UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
Amendment No. 2
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended April 30, 2005
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 033-67532
SHEFFIELD STEEL CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 74-2191557 | |||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
| 220 North Jefferson Street, Sand Springs, OK | 74063 | |||
| (Address of principal executive offices) | (Zip Code) | |||
Registrant’s telephone number, including area code (918) 245-1335
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ No¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes¨. Noþ.
The aggregate market value of voting stock held by nonaffiliates is unknown as the Registrant’s stock is not traded on an established public trading market.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YESþ NO¨
As of July 14, 2005, there were 4,956,819 shares of the Registrants $.01 par value Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Company’s Annual Meeting of Shareholders held on September 14, 2005 are incorporated by reference into Part III of this Report on Form 10-K.
EXPLANATORY NOTE
We are filing this amendment (this “Amendment”) to our Annual Report on Form 10-K for the fiscal year ended April 30, 2005, as amended previously by Amendment No. 1 filed on July 29, 2005 (as amended, the “Original Filing”), to include an audit report (the “Audit Report”) from our predecessor auditor, KPMG, on the statements of income and cash flows for the period from August 14, 2002 to April 30, 2003 which we were unable to include in the Original Filing. As reported in the Form 12b-25 which we filed on July 15, 2005, KPMG had refused to reissue the Audit Report as a result of a dispute between the Company and KPMG related to company-sponsored pension plans. The Company and KPMG have since resolved the dispute.
This Amendment amends the Original Filing by replacing the financial statements filed in response to Item 15(a). As a result of this amendment, the certificates pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350 filed as exhibits to the Original Filing have been re-executed and re-filed as of the date of this Amendment. Except for these changes and this Explanatory Note, this Amendment does not reflect any events that have occurred after July 15, 2005, the filing date of the Original Filing, or modify or update the disclosures presented in the Original Filing.
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) The following documents are filed as a part of this report:
| 1. | Financial Statements.See Index to Consolidated Financial Statements, which appears on page F-1 hereof. The financial statements listed in the accompanying Index to Consolidated Financial Statements are filed herewith in response to this Item. |
| 2. | Financial Statement Schedules.All schedules are omitted because they are not applicable or because the required information is contained in the consolidated financial statements or notes included in this annual report on Form 10-K. |
| 3. | Exhibits. See Index to Exhibits. The exhibits listed in the Index to Exhibits immediately preceding the exhibits are filed herewith in response to this Item. |
1
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 on the 31st day of January 2006.
SHEFFIELD STEEL CORPORATION | ||
| By: | /s/ James P. Nolan | |
| James P. Nolan | ||
| President and Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated on the 31st day of January 2006.
Signature | Title | |||
/s/ James P. Nolan James P. Nolan | President, Chief Executive Officer and Director (Principal Executive Officer) | |||
/s/ Stephen R. Johnson Stephen R. Johnson | Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | |||
/s/ John V. Koerber John V. Koerber | Chairman of the Board of Directors | |||
/s/ Peter Blum Peter Blum | Director | |||
/s/ Kevin S. Flannery Kevin S. Flannery | Director | |||
/s/ Robert L. Purdum Robert L. Purdum | Director | |||
2
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||
Audited Consolidated Financial Statements: | ||
Successor Company | ||
Report of Grant Thornton LLP, Independent Registered Public Accounting Firm | F-2 | |
| F-3 | ||
| F-4 | ||
| F-5 | ||
| F-6 | ||
| F-7 | ||
| F-8 | ||
Predecessor Company | ||
Report of Grant Thornton LLP, Independent Registered Public Accounting Firm | F-26 | |
| F-27 | ||
| F-28 | ||
| F-29 | ||
| F-30 | ||
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Sheffield Steel Corporation
We have audited the accompanying consolidated balance sheets of Sheffield Steel Corporation and subsidiary (a Delaware corporation) as of April 30, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity (deficit) and other comprehensive income (loss), and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of Sheffield Steel Corporation and subsidiary for the eight and one-half months ended April 30, 2003 were audited by other auditors. Those auditors expressed an unqualified opinion on those financial statements in their report dated July 10, 2003.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 2005 and 2004 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sheffield Steel Corporation and subsidiary as of April 30, 2005 and 2004, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Tulsa, Oklahoma
June 24, 2005
F-2
The Board of Directors and Stockholders
Sheffield Steel Corporation:
We have audited the accompanying consolidated statements of operations, stockholders’ deficit and other comprehensive loss and cash flows of Sheffield Steel Corporation and subsidiary for the period from August 14, 2002 (date of reorganization) to April 30, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Sheffield Steel Corporation and subsidiary for the period from August 14, 2002 (date of reorganization) to April 30, 2003, in conformity with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
July 10, 2003
F-3
Sheffield Steel Corporation and Subsidiary
Consolidated Balance Sheets
April 30, 2005 and 2004
| 2005 | 2004 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 4,463 | $ | 3,794 | ||||
Accounts receivable, less allowance for doubtful accounts of $548 and $398, respectively | 37,315 | 35,721 | ||||||
Inventories | 53,305 | 35,909 | ||||||
Prepaid expenses and other | 4,126 | 833 | ||||||
Total current assets | 99,209 | 76,257 | ||||||
PROPERTY, PLANT AND EQUIPMENT, net | 52,037 | 45,412 | ||||||
REORGANIZATION VALUE IN EXCESS OF IDENTIFIABLE ASSETS | 1,476 | 1,476 | ||||||
OTHER ASSETS: | ||||||||
Deferred income tax asset | 3,019 | — | ||||||
Other assets | 6,084 | 749 | ||||||
| $ | 161,825 | $ | 123,894 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
CURRENT LIABILITIES: | ||||||||
Current portion of long-term debt | $ | 11,861 | $ | 5,910 | ||||
Accounts payable | 9,972 | 9,911 | ||||||
Accrued interest payable | 1,930 | 1,754 | ||||||
Accrued liabilities | 14,020 | 11,458 | ||||||
Total current liabilities | 37,783 | 29,033 | ||||||
LONG-TERM DEBT, LESS CURRENT PORTION | ||||||||
Long-term debt | $ | 68,190 | $ | 64,335 | ||||
Term loan | 3,000 | — | ||||||
Total long-term debt, less current portion | 71,190 | 64,335 | ||||||
ACCRUED POSTRETIREMENT BENEFIT COSTS | 30,661 | 30,584 | ||||||
OTHER LIABILITIES | 10,650 | 8,995 | ||||||
Total liabilities | 150,284 | 132,947 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS’ EQUITY (DEFICIT): | ||||||||
Common stock (7,500 authorized, 5,000 issued and outstanding on April 30, 2005 and 2004, $.01 par value) | 50 | 50 | ||||||
Contributed capital | 4,056 | 4,056 | ||||||
Accumulated other comprehensive loss, net of tax of $1,135 | (4,645 | ) | (2,785 | ) | ||||
Accumulated earnings (deficit) | 12,080 | (10,374 | ) | |||||
Total stockholders’ equity (deficit) | 11,541 | (9,053 | ) | |||||
| $ | 161,825 | $ | 123,894 | |||||
F-4
Sheffield Steel Corporation and Subsidiary
Consolidated Statements of Operations
(In thousands)
| For the year ended April 30, | Eight and One-Half Months Ended April 30, 2003 | |||||||||||
| 2005 | 2004 | |||||||||||
SALES | $ | 282,720 | $ | 230,926 | $ | 113,993 | ||||||
BILLED FREIGHT | 13,939 | 13,782 | 7,238 | |||||||||
COST OF SALES | (231,591 | ) | (200,837 | ) | (104,289 | ) | ||||||
FREIGHT COST | (13,939 | ) | (13,782 | ) | (7,238 | ) | ||||||
Gross Profit | 51,129 | 30,089 | 9,704 | |||||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE | 13,178 | 13,068 | 8,816 | |||||||||
DEPRECIATION EXPENSE | 7,037 | 6,955 | 5,694 | |||||||||
POST-RETIREMENT BENEFIT EXPENSE OTHER THAN PENSIONS | 2,634 | 2,715 | 1,671 | |||||||||
Operating income (loss) | 28,280 | 7,351 | (6,477 | ) | ||||||||
OTHER EXPENSE (INCOME): | ||||||||||||
Interest expense, net | 9,677 | 6,935 | 4,264 | |||||||||
Reorganization expense | — | — | 49 | |||||||||
Loss on debt retirement | 3,534 | — | — | |||||||||
Gain from litigation settlement | (4,793 | ) | — | — | ||||||||
Net income (loss) before taxes | 19,862 | 416 | (10,790 | ) | ||||||||
INCOME TAX BENEFIT | (2,592 | ) | — | — | ||||||||
Net income (loss) | $ | 22,454 | $ | 416 | $ | (10,790 | ) | |||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Sheffield Steel Corporation and Subsidiary
Consolidated Statements of Stockholders’ Equity (Deficit) and Other Comprehensive Income (Loss)
For the periods from August 14, 2002 (date of reorganization) to April 30, 2005
(In thousands)
| Common Stock | Contributed Capital | Accumulated Other Comprehensive Loss | Accumulated Earnings (Deficit) | Total | ||||||||||||||
Balance at August 14, 2002 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||
Reorganization of company - reorganization value | 48 | 4,056 | — | — | 4,104 | |||||||||||||
Net loss | — | — | — | (10,790 | ) | (10,790 | ) | |||||||||||
Change in minimum pension liability | — | — | (1,883 | ) | — | (1,883 | ) | |||||||||||
Comprehensive loss | — | — | — | — | (12,673 | ) | ||||||||||||
Balance at April 30, 2003 | 48 | 4,056 | (1,883 | ) | (10,790 | ) | (8,569 | ) | ||||||||||
Common stock issued | 2 | — | — | — | 2 | |||||||||||||
Net income | — | — | — | 416 | 416 | |||||||||||||
Change in minimum pension liability | — | — | (902 | ) | — | (902 | ) | |||||||||||
Comprehensive loss | — | — | — | — | (486 | ) | ||||||||||||
Balance at April 30, 2004 | 50 | 4,056 | (2,785 | ) | (10,374 | ) | (9,053 | ) | ||||||||||
Net income | — | — | — | 22,454 | 22,454 | |||||||||||||
Change in minimum pension liability, net of tax of $1,135 | — | — | (1,860 | ) | — | (1,860 | ) | |||||||||||
Comprehensive income | — | — | — | — | 20,594 | |||||||||||||
Balance at April 30, 2005 | $ | 50 | $ | 4,056 | $ | (4,645 | ) | $ | 12,080 | $ | 11,541 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Sheffield Steel Corporation and Subsidiary
Consolidated Statements of Cash Flows
(In thousands)
| For the year ended April 30, | Eight and One-Half Months Ended April 30, 2003 | |||||||||||
| 2005 | 2004 | |||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net income (loss) | $ | 22,454 | $ | 416 | $ | (10,790 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- | ||||||||||||
Note interest added to principal | — | — | 2,202 | |||||||||
Depreciation | 7,037 | 6,955 | 5,694 | |||||||||
Accretion of discount on senior secured notes | 304 | 1,045 | 627 | |||||||||
Accrual of postretirement benefits other than pensions, net of cash paid | 77 | 510 | 181 | |||||||||
Bad-debt expense | 383 | 356 | 969 | |||||||||
Deferred taxes | (2,592 | ) | — | — | ||||||||
Gain on litigation settlement | (4,793 | ) | — | — | ||||||||
Loss on debt retirement | 3,534 | — | — | |||||||||
Changes in assets and liabilities- | ||||||||||||
Accounts receivable | (1,977 | ) | (14,517 | ) | (4,129 | ) | ||||||
Inventories | (17,396 | ) | 195 | 2,053 | ||||||||
Prepaid expenses and other | (954 | ) | 1,673 | (1,167 | ) | |||||||
Other assets | (2,491 | ) | 125 | 1,133 | ||||||||
Accounts payable | 61 | 3,421 | 2,547 | |||||||||
Accrued interest payable | 176 | 1,649 | 94 | |||||||||
Accrued other current liabilities | 2,259 | 2,557 | (3,806 | ) | ||||||||
Other long-term liabilities | 548 | (5,457 | ) | (1,978 | ) | |||||||
Net cash provided by (used in) operating activities | 6,630 | (1,072 | ) | (6,370 | ) | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Capital expenditures | (13,681 | ) | (1,381 | ) | (1,103 | ) | ||||||
Proceeds on sale of assets | 18 | — | — | |||||||||
Net cash used in investing activities | (13,663 | ) | (1,381 | ) | (1,103 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Issuance of common stock | — | 2 | — | |||||||||
Net payments (proceeds) of long-term debt under revolving lines of credit | (36,375 | ) | 6,605 | 5,643 | ||||||||
Proceeds from issuance of senior notes | 80,000 | — | — | |||||||||
Payments on long-term debt | (33,042 | ) | (2,943 | ) | (2,428 | ) | ||||||
Payments to retire debt | (1,147 | ) | — | — | ||||||||
Debt issuance costs | (4,476 | ) | — | — | ||||||||
Net proceeds received from litigation settlement | 2,742 | — | — | |||||||||
Net cash provided by financing activities | 7,702 | 3,664 | 3,215 | |||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 669 | 1,211 | (4,258 | ) | ||||||||
CASH AND CASH EQUIVALENTS, beginning of period | 3,794 | 2,583 | 6,841 | |||||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 4,463 | $ | 3,794 | $ | 2,583 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||||||
CASH PAID DURING THE PERIOD FOR INTEREST | $ | 8,396 | $ | 3,818 | $ | 1,341 | ||||||
CASH PAID DURING THE PERIOD FOR TAXES | $ | 2,440 | $ | — | $ | — | ||||||
NONCASH ITEMS- | ||||||||||||
Additional minimum pension liability, net of tax | $ | 1,860 | $ | 902 | $ | 1,883 | ||||||
Write-off of debt issuance costs | $ | 2,387 | $ | — | $ | — | ||||||
Note receivable from litigation settlement | $ | 2,051 | $ | — | $ | — | ||||||
F-7
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements
April 30, 2005, 2004 and 2003
(In thousands)
A. Organization
1. Nature of Business
The consolidated financial statements of Sheffield Steel Corporation (Sheffield) include the accounts of its divisions, Sheffield Steel - Sand Springs (Sand Springs), Sheffield Steel — Joliet (Joliet), Sheffield Steel — Kansas City (Kansas City) and Waddell’s Rebar Fabricators (Waddell) (Kansas City and Waddell - collectively Team Rebar), Wellington Industries (Wellington), and its wholly owned subsidiary Sand Springs Railway Company (the Railway). All material intercompany transactions and balances have been eliminated in consolidation.
Sheffield is a mini-mill that produces steel products such as hot-rolled steel bar, concrete reinforcing bar (“rebar”) and fabricated products. Sheffield’s principal markets include Oklahoma, Western Arkansas, Western Missouri, Kansas, Eastern Colorado, Northeastern New Mexico and Northern Texas.
On December 7, 2001, “old” Sheffield Steel Corporation and two of its wholly owned subsidiaries (collectively, the Debtors or Predecessor) filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (the Code) in the United States Bankruptcy Court for the Northern District of Oklahoma (the court). Sheffield’s remaining subsidiary, Sand Springs Railway, did not participate in the bankruptcy. The Company completed a stand-alone plan of reorganization (the Plan or Plan of Reorganization) and emerged from Chapter 11 bankruptcy as of August 14, 2002 (date of reorganization). The Company adopted fresh-start accounting pursuant to American Institute of Certified Public Accountants Statement of Position 90-7,Financial Reporting by Entities in Reorganization under the Bankruptcy Code(SOP 90-7). Under fresh-start accounting, the reorganization fair value of the Company is allocated to the entity’s assets, the Company’s accumulated deficit is eliminated, and the equity in the new company is issued according to the Plan. As a result of adopting fresh-start accounting and emerging from Chapter 11 status, the Company’s financial statements are not comparable with those prepared before the Plan was consummated.
B. Summary of Significant Accounting Policies
1. Organization and Nature of Business
Sheffield’s primary business is the production of concrete reinforcing bar, and a range of hot rolled bar products including rounds, flats and squares and fabricated products, which include fabricated rebar, railroad spikes, and fence posts. The Company operates in an economic environment wherein the commodity nature of both the products for sale and the 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 products for sale, and the supply and demand factors for 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.
2. Cash Equivalents
Sheffield considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
3. Accounts Receivable
Sheffield grants credit to customers on standard industry terms of net 30 days. At April 30, 2005 and 2004, accounts receivable were outstanding an average of 40 days and 41 days, respectively. This variance from the Company’s typical credit terms is largely a result of the practice of several larger customers to pay upon receipt of monthly statements summarizing the previous month’s invoices, resulting in payment for invoices issued early in the previous month to be made outside of the 30 day credit period. The variance also is a result of the Company’s government contractor customers who pay Sheffield only after they receive payment from the government, which occurs outside of the 30 day credit
F-8
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
April 30, 2005, 2004 and 2003
(In thousands)
period. Finally, the variance is also due in part to customers purchasing products that require further processing from third-party vendors paying the Company only after the customer receives the finished product from those vendors, which may occur outside the 30 day credit period.
At April 30, 2005 and 2004, approximately 30% and 39% of accounts receivable were outstanding 30 days or more and, of these, approximately 80% and 86%, respectively, were outstanding 60 days or less.
The Company has policies and procedures in place to evaluate the collectibility of customer accounts and to estimate bad debts based on each customer’s creditworthiness and general economic conditions. The Company evaluates all customer accounts quarterly and its top ten customer accounts monthly. However, any adverse change in the financial condition of customers could affect the Company’s estimate of bad debts.
| Year Ended April 30, | Eight and (unaudited) | |||||||||||
| 2005 | 2004 | |||||||||||
Balance, beginning of the period | $ | 398 | $ | 543 | $ | — | ||||||
Provision for loss on accounts receivable | 383 | 356 | 969 | |||||||||
Accounts receivable written off, net of recoveries | (233 | ) | (501 | ) | (426 | ) | ||||||
Balance, end of period | $ | 548 | $ | 398 | $ | 543 | ||||||
4. Inventories
Raw materials and scrap inventories are stated at the lower of average cost or market. The cost of work-in-process and finished goods inventories is based on standards which approximate the lower of cost or market. Work-in-process and finished goods include direct labor and allocated overhead. Generally, the Company does not have obsolete inventory. Excess finished goods inventory is written down to its scrap value and can be converted into a saleable finished good.
5. Other Assets
Other assets consist primarily of debt issuance costs of $4,476. Debt issuance costs are amortized over the term of the related indebtedness.
6. Reorganization Value in Excess of Identifiable Assets
Reorganization value in excess of identifiable assets is treated as goodwill in accordance with Statement of Financial Accounting Standards (SFAS) No. 142,Goodwill and Other Intangible Assets,and is evaluated by management for impairment annually. No impairment existed as of April 30, 2005 and 2004.
7. Property, Plant and Equipment
Property, plant and equipment, which include capital leases, is stated at cost. Depreciation and amortization 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 twenty-five years. Significant renewals and betterments are capitalized; costs of maintenance and repairs are charged to expense as incurred. Equipment under capital leases is amortized over the shorter of the life of the lease or asset life.
8. 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
F-9
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
April 30, 2005, 2004 and 2003
(In thousands)
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.
9. Pension and Other Post-retirement Plans
The Company has defined benefit pension plans covering the hourly employees at Sand Springs and Joliet and the salaried employees at Sand Springs. The benefits are based on years of service and the employee’s compensation during the highest five of the last ten years before retirement.
The Company also sponsors a defined benefit health care plan for retirees and employees in Sand Springs. Sheffield measures the costs of this obligation based on the Company’s best estimate. The net periodic costs are recognized as employees render the services necessary to earn the post-retirement benefits.
10. Environmental Compliance Costs
Sheffield accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Environmental remediation costs have not had a material impact on the Company’s financial position, results of operations, or liquidity.
11. Revenue Recognition
Revenues from sales are recognized when title passes to the customer, which occurs when products are shipped. Raw material surcharges per ton are calculated based on the monthly Metal Market for Chicago #1 Heavy Melt and are included on the sales invoice on a per ton basis. There are no customer acceptance provisions and customer returns are resolved on a case-by-case basis. Customer returns were 0.05%, 0.08% and 0.5% of sales for the periods ended April 30, 2005, 2004, and 2003 respectively, and were recognized at the time the expense was incurred, except for a quality reserve at Joliet which is established at each year end and subsequently charged with prior year quality issues.
Railway revenue on inbound and outbound shipments is recognized upon delivery to either the interchange or the end user. Revenues for demurrage, equipment rental and switching are recognized at the time of service.
12. Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the amounts reported. The Company believes that these estimates are reasonable and proper; however, actual results could differ from estimates.
13. Asset Impairment
Sheffield periodically evaluates the carrying value of long-lived assets when events and circumstances warrant such a review. A long-lived asset is considered impaired when the anticipated undiscounted future cash flows from a logical grouping of assets is less than its carrying value. In that event, the Company recognizes a loss equal to the amount by which the carrying value exceeds the fair market value of assets. No impairments were recorded for the years ended April 30, 2005 and 2004.
14. Recently Issued Accounting Standards
In November 2002, the FASB issued Financial Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45).
F-10
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
April 30, 2005, 2004 and 2003
(In thousands)
FIN 45 expands the existing disclosure requirements for guarantees and requires that companies recognize a liability for guarantees issued after December 31, 2002. The implementation of FIN 45 did not have an impact on Sheffield Steel Corporation’s financial position or results of operations.
In 2003, the FASB issued FASB Staff Position (FSP) 106-1,Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) provides a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Act. Any measures of the AMBO or net periodic post-retirement benefit cost provided in these financial statements and accompanying notes to the financial statements, do not reflect the effects of the Act.
In 2004, the FASB issued (FSP) FAS 106-2,Accounting and Disclosure Requirements related to the Medicare Prescription Drug Improvement and Modernization Act of 2003, which supersedes (FSP) FAS 106-1. The FSP is effective for the Company’s first interim or annual period beginning after June 15, 2004 and did not have a financial impact on the Company for the fiscal year ended April 30, 2005.
In January of 2003, the Financial Accounting Standards Board (“FASB”) issuedFinancial Interpretation No. 46 Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51(FIN 46). In December 2003, the FASB issued FIN 46R, which clarified certain issues identified in FIN 46. FIN 46R requires an entity to consolidate a variable interest entity if the entity is designated as the primary beneficiary of that variable interest entity even if the entity does not have a majority of voting interest. A variable interest entity is generally defined as an entity where its equity is unable to finance its activities or where the owners of the entity lack the risk and rewards of ownership. The provisions of this statement apply at inception of any entity created after January 31, 2003. For an entity created before February 1, 2003, the provisions of this interpretation must be applied at the beginning of the first interim or annual period beginning after March 15, 2004. The implementation of FIN 46 did not have an impact on Sheffield’s financial position or results of operations.
In May 2003, the FASB issued Statement No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity(SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope of SFAS 150 as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Sheffield adopted the provisions of SFAS 150 as of September 1, 2003. The adoption did not have a material impact on Sheffield’s consolidated financial position or results of operations.
15. Advertising Costs
All advertising costs of the Company are expensed as incurred. Advertising expenses totaled approximately $23, $28 and $20 for the periods ended April 30, 2005, 2004 and 2003, respectively.
16. Shipping and Handling
Internal shipping and handling costs and costs associated with inbound freight are included in inventory or cost of sales. Shipping costs charged to customers are recorded as revenue and the associated costs incurred are recorded as cost of goods sold.
F-11
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
April 30, 2005, 2004 and 2003
(In thousands)
17. Accrued and Other Long-Term Liabilities as of April 30,
| 2005 | 2004 | |||||
Accrued Liabilities | ||||||
Workers Compensation | $ | 1,272 | $ | 1,210 | ||
Pension Benefit Obligation | 3,038 | 4,731 | ||||
Vacation Accrual | 1,424 | 1,000 | ||||
Bankruptcy Accrual | — | 662 | ||||
Bonus and Profit Sharing Accrual | 4,930 | 1,010 | ||||
Other | 3,356 | 2,845 | ||||
Total | $ | 14,020 | $ | 11,458 | ||
Other Long-Term Liabilities | ||||||
Pension Benefit Obligation | 10,638 | 8,950 | ||||
Other | 12 | 45 | ||||
Total | $ | 10,650 | $ | 8,995 | ||
18. Planned Maintenance Activities
Annually, the Company shuts down the plant for planned major maintenance activities. The Company accrues for these planned major maintenance activities costs throughout the year. These costs include estimated costs for material, labor, supplies and contractor assistance for (i) repairs to furnace refractories, (ii) maintenance on transformers and (iii) work on other equipment.
The costs associated with the major maintenance activities were accrued as follows:
| Year Ended April 30, | ||||||||
| 2005 | 2004 | |||||||
Beginning Balance | $ | — | $ | — | ||||
Accrued Planned Major Maintenance Costs | 1,835 | 1,521 | ||||||
Planned Major Maintenance Costs Paid | (1,835 | ) | (1,521 | ) | ||||
Ending Balance | $ | — | $ | — | ||||
19. Segment and Product Revenue Information
The Company provides steel products and services to the steel manufacturing and fabricating industry and therefore believes that all of the business activities from which it earns revenues and incurs expenses are from a single segment. The products produced, production processes, customers and methods of distribution are of a similar nature throughout the Company. The chief operating decision maker of the Company does not make decisions that affect the Company based on discrete financial information with respect to products or production facilities. The Company had consolidated sales of $296,659, $244,708 and $121,231 for the years ended April 30, 2005, 2004 and the eight and one-half months ended April 30, 2003, respectively. None of these sales were outside the United States. The Company sells its products through its own sales force and, to a limited extent, through sales agencies. All of Sheffield’s assets are located in the United States. The Company had one customer that accounted for approximately 8%, 11% and 11 % of sales for the years ended April 30, 2005, 2004 and the eight and one-half months ended April 30, 2003, respectively.
F-12
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
April 30, 2005, 2004 and 2003
(In thousands)
The following table sets forth the Company’s revenues by product line:
| Year ended April 30, | Eight and One-Half Months Ended April 30, 2003 | ||||||||
| 2005 | 2004 | ||||||||
Billets | $ | 4,047 | $ | 661 | $ | 2,922 | |||
Mill Bars (1) | 228,843 | 189,847 | 87,050 | ||||||
Fabricated Products | 47,158 | 37,585 | 21,399 | ||||||
Total Product Revenues | $ | 280,048 | $ | 228,093 | $ | 111,371 | |||
| (1) | Consists of hot rolled bars and rebar. |
The table above does not include revenues of the Railway, which were $2,672, $2,833 and $2,622 for the years ended April 30, 2005, 2004 and the eight and one-half months ended April 30, 2003, respectively.
20. Stock Based Compensation
Sheffield granted 250,000 shares of restricted stock to certain members of senior management and the Board of Directors in December 2003. As the Company had recently emerged from bankruptcy and the market conditions in the steel industry at the time of issuance were depressed and volatile, the fair value of the restricted stock was determined by the Board of Directors to be $0.01 per share. A portion of these awards vested on December 3, 2003, the grant date, with the remaining awards vesting on August 14, 2004. The Company used the fair value method to account for stock based employee compensation. The Company recorded the entire $2 of compensation expense in the statement of operations on the grant date and thus no unearned compensation existed.
21. Reclassifications
Certain amounts in 2003 and 2004 have been reclassified to conform to 2005. These reclassifications have no impact on net income (loss) or accumulated earnings (deficit).
C. 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 equipment financing companies approximate 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 senior secured notes at April 30, 2005 and 2004 was approximately $80,000 and $29,674, respectively.
D. Inventories
The components of inventories at April 30 are as follows:
| 2005 | 2004 | |||||
Raw materials | $ | 15,236 | $ | 11,443 | ||
Work in process | 10,748 | 5,273 | ||||
Finished goods | 27,321 | 19,193 | ||||
| $ | 53,305 | $ | 35,909 | |||
F-13
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
April 30, 2005, 2004 and 2003
(In thousands)
E. Property, Plant and Equipment
The components of property, plant and equipment, net at April 30 are as follows:
| 2005 | 2004 | |||||||
Land and buildings | $ | 7,589 | $ | 10,620 | ||||
Machinery and equipment | 61,137 | 44,480 | ||||||
Office equipment | 1,717 | 1,617 | ||||||
Vehicles | 388 | 341 | ||||||
Construction in progress | 544 | 715 | ||||||
| 71,375 | 57,773 | |||||||
Less-accumulated depreciation | (19,338 | ) | (12,361 | ) | ||||
| $ | 52,037 | $ | 45,412 | |||||
Depreciation of property, plant and equipment charged to operations was $7,037, $6,955 and $5,694 for the periods ending April 30, 2005, 2004 and 2003, respectively. 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 | |
Office equipment | 3-15 years | |
Vehicles | 3 years |
Machinery and equipment is used in the plant and includes computers and electronic processing equipment, which have an estimated useful life range of 3-5 years, and other production type equipment, which has an estimated useful life range of 5-25 years.
F. Long-Term Debt
Long-term debt at April 30 is comprised of the following:
| 2005 | 2004 | |||||||
Senior secured notes, net of discount (a) | $ | — | $ | 29,674 | ||||
Senior secured notes (11 3/8% due 2011) (a) | 80,000 | — | ||||||
Working capital facility (b) | 8 | 35,802 | ||||||
Term loan (c) | — | 3,131 | ||||||
Railway term loan (d) | 3,000 | — | ||||||
Railway term loan & mortgage (d) | — | 1,198 | ||||||
Capital leases (e) | $ | 43 | $ | 440 | ||||
| $ | 83,051 | $ | 70,245 | |||||
Less current portion | (11,861 | ) | (5,910 | ) | ||||
| $ | 71,190 | $ | 64,335 | |||||
(a) Senior secured notes
In August 2004, the Company issued new notes at 11 3/8% due in 2011. The principal balance of $32,202 on the old notes was paid off and we recorded a loss of $3,534 as a result of the transaction.
The cumulative principal balance of the new notes remains at $80,000 as of April 30, 2005, as no principal payments were due through April 30, 2005. Interest is paid semi-annually. The senior secured notes are governed by the Indenture and are secured by property, plant and equipment and a second priority interest in the receivables and inventory of the Company. The indenture agreement includes a
F-14
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
April 30, 2005, 2004 and 2003
(In thousands)
covenant which requires we make an Excess Cash Flow offer to buy back notes equal to 50% of excess cash flow for the fiscal year. Based on excess cash flow for fiscal year 2005, our offer, to be made in September 2005 will be $11,835.
The indenture defines Excess Cash Flow as “for any period, the excess of (i) Consolidated EBITDA for such period over (ii) the sum of (A) the aggregate amount of capital expenditures made in cash by the Company and its Restricted Subsidiaries during such period (other than any such capital expenditures made with insurance or condemnation proceeds), (B) the aggregate principal amount of senior secured Indebtedness of the Company and its Restricted Subsidiaries permanently repaid or prepaid during such period by the Company and its Restricted Subsidiaries to any Person (other than the Company or any Restricted Subsidiary), (C) the cash portion of Consolidated Interest Expense paid by the Company and its Restricted Subsidiaries during such period and (D) the aggregate amount (without duplication) of all income and franchise taxes paid in cash by the Company and its Restricted Subsidiaries.”
(b) Working capital facility
The terms of the working capital facility from The CIT Group/Business Credit, Inc. (CIT) include maximum loan availability of $15,000, interest at prime plus .50%. Our borrowing rate was 6.00% and 4.50% at April 30, 2005 and 2004, respectively. We had $15,000 availability on April 30, 2005. The facility is secured by all of the Company’s accounts receivable and inventory and expires on August 12, 2008.
(c) Term loan
As a part of issuing new notes, the Company paid off the $4,500 term loan in August 2004.
(d) Railway term loan
In April 2004, the Railway amended the credit agreement with the bank to consist of a $1,250 term loan and a $250 revolving line of credit. This note and mortgage was paid off when the new notes were issued in August 2005. A new $3,000 term loan was obtained at that time. At April 30, 2005 our borrowing rate for this loan was 6.00%. This loan is secured by all of the Company’s accounts receivable and inventory and is due on August 12, 2008.
(e) Capital leases
Capital leases are payable to financing companies and vendors related to the financing of machinery and equipment and mobile purchases. The leases are payable in monthly principal installments of approximately $2 plus interest payable at variable rates. The majority of the leases mature in fiscal year 2007 and are secured by mobile equipment.
The aggregate maturities of long-term debt for the years ended April 30, are as follows:
2006 | $ | 11,861 | |
2007 | 15 | ||
2008 | 10 | ||
2009 | 3,000 | ||
2010 | 0 | ||
Thereafter | 68,165 | ||
Total maturities | $ | 83,051 | |
Interest costs were $9,696 and $6,382 in 2005 and 2004, respectively, which included $304 and $1,045 of bond discount amortization. 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
F-15
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
April 30, 2005, 2004 and 2003
(In thousands)
default of the restrictive covenants or failure to maintain the specified performance measures, the lender may withdraw the credit agreements.
In July 2003, at no cost to the Company, Sheffield obtained a permanent waiver of the covenant to provide the lender a post-bankruptcy opening balance sheet and analysis of tax consequences of rescheduling and forgiveness of the indentures within 90 days under the Term Loan Agreement. The Company also received a waiver in July 2003 for a violation of the cash flow covenant of the Working Capital Facility. The Company paid an accommodation fee of $10 for the waiver, which was effective for the period ending on April 30, 2003. In June 2004, Sheffield amended the Term Loan, which included a waiver for non-compliance with the Negative Pledge, Debt and Capital Expenditures covenants of the Term Loan agreement. These violations resulted from the purchase of the office building and transloading and warehouse facility. Sheffield paid no consideration for the amendment to the Term Loan. The Term Loan was subsequently paid off with the new bonds in August 2004.
The Company’s current revolving credit facility and the indenture governing the 11 3/8% senior secured notes, each contain cross default provisions, under which an event of default under one of these instruments may give rise to an event of default under the other.
G. Income Taxes
Income taxes attributable to operations differed form the amounts computed by applying the U.S. federal income tax rate of 34% at April 30, as a result of the following:
| 2005 | 2004 | 2003 | ||||||||||
Computed “expected” tax provision (benefit) | $ | 6,753 | $ | 142 | $ | (3,668 | ) | |||||
Non deductible expenses | 12 | 6 | — | |||||||||
State income tax provision (benefit), net of federal provision (benefit) | 787 | 17 | (431 | ) | ||||||||
Change in valuation allowance | (10,144 | ) | (165 | ) | 4,099 | |||||||
Net tax benefit | $ | (2,592 | ) | $ | — | $ | — | |||||
Current income tax provision | $ | 1,394 | — | — | ||||||||
Deferred income tax benefit | (3,986 | ) | — | — | ||||||||
Net tax benefit | $ | (2,592 | ) | — | — | |||||||
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: | ||||||||||||
Deductible temporary differences: | ||||||||||||
Allowance for doubtful accounts | $ | 208 | $ | 151 | $ | 206 | ||||||
Inventory | 724 | 984 | — | |||||||||
Accrued liabilities not deductible until paid | 1,386 | 1,750 | 722 | |||||||||
Post-retirement benefit costs | 11,871 | 11,618 | 11,428 | |||||||||
Pension liability | 5,192 | 4,914 | 5,149 | |||||||||
Net operating loss carryforwards | — | 1,733 | 30,623 | |||||||||
Alternative minimum tax credit carryforwards | — | 70 | 1,142 | |||||||||
Investment tax credit carryforwards | — | 2,919 | 3,506 | |||||||||
| 19,381 | 24,139 | 52,776 | ||||||||||
Less - valuation allowance | — | (14,527 | ) | (41,333 | ) | |||||||
| 19,381 | 9,612 | 11,443 | ||||||||||
Taxable temporary difference— property, plant and equipment | (14,260 | ) | (9,612 | ) | (11,443 | ) | ||||||
Net deferred tax asset | $ | 5,121 | $ | — | $ | — | ||||||
Management believes that a valuation reserve is no longer required related to the net current and long-term deferred income tax assets as it is more likely than not these assets will reduce future income tax
F-16
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
April 30, 2005, 2004 and 2003
(In thousands)
payments of the Company. Significant factors considered by management in its determination of the probability of the realization of the deferred tax benefits include: (a) current year operating results, (b) expectation of future earnings and (c) certain tax strategies that will accelerate the realization of the assets.
H. Employee Benefit Plans
The Company has defined benefit plans that cover the hourly employees at Sand Springs and Joliet and the salaried employees at Sand Springs. Benefits are generally based on years of service and the employee’s highest compensation during five of the last ten years of employment. The Company’s funding policy is to contribute annually at least the minimum required amount.
In addition to the defined benefit pension plan, the Company also provides post-retirement 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 periodically, and contains other cost-sharing features such deductibles, co-insurance and Medicare. The Company’s policy is to fund the accumulated post-retirement benefits on a “pay-as-you-go” basis.
Sheffield expects future benefit payments as follows:
| Pension | Other | |||
2006 | 2,542 | 1,763 | ||
2007 | 2,570 | 1,853 | ||
2008 | 2,616 | 2,006 | ||
2009 | 2,723 | 2,121 | ||
2010 | 2,828 | 2,185 | ||
Years 2011-2015 | 15,531 | 11,452 |
The following tables set forth the plan’s benefit obligations, fair value of plan assets and funded status at April 30, 2005 and 2004, respectively, as determined by an independent actuary:
| Pension Benefits | Other Benefits | |||||||||||||||
| FY 2005 | FY 2004 | FY 2005 | FY 2004 | |||||||||||||
Change in Projected Benefit Obligation | ||||||||||||||||
Benefit obligation at beginning of year | $ | 41,177 | $ | 39,210 | $ | 36,049 | $ | 33,327 | ||||||||
Service cost | 1,004 | 920 | 579 | 439 | ||||||||||||
Interest cost | 2,482 | 2,442 | 2,052 | 2,155 | ||||||||||||
Actuarial (gain)/loss, including discount rate changes | 1,954 | 1,040 | 859 | 2,333 | ||||||||||||
Benefits paid (net of participant contributions) | (2,700 | ) | (2,435 | ) | (2,555 | ) | (2,205 | ) | ||||||||
Benefit obligation at end of year | $ | 43,917 | $ | 41,177 | $ | 36,984 | $ | 36,049 | ||||||||
| The total accumulated benefit obligation for the three pension plans was $40,352 as of April 30, 2005 and $37,957 as of April 30, 2004. | ||||||||||||||||
Change in Plan Assets | ||||||||||||||||
Fair value of plan assets at beginning of year | $ | 24,277 | $ | 22,245 | $ | — | $ | — | ||||||||
Actual return on plan assets (net of expenses) | 787 | 2,208 | — | — | ||||||||||||
Employer contributions | 4,311 | 2,259 | — | — | ||||||||||||
Benefits paid | (2,700 | ) | (2,435 | ) | — | — | ||||||||||
Fair value of plan assets at end of year | $ | 26,675 | $ | 24,277 | $ | — | $ | — | ||||||||
F-17
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
April 30, 2005, 2004 and 2003
(In thousands)
| Pension Benefits | Other Benefits | |||||||||||||||
| FY 2005 | FY 2004 | FY 2005 | FY 2004 | |||||||||||||
Reconciliation of Funded Status | ||||||||||||||||
Funded status | $ | (17,242 | ) | $ | (16,899 | ) | $ | (36,984 | ) | $ | (36,048 | ) | ||||
Unrecognized net actuarial (gain)/loss | 9,345 | 6,004 | 6,323 | 5,464 | ||||||||||||
(Accrued)/prepaid pension cost at end of year | $ | (7,897 | ) | $ | (10,895 | ) | $ | (30,661 | ) | $ | (30,584 | ) | ||||
Reconciliation of (Accrued)/Prepaid Pension Cost | ||||||||||||||||
(Accrued)/prepaid pension cost at beginning of year | $ | (10,895 | ) | $ | (11,581 | ) | $ | (30,584 | ) | $ | (30,074 | ) | ||||
Net periodic pension (cost)/credit | (1,312 | ) | (1,573 | ) | (2,632 | ) | (2,715 | ) | ||||||||
Employer contributions (net of participant contributions) | 4,310 | 2,259 | 2,555 | 2,205 | ||||||||||||
(Accrued)/prepaid pension cost at end of year | $ | (7,897 | ) | $ | (10,895 | ) | $ | (30,661 | ) | $ | (30,584 | ) | ||||
Amounts Recognized In the Statement of Financial Position Consist of: | ||||||||||||||||
Accrued benefit cost | $ | (13,677 | ) | $ | (13,680 | ) | $ | (30,661 | ) | $ | (30,584 | ) | ||||
Accumulated other comprehensive income | 5,780 | 2,785 | — | — | ||||||||||||
Net amount recognized | $ | (7,897 | ) | $ | (10,895 | ) | $ | (30,661 | ) | $ | (30,584 | ) | ||||
The Company has three pension plans: the Sand Springs Plan, Sand Springs Salaried Pension Plan and the Joliet Pension Plan. Each of these plans had a projected benefit obligation in excess of plan assets. The company expects to contribute approximately $2,315 to its pension plans in fiscal year 2006.
For measurement purposes, the assumed health care cost trend rate used for the post-retirement plan was 9.00%. The trend rate is assumed to decrease gradually to 4.50% by 2009 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. The following table presents the components of the net periodic benefit cost:
|
| |||||||||||||||
| Pension Benefits | Other Benefits | |||||||||||||||
| FY 2005 | FY 2004 | FY 2005 | FY 2004 | |||||||||||||
Components of Net Periodic Benefit Cost | ||||||||||||||||
Service cost | $ | 1,004 | $ | 919 | $ | 579 | $ | 440 | ||||||||
Interest cost | 2,483 | 2,442 | 2,052 | 2,155 | ||||||||||||
Expected return on plan assets | (2,303 | ) | (1,966 | ) | — | — | ||||||||||
Amortization of net (gain)/loss | 128 | 178 | — | 121 | ||||||||||||
Net periodic pension cost | $ | 1,312 | $ | 1,573 | $ | 2,631 | $ | 2,716 | ||||||||
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:
| 1-Percentage -Point Increase | 1-Percentage - Point Increase | ||||
Effect of Health Care Cost Trend Rate | |||||
Effect on total of service and interest cost | 516 | (410 | ) | ||
Effect on postretirement benefit obligation | 5,813 | (4,769 | ) |
F-18
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
April 30, 2005, 2004 and 2003
(In thousands)
The following table describes the percentage of fair value of total plan assets held by the pension plans as of April 30, 2004 and 2003, the measurement date:
| FY 2005 | FY 2004 | |||||
The Plan’s Asset Components as of April 30 Are as Follows: | ||||||
U.S. government securities | 24 | % | 15 | % | ||
Corporate bonds | 18 | % | 16 | % | ||
Equities | 56 | % | 54 | % | ||
Other | 2 | % | 15 | % | ||
Total | 100 | % | 100 | % | ||
The Plan’s assets are to be invested as a balanced portfolio consisting of equity, fixed income, cash equivalent securities and other assets in a moderately conservative manner in accordance with the maximum and minimum range for each asset category as stated below:
| Minimum | Target | Maximum | |||||||
Asset Category | |||||||||
Equity | 25 | % | 50 | % | 70 | % | |||
Fixed income | 30 | % | 40 | % | 50 | % | |||
Cash and equivalents | 0 | % | 5 | % | 20 | % | |||
Other assets including alternative investments (which will generally not be liquid) | 0 | % | 5 | % | 15 | % |
As defined in FAS 87,Employers Accounting for Pensions, assumptions used to determine the rate of return on plan assets reflect the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the benefit obligation. Assumptions have been determined by reflecting expectations regarding future rates of return for the investment portfolio, with consideration given to the distribution of investments by asset class and historical rates of return for each individual asset class. Assumptions used are as follows:
| Pension Benefits | Other Benefits | |||||||||||
| FY 2005 | FY 2004 | FY 2005 | FY 2004 | |||||||||
Assumptions Used to Determine Benefit Obligation at April 30 | ||||||||||||
Discount rate | 5.75 | % | 6.25 | % | 5.75 | % | 6.25 | % | ||||
Compensation increases (Joliet Pension Agreement) | N/A | N/A | N/A | N/A | ||||||||
Compensation increases (Retirement Plan) | 4.00 | % | 4.00 | % | N/A | N/A | ||||||
Compensation increases (Pension Agreement Plan) | 3.00 | % | 3.00 | % | N/A | N/A | ||||||
Assumptions Used to Determine Net Periodic Benefit Cost for years ending April 30 | ||||||||||||
Discount rate | 6.25 | % | 6.25 | % | 6.25 | % | 6.25 | % | ||||
Compensation increases (Joliet Pension Agreement) | N/A | N/A | N/A | N/A | ||||||||
Compensation increases (Retirement Plan) | 4.00 | % | 4.00 | % | N/A | N/A | ||||||
Compensation increases (Pension Agreement Plan) | 3.00 | % | 3.00 | % | N/A | N/A | ||||||
Long-term rate of return on assets for fiscal year | 9.00 | % | 9.00 | % | N/A | N/A | ||||||
The Company has certain divisions that maintain defined contributions plans in which various groups of employees participate. The Company made contributions to these plans of $106 and $87 in 2005 and 2004, respectively.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) was signed into law. The MMA adds a prescription drug benefit under Medicare (Medicare Part D). Additionally, retiree health care plan sponsors that provide a benefit that is at least actuarially
F-19
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
April 30, 2005, 2004 and 2003
(In thousands)
equivalent to Medicare Part D will receive a federal subsidy. Accordingly, the Company is unable to reasonably estimate the amount or timing of any cost savings. As permitted by FASB Staff Position (FSP) FAS 106-1,Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003,the Company has elected to defer recognizing the effects of the MMA in its post-retirement plan accounting at December 31, 2005 and 2004. This deferral will remain in effect until the issuance of authoritative accounting guidance, or until certain other events, such as a plan amendment, settlement or curtailment occur. It is possible that the specific authoritative guidance, when issued, could require the Company to update previously reported information.
I. Operating Leases
The Company is obligated under various noncancelable operating leases for certain machinery and equipment and 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 $1,139 in 2005. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) for the year ending April 30 are as follows:
2006 | $ | 284 | |
2007 | 276 | ||
2008 | 261 | ||
2009 | 218 | ||
2010 | 188 | ||
Thereafter | 678 | ||
| $ | 1,905 | ||
J. Workers’ Compensation
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 $2,505 in accordance with workers’ compensation arrangements and maintains stop loss insurance policies, which limit exposure under the self-insured programs to $175 per person per year for health insurance programs and $500 per incident for workers’ compensation. The liability of $1,272 and $1,210 at April 30, 2005 and 2004, respectively, is included in other liabilities on the consolidated balance sheets.
K. Litigation Settlement
A gain of $4,793 resulting from a litigation settlement with the Company’s former owners was recognized in fiscal year 2005. This litigation related to the payment of dividends to the former owners and redemption of stock at a time when the Company was insolvent or on the verge of insolvency. The gain consisted of the following:
Cash | $ | 4,500 | ||
Note Receivable | 1,300 | |||
Payments to prepetition unsecured creditors | (1,180 | ) | ||
Fees paid | (590 | ) | ||
Decrease in bankruptcy liabilities | 763 | |||
| $ | 4,793 | |||
F-20
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
April 30, 2005, 2004 and 2003
(In thousands)
L. Commitments and Contingencies
The Company is involved in claims and legal actions arising in the ordinary course of business. The Company believes that the ultimate disposition of these matters will not have a material adverse effect on its financial position, results of operations, or liquidity.
M. Concentration of Credit Risk
The Company’s standard credit terms are net 30 days. Management evaluates the creditworthiness of all customers quarterly and evaluates the creditworthiness of its top ten customers monthly. If management determines that a customer’s credit has deteriorated, management will put the customer on credit hold and require that the customer prepay for all future purchases. The Company does not have a policy for requiring collateral from customers for sales.
Approximately 39%, 40% and 34% of Sheffield’s sales were derived from their top ten customers for the periods ended April 30, 2005, 2004 and 2003, respectively. Their top ten customers accounted for approximately $12,534 and $12,600, or 33% and 35% of outstanding accounts receivable, at April 30, 2005 and 2004, respectively. Sales to these customers consisted of rebar, flats, squares, dowels and railroad spikes. These customers have historically paid within the payments terms established by the Company’s credit policy and management does not believe these customers pose a significant credit risk.
N. Liquidity and Management’s Plan
The Company continues to perform at improved levels. The Company generated income from operations in fiscal year 2005 sufficient to meet operating needs. The Company expects to continue to generate income from operations in fiscal year 2006 sufficient to continue to meet covenant requirements and operating needs.
O. Subsidiary Guarantor
Sheffield’s Senior Secured Notes are unconditionally guaranteed by all of Sheffield’s existing and future domestic restricted subsidiaries on a Senior Secured basis. Sheffield Steel Corporation is comprised of its operating divisions: Sheffield Steel - Sand Springs, Sheffield Steel - Joliet, Sheffield Steel - Kansas City and Waddell’s Rebar Fabricators (collectively, “Team Rebar”) and Wellington Industries (collectively, the “Parent”) and its wholly owned subsidiary Sand Springs Railway Company (the “Guarantor”).
F-21
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
April 30, 2005, 2004 and 2003
(In thousands)
Condensed Consolidating Financial Information
Condensed consolidating financial information for the Parent and Guarantor is as follows:
| Condensed Consolidating Balance Sheet April 30, 2005 | |||||||||||||||
| Parent | Guarantor | Eliminations | Total | ||||||||||||
Assets | |||||||||||||||
Cash and cash equivalents | $ | 4,463 | $ | — | $ | — | $ | 4,463 | |||||||
Accounts receivable, net | 37,094 | 221 | — | 37,315 | |||||||||||
Inventories | 53,241 | 64 | — | 53,305 | |||||||||||
Other current assets | 3,699 | 17 | 410 | 4,126 | |||||||||||
Total current assets | 98,497 | 302 | 410 | 99,209 | |||||||||||
Property, plant and equipment | 47,364 | 4,673 | — | 52,037 | |||||||||||
Other assets, net | 10,571 | 8 | — | 10,579 | |||||||||||
Total assets | $ | 156,432 | $ | 4,983 | $ | 410 | $ | 161,825 | |||||||
Liabilities and Stockholders’ Deficit | |||||||||||||||
Current liabilities | $ | 36,276 | $ | 1,097 | $ | 410 | $ | 37,783 | |||||||
Long-term debt, less current portion | 68,174 | 3,016 | — | 71,190 | |||||||||||
Accrued post-retirement benefit costs | 30,661 | — | — | 30,661 | |||||||||||
Other liabilities | 10,650 | — | — | 10,650 | |||||||||||
Total stockholders’ equity | 10,671 | 870 | — | 11,541 | |||||||||||
Total liabilities and stockholders’ equity | $ | 156,432 | $ | 4,983 | $ | 410 | $ | 161,825 | |||||||
| Condensed Consolidating Balance Sheet April 30, 2004 | |||||||||||||||
| Parent | Guarantor | Eliminations | Total | ||||||||||||
Assets | |||||||||||||||
Cash and cash equivalents | $ | 2,810 | $ | 984 | $ | — | $ | 3,794 | |||||||
Accounts receivable, net | 35,495 | 226 | — | 35,721 | |||||||||||
Inventories | 35,843 | 66 | — | 35,909 | |||||||||||
Other current assets | 2,098 | 15 | (1,280 | ) | 833 | ||||||||||
Total current assets | 76,246 | 1,291 | (1,280 | ) | 76,257 | ||||||||||
Property, plant and equipment | 42,074 | 3,338 | — | 45,412 | |||||||||||
Other assets, net | 2,168 | 57 | — | 2,225 | |||||||||||
Total assets | $ | 120,488 | $ | 4,686 | $ | (1,280 | ) | $ | 123,894 | ||||||
Liabilities and Stockholders’ Deficit | |||||||||||||||
Current liabilities | $ | 26,677 | $ | 3,636 | $ | (1,280 | ) | $ | 29,033 | ||||||
Long-term debt, less current portion | 63,740 | 595 | — | 64,335 | |||||||||||
Accrued post-retirement benefit costs | 30,584 | — | — | 30,584 | |||||||||||
Other liabilities | 8,995 | — | — | 8,995 | |||||||||||
Total stockholders’ equity (deficit) | (9,508 | ) | 455 | — | (9,053 | ) | |||||||||
Total liabilities and stockholders’ equity | $ | 120,488 | $ | 4,686 | $ | (1,280 | ) | $ | 123,894 | ||||||
F-22
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
April 30, 2005, 2004 and 2003
(In thousands)
| Condensed Consolidating Statements of Operations For the year ended April 30, 2005 | ||||||||||||||||
| Parent | Guarantor | Eliminations | Total | |||||||||||||
Sales, including billed freight | $ | 293,987 | $ | 4,161 | $ | (1,489 | ) | $ | 296,659 | |||||||
Cost of sales | (243,695 | ) | (1,835 | ) | — | (245,530 | ) | |||||||||
Gross profit | 50,292 | 2,326 | (1,489 | ) | 51,129 | |||||||||||
Selling, general and administrative expense | 12,720 | 458 | — | 13,178 | ||||||||||||
Depreciation and amortization expense | 6,683 | 354 | — | 7,037 | ||||||||||||
Post-retirement benefit expense other than pension | 2,621 | 13 | — | 2,634 | ||||||||||||
Operating income | 28,268 | 1,501 | (1,489 | ) | 28,280 | |||||||||||
Other (income) expense: | ||||||||||||||||
Interest expense, net | 9,527 | 150 | — | 9,677 | ||||||||||||
Other (income) expense, net | (1,259 | ) | — | — | (1,259 | ) | ||||||||||
Income before taxes | 20,000 | 1,351 | (1,489 | ) | 19,862 | |||||||||||
Income tax provision (benefit) | (2,732 | ) | 140 | — | (2,592 | ) | ||||||||||
Net income | $ | 22,732 | $ | 1,211 | $ | (1,489 | ) | $ | 22,454 | |||||||
| Condensed Consolidating Statements of Operations For the year ended April 30, 2004 | ||||||||||||||||
| Parent | Guarantor | Eliminations | Total | |||||||||||||
Sales, including billed freight | $ | 241,793 | $ | 4,258 | $ | (1,343 | ) | $ | 244,708 | |||||||
Cost of sales | (212,767 | ) | (1,852 | ) | — | (214,619 | ) | |||||||||
Gross profit | 29,026 | 2,406 | (1,343 | ) | 30,089 | |||||||||||
Selling, general and administrative expense | 12,430 | 638 | — | 13,068 | ||||||||||||
Depreciation and amortization expense | 6,628 | 327 | — | 6,955 | ||||||||||||
Post-retirement benefit expense other than pension | 2,715 | — | — | 2,715 | ||||||||||||
Operating income | 7,253 | 1,441 | (1,343 | ) | 7,351 | |||||||||||
Other (income) expense: | ||||||||||||||||
Interest expense, net | 6,905 | 30 | — | 6,935 | ||||||||||||
Net income | $ | 348 | $ | 1,411 | $ | (1,343 | ) | $ | 416 | |||||||
F-23
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
April 30, 2005, 2004 and 2003
(In thousands)
| Condensed Consolidating Statements of Operations For the eight and one-half months ended April 30, 2003 | ||||||||||||||||
| Parent | Guarantor | Eliminations | Total | |||||||||||||
Sales, including billed freight | $ | 119,229 | $ | 2,622 | $ | (620 | ) | $ | 121,231 | |||||||
Cost of sales | (110,345 | ) | (1,182 | ) | — | (111,527 | ) | |||||||||
Gross profit | 8,884 | 1,440 | (620 | ) | 9,704 | |||||||||||
Selling, general and administrative expense | 8,310 | 506 | — | 8,816 | ||||||||||||
Depreciation and amortization expense | 5,459 | 235 | — | 5,694 | ||||||||||||
Post-retirement benefit expense other than pension | 1,671 | — | — | 1,671 | ||||||||||||
Operating income | (6,556 | ) | 699 | (620 | ) | (6,477 | ) | |||||||||
Other expense: | ||||||||||||||||
Interest expense, net | 4,210 | 54 | — | 4,264 | ||||||||||||
Other expense, net | 49 | — | — | 49 | ||||||||||||
Net (loss) income | $ | (10,815 | ) | $ | 645 | $ | (620 | ) | $ | (10,790 | ) | |||||
F-24
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
April 30, 2005, 2004 and 2003
(In thousands)
| Condensed Consolidating Statements of Cash Flows For the year ended April 30, 2005 | |||||||||||||||
| Parent | Guarantor | Eliminations | Total | ||||||||||||
Net cash flows provided by (used in) operations | $ | 7,702 | $ | (1,072 | ) | $ | — | $ | 6,630 | ||||||
Net cash used in investing activities | (11,955 | ) | (1,708 | ) | — | (13,663 | ) | ||||||||
Net cash provided by financing activities | 5,906 | 1,796 | — | 7,702 | |||||||||||
Net increase (decrease) in cash and cash equivalents | 1,653 | (984 | ) | — | 669 | ||||||||||
Cash and cash equivalents at beginning of period | 2,810 | 984 | — | 3,794 | |||||||||||
Cash and cash equivalents at end of period | $ | 4,463 | $ | — | $ | — | $ | 4,463 | |||||||
| Condensed Consolidating Statements of Cash Flows For the year ended April 30, 2004 | |||||||||||||||
| Parent | Guarantor | Eliminations | Total | ||||||||||||
Net cash flows (used in) provided by operations | $ | (1,486 | ) | $ | 414 | $ | — | $ | (1,072 | ) | |||||
Net cash used in investing activities | (1,206 | ) | (175 | ) | — | (1,381 | ) | ||||||||
Net cash provided by financing activities | 3,035 | 629 | — | 3,664 | |||||||||||
Net increase in cash and cash equivalents | 343 | 868 | — | 1,211 | |||||||||||
Cash and cash equivalents at beginning of period | 2,467 | 116 | — | 2,583 | |||||||||||
Cash and cash equivalents at end of period | $ | 2,810 | $ | 984 | $ | — | $ | 3,794 | |||||||
| Condensed Consolidating Statements of Cash Flows For the eight and one-half months ended April 30, 2003 | |||||||||||||||
| Parent | Guarantor | Eliminations | Total | ||||||||||||
Net cash flows (used in) provided by operations | $ | (8,388 | ) | $ | 2,018 | $ | — | $ | (6,370 | ) | |||||
Net cash used in investing activities | (514 | ) | (589 | ) | — | (1,103 | ) | ||||||||
Net cash provided by (used in) financing activities | 4,545 | (1,330 | ) | — | 3,215 | ||||||||||
Net (decrease) increase in cash and cash equivalents | (4,357 | ) | 99 | — | (4,258 | ) | |||||||||
Cash and cash equivalents at beginning of period | 6,824 | 17 | — | 6,841 | |||||||||||
Cash and cash equivalents at end of period | $ | 2,467 | $ | 116 | $ | — | $ | 2,583 | |||||||
F-25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Sheffield Steel Corporation
We have audited the accompanying consolidated statements of operations, stockholders’ deficit and cash flows of Sheffield Steel Corporation and subsidiaries (the “Company”) for the three and one-half months ended August 13, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Sheffield Steel Corporation and subsidiaries for the three and one-half months ended August 13, 2002, in conformity with accounting principles generally accepted in the United States of America.
As more fully described in the notes to the financial statements, on December 7, 2001, the Company filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. On August 14, 2002, the Company’s reorganization was completed and the Company emerged from Chapter 11 bankruptcy. The financial statements for the three and one-half months ended August 13, 2002 do not include any adjustments that might result from the effects of applying the provision of the plan, the related financing transactions and the adoption of fresh-start accounting.
/s/ Grant Thornton LLP
Tulsa, Oklahoma
November 12, 2004
F-26
Sheffield Steel Corporation and Subsidiaries
(Debtor in Possession)
Consolidated Statement of Operations
(In thousands)
| Three and One-Half Months Ended August 13, 2002 | ||||
SALES | $ | 42,055 | ||
BILLED FREIGHT | 2,566 | |||
COST OF SALES | (37,244 | ) | ||
FREIGHT COST | (2,566 | ) | ||
Gross Profit | 4,811 | |||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE | 3,952 | |||
DEPRECIATION EXPENSE | 1,773 | |||
Operating loss | (914 | ) | ||
OTHER EXPENSE: | ||||
Interest expense, net | (762 | ) | ||
Reorganization expense | (1,619 | ) | ||
Net loss | $ | (3,295 | ) | |
F-27
Sheffield Steel Corporation and Subsidiaries
(Debtor in Possession)
Consolidated Statement of Stockholders’ Deficit
For the period from May 1, 2002 to August 13, 2002
(In thousands)
| Common Stock | Contributed Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total | ||||||||||||||
Balance at May 1, 2002 | $ | 34 | $ | — | $ | (4,722 | ) | $ | (73,491 | ) | $ | (78,179 | ) | |||||
Net loss | — | — | — | (3,295 | ) | (3,295 | ) | |||||||||||
Balance at August 13, 2002 | $ | 34 | $ | — | $ | (4,722 | ) | $ | (76,786 | ) | $ | (81,474 | ) | |||||
The accompanying notes are an integral part of these consolidated financial statements.
F-28
Sheffield Steel Corporation and Subsidiaries
(Debtor in Possession)
Consolidated Statement of Cash Flows
(In thousands)
| Three and One-Half Months Ended August 13, 2002 | ||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||
Net loss | $ | (3,295 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities- | ||||
Depreciation | 1,773 | |||
Bad-debt expense | 505 | |||
Changes in assets and liabilities- | ||||
Accounts receivable | (584 | ) | ||
Inventories | (3,893 | ) | ||
Prepaid expenses and other | 1,469 | |||
Other assets | 1,209 | |||
Accounts payable | 1,197 | �� | ||
Accrued interest payable | (1 | ) | ||
Accrued liabilities | 129 | |||
Other liabilities | (216 | ) | ||
Net cash provided by (used in) operating activities | (1,707 | ) | ||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||
Capital expenditures | (559 | ) | ||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||
Increase in long-term debt | 139 | |||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (2,127 | ) | ||
CASH AND CASH EQUIVALENTS, beginning of period | 4,468 | |||
CASH AND CASH EQUIVALENTS, end of period | $ | 2,341 | ||
The accompanying notes are an integral part of these consolidated financial statements.
F-29
Sheffield Steel Corporation and Subsidiaries
(Debtor in Possession)
Notes to Consolidated Financial Statements
For the three months ended August 13, 2002
(in thousands)
(1) Reorganization Under Chapter 11
On December 7, 2001, Sheffield Steel Corporation and two of its wholly owned subsidiaries (collectively, the Debtors) filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (the Code) in the United States Bankruptcy Court for the Northern District of Oklahoma (the Court). The wholly owned subsidiary that did not file for Chapter 11 reorganization is not material in relation to Sheffield’s consolidated financial position and results of operations. Sheffield continues to manage its properties and operate its businesses under Sections 1107 and 1108 of the Code as a debtor-in-possession. This raises substantial doubt about the Company’s ability to continue as a going concern.
These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America on a going concern basis, which contemplates continuity of operations, realization of assets and payment of liabilities. This basis contemplates the continuation of operations, realization of assets and discharge of liabilities in the ordinary course of business. The financial statements also present the assets of the Company at historical cost and reflect the intention that they will be realized as a going concern and in the normal course of business. The implementation of the Plan will materially change certain amounts currently disclosed in the accompanying financial statements. Under bankruptcy law, actions by creditors to collect indebtedness owed by the Debtors prior to December 7, 2001 (pre-petition) are stayed and certain other pre-petition contractual obligations may not be enforced against the Debtors. As of April 30, 2002, pre-petition claims are carried at face value in the financial statements. The accompanying financial statements do not present the amounts which will ultimately be assigned to assets and amounts paid to settle liabilities and contingencies in accordance with the Plan. Subsequent to year end, Sheffield completed a standalone plan of reorganization and emerged from Chapter 11 bankruptcy as of August 14, 2002.
Significant provisions of the plan of reorganization approved on August 14, 2002 are as follows:
| • | Forgiveness of debt of $110,000 plus accrued interest on the first mortgage bonds, in exchange for 100% of the equity in Sheffield Steel Corporation and $30,000 of new senior secured notes. |
| • | Unsecured liabilities totaling $33,500 will be settled for $1,500. |
| • | Sheffield Steel Corporation entered into a new $35,000 working capital facility and a new $4,500 term loan. |
| • | Upon emergence, Waddell’s Rebar Fabricators, Inc. and Wellington Industries, Inc. have been consolidated into new Sheffield Steel Corporation. |
These consolidated financial statements have been prepared in accordance with AICPA’s Statement of Position 90-7,Financial Reporting by Entities in Reorganization Under the Bankruptcy Code(SOP 90-7). SOP 90-7 provides for segregating pre-petition liabilities that are subject to compromise identifying all transactions and events that are directly associated with the reorganization of the Debtors and discontinuing interest accrual on unsecured or undersecured debt.
Except for secured debt and capital lease obligations, all recorded pre-petition liabilities of the Debtors have been classified as liabilities subject to compromise. The Court authorized, but did not require, payments of certain pre-petition wages, employee benefits and other obligations. Claims classified as liabilities subject to compromise at April 30, 2002 are as follows:
| April 30, 2002 | |||
Other long-term liabilities | $ | 3,153 | |
First mortgage notes | 110,000 | ||
Accrued interest payable | 11,791 | ||
Accounts payable | 13,234 | ||
Total | $ | 138,178 | |
F-30
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
For the three month period ended August 13, 2002
(in thousands)
For the three and one-half months ended August 13, 2002, the Company recorded $1,619 of reorganization expenses relating primarily to legal, consulting and accounting costs.
The Company did not record interest totaling approximately $3.6 million on undersecured first mortgage notes that was subject to compromise for the three and one-half months ended August 13, 2002.
The Company will adopt, as of the effective date of the Plan, fresh-start accounting pursuant to SOP 90-7. Under fresh-start accounting, the reorganization fair value of the Company is allocated to the entity’s assets, the Company’s accumulated deficit is eliminated, and the equity in the new company is issued according to the Plan.
As a result of adopting fresh-start accounting and emerging from Chapter 11 status, the Company’s financial statements will not be comparable with those prepared before the Plan was consummated, including the accompanying financial statements.
(2) Summary of Significant Accounting Policies
(a) 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, Waddell’s Rebar Fabricators, Inc. (Waddell), Wellington Industries, Inc. (Wellington) and Sand Springs Railway Company (the Railway). HMK Enterprises, Inc. (HMK) owns approximately 95% of our currently issued and outstanding common stock. All material intercompany transactions and balances have been eliminated in consolidation.
Our primary business is the production of concrete reinforcing bar, fence posts and a range of hot rolled bar products including rounds, flats and squares. We operate in an economic environment wherein the commodity nature of both our products for sale and our primary raw materials cause sales prices and purchase costs to fluctuate, often on a short-term basis, due to the worldwide supply and demand situation for those commodities.
The supply and demand factors for our products for sale and the supply and demand factors for our primary raw materials correlate to a degree, but are not necessarily the same. Therefore, margins between sales price and production costs can fluctuate significantly on a short-term basis. We grant credit to customers under normal industry standards and terms. We have established policies and procedures that allow for proper evaluation of each customer’s creditworthiness as well as general economic conditions. Consequently, an adverse change in those factors could affect our estimate of bad debts.
(b) Cash Equivalents
We consider all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.
(c) Accounts Receivable
We grant credit to customers on standard industry terms of net 30 days. At August 13, 2002, accounts receivable were outstanding an average of 45 days. This variance from our typical credit terms is largely a result of the practice of several larger customers to pay upon receipt of monthly statements summarizing the previous month’s invoices, resulting in payment for invoices issued early in the previous month to be made outside of the 30 day credit period. The variance also is a result of our government contractor customers who pay us only after they receive payment from the government, which occurs outside of the 30 day credit period. Finally, the variance is also due in part to customers purchasing products that require further processing from third-party vendors paying us only after the customer
F-31
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
For the three month period ended August 13, 2002
(in thousands)
receives the finished product from those vendors, which may occur outside the 30 day credit period. At August 13, 2002 50% of accounts receivable were outstanding 30 days or more and, of these, approximately 53% were outstanding 60 days or less.
We have policies and procedures in place to evaluate the collectibility of customer accounts and to estimate bad debts based on each customer’s creditworthiness and general economic conditions. We evaluate all customer accounts quarterly and our top ten customer accounts monthly. However, any adverse change in the financial condition of customers could affect our estimate of bad debts.
For the three and one-half months ended August 13, 2002:
Balance, beginning of the period | $ | 576 | ||
Provision for loss on accounts receivable | 505 | |||
Accounts receivable written off, net of recoveries | (257 | ) | ||
Balance, end of period | $ | 824 | ||
(d) 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. Generally, we do not have obsolete inventory. Excess finished goods inventory is written down to its scrap value and can be converted into a saleable finished good.
(e) Intangible Assets
Intangible assets consist primarily of goodwill and debt issuance costs. Debt issuance costs are amortized over the term of the related indebtedness.
(f) Property, Plant and Equipment
Property, plant and equipment, which includes capitalized leases, is stated at cost. Depreciation and amortization of leased equipment is provided over the estimated useful lives of the individual assets using the straight-line method.
The 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 | |
| Office equipment | 3-15 years | |
| Vehicles | 3 years |
Machinery and equipment is used in the plant and includes computers and electronic processing equipment, which have an estimated useful life range of 3-5 years, and other production type equipment, which has an estimated useful life range of 5-25 years.
(g) 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.
F-32
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
For the three month period ended August 13, 2002
(in thousands)
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.
(h) Pension and Other Post-retirement 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 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 post-retirement benefits.
(i) Environmental Compliance Costs
We accrue for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Environmental remediation costs have not had a material impact on our financial position, results of operations or liquidity.
(j) Revenue Recognition
Revenues from sales are recognized when title passes to the customer, which occurs when products are shipped. There are no customer acceptance provisions and customer returns are resolved on a case-by-case basis.
Railway revenue on inbound and outbound shipments is recognized upon delivery to either the interchange or the end user. Revenues for demurrage, equipment rental and switching are recognized at the time of service.
(k) 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.
(l) Stock Option Plan
We adopted SFAS No. 123,Accounting for Stock-Based Compensationwhich 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 apply the provisions of APB Opinion No. 25 for purposes of computing compensation expense. Consistent with the provisions of SFAS No. 123, the effect on the Company’s net loss would not be materially different from amounts reported.
F-33
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
For the three month period ended August 13, 2002
(in thousands)
(m) Segment and Product Revenue Information
We provide steel products and services to the steel manufacturing and fabricating industry and therefore believe that all of our business activities from which we earn revenues and incur expenses are from a single segment. The products produced, production processes, customers and methods of distribution are of a similar nature throughout the company. Our chief operating decision maker does not make decisions that affect the company based on discrete financial information with respect to products or production facilities. In the three and one-half months ended August 13, 2002 we had sales of $42,055, of which $41,651 were sales in the United States and $404 were sales in outside the United States. We sell our products in the United States and internationally through our own sales force, and to a limited extent, through sales agencies. Our assets are all located in the United States. We have one customer that accounted for approximately 11% of sales in the three and one-half months ended August 13, 2002.
The following table sets forth the Company’s revenues by product line for the three and one-half months ended August 13, 2002:
Billets | $ | 625 | |
Mill Bars (1) | 32,417 | ||
Fabricated Products | 8,621 | ||
Total Product Revenues | $ | 41,663 | |
| (1) | Consists of hot rolled bars and rebar. |
The table above does not include revenues of the Railway, which were $392.
(n) Planned Maintenance Activities
Annually, we shut down the plant for major planned maintenance activities. We accrue for these certain planned major maintenance activities costs throughout the year. These costs include estimated costs for material, labor, supplies and contractor assistance for (i) repairs to furnace refractories, (ii) maintenance on transformers and (iii) work on other electrical equipment.
The costs associated with the major maintenance activities for the three and one-half months ended August 13, 2002 were accrued as follows:
Accruals | ||||
Beginning Balance | $ | — | ||
Accrued Planned Maintenance Costs | 268 | |||
Planned Maintenance Costs Paid | (268 | ) | ||
Ending Balance | $ | — | ||
(o) New Accounting Pronouncements
During 2001 the Financial Accounting Standards Board issued Statement No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. This Statement establishes a single accounting approach for measuring impairment of long-lived assets, including a segment of a business accounted for as a discontinued operation whether sold or disposed of by other means. Sheffield adopted this Statement on January 1, 2002, and it had no financial impact.
(3) 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 an equipment
F-34
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
For the three month period ended August 13, 2002
(in thousands)
financing companies approximates the fair value due to these debt instruments having variable interest rates similar to those that are currently available to us.
(4) Income Taxes
Income taxes for the three and one-half months ended August 13, 2002 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:
Computed “expected” tax benefit | $ | 1,120 | ||
State income taxes, net of federal benefit | 132 | |||
Change in valuation allowance | (1,252 | ) | ||
Other, net | — | |||
| $ | — | |||
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 Company has incurred losses in four of the last six years. Considering these losses and the events discussed at Note 1 — Reorganization Under Chapter 11, the Company has established a valuation allowance of $29,516 related to the deferred tax assets at April 30, 2002.
(5) Operating Leases
We are obligated under various noncancelable operating leases for certain machinery and equipment and 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 $268 for the three and one-half months ended August 13, 2002. 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:
2003 | $ | 2,083 | |
2004 | 1,884 | ||
2005 | 1,776 | ||
2006 | 1,819 | ||
2007 | 1,764 | ||
Later Years | 2,058 | ||
| $ | 11,384 | ||
(6) 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 $2,200 in accordance with workers’ compensation arrangements. We maintain stop loss insurance policies which limit our exposure under our self insured programs to $175 per person per year for health insurance programs and $500 per incident for workers’ compensation.
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.
(7) Concentration of Credit Risk
Our standard credit terms are net 30 days. Management evaluates the creditworthiness of all customers quarterly and evaluates the creditworthiness of our top ten customers monthly. If management determines that a customer’s credit has deteriorated, management will put the customer on credit hold and
F-35
Sheffield Steel Corporation and Subsidiary
Notes to Consolidated Financial Statements-(continued)
For the three month period ended August 13, 2002
(in thousands)
require that the customer prepay for all future purchases. We do not have a policy for requiring collateral from customers for sales.
Approximately 34% of our sales were derived from our top ten customers for the three and one-half months ended August 13, 2002. These same ten customers accounted for approximately $6,700 or 36% of outstanding accounts receivable, as of August 13, 2002. Historically, sales to these customers consisted of rebar. However, we have diversified the product mix sold to these customers, which now includes flats, squares and dowels. These customers have historically paid within the payments terms established by our credit policy and management does not believe these customers pose a significant credit risk.
F-36
INDEX TO EXHIBITS
The exhibits below are included, either by being filed herewith or by incorporation by reference, as part of this annual report on Form 10-K. Exhibits are identified according to the number assigned to them in Item 601 of Regulation S-K. Documents that are incorporated by reference are identified by their exhibit number as set forth in the registrant’s filing from which they are incorporated by reference.
| Exhibit Number | Description of Exhibit | |
| 2.1 | Second Amended and Restated Joint Plan of Reorganization of Sheffield Steel Corporation, Waddell’s Rebar Fabricators, Inc. and Wellington Industries, Inc., dated June 7, 2002 (incorporated by reference from exhibit 2.1 to Registration Statement on Form S-4 (File No. 333-121176) filed on March 7, 2005). | |
| 2.2 | First Amendment to Second Amended and Restated Joint Plan of Reorganization of Sheffield Steel Corporation, Waddell’s Rebar Fabricators, Inc. and Wellington Industries, Inc., dated June 22, 2002 (incorporated by reference from exhibit 2.2 to Registration Statement on Form S-4 (File No. 333-121176) filed on March 7, 2005). | |
| 3.1 | Restated Certificate of Incorporation of Sheffield Steel Corporation (incorporated by reference from exhibit 3.1 to Registration Statement on Form S-4 (File No. 333-121176) filed on March 7, 2005). | |
| 3.2 | Amended and Restated Certificate of Incorporation of Sand Springs Railway Company (incorporated by reference from exhibit 3.2 to Registration Statement on Form S-4 (File No. 333-121176) filed on March 7, 2005). | |
| 3.3 | Amended and Restated Bylaws of Sheffield Steel Corporation (incorporated by reference from exhibit 3.3 to Registration Statement on Form S-4 (File No. 333-121176) filed on March 7, 2005). | |
| 3.4 | Bylaws of Sand Springs Railway Company (incorporated by reference from exhibit 3.4 Registration Statement on Form S-4 (File No. 333-121176) filed on March 7, 2005). | |
| 4.1 | Indenture, dated as of August 12, 2004, among Sheffield Steel Corporation, the Subsidiary Guarantors named therein and U.S. Bank National Association, as Trustee and Collateral Agent (incorporated by reference from exhibit 4.1 to Registration Statement on Form S-4 (File No. 333-121176) filed on March 7, 2005). | |
| 4.2 | First Supplemental Indenture, dated October 8, 2004, to Indenture, dated as of August 12, 2004, among Sheffield Steel Corporation, the Subsidiary Guarantors named therein and U.S. Bank National Association, as Trustee and Collateral Agent (incorporated by reference from exhibit 4.2 to Registration Statement on Form S-4 (File No. 333-121176) filed on March 7, 2005). | |
| 4.3 | Second Supplemental Indenture, dated March 31, 2005, to Indenture, dated as of August 12, 2004, among Sheffield Steel Corporation, the Subsidiary Guarantors named therein and U.S. Bank National Association, as Trustee and Collateral Agent (incorporated by reference from exhibit 99.1 to Current Report on Form 8-K filed on April 4, 2005). | |
| 4.4 | Security Agreement, dated August 12, 2004, among Sheffield Steel Corporation, the Guarantor named therein and U.S. Bank National Trust Association, as collateral agent (incorporated by reference from exhibit 4.4 to Registration Statement on Form S-4 (File No. 333-121176) filed on March 7, 2005). | |
| 4.5 | Intercreditor Collateral Subordination Agreement, dated August 12, 2004, among Sheffield Steel Corporation, Sand Springs Railway Company, The CIT Group/Business Credit Inc., as financing agent, and U.S. Bank National Trust Association, as collateral agent (incorporated by reference from exhibit 4.5 to Registration Statement on Form S-4 (File No. 333-121176) filed on March 7, 2005). | |
| 10.1* | Employment Agreement, dated August 13, 2004, among Sheffield Steel Corporation and James P. Nolan (incorporated by reference from exhibit 10.1 to Registration Statement on Form S-4 (File No. 333-121176) filed on March 7, 2005). | |
| 10.2* | Employment Agreement, dated August 13, 2004, among Sheffield Steel Corporation and James E. Dionisio (incorporated by reference from exhibit 10.1 to Registration Statement on Form S-4 (File No. 333-121176) filed on March 7, 2005). | |
| Exhibit Number | Description of Exhibit | |
| 10.3* | Employment Agreement, dated August 13, 2004, among Sheffield Steel Corporation and Stephen R. Johnson (incorporated by reference from exhibit 10.1 to Registration Statement on Form S-4 (File No. 333-121176) filed on March 7, 2005). | |
| 10.4* | Employment Agreement, dated August 13, 2004, among Sheffield Steel Corporation and Richard Howard (incorporated by reference from exhibit 10.1 to Registration Statement on Form S-4 (File No. 333-121176) filed on March 7, 2005). | |
| 10.5 | Amended and Restated Financing Agreement, dated August 12, 2004, among Sheffield Steel Corporation, Sand Springs Railway Company, The CIT Group/Business Credit Inc. and the Lenders party thereto (incorporated by reference from exhibit 10.5 to Registration Statement on Form S-4 (File No. 333-121176) filed on March 7, 2005). | |
| 10.6 | Amended and Restated Pledge and Security Agreement, dated August 12, 2004, between Sheffield Steel Corporation and The CIT Group/Business Credit Inc., as agent (incorporated by reference from exhibit 10.6 to Registration Statement on Form S-4 (File No. 333-121176) filed on March 7, 2005). | |
| 10.7 | Pledge and Security Agreement, dated August 12, 2004, between Sands Springs Railway Company and The CIT Group/Business Credit Inc., as agent (incorporated by reference from exhibit 10.7 to Registration Statement on Form S-4 (File No. 333-121176) filed on March 7, 2005). | |
| 12** | Statement regarding Computation of Ratios. | |
| 21 | Subsidiaries of Sheffield Steel Corporation (incorporated by reference from exhibit 21.1 to Registration Statement on Form S-4 (File No. 333-121176) filed on March 7, 2005). | |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32 | Certifications pursuant to 18 U.S.C. Section 1350. | |
| * | Management contracts and compensatory plans and arrangements required to be filed as exhibits to this Form 10-K pursuant to Item 15(c). |
| ** | Filed previously. |
