the CIT
Group/Equipment Financing, Inc. dated July 14, 1994 (Incorporated by reference to Exhibit 10.6
to the Registrant's Annual Report on Form 10-K for the year ended April 30, 1994).
10.3 Restated Credit Agreement, dated April 23, 1991, between Sand Springs Railway Company and Bank
of Oklahoma (Incorporated by reference to Exhibit 4.7 to the Registrant's Registration Statement
on Form S-1 filed on August 17, 1993).
10.4 Amendment to Restated Credit Agreement, dated May 31, 1992, between Sand Springs Railway Company
and Bank of Oklahoma (Incorporated by reference to Exhibit 4.8 to the Registrant's Registration
Statement on Form S-1 filed on August 17, 1993).
10.5 Amendment to Assignment of Transportation Agreement, dated April 23, 1991 between Sand Springs
Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.10 to the
Registrant's Registration Statement on Form S-1 filed on August 17, 1993).
10.6 Amendment to Assignment of User Contracts, dated April 23, 1991 between Sand Springs Railway
Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.11 to the Registrant's
Registration Statement on Form S-1 filed on August 17, 1993).
10.7 Amendment to Pledge and Security Agreement, dated April 23, 1991 between Sand Springs Railway
Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.12 to the Registrant's
Registration Statement on Form S-1 filed on August 17, 1993).
10.8 Amendment to Security Agreements, dated April 23, 1991 between Sand Springs Railway Company and
Bank of Oklahoma (Incorporated by reference to Exhibit 4.13 to the Registrant's Registration
Statement on Form S-1 filed on August 17, 1993).
10.9 Amendment to Real Estate Mortgage and Security Agreement, dated April 23, 1991 between Sand
Springs Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.14 to the
Registrant's Registration Statement on Form S-1 filed on August 17, 1993).
10.10 Amendment to Real Estate Mortgage and Security Agreement, dated April 23, 1991 between Sand
Springs Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.15 to the
Registrant's Registration Statement on Form S-1 filed on August 17, 1993).
10.11 Assignment of Transportation Agreement, dated December 10, 1987 between Sand Springs Railway
Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.16 to the Registrant's
Registration Statement on Form S-1 filed on August 17, 1993).
10.12 Assignment of User Contracts, dated December 10, 1987 between Sand Springs Railway Company and
Bank of Oklahoma (Incorporated by reference to Exhibit 4.17 to the Registrant's Registration
Statement on Form S-1 filed on August 17, 1993).
10.13 Security Agreement, dated December 10, 1987 between Sand Springs Railway Company and Bank of
Oklahoma (Incorporated by reference to Exhibit 4.18 to the Registrant's Registration Statement
on Form S-1 filed on August 17, 1993).
10.14 Security Agreement, dated December 10, 1987 between Sand Springs Railway Company and Bank of
Oklahoma (Incorporated by reference to Exhibit 4.19 to the Registrant's Registration Statement
on Form S-1 filed on August 17, 1993).
10.15 Real Estate Mortgage and Security Agreement, dated December 10, 1987 between Sand Springs
Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.20 to the
Registrant's Registration Statement on Form S-1 filed on August 17, 1993).
</TABLE>
42
<PAGE>
<TABLE>
<S> <C>
10.16 Real Estate Mortgage and Security Agreement, dated December 10, 1987 between Sand Springs
Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.21 to the
Registrant's Registration Statement on Form S-1 filed on August 17, 1993).
10.17 Pledge and Security Agreement, dated December 10, 1987 between Sand Springs Railway Company and
Bank of Oklahoma (Incorporated by reference to Exhibit 4.22 to the Registrant's Registration
Statement on Form S-1 filed on August 17, 1993).
10.18 Guaranty Agreement, dated December 10, 1987 between HMK Industries of Oklahoma, Inc. and Sand
Springs Railway Company (Incorporated by reference to Exhibit 4.23 to the Registrant's
Registration Statement on Form S-1 filed on August 17, 1993).
10.19 Second Amendment to Restated Credit Agreement, dated September 24, 1993 between Sand Springs
Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.25 to the
Registrant's Registration Statement on Form S-1 filed on August 17, 1993).
10.20 Subordination Agreement dated November 10, 1995, between Sheffield Steel Corporation and the CIT
Group/Equipment Financing, Inc. (Incorporated by reference to Exhibit 10.25 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended April 30, 1996).
10.21 First Amendment to Master Loan and Security Agreement between Sheffield Steel Corporation and
the CIT Group/Equipment Financing, Inc. dated April 25th, 1995. (Incorporated by reference to
Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the fiscal year ended April 30,
1996).
10.22 Second Amendment to Master Loan and Security Agreement between Sheffield Steel Corporation and
the CIT Group/Equipment Financing, Inc. dated July 2, 1996. (Incorporated by reference to
Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the fiscal year ended April 30,
1996).
10.23 Sheffield Steel Corporation 1993 Employee, Director and Consultant Stock Option Plan, as
Amended. (Incorporated by reference to Exhibit 10.23 of the Registrant's Annual Report on Form
10K for the fiscal year ended April 30, 1999).
10.24 Second Amendment to Real Estate Mortgage and Security Agreement, dated July 31, 1996 between
Sand Springs Railway Company and Bank of Oklahoma, N.A. (Incorporated by reference to Exhibit
10.29 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1996).
10.25 Third Amendment to Real Estate Mortgage and Security Agreement, dated July 31, 1996 between Sand
Springs Railway Company and Bank of Oklahoma, N.A. (Incorporated by reference to Exhibit 10.30
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1996).
10.26 Fourth Amendment to Restated Credit Agreement, date July 31, 1996 between Sand Springs Railway
Company and Bank of Oklahoma, N.A. (Incorporated by reference to Exhibit 10.31 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1996).
10.27 Real Time Pricing Program Agreement dated June 1, 1996 between Sheffield Steel Corporation and
Public Service Company of Oklahoma. (Incorporated by reference to Exhibit 10.34 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1996).
10.28 Agreement between the United Steelworkers of America and the Sand Springs Division of Sheffield
Steel Corporation dated March 2, 1997. (Incorporated by reference to Exhibit 10.35 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended April 30, 1997).
</TABLE>
43
<PAGE>
<TABLE>
<S> <C> <C>
10.29 Fifth Amendment to Restated Credit Agreement, dated July 31, 1997 between Sand Springs Railway
Company and Bank of Oklahoma, N.A. (Incorporated by reference to Exhibit 10.36 to the
Registrant's Annual Report on Form 10-Q for the quarter ended July 31, 1997).
10.30 Management Services Agreement, dated December 5, 1997 between HMK Enterprises, Inc. and
Sheffield Steel Corporation. (Incorporated by reference to Exhibit 10.32 to the Registrant's
Registration Statement on Form S-1 filed on January 9, 1998).
10.31 Insurance Services Agreement, dated December 1, 1997 between Risk Management Solutions, Inc. and
Sheffield Steel Corporation. (Incorporated by reference to Exhibit 10.33 to the Registrant's
Registration Statement on Form S-1 filed on January 9, 1998).
10.33 Stock Purchase Agreement between Sheffield Steel Corporation, Waddell's Rebar Fabricators, Inc.
and the Stockholders of Waddell's Rebar Fabricators, Inc. dated October 27, 1997.
(Incorporated by reference to Exhibit 10.38 to the Registrant's Quarterly Report on Form 10Q for
the Quarter ended October 31, 1997.)
10.34 Master Loan and Security Agreement between Sheffield Steel Corporation and Sanwa Business Credit
Corporation dated June 30, 1998. (Incorporated by reference to Exhibit 10.34 to the
Registrant's Annual Report on Form 10K for the fiscal year ended April 30, 1998.)
10.35 Sixth Amendment to Restated Credit Agreement, date July 31, 1998 between Sand Springs Railway
Company and Bank of Oklahoma, N.A. (Incorporated by reference to Exhibit 10.35 to the
Registrant's Quarterly Report on Form 10Q for the Quarter ended July 31, 1998.)
10.36 Stock Purchase Agreement between Sheffield Steel Corporation, Wellington Industries, Inc. and
the Stockholders of Wellington Industries, Inc. Dated October 6, 1998 (Incorporated by
reference to Exhibit 10.36 to the Registrant's Quarterly Report on Form 10Q for the Quarter
ended October 31, 1998).
10.37 Project Lease Agreement between TA Steel I, LLC, as Lessor and Sheffield Steel Corporation as
Lessee dated November 23, 1999 (Incorporated by reference to Exhibit 10.37 to the Registrant's
Quarterly Report on Form 10Q for the Quarter ended October 31, 1999).
10.38 Second Restated Credit Agreement, dated January 5, 2000 between Sand Springs Railway Company and
Bank of Oklahoma, N.A. (Incorporated by reference to Exhibit 10.38 to the Registrant's Quarterly
Report on Form 10Q for the Quarter ended January 31, 2000).
** 12 Statement re Computation of Ratio of Earnings to Fixed Charges. 49
** 13 Statement re Computation of EBITDA. 50
21 Subsidiaries of the Registrant (Incorporated by reference to Exhibit 21 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended April 30,
** 27 Financial Data Schedule.
</TABLE>
* Executive Compensation Plans and Arrangements
** Filed herewith.
ITEM 14(b). REPORTS ON FORM 8-K
----------- -------------------
No reports on Form 8-K were filed during the fourth quarter ended April 30,
2000.
44
<PAGE>
ITEM 14(c). EXHIBITS
---------- --------
The response to this portion of item 14 is submitted as a separate
section of this report.
ITEM 14(d). CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
---------- -----------------------------------------
45
<PAGE>
Schedule II
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended April 30, 2000, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
Balance Charged to Balance
April 30, Costs and Deductions - April 30,
1999 Expenses Write-offs 2000
---- -------- ---------- ----
<S> <C> <C> <C> <C>
Accounts receivable - allowance for
doubtful accounts $ 658 (117) - 541
=== === === ===
<CAPTION>
Balance Charged to Balance
April 30, Costs and Deductions - April 30,
1998 Expenses Write-offs 1999
---- -------- ---------- ----
Accounts receivable - allowance for
doubtful accounts $ 658 - - 658
=== === === ===
<CAPTION>
Balance Charged to Balance
April 30, Costs and Deductions - April 30,
1997 Expenses Write-offs 1998
---- -------- ---------- ----
Accounts receivable - allowance for
doubtful accounts $ 658 - - 658
=== === === ===
</TABLE>
46
<PAGE>
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SHEFFIELD STEEL CORPORATION
July 19, 2000 /s/ James P. Nolan
-------------------------- --------------------------------
Date James P. Nolan, President
and Chief Operating Officer
July 19, 2000 /s/ Stephen R. Johnson
-------------------------- --------------------------------
Date Stephen R. Johnson, Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacity and on the dates indicated.
July 19, 2000 /s/ Steven E. Karol
----------------------------- -------------------------------
Date Steven E. Karol, Chairman of
Board and CEO
July 19, 2000 /s/ Robert W. Ackerman
----------------------------- -------------------------------
Date Robert W. Ackerman, Director
July 19, 1999 /s/ Dale S. Okonow
----------------------------- -------------------------------
Date Dale S. Okonow, Director
July 19, 2000 /s/ Jane M. Karol
----------------------------- -------------------------------
Date Jane M. Karol, Director
July 19, 2000 /s/ Howard H. Stevenson
----------------------------- -------------------------------
Date Howard H. Stevenson, Director
July 19, 2000 /s/ Robert Schaal
----------------------------- -------------------------------
Date Robert Schaal, Director
47
