UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission file number: 33-67532
SHEFFIELD STEEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-2191557
(State or other (I.R.S. Employer
jurisdiction of incorporation) identification No.)
220 North Jefferson Street
Sand Springs, OK 74063
(Address of principal executive offices)
(918) 245-1335
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [_] No _____
At the date of this filing, there were 3,408,675 shares of the Registrant's
$.01 par value Common Stock outstanding. The aggregate market value of voting
stock held by nonaffiliates is unknown, as the Registrant's stock is not traded
on an established public trading market.
SHEFFIELD STEEL CORPORATION
FORM 10-Q
Index
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
July 31, 2001 and April 30, 2001 3
Consolidated Condensed Statements of Operations -
Three months ended July 31, 2001 and 2000 4
Consolidated Condensed Statements of Cash Flows -
Three months ended July 31, 2001 and 2000 5
Notes to Consolidated Condensed Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosure about Market Risk 15
Part II. Other Information
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
2
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In thousands)
July 31,
2001 April 30,
Assets (Unaudited) 2001
------ ----------- ----
Current assets:
Cash and cash equivalents $ 68 181
Accounts receivable, less allowance for doubtful accounts of $582
at July 31, 2001 and $541 at April 30, 2001 20,000 22,531
Inventories 36,541 39,910
Other current assets 1,461 1,144
-------- -------
Total current assets 58,070 63,766
Property, plant and equipment, net 62,647 64,296
Intangible assets, net 8,264 8,790
Receivable from parent, less valuation allowance of $2,205 500 500
Other assets, net 562 886
-------- -------
$130,043 138,238
======== =======
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Current portion of long-term debt $136,725 34,886
Accounts payable 14,090 12,538
Accrued interest payable 7,589 5,444
Accrued liabilities 6,735 6,374
-------- -------
Total current liabilities 165,139 59,242
Long-term debt, excluding current portion 1,104 111,384
Accrued post-retirement benefit costs 14,834 14,426
Other liabilities 2,491 2,375
-------- -------
Total liabilities 18,429 187,427
-------- -------
Stockholders' deficit:
Common stock 34 34
Additional paid-in capital - -
Accumulated deficit (52,424) (48,093)
-------- -------
(52,390) (48,059)
Loans to stockholders (1,135) (1,130)
-------- -------
Total stockholders' deficit (53,525) (49,189)
-------- -------
$130,043 138,238
======== =======
See accompanying notes to consolidated condensed financial statements.
3
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(In thousands)
(Unaudited)
Three Months Ended
July 31,
-----------------------
2001 2000
------- ------
Sales $39,218 45,775
Cost of sales 32,172 36,223
------- ------
Gross profit 7,046 9,552
Selling, general and administrative expense 3,611 3,688
Depreciation and amortization expense 2,146 2,104
Restructuring expense 657 -
Postretirement benefit expense other than pensions 804 646
------- ------
Operating income (loss) (172) 3,114
Other expense:
Interest expense, net 4,153 4,113
Other 11 -
------- ------
4,164 4,113
------- ------
Loss from operations before
Income taxes (4,336) (999)
Income tax expense - -
------- ------
Net loss $(4,336) (999)
======= ======
See accompanying notes to consolidated condensed financial statements.
4
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
July 31,
-------------------------
2001 2000
------- ------
Cash flows from operating activities:
Net loss $(4,336) (999)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,227 2,185
Accrual of postretirement benefits other than pensions,
net of cash paid 408 396
Changes in assets and liabilities 10,442 (5,537)
------- ------
Net cash provided by (used in) operating activities 8,741 (3,955)
------- ------
Cash flows from investing activities:
Capital expenditures (337) (1,646)
------- ------
Net cash used in investing activities (337) (1,646)
------- ------
Cash flows from financing activities:
Net decrease in long-term debt (8,441) 8,536
Other (76) (2,934)
------- ------
Net cash provided by (used in) financing activities (8,517) 5,602
------- ------
Net increase (decrease) in cash (113) 1
Cash and cash equivalents at beginning of period 181 79
------- ------
Cash and cash equivalents at end of period $ 68 80
======= ======
Supplemental disclosure of cash flow information
- ------------------------------------------------
Cash paid during the period for interest $ 1,927 7,126
======= ======
Cash paid during the period for income taxes $ - -
======= ======
Noncash item:
Increase in loans to Shareholders 5 1,123
======= ======
See accompanying notes to consolidated condensed financial statements.
5
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
July 31, 2001 and 2000
(In thousands)
(Unaudited)
1) Basis of Presentation and Summary of Accounting Policies
The consolidated financial statements of Sheffield Steel Corporation (the
Company, which may be referred to as we, us or our) include the accounts of its
divisions, Sheffield Steel-Sand Springs (Sand Springs), Sheffield Steel-Kansas
City (Kansas City), and Sheffield Steel-Joliet (Joliet) and its wholly owned
subsidiaries, 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. Our products are sold throughout the
continental United States. We operate in a single operating segment providing
steel products and services to the steel manufacturing and fabricating industry.
These consolidated condensed interim financial statements have been prepared by
us without audit, according to the rules and regulations of the Securities and
Exchange Commission and reflect all adjustments that we believe were necessary
for a fair statement of the results for the interim periods. All adjustments
made were normal recurring accruals. We suggest that these interim financial
statements are read in conjunction with the consolidated financial statements
and notes contained in our Form 10-K for the year ended April 30, 2001.
Operating results for the quarter and three months ended July 31, 2001 are not
necessarily indicative of the results that we expect for the year ending April
30, 2002.
2) Inventories
The components of inventories are as follows:
July 31,
2001 April 30,
(Unaudited) 2001
----------- ----
Raw materials and storeroom supplies $ 8,567 9,652
Work in process 9,862 11,838
Finished goods 18,112 18,420
------- ------
$36,541 39,910
======= ======
6
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
3) Long-term Debt
Long-term debt is comprised of the following: July 31,
2001 April 30,
(Unaudited) 2001
----------- ----
First mortgage notes $110,000 110,000
Revolving credit agreement 22,799 30,811
Railway term loan 1,500 1,500
Railway revolving credit agreement 694 718
Equipment notes 2,223 2,503
Notes payable 613 738
-------- -------
137,829 146,270
Less current portion 136,725 34,886
-------- -------
$ 1,104 111,384
======== =======
At April 30, 2001, the Company was in violation of certain restrictive
covenants under its revolving credit agreements. The creditors did not waive
the default and, accordingly, all such borrowings are classified as current in
the accompanying consolidated balance sheet. On July 27, 2001, we entered into
a forbearance agreement with Bank of America that provided for a limited
continuation of our line of credit through August 31, 2001. Subsequently, on
September 12, 2001, we entered into an amended and restated forbearance
agreement with Bank of America that provides for a limited continuation of our
line of credit thorough September 30, 2001. The revised line of credit is
capped at $35 million among other limitations. See Note 4.
4) Liquidity and Going Concern
As of July 31, 2001, we had indebtedness of $137.8 million and
approximately $3.1 million of additional borrowing availability under our
revolving credit agreements. As a result of the significant loss in the previous
fiscal year, the Company was unable to meet certain restrictive covenants under
its revolving credit agreements. The Company did not have sufficient cash and
borrowing availability at May 31, 2001 in order to pay its semi-annual interest
payment due under the First Mortgage Notes due 2005 as required. Upon expiration
of the 30-day grace period provided in the indenture, the Company decided to
make a payment of 1/6/th/, or $1.05 million, of the amount due. Management
believes that this decision preserves the liquidity in the Company and allows it
to continue to carry on normal operations and customer support while it pursues
a restructuring of the First Mortgage Notes due 2005. Despite the partial
interest payment, the Company is in default of its First Mortgage Notes due 2005
as of July 3, 2001.
7
On July 17, 2001, we received a letter from State Street Bank and Trust Co.
as Trustee that served as notice to us of the occurrence and continuance of an
event of default with respect to the First Mortgage Notes due 2005. The
existence and continuance of this event of default permits the Trustee or the
holders of at least 25% in principal amount of the outstanding notes to declare
the entire unpaid principal, interest and other amounts payable on the notes to
be immediately due and payable. Further, the letter states that the Trustee's
acceptance of our partial payment of the overdue interest on July 2, 2001 does
not constitute a waiver by the Trustee of any such event of default.
On July 27, 2001, we entered into a forbearance agreement with Bank of
America that provided for a limited continuation of our line of credit through
August 31, 2001. Subsequently, on September 12, 2001, we entered into an amended
and restated forbearance agreement with Bank of America that provides for a
limited continuation of our line of credit thorough September 30, 2001. The
revised line of credit is capped at $35 million, among other limitations. The
Company is currently pursuing alternative financing agreements.
On August 24, 2001, we received a term sheet from a new lender's credit
committee for a $35 million revolving credit facility to replace the line of
credit with Bank of America, and we are currently working on the closing
documents. The lender will require certain conditions precedent, including a
level of comfort that the Bondholder negotiations are moving toward an
acceptable conclusion.
The Company has retained financial and legal advisors to assist it in
reviewing financial alternatives available to the Company, including without
limitation a possible debt restructuring. The Company and the holders of the
First Mortgage Notes due 2005 have commenced discussions, which the Company
believes will result in an agreement with those holders that will lead to a
restructuring. When achieved, the restructuring should result in financial
terms that will better support the implementation of Sheffield's short- and
long-range goals.
The conditions described above raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern
and, accordingly, the financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classifications of liabilities that may result from
the outcome of this uncertainty.
8
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
The following discussion should be read in conjunction with our
Consolidated Condensed Financial Statements and notes included in this Form 10-
Q.
Results of Operations
The results of operations are dependent on the level of construction,
infrastructure spending, oil and gas, agribusiness, and general economic
activity in the U.S. Our sales are seasonal with the third fiscal quarter
generally being weaker than the rest of the year. The major cost components of
our products are steel scrap and other raw materials, energy, labor, warehousing
and handling, and freight costs.
The following table provides information regarding the historical results
of operations (in thousands) for the quarters ended July 31, 2001 and 2000:
Three Months Ended July 31,
---------------------------------------------------------------------
2001 2000
--------------------------------- --------------------------------
Operating Results: Net Sales % of Sales Net Sales % of Sales
---------------- -------------- -------------- ---------------
Sales $39,218 100.0% 45,775 100.0%
Cost of sales 32,172 82.0% 36,223 79.1%
------- ------
Gross Profit 7,046 18.0% 9,552 20.9%
Selling and administrative 3,611 9.2% 3,688 8.1%
Depreciation and amortization 2,146 5.5% 2,104 4.6%
Restructuring Expense 657 1.7% - 0.0%
Postretirement benefit expense 804 2.1% 646 1.4%
------- ------
Operating income (172) (.4%) 3,114 6.8%
Interest expense, net 4,153 10.6% 4,113 9.0%
Other 11 0.0% - 0.0%
------- ------
Loss from operations before
income taxes (4,336) (11.1%) (999) (2.2%)
Income tax expense - - - -
------- ------
Net loss $(4,336) (11.1%) ( 999) (2.2%)
======= ======
9
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
The following table provides information regarding the historical shipment
levels and average selling prices per ton:
Three Months Ended July 31,
---------------------------
2001 2000
-------- --------
Tons shipped: 32,004 45,078
Hot Rolled Bars 62,505 48,387
Rebar 16,130 18,941
Fabricated Products -------- --------
110,639 112,406
Total finished products 7,187 12,093
Billets -------- --------
117,826 124,499
Total tons shipped ======== ========
Average price per ton shipped $ 333 $ 368
Average production cost per ton $ 273 $ 290
Three Months Ended July 31, 2001 As Compared To Three Months Ended July 31, 2000
Sales. Sales for the first quarter of Fiscal Year 2002 were $39.2 million.
Shipments decreased in comparison to the same quarter in the prior year, while
pricing generally decreased as summarized below:
. Steel market conditions were weak in the first quarter of Fiscal Year 2002
due to widespread weaker demand for steel products and the continuing influx of
steel imports. In comparison to the first quarter of Fiscal Year 2001, shipments
of our hot rolled bar products out of Sand Springs decreased 29% and Joliet
shipments decreased 33%. Pricing of hot rolled bar products decreased
approximately 7%.
. In comparison to the first quarter of Fiscal Year 2001, rebar shipments
increased 29% and pricing decreased 6%. Shipments increased due to heavy
infrastructure construction. Rebar demand continues to be strong, however
pricing is down slightly in comparison to prior year due to the continued impact
of imports.
. In comparison to the first quarter of Fiscal Year 2001, fabricated product
shipments decreased 17% the lower shipments were due primarily to weaker markets
for our fence posts, but volumes were also slightly lower for fabricated rebar
and railroad spikes. Pricing decreased 3%, primarily due to sales mix.
. In comparison to the first quarter of Fiscal Year 2001, billet shipments
decreased by 41%. Pricing decreased 12% because billet pricing is related to
scrap raw material costs, which are currently very low.
10
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Cost of Sales and Expenses. Average production cost per ton decreased to $273
in the first quarter of Fiscal Year 2002 from $290 in the first quarter of
Fiscal Year 2001 primarily due to decrease in steel scrap raw material costs.
Hot rolled bar and rebar shipments were 1,046 tons higher in the first quarter
of Fiscal Year 2002 compared to the same quarter in Fiscal Year 2001. Energy
costs were higher during the first quarter of Fiscal Year 2002 as compared to
first quarter of Fiscal Year 2001. We have seen gas costs moderate recently and
expect electric costs to moderate in the second quarter of Fiscal Year 2002 as
well.
Selling, general and administrative expenses decreased approximately $77
thousand over the first quarter of Fiscal Year 2002.
Interest expense increased in comparison to the first quarter of Fiscal
Year 2001 due to higher interest rates on our revolving credit agreement. In the
past year, additions to debt were due to working capital requirements, capital
expenditures, and purchases of common stock.
Liquidity, Capital Resources and Going Concern
As of July 31, 2001, we had indebtedness of $137.8 million and
approximately $3.1 million of additional borrowing availability under our
revolving credit agreements. As a result of the significant loss in the previous
fiscal year, the Company was unable to meet certain restrictive covenants under
its revolving credit agreements. The Company did not have sufficient cash and
borrowing availability at May 31, 2001 in order to pay its semi-annual interest
payment due under the First Mortgage Notes due 2005 as required. Upon expiration
of the 30-day grace period provided in the indenture, the Company decided to
make a payment of 1/6/th/, or $1.05 million, of the amount due. Management
believes that this decision preserves the liquidity in the Company and allows it
to continue to carry on normal operations and customer support while it pursues
a restructuring of the First Mortgage Notes. Despite the partial interest
payment, the Company was in default of its First Mortgage Notes as of July 3,
2001.
On July 17, 2001, we received a letter from State Street Bank and Trust Co.
as Trustee that served as notice to us of the occurrence and continuance of an
event of default with respect to the First Mortgage Notes due 2005. The
existence and continuance of this event of default permits the Trustee or the
holders of at least 25% in principal amount of the outstanding notes to declare
the entire unpaid principal, interest and other amounts payable on the notes to
be immediately due and payable. Further, the letter states that the Trustee's
acceptance of our partial payment of the overdue interest on July 2, 2001 does
not constitute a waiver by the Trustee of any such event of default.
On July 27, 2001, we entered into a forbearance agreement with Bank of
America that provided for a limited continuation of our line of credit through
August 31, 2001. Subsequently, on September 12, 2001, we entered into an amended
and restated forbearance agreement with Bank of America that provides for a
limited continuation of our line of credit thorough September 30, 2001. The
revised line of credit is capped at $35 million, among other limitations. The
Company is currently pursuing alternative financing agreements.
11
On August 24, 2001, we received a term sheet from a new lender's credit
committee for a $35 million revolving credit facility to replace the line of
credit with Bank of America, and we are currently working on the closing
documents. The lender will require certain conditions precedent, including a
level of comfort that the Bondholder negotiations are moving toward an
acceptable conclusion.
The Company has retained financial and legal advisors to assist it in
reviewing financial alternatives available to the Company, including without
limitation, a possible debt restructuring. The Company and the holders of the
First Mortgage Notes due 2005 have commenced discussions, which the Company
believes will result in an agreement with those holders that will lead to a
restructuring. When achieved, the restructuring should result in financial
terms that will better support the implementation of Sheffield's short and long-
range goals.
There can be no assurance that a restructuring is possible or that it will
be successful in addressing the Company's liquidity and capital resource needs.
The Company's failure to achieve its cost reduction initiatives or improve
operating performance could also have a material adverse effect on the financial
results or liquidity of the Company in the future. In addition, external factors
affect the Company's market and related production costs. Unfavorable price
movements for outside purchases of scrap, and energy, among other things, could
also have a material adverse effect on the financial results or liquidity of the
Company.
The conditions described above raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern
and, accordingly, the financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classifications of liabilities that may result from
the outcome of this uncertainty.
Borrowings under our revolving credit agreements bear interest at a
floating rate. To the extent that interest rates and amounts outstanding under
the revolving credit agreements increase, there will be corresponding increases
in expenses. In addition to borrowings under the revolving credit agreements, we
have historically used cash flow from operations and equipment financing
agreements to fund our investing activities, including capital expenditures.
Management believes our cash situation is challenging but manageable
through working capital management, restricting capital spending to maintenance
levels, and improving operating cash flow. This statement must be qualified by
general steel economic conditions and our ability to realize operating
efficiencies. We are into our best shipping season, which generally begins in
March and extends through October. Our new reheat furnace allows certain
opportunities for production efficiencies, lower costs, and selected growth, but
these must be attained and we are dependent on general steel conditions to sell
additional production.
12
Cash flow provided in operating activities was approximately $8.7 million
for the three-month period ended July 31, 2001, as compared with cash flow used
in operating activities of approximately $4.0 million for the three month period
ended July 31, 2000. Cash flow from operations improved over the prior year
primarily as a result of a reduction in inventory and accounts receivable and
non-payment of the interest expense on the First Mortgage Notes due 2005. Cash
used in investing activities in the three months ended July 31, 2001 was
approximately $300,000, consisting of capital expenditures for projects to
sustain and improve existing operations. For the three month period ended July
31, 2001, cash used by financing activities was $8.5 million consisting of
decreased borrowings under the revolving credit agreement and other financing
activities.
Earnings before interest, taxes, depreciation, amortization, and the non-
cash portion of the post-retirement expense (EBITDA) was approximately $2.5
million and (EBITDA) was $3.0 million adding back restructuring costs for the
quarter ended July 31, 2001, compared to approximately $5.6 million for the same
quarter in the prior year. A weak steel economy, imports, and depressed steel
prices contributed to the significant decrease in EBITDA. We believe that EBITDA
is a valuable measure of our operating cash flow and we consider it an indicator
of our ability to meet interest payments and fund capital expenditures. EBITDA
does not represent and should not be considered as an alternative to net income
or cash flow from operations as determined by generally accepted accounting
principles and EBITDA does not necessarily indicate whether cash flow will be
sufficient for cash requirements.
Recent Accounting Pronouncements
On May 1, 2001, The Company adopted the provisions of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("Statement 133"). Statement 133 establishes new
accounting and reporting standards for derivative financial instruments and for
hedging activities. Statement 133 requires an entity to measure all derivatives
at fair value and to recognize them in the balance sheet as an asset or
liability, depending on the entity's rights or obligations under the applicable
derivative contract. The recognition of changes in fair value of a derivative
that affect the income statement will depend on the intended use of the
derivative.
If the derivative does not qualify as a hedging instrument, the gain or
loss on the derivative will be recognized currently in earnings. If the
derivative qualifies for special hedge accounting, the gain or loss on the
derivative will either (1) be recognized in income along with an offsetting
adjustment to the basis of the item being hedged or (2) be deferred in other
comprehensive income and reclassified to earnings in the same period or periods
during which the hedged transaction affects earnings. Statement 133 was amended
by Statement of Financial Accounting Standards No. 138 ("Statement 138") in June
2000 that amended the accounting and reporting standards of statement 133 for
certain derivative instruments and certain hedging activities. Statement 138
also amended Statement 133 for decisions made by the Financial Accounting
Standards Board (FASB) relating to the Derivatives Implementation Group process.
13
Adoption of Statement 133, as of May 1, 2001, did not have a material
effect on results of operations or financial position of the Company, because
the Company does not have any free standing derivatives or embedded derivatives
that would be required to be separated from the host contract and accounted for
under SFAS 133.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" (Statement 141), Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (Statement
142), and Statement of Financial Accounting Standards No. 143, "Accounting for
Asset Retirement Obligations" (Statement 143). Statement 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Statement 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instated tested
for impairment at least annually in accordance with the provisions of Statement
142. The Company is required to adopt the provision of Statement 141 immediately
and Statement 142 effective May 1, 2002. Goodwill acquired in business
combinations completed before July 1, 2001 will continue to be amortized prior
to the adoption of Statement 142.
In connection with the Company's adoption of Statement 142, the Company
will be required to perform an assessment of whether there is an indication that
goodwill, including equity-method goodwill, is impaired as of the date of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings.
As of July 31, 2001, the Company has unamortized goodwill in the amount of
$5.6 million, which will be subject to the transition provisions of Statement
142. Amortization expense related to goodwill was $150 thousand and $38
thousand for the year ended April 30, 2001 and the three months ended July 31,
2001 respectively. Because of the extensive effort needed to comply with
adopting Statements 141 and 142, no estimate is available of the impact of
adopting these Statements. The Company will discontinue amortization of goodwill
effective May 1, 2002 with the adoption of Statement 142.
In August 2001, the FASB issued Statement of Financial Accounting Standard
No. 143, "Accounting for Asset Retirement Obligations". Statement No. 143
requires a Company to record the fair value of an asset retirement obligation as
a liability in the period in which it incurs a legal obligation associated with
the retirement of a tangible long-lived asset. Statement No. 143 also requires
the Company to record the contra to the initial obligation as an increase to the
carrying amount of the related long-lived asset (i.e., the associated asset
retirement costs) and to depreciate that cost over the remaining useful life of
the asset. The liability is changed at the end of each period to reflect the
passage of time (i.e., accretion expense) and changes in the estimated future
cash flows underlying the initial fair value measurement. The Company plans to
adopt Statement No. 143 beginning May 1, 2002. It is too early to determine
whether or not adoption of this statement will have a material impact on the
Company's consolidated financial statements.
14
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings are affected by changes in interest rates (primarily the prime
rate). At July 31, 2001, we had approximately $27.8 million of long-term debt
with variable rates. Therefore, we may have changes in interest expense due to
fluctuations of interest rates in the markets. Interest risk can be estimated
by measuring the impact of a 10% increase in interest rates. We would incur an
additional $252 thousand of interest expense per year on our variable rate
borrowing if our debt levels remained approximately the same as at July 31,
2001. Because we experience changes in our debt levels due to operating
requirements or changes in the general economic environment that we are unable
to predict, this estimate assumes no changes in our financial structure. The
fair value of our First Mortgage Notes due 2005 at July 31, 2001, based on the
currently offered market price was $22 million versus a carrying value of
approximately $110 million.
15
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any significant pending legal proceedings other than
litigation incidental to our business that we believe will not materially affect
our financial position or results of operations. Such claims against us are
ordinarily covered by insurance. We can give no assurance, however, that
insurance will be available in the future at reasonable rates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
See exhibit index.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter ended July 31, 2001.
16
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
SHEFFIELD STEEL CORPORATION
Date: September 13, 2001 /s/ James P. Nolan
---------------------- ------------------------------------------
James P. Nolan, President,
and Chief Operating Officer
Date: September 13, 2001 /s/ Stephen R. Johnson
---------------------- ------------------------------------------
Stephen R. Johnson, Vice President
and Chief Financial Officer
17
Exhibit Index
Exhibit No. Description Page No.
- ----------- ----------- --------
10.43 First Amended and Restated Forbearance Agreement, dated September 12, 2001 19
Between Sheffield Steel Corporation and Bank of America, N.A.
10.44 Twelfth Amendment to Receivable and Inventory Financing Agreement, dated 26
September 12, 2001 between Sheffield Steel Corporation and Bank of America,
N.A.
18