10-K 1 d10k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended April 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the transition period from ________ to __________ Commission file number: 33-67532 SHEFFIELD STEEL CORPORATION (Exact name of registrant as specified in its charter) Delaware 74-2191557 (State or other (I.R.S. Employer jurisdiction of incorporation) identification No.) 220 North Jefferson Street Sand Springs, OK 74063 (Address of principal executive offices) (918) 245-1335 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: None ---- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ] As of July 17, 2001, there were 3,408,675 shares of the Registrants $.01 par value Common Stock outstanding. The aggregate market value of voting stock held by nonaffiliates is unknown as the Registrant's stock is not traded on an established public trading market. Documents Incorporated by Reference 1) Portions of the Registrant's Proxy Statement dated July 31, 2001 are incorporated by reference into Part III of this Report on Form 10-K. SHEFFIELD STEEL CORPORATION FORM 10-K Table of Contents

PART I ------ ITEM 1. BUSINESS ------------------ Overview Sheffield Steel Corporation (the Company, which may be referred to as we, us, or our) is a leading regional mini-mill producer of steel products including: . Hot rolled steel bar products (hot rolled bar), which includes rounds, flats, squares and other shapes. . Concrete reinforcing bar (rebar), which includes #4 bar (1/2 inch or 13mm) to #18 bar (2 1/4 inches or 57mm) which is sheared to standard lengths from 20 feet to 60 feet. . Fabricated products, including fabricated and epoxy-coated rebar, steel fence posts and railroad track spikes. . Various types of semi-finished steel (billets). Our home page on the Internet is at www.sheffieldsteel.com. You can learn ---------------------- more about us by visiting that site. Our Company and its predecessors have been in the steel making business for over 72 years. We believe that we are an efficient producer of billets because of our efficient melt and cast operation, high labor productivity levels, and competitive steel scrap costs. Our low cost billets feed our downstream bar mill operations and fabricated products operations. We shipped approximately 442,228 tons of steel in fiscal 2001, resulting in sales of $157.5 million. Our primary manufacturing facility is located in Sand Springs, Oklahoma (Sand Springs), where we conduct a full range of steel making activities, including the melting and casting of billets and the rolling of billets into rebar, T- section (for subsequent fabrication into steel fence posts), and a range of hot rolled bar products. We currently have 600,000 tons of steel making capacity. We installed a new rolling mill (Rolling Mill) in Sand Springs in 1995 which has increased productivity and efficiency in the manufacturing of rebar and has enabled us to produce certain higher quality hot rolled bar products than we were previously unable to produce. In the fourth quarter of fiscal 1998, we completed a project (the Shear Line Project) to eliminate a production bottleneck in the Rolling Mill that further increased our production and improved quality. During the third quarter of fiscal 2001, we installed a new reheat furnace (the Reheat Furnace Project) in the rolling Mill that will decrease natural gas usage as well as improve quality, product yields, productivity, and capacity. From Sand Springs, we also transfer billets to our rolling mill in Joliet, Illinois (Joliet), where we produce specialty hot rolled bar products. We also operate two rebar fabrication plants, one in Kansas City, Missouri (Kansas City) and one in Independence, Missouri (Waddell), a railroad spike fabrication plant in Sand Springs (Wellington) and a short line railroad (the Railway). 1 Business Strategy We believe our strategy serves to strengthen our market position and maximize profitability. There are three major components to our strategy: (i) improve our finished goods product mix; (ii) continue to focus on and extend our strong customer relationships; and (iii) further modernize our melt shop operations. Improve Finished Goods Product Mix. With the addition of the new Rolling Mill in Sand Springs in 1995 and the Shear Line project in 1998, we substantially increased our hot rolled bar production capacity. Accordingly, shipments of finished products have increased significantly as less profitable third party billet sales have been diverted to the production of hot rolled bars. Billet sales, which accounted for 23.6% of tons shipped in fiscal 1994, accounted for only 9.8% of tons shipped in fiscal 2001. By shifting away from third party billet sales and increasing hot rolled bar production, we hope to increase margins and reduce sales volatility, since hot rolled bar products are significantly more profitable than third party billet sales and demand is more stable. In addition, the Reheat Furnace Project, which was completed in the third quarter of fiscal 2001, will decrease natural gas consumption, improve quality, product yields, productivity, and capacity and, as a result, improve product mix. Extend Strong Customer Relationships. We have a number of long-standing customer relationships in each of our product markets. We have built a reputation for providing consistent product quality, reliable, prompt product delivery and service, product availability and flexible scheduling to meet our customers' needs. We also provide a high level of follow up technical assistance and service. The ISO 9002 certification at both Sand Springs and Joliet is an indication of our commitment to producing quality products. We believe that our business strategy to improve finished product mix will strengthen our existing customer relationships and aid us in developing new customer relationships. Modernize Melt Shop. We believe that we are an efficient producer of billets in the United States as a result of our efficient melt and cast operation, high labor productivity level, and competitive steel scrap costs. Over the last three years, we have made improvements to general operating practices, improved yields, and reduced costs. Annual billet production capacity has increased from 525,000 tons to 600,000 tons per year. In fiscal 2001 we rebuilt our billet caster, which improved product quality and increased casting speeds, i.e., productivity. 2 Products, Customers and Markets The following table shows the percentage of revenues derived from each product category for the last three years:

Hot Rolled Bar. According to the American Iron and Steel Institute (AISI), the size of the hot rolled bar product market in the United States was approximately 7.9 million tons in 1999. The demand for consistent quality is significant in this market, where quality is measured by the adherence to specifications related to chemical composition, surface quality, product integrity and size tolerances. We sell a variety of specialty hot rolled bar products, including flats, squares, rounds and special shapes for end use applications that include auto parts, conveyor assemblies, pole line hardware, wrenches, farm equipment and construction machinery. The majority of hot rolled bar products produced in Joliet are sold directly to original equipment manufacturers and cold drawn bar finishers. Hot rolled bar products produced in Sand Springs are sold primarily to end product manufacturers. We strive to differentiate ourselves from our competitors in the hot rolled bar market. In Joliet, we focus on specialty products and target customers with special requirements as to bar shape, size and chemical composition and, in many cases, small volume needs. We believe that our target customer focus often allows us to act as the sole supplier of particular shapes, sizes or steel chemistries to certain customers. In some cases we compete with a limited number of producers of specialty hot rolled bar products. We believe that these niche markets are unattractive to larger volume producers. In Sand Springs, we provide a competitive geographical advantage in the south-central United States hot rolled bar market. This enables our customers to benefit from lower freight costs, shorter lead times and more timely deliveries. As a result of these competitive advantages and our strong reputation for quality and service, we have developed a number of close relationships with hot rolled bar product customers in our region. We believe that there are significant opportunities for Sand Springs to sell standard hot rolled bar products to customers that Joliet is currently selling specialty products. We also endeavor to provide our hot rolled bar product customers with superior service. To provide a high level of service, we carry substantial customer- designated finished goods inventories of hot rolled bar products in both Joliet and Sand Springs. Joliet has a customer query system that provides agents and major customers with direct computer access to the status of their production orders, the availability of inventory designated for them and our production schedule for their products. 3 During fiscal 2000, business on the Joliet 10" mill continued to decline. Tonnage on this mill has been minimal for several years. The loss of additional tonnage made the mill financially unprofitable. Therefore, we decommissioned the mill at the end of May 2000. We were able to convert a significant portion of the products rolled on the 10" mill to the Joliet 12" mill and to the Rolling Mill in Sand Springs. The shutdown did not have a material write-off associated with it and we believe that it has slightly improved profitability at both Joliet and Sand Springs. Rebar. According to the AISI, the size of the rebar market in the United States was approximately 6.5 million tons in 1999. Rebar is a lower value, higher volume commodity bar product for which price is an important competitive factor. Geographic proximity to customers, which in turn determines both freight costs and delivery times, is also a critical element in the rebar market, where independent fabricators typically depend on quick mill response rather than their own inventories to meet ever-changing construction schedules. We sell rebar to leading independent fabricators located in the south-central United States who then shear and bend the rebar to meet engineering or architectural specifications for construction projects. We produce rebar in Sand Springs, where the bars are rolled in standard diameters from #4 bar (1/2 inch or 13mm) to #18 bar (2 1/4 inches or 57mm) and sheared to standard lengths from 20 feet to 60 feet. To provide rapid response to customer needs, we usually maintain a finished goods inventory of 25,000 to 35,000 tons of rebar. Rebar demand is driven by infrastructure investment trends and trends in commercial and industrial construction. During periods of overall reduced steel industry demand, we have maintained relatively stable rebar sales volume due to the level of public sector investment in roads, bridges, water projects, airports and public facilities in the south-central United States. We have successfully built and we strive to maintain long-term relationships with our customers by providing them with competitive pricing, assured product availability and reliable, prompt delivery and service. This strategy permits the fabricators to compete successfully in the construction and infrastructure markets, thus reinforcing our relationships with such fabricators. Due to the importance of pricing, freight costs and delivery response time, sales of rebar tend to be concentrated within close geographic proximity to a rebar manufacturer's mini-mill. Our rebar market is concentrated in the geographic area surrounding Oklahoma. In the Company's primary market area of Oklahoma, Kansas and portions of Nebraska, Missouri, Arkansas, and northern Texas, we enjoy a freight advantage over our competitors and believe we have a market share in excess of 50%. Approximately 80% of our rebar shipments are made in this primary market area. The remaining rebar shipments are made in the adjacent regions of Nebraska, Missouri, Arkansas, Texas, Louisiana, New Mexico, and Colorado. Fabricated Products. We manufacture three fabricated steel products: fence posts, which are sold to distributors and farm cooperatives, fabricated rebar, including epoxy-coated rebar, and railroad track spikes. Fence posts are produced in a post fabrication shop located adjacent to the Rolling Mill in two weights (1.25 pounds per foot and 1.33 pounds per foot), in orange and green colors and various lengths from 4 feet to 8 feet. The majority of our fence post sales are concentrated in the Oklahoma, Kansas, Missouri, Texas and Arkansas market area. 4 Fabricated rebar is shipped from Kansas City and Waddell to highway and commercial construction contractors in Missouri, Kansas, Nebraska, Iowa, and contiguous markets. In recent years, we have experienced increased demand from contractors bidding on infrastructure projects for fabricated rebar which is epoxy-coated prior to fabrication to protect against corrosion in the field. This has provided Kansas City with a competitive advantage and contributed to a growth in shipments. Our epoxy coating line, which is certified by the Concrete Reinforcing Steel Institute, is the only one located in the Kansas City market. This provides us with a competitive advantage in securing contracts. With Waddell handling smaller, higher value added jobs and Kansas City able to handle larger volume jobs; we believe we have a strong position in this market. On October 6, 1998, we purchased Wellington Industries, Inc., a railroad track spike manufacturer located in Sand Springs. We believe that the purchase of Wellington secured a downstream market for our Rolling Mill products (square hot rolled bar) and it enhances our fabrication capabilities. Billets. We sell billets to forgers and other steel mills for conversion into finished products. Sales volume potential and pricing for billets, particularly in the spot market, is highly variable. The dominant competitive factors are availability and price. Although our sales to forgers are fairly consistent, billet sales to other steel mills are dependent on our own billet requirements and market conditions that vary widely. The Railway Company. We operate approximately seven miles of mainline rail line between Sand Springs and Tulsa, Oklahoma, primarily serving the operations of Sand Springs and, to a lesser extent, third parties. Revenues from third parties are immaterial to our financial results. Manufacturing Process In Sand Springs, steel scrap is conveyed by rail car from our scrap yard to the melt shop, where the steel scrap is melted in two 85-ton electric arc furnaces. During the scrap melting process, impurities are removed from the molten steel. The molten steel is refined and then poured into a ladle, where metal alloys are added to obtain desired chemical compositions. The molten steel is then conveyed to a six-strand continuous caster that casts various sizes of billets. The continuous caster is capable of casting billets up to 6 inches square and 50 feet long. These billets are then reheated and rolled into various finished steel products at the rolling mills in Sand Springs or Joliet or, to a lesser extent, sold to third parties. The rolling mill in Sand Springs produces rebar, "T" sections (which are further processed into fence posts), and a range of hot rolled bar products, including squares (which are forged into track spikes at Wellington). The rolling mill in Joliet produces an extensive range of hot rolled bar products. A portion of the rebar produced in Sand Springs is epoxy coated and/or fabricated at either Kansas City or Waddell. Sales and Marketing Hot rolled bar products produced in Joliet are sold by our sales personnel and through commissioned sales representatives under exclusive agency agreements with us. Rebar and hot rolled bar products produced in Sand Springs are sold through our own sales force and sales agencies which also serve Joliet. We market fence posts directly to farm cooperatives and to fence post distributors. While some billets are sold through semi-finished steel brokers on the "spot" market, most are sold directly by us. As a result of adverse weather conditions that can impact construction activities and a normal seasonal downturn in manufacturing levels, we typically experience lower sales volumes in the third fiscal quarter. 5 Raw Materials Our primary raw material is steel scrap, which is generated principally from industrial, automotive, demolition, railroad, obsolete, and other sources. We purchase scrap in the open market by direct purchase, dealers and through a limited number of steel scrap brokers. The cost of steel scrap is subject to market forces, including demand by other steel producers, export/import volumes, and utilization of scrap substitutes such as pig iron and hot-briquette iron. Our cost of scrap can vary significantly and we may not be able to adjust product prices in the short-term to recover large increases in scrap costs. Over longer periods of time, however, product prices and steel scrap prices have tended to move in the same direction. The long-term demand for steel scrap and its importance to the domestic steel industry may be expected to increase as mini-mill producers continue to expand steel scrap-based electric arc furnace capacity and capture market share from existing integrated facilities. For the foreseeable future, however, we believe that supplies of steel scrap will continue to be available in sufficient quantities. In addition, a number of technologies exist for the processing of iron ore into forms, which may be substituted for steel scrap in electric arc furnace-based steelmaking. Such forms include direct-reduced iron, hot-briquette iron and pig iron. A sustained increase in the price of steel scrap could result in increased use of these alternative materials. We have successfully employed scrap substitutes in our manufacturing process to achieve quality characteristics. Energy Our manufacturing process in Sand Springs consumes large amounts of electricity. We purchase our electrical needs for Sand Springs from Public Service of Oklahoma (PSO) under a real time pricing tariff, which is available only to PSO's largest customers. Under this tariff, we purchase a base load at a contracted price adjusted for fuel costs and then purchase or sell power on an hour-by-hour basis at rates which approximate PSO's incremental costs plus a small markup. During the summer months, we may elect to shut-down our melt shop during peak periods of power costs, however, we typically do not experience power interruptions to the same extent as others in our industry. Historically, we have been adequately supplied with electricity and we do not anticipate any material curtailment in our operations resulting from energy shortages. Until natural gas prices increased in fiscal year 2001, we believed that our utility rates from PSO were among the lowest in the domestic mini-mill steel industry. PSO was able to generate electricity at relatively low rates, as its electric load is generated using western coal and local natural gas. Approximately 55% of PSO's generation is natural gas based and as gas prices increased over this past fiscal year, we have seen our power cost increase approximately 80%. We also use natural gas to reheat billets, but we are not considered a large natural gas user in Oklahoma. Since deregulation of the natural gas industry, we have negotiated and purchased wellhead gas with supplemental transportation through local pipeline distribution networks. Although increases in the price of natural gas might have an adverse impact on our cost structure, any such price increase would likely have a similar affect on competitors using natural gas and/or electricity generated by natural gas. The majority of our natural gas needs (both to reheat billets and as a consumer of the electricity generated by natural gas) stem from use in Sand Springs, Oklahoma, a state with excess natural gas supplies. Historically, we have been adequately supplied with natural gas and we expect an adequate supply to be available in the future. The new Reheat Furnace significantly reduces our exposure to gas prices because of its much greater efficiency. 6 Competition We compete with a number of domestic mini-mills in each of our markets. There are common competitive factors in the steel bar business--price, proximity to market, quality and service, for example--although their relative importance varies in the different market segments. In the market for hot rolled bar products, Joliet occupies a niche position at the specialty end of the product range. We believe we are the sole supplier to certain customers because of their requirements for particular shapes, sizes, small order quantities, or steel chemistries. In other cases, we compete with a limited number of other producers of specialty hot rolled bar products, including Kentucky Electric Steel Incorporated, Calumet Steel Company, North Star Steel Company, and Laclede Steel Company. From Sand Springs and to a much lesser degree from Joliet, we compete with mini-mill producers of standard hot rolled bar products, including Chaparral Steel Company, North Star Steel Company, Laclede Steel Company and Structural Metals, Incorporated. Competitors vary from customer to customer depending on product specifications and requirements for order sizes and inventory support. Since pricing, freight costs and delivery times are the most important competitive factors in the sale of rebar, sales tend to be concentrated within about 350 miles of a mini-mill. In the south-central United States, we enjoy a competitive advantage as the closest mill serving an area comprising Oklahoma, Kansas, western Missouri and Arkansas, and parts of northern Texas. The majority of our rebar tonnage was shipped to this area in fiscal 2001. We compete in the rebar market with a number of other mini-mills, principally Structural Metals, Incorporated and others. We are not in competition on a regular basis with foreign or integrated steel producers. Our strategy is to focus on end-users and to provide our customers with exceptional services. Because of our customer focus and the fact that the foreign and integrated mills have cost and freight disadvantages compared to us and other domestic mini-mills, we have effectively precluded them from competing in the relatively low priced hot rolled bar product and graded rebar markets. However, the twenty-foot length rebar and no-grade rebar markets have been impacted by foreign imports which has significantly reduced selling prices in the past three years. Competitive factors in fence post sales include product quality measured by durability, appearance, workmanship, delivery response time, price, and freight costs. Competitors include Structural Metals, Incorporated and Chicago Heights Steel Company. For fabricated rebar, primary competitors are independent fabrication shops that are furnished with rebar from other mini-mills in the Midwest. In recent years, we believe that increased demand for epoxy-coated product from contractors bidding on infrastructure projects has provided Kansas City with a competitive advantage. Other competitive factors include delivery performance, engineering support, accurate fabrication and competitive pricing. Waddell's focus is on small rebar projects, generally less than 200 tons each. These two fabricators complement each other and allow for most efficient production at both locations. In the railroad track spike market competitive factors include quality, service and price. Our primary competitors are Ameristeel and Birmingham Rail. 7 Employees As of April 30, 2001, we had approximately 610 employees. Approximately 66% of our employees are represented by one of three bargaining units affiliated with the United Steelworkers of America (Sand Springs, Joliet and Kansas City). Sand Springs is party to a collective bargaining agreement covering approximately 262 hourly-paid production and maintenance employees. This agreement, which was negotiated as of March 2, 2000, is for a four-year period expiring on March 2, 2004. The agreement included wage increases, minor changes to certain benefits and changes to local work rules. Joliet is also party to a collective bargaining agreement covering approximately 108 hourly-paid production and maintenance employees that expires on March 1, 2002. Kansas City has a collective bargaining agreement covering approximately 18 employees that was negotiated on November 1, 1999 and expires on October 31, 2003. The Railway has approximately 18 employees of which 12 are represented by various labor unions. We believe that we have maintained good relationships with our labor unions in the past, but we are unable to provide assurance that the terms of any future collective bargaining agreements with any labor unions will contain terms comparable to the terms contained in its existing collective bargaining agreements. Since the last national, industry-wide strike of steelworkers in 1959, the Company has experienced only a five-day strike in Sand Springs in May 1988 and a work stoppage in Kansas City after the expiration of its collective bargaining agreement in September 1991. We have not experienced a protracted work stoppage in Sand Springs or Joliet, and we believe that we have good relations with our employees. However, we can give no assurance that work stoppages will not occur in the future, in connection with labor negotiations or otherwise. Environmental Compliance We are subject to a broad range of federal, state and local environmental requirements, including those governing air emissions, storm water discharges, and the handling and disposal of wastes. We have spent substantial amounts to comply with these requirements. In addition, in the event that we release hazardous materials, we could potentially be responsible for the remediation of contamination associated with such a release. Primarily because the melting process in Sand Springs generates emission dust that contains lead, cadmium and other heavy metals, we are classified, in the same manner as other electric arc furnace operators in this industry, as a generator of hazardous waste. The Resource Conservation and Recovery Act of 1976, as amended (RCRA), regulates the management of emission control sludge/dust from electric arc furnaces (KO61), a waste stream generated in significant quantities in Sand Springs. All of the KO61 generated in Sand Springs is shipped to Mexico, where a High Temperature Metals Recovery processor, Zinc Nacional, S.A., recovers the zinc, lead and cadmium and manufactures commercial and high purity zinc products. Zinc Nacional, S.A. is in compliance with the Mexican agency, Office of Environmental Protection, which is similar to the EPA in the United States. If a release of KO61 were to occur, we could be required to remediate such a release. Although current law permits the export of KO61, we can provide no assurance that new United States legislation prohibiting the export of hazardous waste materials or new Mexican legislation prohibiting the import of such materials, including KO61, will not be enacted. In that event, we would have to find an alternative means of treatment or disposal of the KO61 in compliance with RCRA. 8 We believe that we could properly dispose of the KO61 generated in Sand Springs by constructing an on-site recovery or chemical stabilization process or by shipping the KO61 to a licensed domestic treatment facility. However, we can give no assurance that such an alternative would be available or that their construction and/or use would not result in significant cost increases. In accordance with the Clean Air Act Amendments of 1990 (CAAA) and Oklahoma's State Implementation Plan, we submitted a Title V application for an operating permit in January of 1997 and received the permit in March 1998. We have been routinely audited and have had no resulting violations, outstanding issues or questions that were not resolved. Late in 2000, we participated in a plant wide EPA self-audit at our Sand Springs plant. No financially significant issues were found to exist in our opinion. Final discussions and responses regarding the audit are still pending. Additional or new air emission control regulations or requirements applicable to our operations may be promulgated under the Clean Air Act in the future. We cannot at this time accurately estimate the costs, if any, of compliance with such future Clean Air Act regulations or requirements. We are finalizing work with the EPA in concluding their RCRA Compliance Evaluation Inspection, which was conducted by Region 6 officials in April of 1997. While we have addressed all of the EPA's concerns and they have indicated (verbally) over a year ago that no penalties should be imposed, the final written release has not been issued. The EPA was comfortable enough with our responses that they allowed our consultants to write the final report, or "Risk Assessment" in 1999. We received some additional questions from the EPA after issuing that report. We have responded to those questions and are awaiting the EPA's response. We feel that any remediation work on the site (if any is required) will be minimal in nature and will not require us to make any substantial expenditures for either remediation or environmental control during the next three years. Cautionary Factors That May Affect Future Results Our disclosure and analysis in this report to shareholders contain some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate", "estimate", "expect", "project", "intend", "plan", "believe", or other words and terms of similar meaning in connection with any discussion of future operating or financial performance. Specifically, these include statements relating to future actions, prospective products, future performance or results of current and anticipated new products, sales efforts, availability of raw materials, expenses such as energy costs, the outcome of contingencies, the cost of environmental compliance and financial results. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion above--for example, competition--will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. 9 We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our other reports to the SEC. Also note that we provide the following cautionary discussion of risks, uncertainties, and possibly inaccurate assumptions relevant to our businesses. These are factors that we think could cause our actual results to differ materially from expected and historical results. Other factors besides those listed here could also adversely affect us. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. . The highly cyclical and seasonal nature of the steel industry. . The possibility of increased competition from other mini-mills. . The risk of our ability to expand our product lines and increase acceptance of existing product lines. . The risk of our ability to successfully produce quality products. . The risk regarding the availability of raw materials such as steel scrap. . The risk in cost and availability of energy, specifically natural gas and electricity. . The costs of environmental compliance and the impact of government regulations. . Our relationship with our workforce, including the United Steelworkers of America Union. . The restrictive covenants and tests contained in our debt instruments that could limit our operating and financial flexibility. . The risk associated with our failure to pay the full semi-annual installment on the 11 1/2% First Mortgage Notes due 2005 that was due on June 1, 2001. . The imports into the United States that have affected the steel market. . General economic conditions in the United States. 10 ITEM 2. PROPERTIES AND FACILITIES ---------------------------------- We own the properties that are the operations for Sand Springs, Joliet, and Waddell. The facility in Sand Springs is located on approximately 148 acres of land in Sand Springs, Oklahoma. The facility in Joliet is located on approximately 30 acres of land in Joliet, Illinois. Waddell's 33,000 square foot building is located on approximately 2.3 acres of land in Independence, Missouri. We lease nine acres of land adjacent to the facility in Joliet from the Metropolitan Water Reclamation District of Greater Chicago under a long-term lease expiring in 2053. We also lease the plant in Kansas City, which contains approximately 77,100 square feet. We lease the Wellington facility, which is approximately 26,000 square foot building located on three acres in Sand Springs, Oklahoma. The facility in Sand Springs comprises an aggregate of approximately 520,390 square feet of floor space and contains two 85-ton electric arc furnaces, a six- strand billet continuous caster, a rolling mill, two warehouses and a fence post shop. The current total annual capacity in Sand Springs is approximately 600,000 tons of billet, approximately 450,000 tons of rebar and hot rolled bar and approximately 70,000 tons of fence post. The facility in Joliet comprises an aggregate of approximately 334,305 square feet of floor space and contains a 12-inch merchant bar mill and a decommissioned 10-inch merchant bar mill. The total annual capacity in Joliet is approximately 145,000 tons of hot rolled bar products. The Railway provides freight service between Sand Springs and Tulsa on seven miles of yard track and 17.3 miles of spur line, which connect customer facilities with the main line. The Railway owns the 24.3 miles of railroad track plus three locomotives, 28 gondolas and 4 flat cars. The Railway operates a maintenance shop for normal repairs and upkeep of locomotives and railcars. The Railway owns approximately 10 acres and leases and operates a transload facility and warehouse. We have granted a security interest in substantially all of the Railway assets to the Bank of Oklahoma as security for the Railway's obligations under the Railway Revolving Credit Facility and the Railway Term Loan. We have granted a first priority lien on substantially all of our real property and equipment (excluding the Railway, Waddell and Wellington) in favor of the Trustee for the benefit of the holders of the First Mortgage Notes. ITEM 3. 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 ------------------------------------------------------------- Not applicable. 11 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED --------------------------------------------------------- STOCKHOLDER MATTERS ------------------- Our Common Stock, par value $.01 per share, is not traded on an established public trading market. As of the date of this filing, there were eight stockholders of record. We paid dividends of $2,500,000, or $.71 per share, to stockholders in fiscal 2000. There were no dividends paid during the years ended April 30, 2001 and 1999. We have loan agreements that contain limitations on our ability to pay cash dividends on Common Stock. 12 ITEM 6. SELECTED FINANCIAL DATA ------ ----------------------- The following selected consolidated financial data for the five years ended April 30, 2001 has been derived from our financial statements audited by KPMG LLP, independent auditors. Our financial statements and the report thereon are included elsewhere in this Annual Report on Form 10-K. The information below should be read in conjunction with our financial statements and the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in Item 7.

-------------------- [a] A restructuring charge of $1.3 million was recognized in fiscal year 1997 as a result of early retirement incentives included in a collective bargaining agreement and salaried workforce reductions in Sand Springs. [b] Litigation settlement income of $2.4 million in fiscal 2000 and $2.3 million in fiscal 1999 was recorded as a result of a lawsuit against certain graphite electrode manufacturers. [c] Extraordinary loss of $8.0 million was recorded in fiscal 1998 related to the First Mortgage Note offering. The extraordinary charge related to a redemption premium, unamortized discount and debt issue costs associated with the retirement of our old First Mortgage Notes that were due in fiscal 2001. [d] Ratio of earnings to fixed charges is defined as income before income taxes and extraordinary item plus amortization of debt issuance cost and interest expense divided by the sum of interest expense plus amortization of debt issuance costs. Earnings of approximately ($17,406) in fiscal 2001 and ($3,509) in fiscal 1997 were insufficient to cover fixed charges. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------- ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- The following discussion should be read in conjunction with our Consolidated Financial Statements and notes included in Item 8 of this Form 10-K. General The results of operations are dependent on the level of construction, infrastructure spending, oil and gas, agribusiness, and general economic activity in the U.S. Our sales are seasonal with the third fiscal quarter generally being weaker than the rest of the year. The major cost components of our products are steel scrap and other raw materials, energy, labor, warehousing and handling, and freight costs. The following table provides information regarding the historical results of operations (in thousands):

14 The following table provides information regarding the historical shipment levels and average selling prices per ton:

Results of Operations Fiscal 2001 As Compared To Fiscal 2000 Sales. Sales in fiscal 2001 were approximately $14.6 million or 8.5% less than sales in fiscal 2000. Demand dropped to very low levels coupled with the inventory reduction, harsh winter weather, holiday outages, and unprecedented levels of subsidized imports. As summarized below, shipments and pricing generally decreased in comparison to the prior year: . Our shipments of hot rolled bar from Sand Springs increased 21% compared to fiscal 2000. The Sand Springs mill increased production of hot rolled bar products and experienced higher productivity rates than in the prior year contributing to the increased sales volume. The increase in tonnage shipped by Sand Springs did not offset the decrease at Joliet. Shipments of our hot rolled bar products in Joliet have been impacted by market conditions with shipments decreasing 21% while pricing remained constant. We have seen improvement in hot rolled bar sales that support certain industries such as oil field equipment; however, agricultural equipment sales continue to lag. . In comparison to Fiscal 2000, rebar shipments decreased 6% and pricing decreased 3%. Shipments decreased due to heavy rainfall in November and record-breaking snowfall in December. Rebar shipments are very sensitive to rainy and cold weather conditions. The weak shipments do not reflect shipments lost, but shipments delayed. . Although not as significant, rebar imports impacted our sales and pricing of twenty-foot no-grade rebar. . Our shipments of fabricated products decreased 10% while pricing remained constant compared to fiscal 2000. Shipments of fence posts have been impacted by a slow down in the farm economy. 15 Cost of Sales and Expenses. Average product costs increased to $299 in fiscal 2001 from $284 in fiscal 2000 due primarily to increases in energy costs and reduced operations due to weak shipments and our efforts to reduce inventories along with a one-week outage in the Sand Springs mill and two weeks in the Joliet rolling mill. Reduced production means we have fewer tons of production to spread fixed or semi-fixed costs, increasing costs per ton. Selling, general and administrative expenses decreased over the prior fiscal year due primarily to employment costs. Depreciation increased because of additional capital expenditures primarily in Sand Springs. Amortization increased compared to the prior year due to increased amortization of intangible assets associated with the operating lease for the reheat furnace. During fiscal 2000, we were party to a lawsuit with several other steel manufacturers against certain manufacturers of graphite electrodes related to price fixing within the electrode industry. We received approximately $2.4 million related to the settlements reached fiscal year 2000 with certain of the defendants. Interest expense increased due to the level of outstanding debt during the fiscal year. Additions to debt were due to operating losses and capital expenditure requirements. The Company has incurred losses, in the current and prior years. Considering these losses, the Company increased its valuation allowance to $20.8 million relating to the net deferred tax assets. The Company will evaluate the possible realization of its net deferred tax assets upon its return to profitability. Fiscal 2000 As Compared To Fiscal 1999 Sales. Sales in fiscal 2000 were approximately $8.7 million or 5.3% more than sales in fiscal 1999. Shipments increased in comparison to the prior year, while pricing generally decreased as summarized below: . Our shipments of hot rolled bar from Sand Springs increased 61% over fiscal 1999 (excluding sales to Wellington). The Sand Springs mill increased production of hot rolled bar products and experienced higher productivity rates than in the prior year contributing to the increased sales volume. Shipments and pricing of our hot rolled bar products in Joliet have been impacted by market conditions with shipments decreasing 2% and pricing decreasing 3%. We have seen improvement in hot rolled bar sales that support certain industries such as oil field equipment; however, agricultural equipment sales continue to lag. . Rebar shipments rebounded in 2000 due to our favorable inventory position in comparison to fiscal 1999. In the prior year, we had very low inventories due to the rolling mill outage at the Sand Springs Facility related to the Shear Line Project completed in the fourth quarter of fiscal 1998. 16 . Finished goods prices are down in comparison to fiscal 1999, in part due to reductions in steel scrap raw material costs. During the second quarter of fiscal 2000, our scrap raw material costs began to increase which had an adverse effect on cost of sales for the remainder of the year. However, scrap prices have moderated since year-end and we expect our margins will not be negatively impacted any further. . Although not as significant, rebar imports impacted our sales and pricing of twenty-foot rebar and no-grade rebar. Cost of Sales and Expenses. Average product costs decreased to $284 in fiscal 2000 from $297 in fiscal 1999 due to decreases in steel scrap raw material costs. This decrease was partially offset by higher costs associated with finished goods product mix and higher operating costs. Selling, general and administrative expenses increased over the prior fiscal year due primarily to employment costs as well as the acquisition of Wellington. Depreciation increased because of additional capital expenditures primarily in Sand Springs. Amortization increased compared to the prior year due to increased amortization of intangible assets associated with the acquisition of Wellington. During fiscal 1999 and 2000, we were party to a lawsuit with several other steel manufacturers against certain manufacturers of graphite electrodes related to price fixing within the electrode industry. We received approximately $2.4 million related to the settlements reached this fiscal year ($2.3 million in fiscal 1999) with certain of the defendants. Interest expense increased due to the level of outstanding debt during the fiscal year. Additions to debt were due to working capital and capital expenditure requirements. Liquidity and Capital Resources As of April 30, 2001, we had long-term indebtedness of $146.3 million and approximately $7.4 million of additional borrowing availability under our revolving credit agreements. The Company's current liquidity requirements include working capital needs, cash for debt service and capital expenditures. The Company intends to finance its current operations and investing activities with cash from operations and borrowing under its revolving credit agreements. As discussed under the section "Liquidity", the Company is in violation of certain restrictive covenants under its revolving credit agreements as of April 30, 2001. If these agreements are withdrawn by the lenders or subjected to forbearance agreements, the Company's liquidity and capital resources could be materially adversely affected. Borrowings under our revolving credit agreements bear interest at a floating rate. To the extent that interest rates increase or decrease, and to the extent that amounts outstanding under the revolving credit agreements increase or decrease, there will be corresponding increases in our interest obligations. In addition to borrowings under the revolving credit agreements, we have historically used cash flow from operations and equipment financing agreements to fund our investing activities, including capital expenditures. 17 Cash Flow Analysis Fiscal 2001 As Compared To Fiscal 2000 Cash flow used by operating activities was $2.0 million in fiscal 2001, compared with cash flow provided in operating activities of $4.9 million in fiscal 2000. Cash used by operations was negatively impacted by fiscal 2001 net loss. In fiscal 2000, we entered into a $10.0 million operating lease for a new reheat furnace for the Sand Springs rolling mill. The lease term is approximately six years and contains an option to purchase the equipment at fair market value at the end of the lease term. Earnings before interest, taxes, depreciation, amortization, extraordinary item and the non-cash portion of the post-retirement expense (EBITDA) was approximately $9.6 million at April 30, 2001 as compared to $22.4 million in the prior year. We have excluded the electrode litigation settlement in all EBITDA calculations. We believe that EBITDA is a valuable measure of our operating cash flow and we consider it an indicator of our ability to meet interest payments and fund capital expenditures. EBITDA does not represent and should not be considered as an alternative to net income or cash flow from operations as determined by generally accepted accounting principles and EBITDA does not necessarily indicate whether cash flow will be sufficient for cash requirements. We exclude restructuring expense, extraordinary items and gain or loss on retirements from EBITDA due to the non-recurring nature of these items. Cash used in investing activities in fiscal 2001 was $5.9 million consisting of capital improvements. Capital expenditures consisted of normal capital projects to sustain and improve existing operations. Cash flow provided by financing activities consisted of increased borrowings under the revolving credit agreement offset by debt payments, and repurchase of common stock. Fiscal 2000 As Compared To Fiscal 1999 Cash flow provided by operating activities was $4.9 million in fiscal 2000, compared with cash flow used in operating activities of $3.7 million in fiscal 1999. Cash provided by operations was negatively impacted in the prior year by payments made on the shear line project. In addition, raw material pricing increased accounts payable balances at fiscal 2000 year-end. Cash used in investing activities in fiscal 1999 was $8.9 million, consisting principally of the purchase of Wellington of $2.6 million and capital improvements of $6.2 million including $0.7 million related to last years Shear Line Project. In fiscal 1999, cash provided by financing activities consisted of increases in the revolving line of credit, proceeds from equipment financing and the debt related to the purchase of Wellington. Cash used in financing activities included payments on the revolving credit facilities and other equipment loans and the repurchase of common stock. 18 Liquidity Recent Developments. As a result of the significant loss in the current year, the Company was unable to meet certain restrictive covenants under its revolving credit agreements. 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 provides for a limited continuation of our line of credit through August 31, 2001. The revised line of credit is capped at $35 million among other limitations. We have no assurance that the terms of the forbearance agreement will be extended beyond August 31, 2001. The Company is currently pursuing alternative financing 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 1/6th, or $1.05 million, of the amount due. Management believes that such 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 is in default of its First Mortgage Notes as of July 3, 2001. 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 have commended discussion, which the Company believes will result in an agreement with those holders that will lead to a restructuring. When achieved, the restructuring will result in a balance sheet 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, energy, among other, could also have a material adverse effect on the financial results or liquidity of the Company. 19 The accompanying financial statements have been prepared assuming that Sheffield Steel will continue as a going concern. As more fully described in Note 14, the Company has incurred recurring significant losses in fiscal 2001 and subsequent to year end was unable to meet its debt service obligations when due. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described under the heading "Description of the Company and Liquidity" contained in Note 14. The financial statements do not include any adjustments to reflect the possible future effects on the recover-ability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Compliance with Environmental Laws and Regulations We are subject to a broad range of federal, state and local environmental regulations and requirements, including those governing air emissions and discharges into water, and the handling and disposal of solid and/or hazardous wastes. As part of the normal course of business, we incur expenses, primarily for the disposal of bag house dust generated in the melt shop, to comply with these regulations and requirements. Expenses were approximately $1.9 million in fiscal 2001, $2.0 million in fiscal 2000, and $2.2 million in fiscal 1999. Capital expenditures incurred to comply with these requirements were approximately $155 thousand in fiscal 2001and $205 thousand in fiscal 2000. In addition, in the event that we release a hazardous substance, we could be responsible for the remediation of contamination associated with such a release. We believe that we are currently in substantial compliance with all known material and applicable environmental regulations. Inflation We have not experienced any material adverse effects on operations in recent years because of inflation, though margins can be affected by inflationary conditions. Our primary cost components are ferrous scrap and other raw materials, energy and labor, all of which are susceptible to domestic inflationary pressures. Pricing of finished products, however, can be influenced by general economic conditions and competitive factors in the steel industry. While we have been successful in passing on cost increases to our customers through price adjustments, the effect of steel imports, severe market price competition and under-utilized industry capacity has in the past, and could in the future, limit our ability to adjust pricing. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS 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. 20 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. SFAS 133 was amended by Statement of Financial Accounting Standards No. 138 ("SFAS 138") in June 2000 that amended the accounting and reporting standards of SFAS 133 for certain derivative instruments and certain hedging activities. SFAS 138 also amended SFAS 133 for decisions made by the FASB relating to the Derivatives Implementation Group process. The Company has completed its analysis of Statement 133 and does not expect adoption as of May 1, 2001 to have a material effect on results of operations or financial position. In July 2001, the FASB issued Statement No. 141, "Business Combinations", and Statement No. 142, "Goodwill and Other Intangible Assets". Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Company is required to adopt the provisions of Statement 141 immediately, except with regard to business combinations initiated prior to July 1, 2001, which it expects to account for using the pooling-of-interests method, and Statement 142 effective January 1, 2002.* Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142. Statement 141 will require upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. 21 In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of it assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year 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. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT -------- ----------------------------------------------- MARKET RISK ----------- Our earnings are affected by changes in interest rates (primarily the prime rate). At April 30, 2001, we had approximately $36.3 million of long-term debt with variable rates. Interest risk can be estimated by measuring the impact of a 10% increase in interest rates. We would incur an additional $328 thousand of interest expense per year on our variable rate borrowing if our debt levels remained approximately the same as at April 30, 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 the First Mortgage Notes at April 30, 2001, based on currently offered market price was $38 million verses a carrying value of approximately $110 million. 22 ITEM 8. FINANCIAL STATEMENTS ---------------------------- Independent Auditors' Report The Board of Directors and Stockholders Sheffield Steel Corporation: We have audited the accompanying consolidated balance sheets of Sheffield Steel Corporation and subsidiaries as of April 30, 2001 and 2000, and the related consolidated statements of operations, stockholders' deficit, and cash flows for each of the years in the three-year period ended April 30, 2001. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule listed in the index at Item 14(a)2. These consolidated financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sheffield Steel Corporation and subsidiaries at April 30, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended April 30, 2001, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14 to the financial statements, the Company has suffered significant losses from operations in the current year and subsequent to year-end was in default under its first mortgage note agreement which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 14. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP Tulsa, Oklahoma July 16, 2001 23 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except share and share data)

See accompanying notes to consolidated financial statements. 24 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (In thousands)

See accompanying notes to consolidated financial statements. 25 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Deficit (In thousands, except share data)

See accompanying notes to consolidated financial statements. 26 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands)

(Continued) 27 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued (In thousands)

See accompanying notes to consolidated financial statements. 28 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements April 30, 2001, 2000 and 1999 (In thousands, except share data) (1) Summary of Significant Accounting Policies Organization and Nature of Business The consolidated financial statements of Sheffield Steel Corporation (the Company, which may be referred to as we, us or our) include the accounts of its divisions, Sheffield Steel-Sand Springs (Sand Springs), Sheffield Steel-Kansas City (Kansas City), and Sheffield Steel-Joliet (Joliet) and its wholly owned subsidiaries, 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. Cash Equivalents We consider all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Inventories Inventories are stated at the lower of cost (as determined by the first-in first-out method) or market. The cost of work-in-process and finished goods inventories is based on standards, which approximate cost. Work-in-process and finished goods include direct labor and allocated overhead. Intangible Assets Intangible assets consist primarily of goodwill and debt issuance costs. The cost of goodwill is being amortized on a straight-line basis over a period of 40 years. Debt issuance costs are amortized over the term of the related indebtedness. Our policy is to recognize an impairment of the carrying value of goodwill when our best estimate of undiscounted future cash flows over the remaining amortization period is less than the carrying amount. 29 Property, Plant and Equipment Property, plant and equipment, which includes assets under capitalized leases, is stated at cost. Depreciation and amortization is provided over the estimated useful lives of the individual assets using the straight-line method. Significant renewals and betterments are capitalized; costs of maintenance and repairs are charged to expense as incurred. Income Taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We are members of a group that files a consolidated income tax return with HMK (the Group). The Group's tax-sharing agreement provides that current and deferred income taxes are determined as if each member of the Group were a separate taxpayer. All income taxes payable or receivable are due to or from HMK. Pension and Other Postretirement Plans We have defined benefit pension plans covering the hourly employees at Sand Springs and Joliet and the salary employees at Sand Springs. The benefits are based on years of service and the employee's compensation during the highest five out of the last ten years before retirement. The cost of this program is being funded currently. We also sponsor a defined benefit health care plan for the retirees and employees in Sand Springs. We measure the costs of this obligation based on our best estimate. The net periodic costs are recognized as employees render the services necessary to earn the postretirement benefits. Environmental Compliance Costs We accrue for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Environmental remediation costs have not had a material impact on our financial position, results of operations, or liquidity. Revenue Recognition Revenues from sales are recognized when products are shipped to customers, except the Railway, which recognizes revenues when services are performed. 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. 30 Stock Option Plan We adopted SFAS No. 123, "Accounting for Stock-Based Compensation" which permits, but does not require, a fair value based method of accounting for stock-based employee compensation. Alternatively, SFAS No. 123 allows companies to continue applying the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees"; however, such companies are required to disclose pro forma net income and earnings per share as if the fair value based method had been applied. We have elected to continue to apply the provisions of APB Opinion No. 25 for purposes of computing compensation expense and we have provided the pro forma disclosure provisions of SFAS No. 123 herein. Segment Information We operate in a single operating segment providing steel products and services to the steel manufacturing and fabricating industry. We had sales of $157,483 in 2001, of which $156,316 was sales in the United States and $1,167 was sales outside the United States. We sell our products in the United States and internationally through our own sales force and to a limited extent, sales agencies. Our assets are all located in the United States. We have one customer that accounted for approximately 13% of sales in 2001 and 14% of sales in 2000 and 1999. This same customer accounted for 12% of trade accounts receivable in 2001 and 2000. (2) Fair Value of Financial Instruments We define the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying value of cash and cash equivalents, trade accounts receivable and trade accounts payable approximates the fair value because of the short maturity of those instruments. The carrying amounts of notes payable to banks and equipment financing companies (see Note 5) approximates the fair value due to these debt instruments having variable interest rates similar to those that are currently available to us. The fair value of the first mortgage notes (see Note 5) at April 30, 2001, based on the currently offered market price, is approximately $37,950 ($91,300 at April 30th, 2000) versus a carrying value of approximately $110,000. (3) Inventories The components of inventories are as follows:

31 (4) Property, Plant and Equipment The components of property, plant and equipment are as follows:

Depreciation and amortization of property, plant and equipment charged to operations was $7,786 in 2001, $7,697 in 2000 and $7,119 in 1999. The range of estimated useful lives for determining depreciation and amortization of the major classes of assets are: Buildings 5-25 years Machinery and equipment 3-25 years Roadbed and improvements 3-40 years (5) Long-term Debt Long-term debt is comprised of the following:

[a] On November 26, 1997, we issued $110,000 of 11.5% First Mortgage Notes due 2005. Interest on the First Mortgage Notes is payable semi-annually on June 1st and December 1st of each year at the rate of 11.5% per year. The First Mortgage Notes are secured by a first priority lien on substantially all existing and future real property and equipment. We are subject to certain covenants including certain limitations on additional indebtedness and restricted payments, such as dividends and purchases of stock. See note (14) liquidity and going concern. 32 [b] The revolving credit agreement with a bank provides for maximum borrowings of $35,000 based on a percentage of eligible accounts receivable and inventory, of which approximately $7,400 was available as of April 30, 2001. Borrowings are secured by a first priority lien on inventory and accounts receivable. Interest is computed at prime plus a variable margin (based on the achievement of certain interest coverage ratios) from 0% to 1 1/2% and is payable monthly. At April 30, 2001, the interest rate was 7.5% (prime). An annual commitment fee of .5% is charged on the unused portion of the revolving credit agreement. The agreement will continue through July 31, 2003 and thereafter on a year-to-year basis until terminated by the lender or us. At April 30, 2001, the Company was in violation of certain restrictive covenants under its revolving credit agreement. 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 provides for a limited continuation of our line of credit through August 31, 2001. The revised line of credit is capped at $35 million among other limitations. The Company is currently pursuing alternative financing agreements. [c] The Railway credit agreement with a bank is comprised of two notes; a $2,000 term loan with $500 principal payments each year with the final payment on February 4, 2004, and a $1,000 line of credit maturing February 1, 2002. All of the assets and capital stock of the Railway secure the notes. Interest is computed at prime plus 3/4% and is payable quarterly. At April 30, 2001, the interest rate was 8.25%. At April 30, 2001, the Company was in violation of certain restrictive covenants under the Railway credit agreement. The creditors did not waive the default and, accordingly, all such borrowings are classified as current in the accompanying consolidated balance sheet. [d] Equipment notes are notes payable to equipment financing companies and vendors related primarily to the financing of equipment purchases. The notes are payable in monthly principal installments of $93 plus interest payable at variable rates. The notes mature in fiscal year 2004 and are secured by equipment. [e] Notes payable consists of various notes issued and assumed in conjunction with the acquisition of Waddell and Wellington and are secured by the stock of these two companies. The notes, which mature over the next two years, bear interest at varying rates based on the prime rate of interest as determined by Bank of America. The aggregate maturities of long-term debt for the years ended April 30, are as follows: 2002 $ 34,886 2003 401 2004 765 2005 218 2006 - Thereafter 110,000 -------- Total Maturities $146,270 ========

Interest costs were $16,919 in 2001, $15,167 in 2000 and $14,599 in 1999. Various agreements contain restrictive covenants including limitations on additional borrowings, dividends and other distributions and the retirement of stock. Additionally, certain agreements require maintenance of specified performance ratios. In the event of default of the restrictive covenants or failure to maintain the specified performance measures, the lender may withdraw the credit agreements. 33 (6) Income Taxes Income tax benefit for the years ended April 30, 2001, 2000, and 1999 consists of:

Income taxes attributable to operations differed from the amounts computed by applying the U.S. federal income tax rate of 34% as a result of the following:

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

34 At April 30, 2001, we had available net operating loss (NOL) carryforwards for regular federal tax purposes of approximately $52,655 which will expire as follows: $3,267 in 2007, $4,249 in 2008, $5,764 in 2009, $7,447 in 2011, $6,264 in 2012, $7,754 in 2013, $357 in 2015 and $17,553 in 2016. We have investment tax credit carryforwards of $36 for federal tax purposes and $3,178 for state tax purposes. We have fully reserved for the investment tax credit carryforwards as it is likely that they will not be utilized prior to their expiration. The credits expire in various periods through 2007. We also have available $1,142 of alternative minimum tax (AMT) credit carryforwards which may be used indefinitely to reduce future federal regular income tax obligations. Of the amounts noted above, approximately $810 of NOL carryforwards and $152 of investment tax credit carryforwards were added due to the purchase of Wellington and can only be used if Wellington has taxable income; these amounts were fully reserved at the date of acquisition. Future annual postretirement benefit costs are expected to exceed deductible amounts for many years and it is anticipated that all of the deferred tax assets related thereto will be utilized as such amounts become deductible. A valuation allowance is required when it is more likely than not that all or a portion of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon future profitability. The Company has incurred losses in three of the last five years. Considering these losses and the events discussed at Note 14 - Liquidity and Going Concern, the Company has established a valuation allowance of $20.8 million relating to the deferred tax assets. We have a receivable of $2,205 from HMK related to certain tax attributes allocated to us. Under an agreement with HMK, the receivable will be realized by reducing future income taxes otherwise payable to HMK among other methods. Given the amount of NOL carryforwards generated by the Company and the financial condition of the Company as discussed above, a valuation allowance was established against this receivable as it is more likely than not that this receivable will not be realized. (7) Employee Benefit Plans We have defined benefit plans that cover the hourly employees at Sand Springs and Joliet and the salaried employees at Sand Springs. Benefits are generally based on years of service and the employee's compensation during the last ten years of employment. Our funding policy is to contribute annually at least the minimum amount necessary to avoid a deficiency in the funding standard. In addition to the defined benefit pension plan, we also provide postretirement health and life insurance benefits to certain retirees and their beneficiaries, generally for the remainder of their lives. The Plan is contributory, with retiree contributions adjusted annually, and contains other cost-sharing features such as deductibles, co-insurance, and Medicare. Our policy is to fund accumulated postretirement benefits on a "pay-as-you-go" basis. The following tables set forth the plan's benefit obligations, fair value of plan assets, and funded status at April 30, 2001 and 2000 as determined by an independent actuary: 35

For measurement purposes, the medical trend rates used for HMO and PPO/indemnity plans were 5.6% and 8.00%, respectively. The medical and HMO trend rates are assumed to decrease gradually to 5.0% by 2005 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. 36 The following table presents the components of the net periodic benefit cost:

At April 30, 1999, we had one pension plan that had a projected benefit obligation in excess of plan assets. For this plan, the projected benefit obligation was $3,659, the accumulated benefit obligation was $3,659, and the fair value of plan assets was $3,170. At April 30, 2000, there were no pension plans that had a projected benefit obligation in excess of plan assets. At April 30, 2001, we had two pension plans that had a projected benefit obligation in excess of plan assets. For these plans, the projected benefit obligations were $17,629 and $3,735, the accumulated benefit obligations were $16,110 and $3735, and the fair value of plan assets were $17,284 and $3,236. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

We have certain divisions of the Company that maintain defined contribution plans in which various groups of employees participate. We made contributions to these plans of $101 in 2001, $131 in 2000, and $132 in 1999 (8) Operating Leases We are obligated under various noncancelable-operating leases for certain land and buildings. These leases generally contain inflationary rent escalations and require us to pay all executory costs such as maintenance and insurance. Rental expense for operating leases (except those with lease terms of a month or less that were not renewed) was $366 in 2001, $370 in 2000 and $345 in 1999. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) for the years ending April 30, are as follows: 2002 $ 2,164 2003 2,029 2004 1,874 2005 1,874 2006 1,809 Later years 1,195 ------- Total maturities $10,945 =======

37 (9) Commitments and Contingencies We are partially self-insured for certain risks consisting primarily of employee health insurance programs and workers' compensation. Probable losses and claims are accrued as they become estimable. We maintain letters of credit totaling approximately $2.8 million in accordance with workers' compensation arrangements. We are involved in claims and legal actions arising in the ordinary course of business. We believe that the ultimate disposition of these matters will not have a material adverse effect on our financial position, results of operations, or liquidity. (10) Related Party Transactions An affiliated company provides management and business services to us, including, but not limited to, financial, marketing, executive personnel, corporate development, human resources, and limited legal services. We believe that transactions with related parties are at costs that could be obtained from third parties. Management fees charged were $787 in 2001, $861 in 2000, and $817 in 1999. In addition, we purchase general liability, workers' compensation and other insurance through an affiliated company that provides risk management services. These risk management services include; procuring and maintaining property and casualty insurance coverage; reviewing and recommending alternative financing methods for insurance coverage; identifying and evaluating risk exposures, and preparing and filing proof of loss statements for insured claims. Total fees paid for insurance services were $121 in 2001, $213 in 2000 and $204 in 1999. During fiscal year 1993, certain minority shareholders issued $1,000 of notes receivable to us. The notes bear interest at an annual rate of 7.61% and are secured by common stock of the Company owned by those shareholders. Principal and interest are due on February 1, 2007, unless extended at our option until February 1, 2012. The principal balance outstanding was $700 as of April 30, 2001 and 2000. On September 30, 1996, we signed an agreement to repurchase 50,625 shares of our common stock from two minority shareholders who were former officers of the Company. The stock repurchase is pursuant to the Amended and Restated Stockholder's Agreement dated September 15, 1993 and the stock purchase price was calculated in accordance with the agreement. As a result of this transaction, $393 of notes receivable from the former shareholders was satisfied, we recorded a note payable in the amount of $662 and decreased paid- in capital by $1,055. The notes payable accrue simple interest at 6.02% and are being repaid in five annual installments that began December 12, 1997. The principal balance outstanding was $265 at April 30, 2000 and $132 at April 30, 2001. During fiscal 2000, one employee and two former employees of the Company issued $535 of full recourse notes receivable to us for stock options exercised in 2000. During fiscal 2001, one former employee of the Company issued $1,125 of full recourse notes receivable to us for stock options exercised in 2001. In fiscal 2001, the notes receivable were satisfied. In fiscal 2001, notes payable in the amount of $1,849 were recorded and paid in capital decreased by $5,136 in order to repurchase stock from two former employees. The notes payable accrue simple interest ranging from 5.78% to 6.45% and are being repaid in five annual installments that began July 4, 2000. We have a receivable of $2,205 from HMK related to certain tax attributes allocated to us. Under an agreement with HMK, the receivable will be realized by reducing future income taxes otherwise payable to HMK. Given the amount of NOL carryforwards generated by the Company and the financial condition of the Company as discussed in Note 14- Liquidity and Going Concern, a valuation allowance was established against this receivable as it more likely than not that this receivable will be realized. In addition, we advanced $500 to HMK to secure a letter of credit for the Joliet insurance program. 38 (11) Stock Options On September 15, 1993, the Board of Directors adopted, and the stockholders approved, our 1993 Employee, Director and Consultant Stock Option Plan (the Stock Option Plan). The Stock Option Plan provides for the grant of incentive options to key employees and nonqualified stock options to key employees, directors, and consultants. A total of 580,000 shares of our common stock, which would represent approximately 14.9% of the common stock on a fully diluted basis, have been reserved for issuance under the Stock Option Plan. The options vest three years from the date of grant and may be exercised within 10 years from the grant date for incentive stock options or 20 years from the grant date for non-qualified stock options at a price not less than the fair market value of the stock at the time the options are granted. Fair market value for purposes of determining the exercise price is determined by appraisal as prescribed in the Stock Option Plan. At April 30, 2001, there were 336,140 additional shares available for grant under the Stock Option Plan. We apply APB Opinion No. 25 in accounting for the Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. If we had determined compensation cost based on the fair value at the grant date for our stock options under SFAS No. 123, our results would have been reduced to a loss of $97 in 2000, and a loss of $1,409 in 1999. The per share weighted-average fair value of stock options granted was $8.70 in 2000 and $7.48 in 1999 on the date of grant using the minimum value method with the following assumptions: expected dividend yield of approximately 1.0%, risk- free interest rate of 6.38%, and an expected life of five years. The options outstanding and activity during the periods indicated is as follows:

Exercise prices for options outstanding as of April 30, 2001 ranged from $7.41 to $38.67. The weighted-average remaining contractual life of those options is 13.7 years. 39 In connection with the adoption of the Stock Option Plan, we elected to terminate our Stock Appreciation Rights Plan (SAR). Existing liabilities under the SAR plan were frozen at their current level. All vested rights become exercisable upon the participants' termination. Included in other liabilities at April 30, 2001 is $294, in 2000 and 1999 is $368, which is the present value of the SAR's based on vesting and retirement dates. (12) Litigation Settlement We were party to a lawsuit with several other steel manufacturers against certain manufacturers of graphite electrodes related to price fixing within the electrode industry. We recognized approximately $2,379 in 2000 related to settlements with certain of the defendants. (13) Acquisitions On October 6, 1998, we acquired all of the outstanding capital stock of Wellington Industries, Inc. The acquisition price consisted of $1,500 in cash, subject to performance related contingency payments, and unsecured, subordinated promissory notes in an aggregate principal amount of $1,464. The acquisition was accounted for in accordance with the purchase method. The fair value of tangible assets acquired was $1,683 including $1,229 of current assets and $454 of fixed assets. The amount of liabilities assumed was $947 including $711 of accounts payable and accrued liabilities and $236 of long-term debt. In addition, we recorded $2,228 as excess cost over net assets acquired (goodwill). (14) Liquidity and Going Concern The Company incurred significant losses in the current year stemming primarily from an $8.2 million loss in the third quarter. Management believes that the trough of the current steel recession occurred in November 2000 through February 2001. Demand dropped to very low levels coupled with the inventory reduction harsh winter weather, holiday outages, and unprecedented levels of subsidized imports. In addition, energy costs escalated suddenly and dramatically. This impacted both our cost of electricity, which is used in the melt shop where steel scrap is melted using two 85-ton electric arc furnaces, and natural gas, which is used to reheat billets to be rolled in our rolling mill. As a result of the significant loss in the current 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 1/6th, or $1.05 million, of the amount due. Management believes that such 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 is 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 provides for a limited continuation of our line of credit through August 31, 2001. The revised line of credit is capped at $35 million among other limitations. The Company is currently pursuing alternative financing agreements. 40 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 have commended discussion, which the Company believes will result in an agreement with those holders that will lead to a restructuring. When achieved, the restructuring will result in a balance sheet 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 financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. 41 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ------- ------------------------------------------------------- ACCOUNTING AND FINANCIAL DISCLOSURE -------------------------------------- None PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS -------- -------------------------------- The information included under the caption entitled "Management" in our Proxy Statement dated July 31, 2001, with respect to directors and executive officers is incorporated herein by reference in response to this item. Because we do not have a class of securities registered under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), none of our directors, executive officers or ten percent or greater security holders are subject to the reporting requirements of Section 16(a) of the Exchange Act. Accordingly, disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not applicable. ITEM 11. EXECUTIVE COMPENSATION -------- ----------------------- The information regarding compensation of our executive officers is included under the caption entitled "Executive Compensation" in our Proxy Statement dated July 31, 2001, and is incorporated herein by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND -------- --------------------------------------------------- MANAGEMENT ---------- The information regarding beneficial ownership of our Common Stock by certain beneficial owners and by management is included under the caption entitled "Share Ownership" in our Proxy Statement dated July 31, 2001, and is incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -------- -------------------------------------------------- The information regarding certain relationships and related transactions with management and others is included under the caption entitled "Certain Transactions" in our Proxy Statement dated July 31, 2001, and is incorporated herein by reference in response to this item. 42 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -------- --------------------------------------------------------------- ITEM 14(a)1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS COVERED BY ------------ ---------------------------------------------------------- REPORT OF INDEPENDENT AUDITORS --------------------------------- The Consolidated Financial Statements of Sheffield Steel Corporation are included in Item 8: Independent Auditors' Report Consolidated Balance Sheets - April 30, 2001 and 2000 Consolidated Statements of Operations - Years ended April 30, 2001, 2000 and 1999 Consolidated Statements of Stockholders' Deficit - Years Ended April 30, 2001, 2000 and 1999 Consolidated Statements of Cash Flows - Years Ended April 30, 2001, 2000 and 1999 Notes to Consolidated Financial Statements - April 30, 2001, 2000 and 1999 ITEM 14(a)2. INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES ------------ -------------------------------------------------------- The following consolidated financial statement schedules of Sheffield Steel Corporation are included in Item 14(d):

Schedules other than those listed above have been omitted because they are not applicable. Columns omitted from schedules filed have been omitted because the information is not applicable. 43 ITEM 14(a)3. EXHIBITS ------------ -------- The exhibits listed on the Exhibit Index below are filed or incorporated by reference as part of this report and such Exhibit Index is hereby incorporated herein by reference. Exhibit Index

44 4.10 Warrant Agreement, dated November 1, 1993, between Sheffield Steel Corporation and Shawmut Bank Connecticut, N.A., as Warrant Agent (Incorporated by reference to Exhibit 4.8 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1993). 4.13 Second Amendment to Receivable and Inventory Financing Agreement, dated November 1, 1993 between Sheffield Steel Corporation-Oklahoma City, Sheffield Steel Corporation, and NationsBank of Georgia, N.A. (Incorporated by reference to Exhibit 4.13 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1993). 4.14 Third Amendment to Receivable and Inventory Financing Agreement, dated December 13, 1994 between Sheffield Steel Corporation and NationsBank of Georgia, N.A. (Incorporated by reference to Exhibit 4.14 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1993). 4.15 Fourth Amendment to Receivable and Inventory Financing Agreement, dated October 30, 1995 between Sheffield Steel Corporation and NationsBank of Georgia, N.A. (Incorporated by reference to Exhibit 4.15 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1995). 4.16 Fifth Amendment to Receivable and Inventory Financing Agreement, dated April 19, 1996 between Sheffield Steel Corporation and NationsBank of Georgia, N.A. (Incorporated by reference to Exhibit 4.16 of the Registrant's Annual Report on Form 10-K for the fiscal year ended April 30, 1996). 4.17 Sixth Amendment to Receivable and Inventory Financing Agreement, dated December 1, 1997 between Sheffield Steel Corporation and NationsBank, N.A. (Incorporated by reference to Exhibit 4.17 to the Registrant's Regristration Statement on Form S-1 filed on January 9, 1998). 4.18 Seventh Amendment to Receivable and Inventory Financing Agreement, dated December 1, 1997 between Sheffield Steel Corporation and NationsBank, N.A. (Incorporated by reference to Exhibit 4.18 of the Registrant's Annual Report on Form 10K for the fiscal year ended April 30, 1999). 4.19 Eighth Amendment to Receivable and Inventory Financing Agreement, dated April 13, 1999 between Sheffield Steel Corporation and NationsBank, N.A. (Incorporated by reference to Exhibit 4.19 of the Registrant's Annual Report on Form 10K for the fiscal year ended April 30, 1999). 4.20 Ninth Amendment to Receivable and Inventory Financing Agreement, dated July 31, 1999 between Sheffield Steel Corporation and Bank of America, N.A. (Incorporated by reference to Exhibit 4.20 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1999). 4.21 First Supplemental Indenture dated December 6, 1999 by Sheffield Steel Corporation and State Street Bank and Trust Company, as Trustee (Incorporated by reference to Exhibit 4.21 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 1999). 4.22 Tenth Amendment to Receivable and Inventory Financing Agreement, dated April 29, 2000 between Sheffield Steel Corporation and Bank of America, N.A.(Incorporated by reference to Exhibit 4.22 to the Registrant's quarterly Report on Form 10-Q for the quarter ended July 31, 2000). 10.1 Income Tax Expense Allocation Policy and Tax Sharing Agreement, effective May 1, 1991 between HMK Enterprises, Inc. and Sheffield Steel Corporation, Sheffield Steel Corporation-Joliet, Sheffield Steel Corporation-Oklahoma City and Sand Springs Railway Company (Incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 filed on August 17, 1993).

45 10.2 Form of Master Loan and Security Agreement between Sheffield Steel Corporation and the CIT Group/Equipment Financing, Inc. dated July 14, 1994 (Incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the year ended April 30, 1994). 10.3 Restated Credit Agreement, dated April 23, 1991, between Sand Springs Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.7 to the Registrant's Registration Statement on Form S-1 filed on August 17, 1993). 10.4 Amendment to Restated Credit Agreement, dated May 31, 1992, between Sand Springs Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.8 to the Registrant's Registration Statement on Form S-1 filed on August 17, 1993). 10.5 Amendment to Assignment of Transportation Agreement, dated April 23, 1991 between Sand Springs Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.10 to the Registrant's Registration Statement on Form S-1 filed on August 17, 1993). 10.6 Amendment to Assignment of User Contracts, dated April 23, 1991 between Sand Springs Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.11 to the Registrant's Registration Statement on Form S-1 filed on August 17, 1993). 10.7 Amendment to Pledge and Security Agreement, dated April 23, 1991 between Sand Springs Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.12 to the Registrant's Registration Statement on Form S-1 filed on August 17, 1993). 10.8 Amendment to Security Agreements, dated April 23, 1991 between Sand Springs Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.13 to the Registrant's Registration Statement on Form S-1 filed on August 17, 1993). 10.9 Amendment to Real Estate Mortgage and Security Agreement, dated April 23, 1991 between Sand Springs Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.14 to the Registrant's Registration Statement on Form S-1 filed on August 17, 1993). 10.10 Amendment to Real Estate Mortgage and Security Agreement, dated April 23, 1991 between Sand Springs Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.15 to the Registrant's Registration Statement on Form S-1 filed on August 17, 1993). 10.11 Assignment of Transportation Agreement, dated December 10, 1987 between Sand Springs Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.16 to the Registrant's Registration Statement on Form S-1 filed on August 17, 1993). 10.12 Assignment of User Contracts, dated December 10, 1987 between Sand Springs Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.17 to the Registrant's Registration Statement on Form S-1 filed on August 17, 1993). 10.13 Security Agreement, dated December 10, 1987 between Sand Springs Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.18 to the Registrant's Registration Statement on Form S-1 filed on August 17, 1993). 10.14 Security Agreement, dated December 10, 1987 between Sand Springs Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.19 to the Registrant's Registration Statement on Form S-1 filed on August 17, 1993). 10.15 Real Estate Mortgage and Security Agreement, dated December 10, 1987 between Sand Springs Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.20 to the Registrant's Registration Statement on Form S-1 filed on August 17, 1993).

46 10.16 Real Estate Mortgage and Security Agreement, dated December 10, 1987 between Sand Springs Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.21 to the Registrant's Registration Statement on Form S-1 filed on August 17, 1993). 10.17 Pledge and Security Agreement, dated December 10, 1987 between Sand Springs Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.22 to the Registrant's Registration Statement on Form S-1 filed on August 17, 1993). 10.18 Guaranty Agreement, dated December 10, 1987 between HMK Industries of Oklahoma, Inc. and Sand Springs Railway Company (Incorporated by reference to Exhibit 4.23 to the Registrant's Registration Statement on Form S-1 filed on August 17, 1993). 10.19 Second Amendment to Restated Credit Agreement, dated September 24, 1993 between Sand Springs Railway Company and Bank of Oklahoma (Incorporated by reference to Exhibit 4.25 to the Registrant's Registration Statement on Form S-1 filed on August 17, 1993). 10.20 Subordination Agreement dated November 10, 1995, between Sheffield Steel Corporation and the CIT Group/Equipment Financing, Inc. (Incorporated by reference to Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the fiscal year ended April 30, 1996). 10.21 First Amendment to Master Loan and Security Agreement between Sheffield Steel Corporation and the CIT Group/Equipment Financing, Inc. dated April 25th, 1995. (Incorporated by reference to Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the fiscal year ended April 30, 1996). 10.22 Second Amendment to Master Loan and Security Agreement between Sheffield Steel Corporation and the CIT Group/Equipment Financing, Inc. dated July 2, 1996. (Incorporated by reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the fiscal year ended April 30, 1996). 10.23 Sheffield Steel Corporation 1993 Employee, Director and Consultant Stock Option Plan, as Amended. (Incorporated by reference to Exhibit 10.23 of the Registrant's Annual Report on Form 10K for the fiscal year ended April 30, 1999). 10.24 Second Amendment to Real Estate Mortgage and Security Agreement, dated July 31, 1996 between Sand Springs Railway Company and Bank of Oklahoma, N.A. (Incorporated by reference to Exhibit 10.29 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1996). 10.25 Third Amendment to Real Estate Mortgage and Security Agreement, dated July 31, 1996 between Sand Springs Railway Company and Bank of Oklahoma, N.A. (Incorporated by reference to Exhibit 10.30 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1996). 10.26 Fourth Amendment to Restated Credit Agreement, date July 31, 1996 between Sand Springs Railway Company and Bank of Oklahoma, N.A. (Incorporated by reference to Exhibit 10.31 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1996). 10.27 Real Time Pricing Program Agreement dated June 1, 1996 between Sheffield Steel Corporation and Public Service Company of Oklahoma. (Incorporated by reference to Exhibit 10.34 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1996). 10.28 Agreement between the United Steelworkers of America and the Sand Springs Division of Sheffield Steel Corporation dated March 2, 1997. (Incorporated by reference to Exhibit 10.35 to the Registrant's Annual Report on Form 10-K for the fiscal year ended April 30, 1997).

47 10.29 Fifth Amendment to Restated Credit Agreement, dated July 31, 1997 between Sand Springs Railway Company and Bank of Oklahoma, N.A. (Incorporated by reference to Exhibit 10.36 to the Registrant's Annual Report on Form 10-Q for the quarter ended July 31, 1997). 10.30 Management Services Agreement, dated December 5, 1997 between HMK Enterprises, Inc. and Sheffield Steel Corporation. (Incorporated by reference to Exhibit 10.32 to the Registrant's Registration Statement on Form S-1 filed on January 9, 1998). 10.31 Insurance Services Agreement, dated December 1, 1997 between Risk Management Solutions, Inc. and Sheffield Steel Corporation. (Incorporated by reference to Exhibit 10.33 to the Registrant's Registration Statement on Form S-1 filed on January 9, 1998). 10.33 Stock Purchase Agreement between Sheffield Steel Corporation, Waddell's Rebar Fabricators, Inc. and the Stockholders of Waddell's Rebar Fabricators, Inc. dated October 27, 1997. (Incorporated by reference to Exhibit 10.38 to the Registrant's Quarterly Report on Form 10Q for the Quarter ended October 31, 1997.) 10.34 Master Loan and Security Agreement between Sheffield Steel Corporation and Sanwa Business Credit Corporation dated June 30, 1998. (Incorporated by reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10K for the fiscal year ended April 30, 1998.) 10.35 Sixth Amendment to Restated Credit Agreement, date July 31, 1998 between Sand Springs Railway Company and Bank of Oklahoma, N.A. (Incorporated by reference to Exhibit 10.35 to the Registrant's Quarterly Report on Form 10Q for the Quarter ended July 31, 1998.) 10.36 Stock Purchase Agreement between Sheffield Steel Corporation, Wellington Industries, Inc. and the Stockholders of Wellington Industries, Inc. Dated October 6, 1998 (Incorporated by reference to Exhibit 10.36 to the Registrant's Quarterly Report on Form 10Q for the Quarter ended October 31, 1998). 10.37 Project Lease Agreement between TA Steel I, LLC, as Lessor and Sheffield Steel Corporation as Lessee dated November 23, 1999 (Incorporated by reference to Exhibit 10.37 to the Registrant's Quarterly Report on Form 10Q for the Quarter ended October 31, 1999). 10.38 Second Restated Credit Agreement, dated January 5, 2000 between Sand Springs Railway Company and Bank of Oklahoma, N.A. (Incorporated by reference to Exhibit 10.38 to the Registrant's Quarterly Report on Form 10Q for the Quarter ended January 31, 2000). 10.39 First Amendment to Project Lease Agreement between TA Steel I, LLC, as Lessor and Sheffield Steel Corporation as Lessee dated December 4, 2000 (Incorporated by reference to Exhibit 10.39 to the Registrant's Quarterly Report on Form 10Q for the Quarter ended October 31, 2000). 10.40 Eleventh Amendment and Waiver to Receivable and Inventory Financing Agreement, dated February 28, 2001 between Sheffield Steel Corporation and Bank of America, N.A. (Incorporated by reference to Exhibit 10.40 to the Registrant's Quarterly Report on Form 10Q for the Quarter ended January 31, 2001). **10.41 Second Amendment to Project Lease Agreement, dated May 30, 2001 between Sheffield Steel Corporation and Transamerica Equipment Financial Services Corporation, TA Steel I, LLC. **10.42 Forbearance Agreement, dated July 27, 2001 between Sheffield Steel Corporation and Bank of America, N.A. ** 12 Statement re Computation of Ratio of Earnings to Fixed Charges. 52 ** 13 Statement re Computation of EBITDA. 53

48 ~~21 Subsidiaries of the Registrant (Incorporated by reference to Exhibit 21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended April 30, 1999).~~

ITEM 14(b). REPORTS ON FORM 8-K ----------- ---------------------- No reports on Form 8-K were filed during the fourth quarter ended April 30, 2001. ITEM 14(c). EXHIBITS ---------- -------- The response to this portion of item 14 is submitted as a separate section of this report. ITEM 14(d). CONSOLIDATED FINANCIAL STATEMENT SCHEDULE ---------- ------------------------------------------- 49 Schedule II SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts Years ended April 30, 2001, 2000 and 1999 (In thousands)

50 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SHEFFIELD STEEL CORPORATION 7/30/01 /s/ James P. Nolan ------------------ ---------------------------------------------- Date James P. Nolan, President and Chief Operating Officer 7/30/01 /s/ Stephen R. Johnson ------------------ ---------------------------------------------- Date Stephen R. Johnson, Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacity and on the dates indicated. 7/30/01 /s/ Steven E. Karol ------------------- ---------------------------------------------- Date Steven E. Karol, Chairman of Board and CEO 7/30/01 /s/ Robert W. Ackerman ------------------- ---------------------------------------------- Date Robert W. Ackerman, Director 7/30/01 /s/ Dale S. Okonow ------------------- ---------------------------------------------- Date Dale S. Okonow, Director 7/30/01 /s/ Jane M. Karol ------------------- ---------------------------------------------- Date Jane M. Karol, Director 7/30/01 /s/ Howard H. Stevenson ------------------- ---------------------------------------------- Date Howard H. Stevenson, Director 7/30/01 /s/ Robert Schaal ------------------ ---------------------------------------------------------- Date Robert Schaal, Director ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Exhibits to Annual Report on Form 10-K for the Fiscal Year Ended April 30, 2001 SHEFFIELD STEEL CORPORATION ================================================================================

SHEFFIELD STEEL CORP 10-K