ITEM 1. BUSINESS - ------- --------
OVERVIEW
Sheffield Steel Corporation ("the Company") is a leading regional mini-mill producer of hot rolled steel bar products ("hot rolled bar"), concrete reinforcing bar ("rebar"), fabricated products, including fabricated and epoxy-coated rebar and steel fence posts, and various types of semi-finished steel ("billets"). The Company and its predecessors have been in the steelmaking business for over 69 years. The Company believes that it is among the lowest cost producers of billets in the United States as a result of its modern melt and cast operations, high labor productivity levels, low energy costs and competitive steel scrap costs. The Company's low cost billets serve as the feedstock for its downstream bar mill operations and finished products. The Company shipped approximately 490,000 tons of steel in fiscal 1998, resulting in sales of $185.1 million.
The Company's primary manufacturing facility is located in Sand Springs, Oklahoma (the "Sand Springs Facility"), where it conducts a full range of steelmaking activities, including the melting and casting of billets and the rolling of billets into rebar, steel fence posts and a range of hot rolled bar products. The Company currently has 600,000 tons of steelmaking capacity. The Company installed a new rolling mill (the "Rolling Mill") at the Sand Springs Facility in 1995 which has increased productivity and efficiency in the manufacturing of rebar and has enabled the Company to produce certain higher quality hot rolled bar products that it was previously unable to produce. In the fourth quarter of fiscal 1998, the Company completed a project to eliminate a production bottleneck at the Sand Springs Facility rolling mill ("Shear Line Project") which is expected to significantly improve hot rolled bar production. Although the Shear Line Project will improve production for all products, it is expected to have the most significant impact on hot rolled bar products, specifically rounds and flats. From the Sand Springs Facility, the Company also transfers billets to its two rolling mills in Joliet, Illinois (the "Joliet Facility"), where it produces high-end specialty hot rolled bar products. The Company also operates two rebar fabrication plants, one in Kansas City, Missouri (the "Kansas City Plant") and one in Independence, Missouri ("Waddell") and a short line railroad (the "Railway Company"). The Sand Springs Facility and the Joliet Facility received ISO 9002 quality certification in November 1995 and June 1996.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K may contain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties which could cause results to differ materially from those described in the forward-looking statements. There can be no assurance that actual results or business conditions will not differ materially from those anticipated or suggested in such forward-looking statements as a result of various factors, including, but not limited to, the following: the size and timing of significant orders, as well as deferral of orders, over which the Company has no control; the variation in the Company's sales cycles from customer to customer; increased competition posed by other mini-mill producers; changes in pricing policies by the Company and its competitors; the Company's success in expanding its sales programs and its ability to gain increased market acceptance for its existing product lines; the ability to scale up and successfully produce its products; the potential
for significant quarterly variations in the mix of sales among the Company's products; the gain or loss of significant customers; shortages in the availability of raw materials from the Company's suppliers; fluctuations in energy costs; the costs of environmental compliance and the impact of government regulations; the Company's relationship with its work force; the restrictive covenants and tests contained in the Company's debt instruments, which could limit the Company's operating and financial flexibility; and general economic conditions.
BUSINESS STRATEGY
The Company has formulated an operating strategy to strengthen its market position and maximize profitability which has four major components: (i) improve finished goods product mix; (ii) continue to focus on and extend strong customer relationships; (iii) further modernize melt shop operations; and (iv) streamline and strengthen organizational structure.
Improve Finished Goods Product Mix. With the addition of the Rolling Mill at the Sand Springs Facility, the Company has substantially increased its hot rolled bar production capacity. Accordingly, shipments of finished products have increased significantly as less profitable third party billet sales have been diverted to the production of hot rolled bars. Billet sales, which accounted for 23.6% of tons shipped in fiscal 1994, accounted for only 7.5% of tons shipped in fiscal 1998. Shifting away from third party billet sales by increasing hot rolled bar production has also increased margins and reduced sales volatility for the Company, since hot rolled bar products are significantly more profitable than third party billet sales and demand is more stable. As part of its strategy to further improve product mix, in the fourth quarter of fiscal 1998, the Company substantially completed the Shear Line Project which, when fully integrated, is expected to (i) increase hot rolled bar production capacity by more than 100,000 tons per year; (ii) enable the Company to more fully utilize its existing 600,000 tons of steelmaking capacity; (iii) improve the quality of all mill products, especially hot rolled bar; and (iv) improve product mix by further reducing billet sales to third parties. Progress and improvement in the operation and performance of the shear line is dependent on the successful integration of the new equipment into existing operations.
Extend Strong Customer Relationships. The Company benefits from having a number of long-standing customer relationships in each of its product markets. The Company has built a reputation for providing consistent product quality, reliable, prompt product delivery and service, product availability and flexible scheduling to meet customer needs and a high level of follow up technical assistance and service. The ISO 9002 certification at both the Sand Springs Facility and the Joliet Facility is an indication of the Company's commitment to producing quality products. The Company believes that its business strategy to improve its finished product mix will strengthen its existing customer relationships and will aid it in developing new customer relationships.
Modernize Melt Shop. The Company believes that it is among the lowest cost producers of billets in the United States as a result of its efficient melt and cast operations, high labor productivity levels, low energy costs and competitive steel scrap costs. With the addition of the New Rolling Mill, which can utilize a larger billet, together with improvements in general operating practices, yields have improved, costs have been reduced and annual billet production capacity has increased from 525,000 tons to 600,000 tons per year. Through incremental capital investments, the Company intends to pursue additional modernization measures, such as the
installation of a ladle arc furnace in the melt shop, which will further enhance production capability, increase production capacity, reduce manufacturing costs and improve the quality of finished products.
Streamline and Strengthen Organizational Structure. The Company has improved strategic planning, strengthened financial reporting systems and aligned organizational structure and management incentives with the Company's business strategies and objectives. In accordance with the collective bargaining agreement reached in February 1997 that resulted in a 15% workforce reduction, the Company has been able to implement multi-craft training and use greater flexibility in job assignments. Additional initiatives to streamline operations include the elimination of a centralized maintenance structure and close coordination of the melt shop, casting and rolling mill operations which have resulted in significant reductions in both billet and finished goods inventories. The Company has also put in place a new management team to manage the Sand Springs Facility manufacturing operations. These initiatives have made the Company more flexible and responsive to customer needs and positioned it to implement its business strategy of improving finished product mix.
PRODUCTS, CUSTOMERS AND MARKETS
Hot Rolled Bar. According to the American Iron and Steel Institute ("AISI"), the size of the hot rolled bar product market in the United States was approximately 7 million tons in 1996. The demand for consistent quality is very significant in this market, where quality is measured by the adherence to specifications related to chemical composition, surface quality, product integrity and size tolerances. The Company sells a variety of specialty hot rolled bar products, including flats, squares, rounds and channels for end use applications that include farm equipment, auto parts, conveyor assemblies, pole line hardware, wrenches and construction machinery. The majority of hot rolled bar products produced at the Joliet Facility is 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 at the Sand Springs Facility are sold to both end product manufacturers and steel service centers. For fiscal 1998, sales of hot rolled bar products accounted for approximately 46% of the Company's total revenues.
In the hot rolled bar market, the Company differentiates itself from its competitors through the Joliet Facility's focus on specialty products and by targeting customers with special requirements as to bar shape, size and chemical composition and, in many cases, small volume needs. The Company believes that its targeted customer focus often allows it to act as the sole supplier of particular shapes, sizes or steel chemistries to certain customers, while in other cases it competes with a limited number of producers of specialty hot rolled bar products. The Company believes that these niche markets are unattractive to larger volume producers. The Company's Sand Springs Facility provides it with a competitive geographical advantage in the south-central United States hot rolled bar market and enables the Company's customers to benefit from lower freight costs, shorter lead times and more timely deliveries. As a result of these competitive advantages and its strong reputation for quality and service, the Company has developed a number of close relationships with the region's hot rolled bar product customers. The Company also believes that there are significant opportunities to sell standard hot rolled bar products to customers for whom the Joliet Facility currently satisfies specialty hot rolled bar product requirements.
The Company also strives to provide its hot rolled bar product customers with superior service. To permit a high level of service consistent with efficient production scheduling, the Company carries a large customer-designated finished goods inventory of hot rolled bar products at both the Joliet and Sand Springs facilities. Both the Sand Springs Facility and the Joliet Facility have implemented an internally developed bar-coded inventory tracking system which permits quick and precise inventories to be taken at any time. The Joliet Facility has also developed a customer query system which provides agents and major customers with direct computer access to the status of their production orders, the availability of inventory designated for them and the Joliet Facility's production schedule for their products.
Rebar. According to the AISI, the size of the rebar market in the United States was approximately 6.3 million tons in 1996. Rebar is a lower value, higher volume commodity bar product for which price is 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. The Company sells rebar to leading independent fabricators located in the south-central United States who then shear and bend the rebar to meet engineering or architectural specifications for construction projects. The Company produces rebar at the Sand Springs Facility rolling mill, where the bars are rolled in standard diameters from #4 bar (1/2 inch or 13mm) to #18 bar (2 1/4 inches or 57mm) and sheared to standard lengths from 20 feet to 60 feet. To provide rapid response to customer needs, the Company usually maintains a finished goods inventory of 25,000 to 35,000 tons of rebar. Currently, inventories are at a lower level due to the outage for installation of the Shear Line Project during the fourth fiscal quarter. Sales of rebar constituted approximately 34% of total Company revenues in fiscal 1998.
Rebar demand is driven by trends in commercial and industrial construction and infrastructure investment. During periods of overall reduced steel industry demand, the Company has maintained relatively stable rebar sales volume due to the level of public sector investment in roads, bridges, dams, airports and public facilities in the south-central United States. The Company has worked successfully to build and maintain long-term relationships with its customers by providing them with competitive pricing, assured product availability and reliable, prompt delivery and service. This strategy permits the fabricators to compete successfully in the construction and infrastructure markets, thus reinforcing the Company's relationships with such fabricators.
Due to the importance of pricing, freight costs and delivery response time, sales of rebar tend to be concentrated within close geographic proximity to a rebar manufacturer's mini-mill. The Company's rebar market is concentrated in the geographic area surrounding the Sand Springs Facility. In the Company's primary market area of Oklahoma, Kansas and portions of Nebraska, Missouri, Arkansas, and northern Texas, the Company enjoys a freight advantage over its competitors and believes it has a market share in excess of 50%. Approximately half of the Company's rebar shipments are made in this primary market area. The remaining rebar shipments are made in the adjacent regions of Nebraska, Missouri, Arkansas, Texas, Louisiana, New Mexico, and Colorado.
Fabricated Products. The Company manufactures two fabricated steel products: fence posts, which are sold to distributors and farm cooperatives, and fabricated rebar, including
epoxy-coated rebar. Fabricated products sales constituted approximately 11% of total Company revenues in fiscal 1998. Fence posts are produced in a post fabrication shop located adjacent to the New 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 the Company's fence post sales are concentrated in the Oklahoma, Kansas, Missouri, Texas and Arkansas market area.
Fabricated rebar is shipped from the Kansas City Plant to highway and construction contractors in Missouri, Kansas, Nebraska and in contiguous markets. In recent years, the Company has experienced increased demand from contractors bidding on infrastructure projects for fabricated rebar which is epoxy-coated prior to fabrication to protect against corrosion in the field. This has provided the Kansas City Plant with a competitive advantage and contributed to a growth in shipments. The Company believes that its epoxy coating line, the only one located in the Kansas City, Missouri market, provides a competitive advantage in securing contracts.
On October 28, 1997, the Company acquired (the "Acquisition") all of the issued and outstanding capital stock of Waddell's Rebar Fabricators, Inc. ("Waddell"), pursuant to a Stock Purchase Agreement among the Company, Waddell and the former stockholders of Waddell. The Acquisition purchase price consisted of approximately (i) $1,100,000 in cash, subject to post-closing adjustment based upon the actual net worth of Waddell on the closing date, and (ii) secured, subordinated promissory notes (the "Notes") in an aggregate principal amount of $2,000,000, which Notes mature in four years and accrue interest at NationsBank's prime rate minus 1/2 of one percent per annum. The Notes are secured by the Company's pledge of the capital stock of Waddell. Waddell is a rebar fabricator located in Independence, Missouri which specializes in smaller volume, higher value added construction contracts. Although the Company will maintain Waddell as a separate subsidiary for the foreseeable future, the Company has integrated the management of Waddell with the management of the Company's rebar fabrication plant in Kansas City, Missouri.
Billets. The Company sells billets to other steel mills or forgers for conversion into finished products. 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 the Company's own billet requirements and market conditions that vary widely. In the past three fiscal years, billets sales to third parties have ranged between 4.5% and 12% of the Company's total revenues. Billet sales constituted approximately 4.5% of total Company revenues in fiscal 1998.
The Railway Company. The Railway Company operates approximately seven miles of mainline rail line between Sand Springs and Tulsa, Oklahoma, serving primarily the operations of the Sand Springs Facility and, to a lesser extent, third parties. The Railway Company's revenues from third parties are immaterial to the financial results of the Company.
MANUFACTURING PROCESS
The Company's primary manufacturing facility is the Sand Springs Facility, where it conducts a full range of steelmaking activities, including the melting and casting of billets and the rolling of billets into rebar, steel fence posts and a range of hot rolled bar products. At the Sand Springs Facility, steel scrap is conveyed by rail car from the Company's scrap yard to the facility's melt shop, where the steel scrap is melted with electricity in two 85-ton electric arc
furnaces. During the scrap melting process, impurities are removed from the molten steel. The molten steel is then poured into a ladle, where metal alloys are added to obtain desired chemical compositions. The molten steel is then conveyed to a six-strand continuous caster which casts various types of billets. The continuous caster is capable of 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 Sand Springs or Joliet rolling mills or, to a lesser extent sold to third parties. The Sand Springs rolling mill produces rebar, "T" sections (which are further processed into fence posts), and a range of hot rolled bar products. The rolling mills at the Joliet Facility produce an extensive range of hot rolled bar products. A portion of the rebar from the Sand Springs Facility is epoxy coated and/or fabricated at either the Kansas City Facility or Waddell.
SALES AND MARKETING
Hot rolled bar products produced at the Joliet Facility are sold by the Company's sales personnel and through commissioned sales representatives under exclusive agency agreements with the Company. Rebar and hot rolled bar products produced at the Sand Springs Facility are sold through the Company's own sales force and limited sales agencies which also service the Joliet Facility. The Company markets fence post directly to farm cooperatives and to fence post distributors. While some billets are sold through semi-finished steel brokers on the "spot" market, most are sold directly by the Company. As a result of increased production capacity directly related to the completion of the Shear Line Project, the Company expects that internal billet requirements will increase and the availability of billets for sale to third parties will decrease accordingly. As a result of adverse weather conditions which impact construction activities and a normal seasonal downturn in manufacturing levels, the Company typically experiences lower sales volumes in its third fiscal quarter.
RAW MATERIALS
The Company's primary raw material is steel scrap, which is generated principally from industrial, automotive, demolition, railroad, obsolete, and other sources and is purchased by the Company in the open market through a limited number of steel scrap brokers and dealers or by direct purchase. The cost of steel scrap is subject to market forces, including demand by other steel producers and export volumes. The cost of steel scrap to the Company can vary significantly, and product prices generally cannot be adjusted in the short-term to recover large increases in steel scrap costs. Over longer periods of time, however, product prices and steel scrap prices have tended to move in the same direction.
The long-term demand for steel scrap and its importance to the domestic steel industry may be expected to increase as mini-mill producers continue to expand steel scrap-based electric arc furnace capacity with additions to or replacements of existing integrated facilities. For the foreseeable future, however, the Company believes that supplies of steel scrap will continue to be available in sufficient quantities. In addition, a number of technologies exist for the processing of iron ore into forms which may be substituted for steel scrap in electric arc furnace-based steelmaking. Such forms include direct- reduced iron, iron carbide, hot-briquette iron and pig iron. A sustained increase in the price of steel scrap could result in increased use of these alternative materials. The Company has successfully employed scrap substitutes in its manufacturing process to achieve quality characteristics and expects to increase its usage of such substitutes in the future.
ENERGY
The Company's manufacturing process in Sand Springs consumes large amounts of electricity. The Company purchases its electrical needs at the Sand Springs Facility from Public Service of Oklahoma ("PSO") under a real time pricing tariff which is available only to PSO's largest customers. Under this tariff, the Company purchases its base load at a contracted amount adjusted for fuel costs and then purchases or sells power on an hour-by-hour basis at rates which approximate PSO's incremental costs plus a small markup. Historically, the Company has been adequately supplied with electricity and does not anticipate any material curtailment in its operations resulting from energy shortages.
The Company believes that its utility rates 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.
The Company also uses natural gas to reheat billets, but is not considered a large natural gas user. Since deregulation of the natural gas industry, natural gas requirements generally have been provided through negotiated contract purchases of well-head gas with supplemental transportation through local pipeline distribution networks. Although increases in the price of natural gas might have an adverse impact on the Company's cost structure, 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 the Company's natural gas needs (both to reheat billets and as a consumer of the electricity generated by natural gas) are at the Sand Springs Facility in Oklahoma, a state with excess natural gas supplies. Historically, the Company has been adequately supplied with natural gas and an adequate supply is expected to be available in the future.
COMPETITION
The Company competes with a number of domestic mini-mills in each of its market segments. There are common competitive factors in the steel bar business - --price, proximity to market, quality and service, for example--although their relative importance varies in the different market segments.
In the market for hot rolled bar products, the Joliet Facility occupies a niche position at the specialty end of the product range. The Company believes that it is the sole supplier of several particular shapes, sizes or steel chemistries to certain customers. In other cases, the Company competes with a limited number of other producers of specialty hot rolled bar products, including 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, the Company competes 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, the Company believes it enjoys a competitive advantage as the closest mill serving an area comprising Oklahoma, Kansas, western Missouri and Arkansas, and parts of northern Texas. The majority of the Company's rebar tonnage was shipped to this area in fiscal 1998. The Company competes in the rebar market with a number of other mini-mills, principally Chaparral Steel Company and Structural Metals, Incorporated.
The Company is not in competition on a regular basis with foreign or integrated steel producers. These mills have cost and freight disadvantages compared to the Company 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 which are furnished with rebar from other mini-mills in the Midwest. In recent years, the Company believes that increased demand for epoxy-coated product from contractors bidding on infrastructure projects has provided the Kansas City Plant with a competitive advantage and contributed to growth in shipments. Other competitive factors include delivery performance, engineering support, accurate fabrication and competitive pricing. Waddell's focus is on small rebar projects, generally under 200 tons each.
EMPLOYEES
As of April 30, 1998, there were approximately 623 employees of the Company. Approximately 69% of the Company's employees are represented by one of three bargaining units affiliated with the United Steelworkers of America (Sand Springs, Joliet and Kansas City facilities). The Sand Springs Facility is party to a collective bargaining agreement covering approximately 265 hourly-paid production and maintenance employees. This agreement, which was negotiated as of March 2, 1997, is for a three year period expiring on March 1, 2000. The agreement included wage increases, certain benefit increases and changes to local work rules. The agreement also allowed the Company to reduce and reorganize its hourly workforce by approximately 70 positions, primarily maintenance related. Of the 70 positions, 42 were eliminated through retirement offers effective June 1, 1997 and the remaining positions have been eliminated through attrition.
The Joliet Facility is also party to a collective bargaining agreement covering approximately 148 hourly-paid production and maintenance employees, which expires on March 1, 1999, and the Kansas City Plant has a collective bargaining agreement covering approximately 20 employees which expires on October 31, 1999. The Railway Company has approximately 14 employees who are represented by various labor unions. The Company believes that it has maintained good relationships with its labor unions in the past, but there can be no assurance that the terms of any future collective bargaining agreements with any labor unions will contain terms comparable to the terms contained in its existing collective bargaining agreements.
Since the last national, industry-wide strike of steelworkers in 1959, the Company has experienced only a five-day strike at the Sand Springs Facility in May 1988 and a work stoppage
at the Kansas City Plant after the expiration of its collective bargaining agreement in September 1991. The Company has not experienced a protracted work stoppage at either the Sand Springs Facility or the Joliet Facility, and believes that it has good relations with its employees, but there can be no assurance that work stoppages will not occur in the future, in connection with labor negotiations or otherwise.
ENVIRONMENTAL COMPLIANCE
The Company is subject to a broad range of Federal, state and local environmental requirements, including those governing air emissions and discharges into water, and the handling and disposal of wastes. The Company has spent substantial amounts to comply with these requirements. In addition, in the event of a release of hazardous materials generated by the Company, the Company could potentially be responsible for the remediation of contamination associated with such a release.
Primarily because the melting process at the Sand Springs Facility generates emission dust that contains lead, cadmium and other heavy metals, the Company is classified, in the same manner as other similar mini-mills in its industry, as a generator of hazardous waste. The Resource Conservation and Recovery Act of 1976, as amended ("RCRA"), regulates the management of emission control sludge/dust from electric arc furnaces ("K061"), a waste stream generated in significant quantities at the Sand Springs Facility. All of the K061 generated at the Sand Springs Facility is shipped to Mexico, where a High Temperature Metals Recovery processor, Zinc Nacional, S.A., recovers the zinc, lead and cadmium and manufactures commercial and high purity zinc products. If a release of K061 were to occur, the Company could be required to remediate such release. Although current law permits the export of K061, there can be no assurance that new United States legislation prohibiting the export of hazardous waste materials or new Mexican legislation prohibiting the import of such materials, including K061, will not be enacted. In that event, the Company would have to find an alternative means of treatment or disposal of the K061 in compliance with RCRA. The Company believes that it could properly dispose of the K061 generated at the Sand Springs Facility by constructing an on-site recovery or chemical stabilization process or by shipping the K061 to a licensed domestic treatment facility. However, there can be no assurance as to the availability of such alternatives or that their construction and/or use would not result in significant cost increases.
In accordance with the Clean Air Act Amendments of 1990 ("CAAA") and Oklahoma's State Implementation Plan, the Sand Springs Facility submitted a Title V application for an operating permit in January 1997 and received the permit in March, 1998. One compliance audit has occurred since then, with no resulting violations or outstanding issues. Additional or new air emission control regulations or requirements applicable to the Company's operations may be promulgated under the Clean Air Act in the future. The Company cannot at this time accurately estimate the costs, if any, of compliance with such future Clean Air Act regulations or requirements.
It is possible that EPA may identify violations of RCRA requirements as a result of the Compliance Evaluation Inspection conducted by EPA at the Sand Springs Facility in April 1997, and that EPA may seek penalties and/or corrective action relating to the Solid Waste Management Units identified at the Sand Springs Facility, including the three previously closed K061 landfills. While the Company believes that any such RCRA violations that may be
identified by EPA will not result in penalties which will have a material adverse effect on the Company's results of operations or financial condition, the costs of corrective action (if any is required) cannot be predicted at this time and may be material. Apart from the issues associated with the April 1997 RCRA inspection conducted by EPA, the Company believes that it is currently in substantial compliance with applicable environmental requirements and does not anticipate the need to make substantial expenditures for environmental control or remediation measures during the next three years.
ITEM 2.
ITEM 2. PROPERTIES AND FACILITIES - ------- -------------------------
The Company owns the properties comprising the Sand Springs Facility, the Joliet Facility, and Waddell. The Sand Springs Facility is located on approximately 148 acres of land in Sand Springs, Oklahoma. The Joliet Facility is located on approximately 30 acres of land in Joliet, Illinois. Waddell's 33,000 square feet building is located on approximately 2.1 acres of land in Independence, Missouri. The Company leases 9 acres of land adjacent to the Joliet Facility from the Metropolitan Water Reclamation District of Greater Chicago under a long term lease expiring in 2053. The Company also leases the Kansas City Plant, containing approximately 77,100 square feet. In addition, the Company owns 4.5 acres of land in Oklahoma City, Oklahoma that formerly comprised the Oklahoma City Mill.
The Sand Springs Facility comprises an aggregate of approximately 520,390 square feet of floor space and contains two 85-ton electric arc furnaces, a six strand billet continuous caster, a rolling mill, two warehouses and a fence post shop. The current total annual capacity of the Sand Springs Facility is approximately 600,000 tons of billet, approximately 450,000 tons of rebar and hot rolled bar and approximately 70,000 tons of fence post.
The Joliet Facility comprises an aggregate of approximately 334,305 square feet of floor space and contains a 12 inch merchant bar mill and a 10 inch merchant bar mill. The total annual capacity of the Joliet Facility is approximately 155,000 tons of hot rolled bar products.
The Railway Company provides freight service between Sand Springs and Tulsa on seven miles of mainline track and 21 miles of spur line which connect customer facilities with the main line. The Railway Company owns the mainline track and three locomotives and operates a maintenance shop for normal repairs and upkeep. The Railway Company own approximately 10 acres and leases and operates a transload facility and warehouse.
The Railway Company has granted a security interest in substantially all of its assets to the Bank of Oklahoma as security for the Railway Company's obligations under the Railway Revolving Credit Facility and the Railway Term Loan.
The Company has granted a first priority lien on substantially all of Sheffield's real property and equipment in favor of the Trustee for the benefit of the holders of the First Mortgage Notes.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - ------- -----------------
The Company is not a party to any significant pending legal proceedings other than litigation incidental to its business which the Company believes will not materially affect its financial position or results of operations. Such claims against the Company are ordinarily covered by insurance. There can be no assurance, however, that insurance will be available in the future at reasonable rates.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- ---------------------------------------------------
Not applicable.
PART II -------
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED - ------- ------------------------------------------------ STOCKHOLDER MATTERS -------------------
The Company's 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 nine stockholders of record. The Company 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, 1997. Certain of the Company's loan agreements contain limitations on the ability of the Company 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, 1998 has been derived from the Company's financial statements audited by KPMG Peat Marwick LLP, independent auditors. The Company's 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 the Company's 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 the Consolidated Financial Statements of the Company and the notes thereto 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, 1997 and 1998, 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, 1998. 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, 1997 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended April 30, 1998, 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.
KPMG Peat Marwick LLP
Tulsa, Oklahoma June 27, 1998
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
See accompanying notes to consolidated financial statements.
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
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, 1996, 1997 AND 1998 (In thousands, except share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS
The consolidated financial statements of Sheffield Steel Corporation (the Company) include the accounts of its divisions, Sheffield Steel-Sand Springs (Sand Springs), Sheffield Steel-Kansas City (Kansas City), and Sheffield Steel- Joliet (Joliet) and its wholly owned subsidiaries, Sheffield Steel Corporation- Oklahoma City (Oklahoma City), Waddell's Rebar Fabricators, Inc. (Waddell) since October 28, 1997, and Sand Springs Railway Company (the Railway). HMK Enterprises, Inc. (HMK) owns approximately 90% of the currently issued and outstanding common stock of the Company. All material intercompany transactions and balances have been eliminated in consolidation.
The Company's primary business is the production of concrete reinforcing bar, fence posts, and a range of hot rolled bar products including rounds, flats and squares. The Company operates in an economic environment wherein the commodity nature of both its products for sale and its primary raw materials cause sales prices and purchase costs to fluctuate, often on a short-term basis, due to the worldwide supply and demand situation for those commodities. The supply and demand factors for its products for sale and the supply and demand factors for its primary raw materials correlate to a degree, but are not necessarily the same. Therefore, margins between sales price and production costs can fluctuate significantly on a short-term basis.
The Company sells to customers located throughout the continental United States. The Company had one customer that accounted for approximately 12% of sales for the year ended April 30, 1998 and no customers that accounted for greater than 10% of sales for the years ended April 30, 1996 and 1997. The Company grants credit to customers under normal industry standards and terms. Policies and procedures have been established which allow for proper evaluation of each customer's creditworthiness as well as general economic conditions. Consequently, an adverse change in those factors could effect the Company's estimate of its bad debts.
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (as determined by the first-in first-out method) or market. The cost of work-in-process and finished goods inventories is based on standards which approximate cost. Work-in-process and finished goods include direct labor and allocated overhead.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill and debt issuance costs. The cost of goodwill is being amortized on a straight-line basis over a period of 40 years. Debt issuance costs are amortized over the term of the related indebtedness. It is the Company's policy to recognize an impairment of the carrying value of goodwill when management's best estimate of undiscounted future cash flows over the remaining amortization period is less than the carrying amount.
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. Interest costs for the construction of certain long-term assets are capitalized and amortized over the estimated useful lives of the related assets.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company is a member of a group that files a consolidated income tax return with HMK (the Group). The Group's tax-sharing agreement provides that current and deferred income taxes be determined as if each member of the Group were a separate taxpayer. All income taxes payable or receivable are due to or from HMK.
POSTRETIREMENT BENEFITS
The Company provides postretirement benefits to certain retirees and their beneficiaries, generally for the remainder of their lives. The Company measures the cost of its obligation based on an actuarially determined present liability, the accumulated postretirement benefit obligation (APBO). The net periodic costs are recognized as employees render the services necessary to earn the postretirement benefits.
ENVIRONMENTAL COMPLIANCE COSTS
The Company accrues the cost of environmental remediation liabilities when the criteria of Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies, have been met. Environmental remediation costs have not had a material impact on the Company's financial position, results of operations, or liquidity.
REVENUE RECOGNITION
Revenues from sales are recognized when products are shipped to customers, except the Railway which recognizes revenues when services are performed.
EARNINGS PER SHARE
Effective January 31, 1998, the Company adopted the guidelines established by Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings Per Share". All references in the financial statements to earnings per share amounts have been restated to conform with the requirements of SFAS No. 128. All options and warrants were excluded from computations for the years ended April 30, 1996 and 1997 since their effect on loss per share was anti-dilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
STOCK OPTION PLAN
Prior to May 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On May 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair- value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
(2) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying value of cash and cash equivalents, trade accounts receivable and trade accounts payable approximates the fair value because of the short maturity of those instruments. The carrying amounts of notes payable to banks and an equipment financing company (see Note 5) approximates the fair value due to these debt instruments having variable interest rates similar to those that are currently available to the Company. The fair value of the first mortgage notes (see Note 5) at April 30, 1998, based on the currently offered market price, is approximately $114.4 million versus a carrying value of approximately $110.0 million.
(3) INVENTORIES
The components of inventories are as follows:
(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 in 1996, 1997 and 1998 was $6,021, $6,271 and $6,605, respectively. Approximately $25 of interest costs were capitalized as part of property, plant and equipment in 1996. No interest costs were capitalized in 1997 or 1998.
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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] At April 30, 1997 the Company had $75 million of 12% first mortgage notes due 2001 (2001 Notes) with warrants to purchase 10% of the Company's common stock. The notes were sold in units consisting of $1,000 principal amount and five warrants. Each warrant entitled the holder to purchase one share of the Company's common stock through November 1, 2001, at an exercise price of $.01 per share, subject to adjustment.
Effective November 26, 1997, the Company offered $110,000,000 of 11.5% First Mortgage Notes due 2005. The proceeds from the offering were used primarily to redeem the Company's 2001 Notes, to pay dividends to stockholders and to reduce outstanding indebtedness under the Company's revolving credit facilities. On January 28, 1998, the Company exchanged the aforementioned First Mortgage Notes for New First Mortgage Notes which are identical in all material respects except that the New First Mortgage Notes have been registered under the Securities Act of 1933, as amended.
Interest on the New First Mortgage Notes is payable semi-annually on June 1 and December 1 of each year at the rate of 11.5% per annum. The New First Mortgage Notes are secured by a first priority lien on substantially all existing and future real property and equipment. The Company is subject to certain covenants including certain limitations on additional indebtedness and restricted payments, such as dividends and purchases of stock.
[b] The revolving credit agreement with a bank provides for maximum borrowings of $40 million based on a percentage of eligible accounts receivable and inventory. Borrowings are secured by a first priority lien on inventory, accounts receivable and related intangibles. 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, 1998, the interest rate was 8.5%. An annual commitment fee of.25% is charged on the unused portion of the revolving credit agreement. The agreement continues through November 1, 2000 and thereafter on a year-to-year basis until terminated by the Company or the lender.
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
[c] The Railway credit agreement with a bank is comprised of two notes; a $2 million term loan with $0.5 million principal payments each year with the final payment on July 31, 2000, and a $1.5 million line of credit maturing July 31, 1999. Obligations under the notes are secured by all of the assets and capital stock of the Railway. Interest is computed at prime plus a variable margin (based on the achievement of certain interest coverage ratios) from 0% to 1% and is payable quarterly. At April 30, 1998, the interest rate was 9.0%.
[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 $57 plus interest payable at variable rates. The notes mature on various dates through 2002 and are secured by equipment.
[e] Notes payable consists of $1,750 million payable in quarterly installments over four years to the former shareholders of Waddell (see Note 16). The notes are secured by the capital stock of Waddell and bear interest at NationsBank prime rate minus one-half of one percent. At April 30, 1998, the interest rate was 8%. In addition, the Company assumed a note payable to a bank in conjunction with the acquisition of Waddell.
The aggregate maturities of long-term debt for the years ended April 30, are as follows:
Interest costs incurred in 1996, 1997 and 1998 were $11,758, $11,769 and $12,164, respectively. 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 commitments related to the credit agreements can be withdrawn by the lender.
6) INCOME TAXES
The Company had no income tax expense or benefit for the years ended April 30, 1996 and 1997. Income tax benefit for the year ended April 30, 1998 consists of deferred tax benefit for federal and state purposes of $421 and $74, respectively. 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:
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
At April 30, 1998 the Company had available net operating loss (NOL) carryforwards for regular federal tax purposes of approximately $36,700 which will expire as follows: $1,400, $400, $3,700, $4,200, $5,600, $7,400, $6,300, and $7,700 in the years ended 2000, 2002, 2007, 2008, 2009, 2011, 2012, and 2013, respectively. The Company has investment tax credit carryforwards for federal and state tax purposes of $520 and $2,778, respectively, which the Company has fully reserved as it is likely that those tax credits will not be utilized prior to their expiration. The credits expire in various periods through 2007. Company also has available $962 of alternative minimum tax (AMT) credit carryforwards which may be used indefinitely to reduce future federal regular income tax obligations.
A valuation allowance is required when it is more likely than not that all or a portion of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon future profitability. Fiscal 1990 capped a three-year period in which the Company generated approximately $19 million and $11.5 million in book and tax earnings, respectively. During fiscal 1991 through fiscal 1994, the Company incurred approximately $12.4 million in taxable losses as a result of steel bar prices, significant losses from operations at Oklahoma City, and a $5.3 million loss on the early retirement of debt. A recovery of steel bar prices which began in fiscal 1994 and continued into 1995 resulted in the Company generating $3.6 million in taxable income. In 1995, the Company started up a new rolling mill which passed the required performance tests and was accepted during fiscal 1997. During 1998, the Company improved mill productivity and operating performance achieving profitability before the extraordinary charge related to issuance of the First Mortgage Notes. The Company continues to introduce new mill products and make progress toward achieving the anticipated potential of the mill. However, there can be no assurance that the mill will reach the forecasted production goals or that the Company will achieve future profitability. Accordingly, a valuation allowance has been established at April 30, 1998, to reduce the deferred tax assets to a level which, more likely than not, will be realized.
Future annual postretirement benefit costs are expected to exceed deductible amounts for many years and it is anticipated that all of the deferred tax assets related thereto will be utilized as such amounts become deductible. Accordingly, management did not establish a valuation allowance for the deferred tax asset related to future annual postretirement benefit costs. In order to fully realize the remaining net deferred tax asset, the Company will need to generate future taxable income of approximately $6,900. Based upon
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
historical taxable income trends and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of the net deferred assets, net of the existing valuation allowance, at April 30, 1998.
(7) EMPLOYEE BENEFIT PLANS
Sand Springs and Joliet have defined benefit plans covering substantially all of their employees. Benefits are generally based on years of service and the employee's compensation during the last ten years of employment. The Company's funding policy is to contribute annually at least the minimum amount necessary to avoid a deficiency in the funding standard. The Company received a waiver of the minimum funding standard in the amount of $776 for the plan year ended December 31, 1984, which is being amortized over 15 years. Net periodic pension expense for these plans included the following:
The following table sets forth the funded status of the Company's plans, as determined by an independent actuary:
Plan assets consist primarily of U.S. government obligations and marketable equity securities. The unrecognized net transition obligations are being amortized over periods of 14-15 years.
Major assumptions used in the accounting for the pension plans were as follows:
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Certain divisions of the Company maintain defined contribution plans in which various groups of employees participate. Total Company contributions for these plans amounted to $85, $81, and $89 in 1996, 1997, and 1998, respectively.
(8) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides postretirement health and life insurance benefits to certain retirees and their beneficiaries, generally for the remainder of their lives. The Plan is contributory, with retiree contributions adjusted annually, and contains other cost-sharing features such as deductibles, co-insurance, and Medicare. The Company's policy is to fund accumulated postretirement benefits on a "pay-as-you-go" basis. Net periodic postretirement benefit costs for 1996, 1997 and 1998 include the following components:
The following table sets forth the APBO and the amount of the net postretirement benefit liability as determined by an independent actuary and recognized in the balance sheet at April 30, 1997 and 1998:
The annual discount rate used in determining the APBO was 7.5% and 7.0% at April 30, 1997 and 1998, respectively. Also, for measurement purposes, the medical trend rates used for HMO and PPO/indemnity plans were 6.2% and 10.4%, respectively. The medical and HMO trend rates are assumed to decline one-half percent per year to an ultimate level of 5.5%. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the APBO as of April 30, 1998, by $2,933 and the aggregate service and interest cost components of net periodic postretirement benefit costs by $249.
(9) OPERATING LEASES
The Company is obligated under various noncancelable operating leases for certain land and buildings. These leases generally contain inflationary rent escalations and require the Company to pay all executory costs such as maintenance and insurance. Rental expense for operating leases (except those with lease terms of a month or less that were not renewed) was $277, $313 and $315 for the years ended April 30, 1996, 1997 and 1998, respectively.
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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:
(10) COMMITMENTS AND CONTINGENCIES
The Company is partially self-insured for certain risks consisting primarily of employee health insurance programs and workers' compensation. Probable losses and claims are accrued as they become estimable. The Company maintains letters of credit totaling approximately $2.2 million in accordance with workers' compensation arrangements.
The Company is involved in claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position, results of operations, or liquidity.
(11) RELATED PARTY TRANSACTIONS
An affiliated company provides management and business services to the Company, including, but not limited to, financial, marketing, executive personnel, corporate development, human resources, and limited legal services. The Company believes that transactions with related parties are at costs that could be obtained from third parties. Management fees charged during the years ended April 30, 1996, 1997 and 1998, were approximately $573, $569 and $720, respectively. In addition, the Company purchases general liability, workers' compensation and other insurance through an affiliated company which provides risk management services, including procuring and maintaining property and casualty insurance coverage; reviewing and recommending alternative financing methods for insurance coverage; identifying and evaluating risk exposures, and preparing and filing proof of loss statements for insured claims. Total fees paid for insurance services during the years ended April 30, 1996, 1997 and 1998, were approximately $115, $115 and $142, respectively.
During fiscal year 1993, certain minority shareholders issued $1,000 of notes receivable to the Company. The notes bear interest at an annual rate of 7.61% and are secured by common stock of the Company. Principal and interest are due on February 1, 2007, unless extended at the Company's option until February 1, 2012. The principal balance outstanding was $700 as of April 30, 1997 and 1998.
On September 30, 1996, the Company signed an agreement to repurchase 50,625 shares of the Company's common stock from two minority shareholders who formerly were officers of the Company. The stock repurchase is pursuant to the Amended and Restated Stockholder's Agreement dated September 15, 1993 and the stock purchase price was calculated in accordance with said agreement. As a result of this transaction, $393 of notes receivable from the former shareholders was satisfied, the Company recorded a note payable in the amount of $662 and decreased paid-in capital by $1,055. The notes payable accrue simple interest at 6.02% and are being repaid in five annual installments which began December 12, 1997. The principal balance outstanding at April 30, 1997 and 1998 was $662 and $530, respectively.
The Company has a receivable of $2,205 from HMK related to certain tax attributes allocated to the Company. Under an agreement with HMK, the receivable will be realized by reducing future income taxes otherwise payable by the Company to HMK. In addition, the Company advanced $500 to HMK to secure a letter of credit for the Joliet insurance program.
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(12) STOCK OPTIONS
On September 15, 1993, the Board of Directors adopted, and the stockholders of the Company approved, the Company's 1993 Employee, Director and Consultant Stock Option Plan (the Stock Option Plan). The Stock Option Plan provides for the grant of incentive options to key employees of the Company and nonqualified stock options to key employees, directors, and consultants of the Company. A total of 580,000 shares of the Company's common stock, which would represent approximately 15.3% of the Company's common stock on a fully diluted basis, have been reserved for issuance under the Stock Option Plan. The options vest in three years after the date of grant and may be exercised within 10 years or 20 years from the grant date for incentive and non-qualified options, respectively, at a price not less than the fair market value of the stock at the time the options are granted. Fair market value for purposes of determining the exercise price is determined by the performance-based formula prescribed in the Stock Option Plan. At April 30, 1998, there were 124,000 additional shares available for grant under the Plan.
The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss would have been reduced to the pro forma amounts indicated below:
The per share weighted-average fair value of stock options granted during 1997 and 1998 was $4.83 and $4.66, respectively, on the date of grant using the minimum value method with the following assumptions: expected dividend yield of approximately 1.0%, risk-free interest rate of 6.38%, and an expected life of five years. Pro forma net income reflects only options granted in 1997 and 1998.
The options outstanding and activity during the periods indicated is as follows:
Exercise prices for options outstanding as of April 30, 1998 ranged from $7.41 to $20.52. The weighted-average remaining contractual life of those options is 13.6 years. There were 405,000 shares exercisable as of April 30, 1996, 1997 and 1998. There were no shares exercisable at April 30, 1995.
In connection with the adoption of the Stock Option Plan, the Company elected to terminate its Stock Appreciation Rights Plan (SAR). Existing liabilities under the SAR plan were frozen at their current level. All vested rights become exercisable upon the participants' termination. Included in other liabilities at April 30, 1997 and 1998 is $368 which represents the present value of the SAR's based on vesting and retirement dates.
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) RESTRUCTURING EXPENSE
During 1997, the Company recognized costs related to workforce reductions. Approximately 42 hourly employees accepted early retirement incentives resulting in costs of approximately $1,070 during the fourth quarter. In addition, 14 salaried employees were involuntarily terminated in the third quarter resulting in severance costs totaling approximately $250.
(14) EARNINGS (LOSS) PER SHARE
The following information reconciles the number of shares used to compute basic earnings (loss) per share to those used to compute diluted earnings (loss) per share. The numerator amounts for each period presented are as shown on the consolidated condensed statements of operations.
(15) EXTRAORDINARY ITEM
The Company incurred a $8,023 extraordinary loss related to the First Mortgage Note offering completed during the third fiscal quarter. The extraordinary charge relates primarily to a redemption premium, unamortized discount and debt issue costs associated with the 2001 Notes.
(16) ACQUISITION
On October 28, 1997, the Company acquired all of the outstanding capital stock of Waddell's Rebar Fabricators, Inc. The purchase price of the stock was $3,137, subject to certain potential performance related payments. The Company 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 and liabilities assumed was $2,490 and $812, respectively. In addition, the Company recorded $1,459 as excess of cost over net assets acquired (goodwill).
The following pro forma financial information reflects the results of operations for the Company for the years ended April 30, 1997 and 1998 as though the operations of Waddell had been considered combined as of May 1, 1996:
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 Sheffield Steel Corporation's Proxy Statement dated July 31, 1998, with respect to directors and executive officers of the Company is incorporated herein by reference in response to this item.
Because the Company does not have a class of securities registered under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), none of its 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 the Company's executive officers is included under the caption entitled "Executive Compensation" in Sheffield Steel Corporation's Proxy Statement dated July 31, 1998, 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 the Company's Common Stock by certain beneficial owners and by management is included under the caption entitled "Share Ownership" in Sheffield Steel Corporation's Proxy Statement dated July 31, 1998, 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 Sheffield Steel Corporation's Proxy Statement dated July 31, 1998, 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, 1997 and 1998
Consolidated Statements of Operations - Years ended April 30, 1996, 1997 and 1998
Consolidated Statements of Stockholders' Equity - Years Ended April 30, 1996, 1997 and 1998
Consolidated Statements of Cash Flows - Years Ended April 30, 1996, 1997 and 1998
Notes to Consolidated Financial Statements - April 30, 1996, 1997 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):
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, 1998.
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, 1998, 1997 and 1996
(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 25, 1998 /s/ Robert W. Ackerman - -------------------------- ----------------------------- Date Robert W. Ackerman, President and Chief Executive Officer
July 25, 1998 /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 25, 1998 /s/ Robert W. Ackerman - -------------------------- ------------------------------- Date Robert W. Ackerman, Director
July 25, 1998 /s/ Steven E. Karol - -------------------------- ------------------------------- Date Steven E. Karol, Director
July 25, 1998 /s/ Dale S. Okonow - -------------------------- ------------------------------- Date Dale S. Okonow, Director
July 25, 1998 /s/ Jane M. Karol - -------------------------- ------------------------------- Date Jane M. Karol, Director
July 25, 1998 /s/ Howard H. Stevenson - -------------------------- ------------------------------- Date Howard H. Stevenson, Director
July 25, 1998 /s/ John D. Lefler - -------------------------- ------------------------------- Date John D. Lefler, Director
================================================================================
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
Exhibits to Annual Report on Form 10-K for the Fiscal Year Ended April 30, 1998
SHEFFIELD STEEL CORPORATION
================================================================================