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, channels 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 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 420,000 tons of steel in fiscal 1999, resulting in sales of $163.4 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, 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. Recently we entered into a letter of intent to purchase a new reheat furnace for the Rolling Mill that would decrease natural gas usage as well as improve quality, yields, and productivity. If we proceed with this project, which is expected to cost approximately $10 million, we anticipate installation to be during fiscal 2001. From Sand Springs, we also transfer billets to our two rolling mills in Joliet, Illinois (Joliet), where we produce high-end 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).
Business Strategy
We believe our operating 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 increased our hot rolled bar production capacity. Accordingly, shipments of finished products have increased 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 7.4% of tons shipped in fiscal 1999. 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.
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 possible 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. An engineering study is currently underway to determine the feasibility of this project.
Products, Customers and Markets
The following table shows the percentage of revenues derived from each product category for the last three years:
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 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 channels for end use applications that include wrenches, pole line hardware, conveyor assemblies, construction machinery, auto parts, farm equipment, and oilfield sucker rods. 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 to both end product manufacturers and steel service centers.
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 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 to sell standard hot rolled bar products to customers that Joliet is currently serving in the specialty hot rolled bar market.
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.
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, dams, 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 our primary market area of Oklahoma, Kansas and portions of southern Nebraska, western Missouri, western 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.
Fabricated rebar is shipped from Kansas City and Waddell to highway and construction contractors in Missouri, Kansas and Nebraska. 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. We believe that our epoxy coating line, the only one located in the Kansas City market, provides 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. The acquisition price was approximately $3 million, subject to performance related contingency payments, consisting of $1.5 million in cash and $1.5 million of unsecured subordinated promissory notes which mature annually over three years and bear interest at Bank America's prime rate. We believe that the purchase of Wellington secured a downstream market for our Rolling Mill products and it enhances our fabrication capabilities.
Billets. We sell billets to forgers and other steel mills 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. 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 mills in Joliet produce 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.
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 personnel and limited 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 increased production capacity directly related to the completion of the Shear Line Project, we expect that internal billet requirements will increase and the availability of billets for sale to third parties will decrease. 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 the following sources: industrial, automotive, demolition, railroad, obsolete and other. We purchase scrap in the open market through a limited number of steel scrap brokers and dealers or by direct purchase. The cost of steel scrap is subject to market forces, including demand by other steel producers and export volumes. 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 with additions to or replacements of 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, iron carbide, hot-briquette iron and pig iron. A sustained increase in the price of steel scrap could result in increased use of these alternative materials. We have successfully employed scrap substitutes in our manufacturing process to achieve quality characteristics and we expect to increase usage of such substitutes in the future.
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. Historically, we have been adequately supplied with electricity and we do not anticipate any material curtailment in our operations resulting from energy shortages.
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. 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 affect 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, 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 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 1999. We compete in the rebar market with a number of other mini-mills, principally Chaparral Steel Company and Structural Metals, Incorporated.
We are not in competition on a regular basis with foreign or integrated steel producers. These mills have cost and freight disadvantages compared to us and other domestic mini-mills which have effectively precluded them from competing in the relatively low priced hot rolled bar product and rebar markets.
Competitive factors in fence post sales include product quality measured by durability, 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 more 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, 1999, we had approximately 673 employees. Approximately 65% 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 289 hourly-paid production and maintenance employees. This agreement was negotiated as of March 2, 1997 and is for a three-year period expiring on March 1, 2000.
Joliet is also party to a collective bargaining agreement covering approximately 133 hourly-paid production and maintenance employees, which was negotiated on February 28, 1999. The new agreement, which expires on March 1, 2002, contains provisions for wage increases and benefit changes. Kansas City has a collective bargaining agreement covering approximately 16 employees which expires on October 31, 1999. The Railway has approximately 14 employees who 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.
Environmental Compliance
We are subject to a broad range of Federal, state and local environmental requirements, including those governing air emissions and discharges into water, and the handling and disposal of wastes. We have spent substantial amounts to comply with these requirements. 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 similar mini-mills in its industry, as a generator of hazardous waste. The Resource Conservation and Recovery Act of 1976, as amended (RCRA), regulates the management of emission control sludge/dust from electric arc furnaces (K061), a waste stream generated in significant quantities in Sand Springs. All of the K061 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. If a release of K061 were to occur, we could be required to remediate such a release. Although current law permits the export of K061, 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 K061, will not be enacted. In that event, we would have to find an alternative means of treatment or disposal of the K061 in compliance with RCRA. We believe that we could properly dispose of the K061 generated in Sand Springs by constructing an on-site recovery or chemical stabilization process or by shipping the K061 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 1997 and received the permit in March, 1998. We have had one compliance audit that had no resulting violations or outstanding issues. 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 in the final stages of work with the EPA in concluding their RCRA Compliance Evaluation Inspection, which was conducted by Region 6 officials in April of 1997. Because we have been able to effectively address all of the EPA's concerns, they have verbally indicated that no penalties should be imposed. The EPA has dismissed their consultants and decided to let our consultants write the final report, or "Risk Assessment." The report was filed on June 15, 1999 and the EPA review will take several more weeks. However, we now believe that the outcome of the inspection will not have a material adverse impact on our results of operations or financial condition. We also feel that any remediation work on the site (if any is required) will be minimal in nature and will not require us to make any substantial expenditures for 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, capital expenditures 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 acceptance 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 that could limit our operating and financial flexibility. . There have been imports into the United States that have affected the steel market. . General economic conditions in the United States.
ITEM 2.
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 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 approximately 3 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 10 inch merchant bar mill. The total annual capacity in Joliet is approximately 155,000 tons of hot rolled bar products.
The Railway provides freight service between Sand Springs and Tulsa on seven miles of mainline track and 21 miles of spur line which connect customer facilities with the main line. The Railway owns the mainline track and three locomotives and operates a maintenance shop for normal repairs and upkeep. The Railway owns approximately 10 acres and leases and operates a transload facility and warehouse.
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.
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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- ---------------------------------------------------
On January 5, 1999, the stockholders of the Company voted to amend the 1993 Employee, Director and Consultant Stock Option Plan to allow for an independent appraisal of the formula used to calculate the fair market value of the equity of the Company.
PART II - -------
ITEM 5.
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 eight stockholders of record. We paid dividends of $10,000,000, or $2.80 per share, to stockholders in fiscal 1998. 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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - ------ -----------------------
The following selected consolidated financial data for the five years ended April 30, 1999 has been derived from our financial statements audited by KPMG LLP, independent auditors. Our financial statements 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.
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
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, 1998 and 1999, 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, 1999. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sheffield Steel Corporation and subsidiaries at April 30, 1998 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended April 30, 1999, in conformity with generally accepted accounting principles. 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 6, 1999
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (In thousands, except share and share data)
See accompanying notes to consolidated financial statements.
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations (In thousands)
See accompanying notes to consolidated financial statements.
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit) (In thousands, except share data)
See accompanying notes to consolidated financial statements.
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (In thousands)
(Continued)
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued (In thousands)
See accompanying notes to consolidated financial statements.
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 1997, 1998 and 1999 (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 effect 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.
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements, Continued
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the individual assets using the straight-line method. The useful lives of the property and equipment range from three to forty years. Significant renewals and betterments are capitalized; costs of maintenance and repairs are charged to expense as incurred.
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
On May 1, 1998, we adopted Statement of Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits which revises employers' disclosures about pension and other postretirement plans but does not change the method of accounting for such 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. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. 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.
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 and earnings per share 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 $163,444 in fiscal 1999, of which $162,730 were sales in the United States and $714 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 no customers that accounted for greater than 10% of sales in 1997.
(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, 1999, based on the currently offered market price, is approximately $107.8 million versus a carrying value of approximately $110.0 million.
(3) Inventories
The components of inventories are as follows:
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:
Depreciation and amortization of property, plant and equipment charged to operations was $6,271 in 1997, $6,605 in 1998 and $7,119 in 1999.
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:
[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 1st and December 1st 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.
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 $40,000 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% and is payable monthly. At April 30, 1999, the interest rate was 7.75%. An annual commitment fee of .25% is charged on the unused portion of the revolving credit agreement. The agreement continues 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 July 31, 2000, and a $1,500 million line of credit maturing July 31, 2000. The notes are secured by all of the assets and capital stock of the Railway. Interest is computed at prime plus a variable margin (based on the achievement of certain interest coverage ratios) from 0% to 1% and is payable quarterly. At April 30, 1999, the interest rate was 7.75%.
[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 $143 plus interest payable at variable rates. The notes mature on various dates through 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 three to four 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 ended April 30, are as follows:
Interest costs were $11,769 in 1997, $12,300 in 1998 and $14,599 in 1999. 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.
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements, Continued
(6) Income Taxes
We had no income tax expense or benefit for the year ended April 30, 1997. Income tax benefit for the years ended April 30, 1998 and 1999 consists of:
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:
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements, Continued
At April 30, 1999, we had available net operating loss (NOL) carryforwards for regular federal tax purposes of approximately $34,629 which will expire as follows: $66 in 2001, $69 in 2002, $100 in 2004, $135 in 2005, $2,623 in 2007, $4,374 in 2008, $5,797 in 2009, $7,447 in 2011, $6,264 in 2012 and $7,754 in 2013. We have investment tax credit carryforwards of $599 for federal tax purposes and $2,924 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 $1,042 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 and can only be used if Wellington has taxable income; these amounts were fully reserved at the date of acquisition. Future annual postretirement benefit costs are expected to exceed deductible amounts for many years and it is anticipated that all of the deferred tax assets related thereto will be utilized as such amounts become deductible.
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 $6.8 million and $13.3 million 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 established a valuation allowance at April 30, 1999, 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 of approximately $13 million.
(7) Employee Benefit Plans
We have defined benefit plans that cover the hourly employees at Sand Springs and Joliet and the salary 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 plan's benefit obligations, fair value of plan assets, and funded status at April 30, 1999 and 1998 as determined by an independent actuary:
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements, Continued
For measurement purposes, the medical trend rates used for HMO and PPO/indemnity plans were 6.0% and 9.5%, respectively. The medical and HMO trend rates are assumed to decline one-half percent per year to an ultimate level of 5.0%. The health care cost trend rate assumption has a significant effect on the amounts reported.
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements, Continued
The following table presents the components of the net periodic benefit cost:
At April 30, 1999, we had one pension plan that has 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.
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:
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 $81 in 1997, $89 in 1998, and $132 in 1999.
(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 $313 in 1997, $315 in 1998 and $345 in 1999. 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:
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements, Continued
(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 $2.3 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. We believe that transactions with related parties are at costs that could be obtained from third parties. Management fees charged were $569 in 1997, $720 in 1998 and $817 in 1999. 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 $115 in 1997, $142 in 1998 and $204 in 1999.
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, 1998 and 1999.
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 $530 at April 30, 1998 and $397 at April 30, 1999.
On January 31, 1999, we signed a short-term note receivable with an officer of the Company for $375. The note is secured by common stock of the Company and is due July 31, 1999.
We have a receivable of $2,205 from HMK related to certain tax attributes allocated to us. Under an agreement with HMK, the receivable will be realized by reducing future income taxes otherwise payable to HMK. In addition, we advanced $500 to HMK to secure a letter of credit for the Joliet insurance program.
(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 16.8% 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
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements, Continued
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 market value of the stock at the time the options are granted. Fair market value for purposes of determining the exercise price is determined by appraisal as prescribed in the Stock Option Plan. At April 30, 1999, there were 106,000 additional shares available for grant under the Stock Option Plan.
We apply APB Opinion No. 25 in accounting for the Plan and, accordingly, no compensation cost has been recognized for its 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 losses of $3,578 in 1997 and $6,303 in 1998 and income of $1,409 for the year ended April 30, 1999.
The per share weighted-average fair value of stock options granted was $4.83 in 1997, $4.66 in 1998 and $7.48 in 1999 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. Pro forma net income reflects only options granted in 1997, 1998 and 1999.
The options outstanding and activity during the periods indicated is as follows:
Exercise prices for options outstanding as of April 30, 1999 ranged from $7.41 to $30.48. The weighted-average remaining contractual life of those options is 12.8 years. There were 405,000 shares exercisable as of April 30, 1997 and 1998 and 354,375 exercisable as of April 30, 1999.
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, 1998 and 1999 is $368 which is the present value of the SAR's based on vesting and retirement dates.
(12) Restructuring Expense
During fiscal 1997, we recognized costs related to workforce reductions. Approximately 42 hourly employees accepted early retirement incentives resulting in costs of approximately $1,070 during the fourth quarter of fiscal 1997. In addition, 14 salaried employees were involuntarily terminated in the third quarter of fiscal 1997 resulting in severance costs totaling approximately $250.
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES Notes to the Consolidated Financial Statements, Continued
(13) Litigation Settlement
We were party to a lawsuit with several other steel manufacturers against certain manufacturers of carbon electrodes related to price fixing within the electrode industry. We recognized approximately $2,256 related to settlements reached to date with certain of the defendents.
(14) 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.
(15) Acquisition
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).
The following pro forma financial information reflects the results of operations for the years ended April 30, 1998 and 1999 as though the operations of Waddell and Wellington had been considered combined as of May 1, 1997:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON - ------- ------------------------------------------------ ACCOUNTING AND FINANCIAL DISCLOSURE -----------------------------------
None
PART III --------
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS - -------- --------------------------------
The information included under the caption entitled "Management" in our Proxy Statement dated July 31, 1999, 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 and 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.
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, 1999, and is incorporated herein by reference in response to this item.
ITEM 12.
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, 1999, and is incorporated herein by reference in response to this item.
ITEM 13.
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, 1999, and is incorporated herein by reference in response to this item.
PART IV -------
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 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, 1998 and 1999
Consolidated Statements of Operations - Years ended April 30, 1997, 1998 and 1999
Consolidated Statements of Stockholders' Deficit - Years Ended April 30, 1997, 1998 and 1999
Consolidated Statements of Cash Flows - Years Ended April 30, 1997, 1998 and 1999
Notes to Consolidated Financial Statements - April 30, 1997, 1998 and
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.
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
* 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, 1999.
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 - ---------- -----------------------------------------
Schedule II
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended April 30, 1999, 1998 and 1997 (In thousands)
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, 1999 /s/ Robert W. Ackerman - ------------------------- ----------------------------- Date Robert W. Ackerman, President and Chief Executive Officer
July 19, 1999 /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, 1999 /s/ Robert W. Ackerman - ----------------------- ----------------------------- Date Robert W. Ackerman, Director
July 19, 1999 /s/ Steven E. Karol - ----------------------- ----------------------------- Date Steven E. Karol, Director
July 19, 1999 /s/ Dale S. Okonow - ----------------------- ----------------------------- Date Dale S. Okonow, Director
July 19, 1999 /s/ Jane M. Karol - ----------------------- ----------------------------- Date Jane M. Karol, Director
July 19, 1999 /s/ Howard H. Stevenson - ----------------------- ----------------------------- Date Howard H. Stevenson, Director
July 19, 1999 /s/ Robert Schaal - ------------- ----------------------------- Date Robert Schaal, Director
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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Exhibits to Annual Report on Form 10-K for the Fiscal Year Ended April 30, 1999
SHEFFIELD STEEL CORPORATION
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