10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO __________ COMMISSION FILE NUMBER: 33-67532 SHEFFIELD STEEL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 74-2191557 (State or other (I.R.S. Employer jurisdiction of incorporation) identification No.) 220 NORTH JEFFERSON STREET SAND SPRINGS, OK 74063 (Address of principal executive offices) (918) 245-1335 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- At the date of this filing, there were 3,408,675 shares of the Registrant's $.01 par value Common Stock outstanding. The aggregate market value of voting stock held by nonaffiliates is unknown, as the Registrant's stock is not traded on an established public trading market. 1 SHEFFIELD STEEL CORPORATION FORM 10-Q INDEX PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Condensed Balance Sheets - October 31, 2001 and April 30, 2001 3 Consolidated Condensed Statements of Operations - Three and six month periods ended October 31, 2001 and 2000 4 Consolidated Condensed Statements of Cash Flows - Six months ended October 31, 2001 and 2000 5 Notes to Consolidated Condensed Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-16 Item 3. Quantitative and Qualitative Disclosure about Market Risk 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 6. Exhibits and Reports on Form 8-K 18 Signature 19 Statements regarding the Company's ability to complete its bankruptcy reorganization proceedings timely, the outcome of the reorganization plan, the Company's ability to sustain current operations during the pendency of the reorganization including its ability to maintain normal relationships with customers, the ability of the company to establish normal terms and conditions with suppliers and vendors, costs of the reorganization process, the adequacy of financing arrangements during the reorganization period, future market prices, operating results, synergies, future operating efficiencies, future governmental actions and the results of such actions, cost savings and other statements which are not historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. The words "expect", "project", "estimate", "believe", "anticipate", "plan", "intend", "could", "should", "may", "predict" and similar expressions are also intended to identify forward-looking statements. Such statements involve risks, uncertainties and assumptions, including, without limitation, the results of the bankruptcy proceedings, court decisions and actions, the negotiating positions of various constituencies, the results of negotiations, market factors, the effect of weather and economic conditions, the ability of the Company to realize planned cost savings, the available supply of steel and other factors detailed in this and other Company filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. 2 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS)

~~July~~October 31, 2001 April 30, ~~Assets~~ASSETS (Unaudited) 2001 ------ -------------- ---------- Current assets: Cash and cash equivalents $ 6864 181 Accounts receivable, less allowance for doubtful accounts of $~~582~~552 at ~~July~~October 31, 2001 and $541 at April 30, 2001 2019,~~000~~773 22,531 Inventories 3637,~~541~~882 39,910 Other current assets 1,~~461~~374 1,144 -------- ------- Total current assets 5859,~~070~~093 63,766 Property, plant and equipment, net 6261,~~647~~235 64,296 Intangible assets, net 8,~~264~~079 8,790 Receivable from parent, less valuation allowance of $2,205 500 500 Other assets, net ~~562~~473 886 -------- ------- $~~130~~129,~~043~~380 138,238 ======== ======= ~~Liabilities~~LIABILITIES ~~and~~AND ~~Stockholders~~STOCKHOLDERS' ~~Deficit~~DEFICIT ------------------------------------- Current liabilities: Current portion of long-term debt $~~136~~138,~~725~~795 34,886 Accounts payable 1411,~~090~~652 12,538 Accrued interest payable 710,~~589~~783 5,444 Accrued liabilities 6,~~735~~943 6,374 -------- ------- Total current liabilities ~~165~~168,~~139~~173 59,242 Long-term debt, excluding current portion ~~1,104~~824 111,384 Accrued post-retirement benefit costs 1415,~~834~~242 14,426 Other liabilities 23,~~491~~350 2,375 -------- ------- Total liabilities 18187,~~429~~589 187,427 -------- ------- Stockholders' deficit: Common stock 34 34 ~~Additional paid-in capital - -~~ Accumulated deficit (5257,~~424~~102) (48,093) -------- ------- (5257,~~390~~068) (48,059) Loans to stockholders (1,~~135~~141) (1,130) -------- ------- Total stockholders' deficit (5358,~~525~~209) (49,189) -------- ------- $~~130~~129,~~043~~380 138,238 ======== =======

See accompanying notes to consolidated condensed financial statements. 3 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)

Three Months Ended ~~July~~Six Months Ended October 31, October 31, ----------------------- ----------------------- 2001 2000 2001 2000 ------- ------- ------ ------ Sales $3937,~~218~~963 45,~~775~~769 77,184 91,544 Cost of sales 3231,~~172~~672 36,~~223~~952 63,847 73,175 ------- ------- ------ ------ Gross profit 76,~~046~~291 98,~~552~~817 13,337 18,369 Selling, general and administrative expense 3,~~611~~456 34,~~688~~080 7,068 7,768 Depreciation and amortization expense 2,~~146~~002 2,~~104~~108 ~~Restructuring~~4,149 ~~expense~~4,212 ~~657 -~~ Postretirement benefit expense other than pensions 804 646 1,608 1,292 Restructuring Expense 657 - 1,314 - ------- ------- ------ ------ Operating income (loss) (~~172~~628) 31,~~114~~983 (802) 5,097 Other (income)expense: Interest expense, net 4,~~153~~049 4,~~113~~148 8,220 8,261 Other 11(income)expense (16) 4 (5) 4 ------- ------- ------ ------ 4,~~164~~033 4,~~113~~152 8,215 8,265 ------- ------- ------ ------ Loss from operations before Income taxes (4,~~336~~661) (~~999~~2,169) (9,017) (3,168) Income tax expense - - - - ------- ------- ------ ------ Net ~~loss~~Loss $(4,~~336~~661) $(~~999~~2,169) (9,017) (3,168) ======= ======= ====== ======

See accompanying notes to consolidated condensed financial statements. 4 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

~~Three~~Six Months Ended ~~July~~October 31, ------------------------- 2001 2000 ------- ------ Cash flows from operating activities: Net loss $(49,~~336~~017) (~~999~~3,168) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 24,~~227~~311 24,~~185~~344 Accrual of postretirement benefits other than pensions, net of cash paid ~~408~~816 ~~396~~792 Changes in assets and liabilities 1011,~~442~~324 (~~5,537~~460) ------- ------ Net cash provided by ~~(used in)~~ operating activities 87,~~741~~434 (31,~~955)~~508 ------- ------ Cash flows from investing activities: Capital expenditures (~~337~~769) (13,~~646~~968) ------- ------ Net cash (used in) investing activities (~~337~~769) (13,~~646~~968) ------- ------ Cash flows from financing activities: Net increase (decrease) in long-term debt (86,~~441~~651) 85,~~536~~818 Other (76131) (23,~~934~~289) ------- ------ Net cash provided by (used in) financing activities (86,~~517~~782) 52,~~602~~529 ------- ------ Net increase (decrease) in cash (~~113~~117) 169 Cash and cash equivalents at beginning of period 181 79 ------- ------ Cash and cash equivalents at end of period $ 6864 80148 ======= ====== Supplemental disclosure of cash flow information ------------------------------------------------ Cash paid during the period for interest $ ~~1,927~~313 78,~~126~~087 ======= ====== Cash paid during the period for income taxes $ - - ======= ====== Noncash item: Increase in loans to Shareholders 511 1,~~123~~139 ======= ======

See accompanying notes to consolidated condensed financial statements. 5 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OCTOBER 31, 2001 AND 2000 (IN THOUSANDS) (UNAUDITED) 1) NATURE OF OPERATIONS, ORGANIZATIONS AND OTHER RELATED INFORMATION Sheffield Steel is a mini-mill producer of SBQ and MBQ hot-rolled bar products, concrete reinforcing bar and fabricated products including fabricated rebar, steel fence posts and railroad track spikes. The Company's headquarters and largest manufacturing facility is located in Sand Springs, Oklahoma where it has an annual billet making capacity of 600,000 tons. It also has a rolling mill in Joliet, Illinois and two fabrication shops in the Kansas City area. On December 7, 2001 (the Petition Date), Sheffield Steel Corporation and its subsidiaries, Waddell's Rebar Fabricators, Inc. and Wellington Industries, Inc. (collectively, the Debtors), filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. The petition requesting an order for relief was filed in United States Bankruptcy Court, Northern District of Okalahoma (the Bankruptcy Court), where the case is now pending before The Honorable Dana L. Rasure (Case No. 01-05508-R; 01-05509-R; and 01-05510). Sheffield Steel intends to continue normal operations and does not currently foresee any significant interruption in the shipment of product to our customers in the near term. The Company is managing its business subsequent to the Petition Date as debtor-in-possession subject to Bankruptcy Court approval and oversight. The Company attributed the need to reorganize to market conditions in the U.S. steel industry resulting from significant pressure from imported steel products, low product pricing and high energy costs. These factors, coupled with the reduced demand, have adversely affected the Company over the past 18 months. Under Chapter 11 proceedings, actions by creditors to collect claims in existence at the filing date ("prepetition") are stayed ("deferred"), absent specific Bankruptcy Court authorization to pay such claims, while the Company continues to manage the business as a debtor-in-possession. The rights of and ultimate payments by the Company to prepetition creditors and to equity investors may be substantially altered. This could result in claims being liquidated in the Chapter 11 proceedings at less (and possibly substantially less) than 100% of their face value and the equity of the Company's equity investors being diluted or cancelled. The Company's prepetition creditors and its equity investors will each have votes in the plan of reorganization. The Company has not yet proposed a plan of reorganization. Due to material uncertainties, it is not possible to determine the additional amount of claims that may arise or ultimately be filed, or to predict the length of time the Company will operate under the protection of Chapter 11, the outcome of the Chapter 11 proceedings in general, whether the Company will continue to operate under its current organizational structure, or the effect of the proceedings on the business of the Company or its subsidiaries or on the interests of the various creditors and security holders. On December 12, 2001, the Bankruptcy Court approved an Interim Order authorizing the use of cash collateral (the Collateral Agreement) to continue to operate on a going concern basis. Under the Collateral Agreement, which was consented to by Bank of America, all cash generated from operations subsequent to the Petition Date can be used by the Company to pay wages and generally conduct its business affairs so as to avoid immediate and irreparable harm to the Company and the going concern value of its assets. 6 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED Although the Company has entered into the Collateral Agreement, the Company may need to obtain additional financing to meet its cash flow requirements. Oversight by the Bankruptcy Court limits the Company's ability to incur additional indebtedness or sell assets (most of which are pledged), and may otherwise limit the operational and financial flexibility of the Company. The accompanying consolidated financial statements have been prepared on a going concern basis of accounting and do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company's recurring losses and negative cash flows from operations, current liabilities in excess of current assets and the subsequent Chapter 11 cases raise substantial doubt about the Company's ability to continue as a going concern. As discussed above, management intends to submit a plan for reorganization to the Bankruptcy Court. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, (i) the Company's ability to comply with debtor-in-possession financing agreements, (ii) submission and confirmation of a plan of reorganization under the Bankruptcy Code, (iii) the Company's ability to achieve profitable operations after such confirmation, and (iv) the Company's ability to generate sufficient cash from operations to meet its obligations. Management believes that a plan of reorganization, as it is being developed and subject to approval of the Bankruptcy Court, and the Collateral Agreement, will provide sufficient liquidity to allow the Company to continue as a going concern; however, there can be no assurance that the sources of liquidity will be available or sufficient to meet the Company's needs. The consolidated financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Prior to the Company's filing for bankruptcy protection, the Company was in default of certain restrictive covenants under its revolving credit agreements and entered into a forbearance agreement with Bank of America. In addition, the Company did not make its scheduled semi-annual interest payments due June 1, and December 1, 2001, under the First Mortgage Notes due 2005 as required. All such borrowings are classified as current in the accompanying consolidated balance sheet. See Note 4. 2) BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES The consolidated financial statements of Sheffield Steel Corporation (the Company, which may be referred to as we, us or our) include the accounts of its divisions, Sheffield Steel-Sand Springs (Sand Springs), Sheffield Steel-Kansas City (Kansas City), and Sheffield Steel-Joliet (Joliet) and its wholly owned subsidiaries, Waddell's Rebar Fabricators, Inc. (Waddell), Wellington Industries, Inc. (Wellington) and Sand Springs Railway Company (the Railway). HMK Enterprises, Inc. (HMK) owns approximately 95% of our currently issued and outstanding common stock. All material intercompany transactions and balances have been eliminated in consolidation. Our primary business is the production of concrete reinforcing bar, fence posts, and a range of hot rolled bar products including rounds, flats and squares. Our products are sold throughout the continental United States. We operate in a single operating segment providing steel products and services to the steel manufacturing and fabricating industry. 7 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED These consolidated condensed interim financial statements have been prepared by us without audit, according to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments that we believe were necessary for a fair statement of the results for the interim periods. All adjustments made were normal recurring accruals. We suggest that these interim financial statements are read in conjunction with the consolidated financial statements and notes contained in our Form 10-K for the year ended April 30, 2001. Operating results for the quarter and six months ended October 31, 2001 are not necessarily indicative of the results that we expect for the year ending April 30, 2002. 3) INVENTORIES The components of inventories are as follows:

~~Three~~October ~~Months~~31, ~~Ended~~2001 ~~July~~April 3130, ~~---------------------------------------------------------------------~~(Unaudited) 2001 ~~2000~~ -------------~~--------------------~~ -------------~~-------------------~~ ~~Operating~~Raw ~~Results:~~materials ~~Net~~and ~~Sales~~storeroom %materials ~~of Sales Net Sales % of Sales ---------------- -------------- -------------- --------------- Sales~~ $~~39,218~~ ~~100.0% 45~~8,~~775~~480 ~~100.0% Cost of sales 32,172 82.0% 36,223 79.1% ------- ------ Gross Profit 7,046 18.0%~~ 9,~~552~~652 ~~20.9%~~Work ~~Selling~~in ~~and~~process ~~administrative 3,611 9.2% 3,688~~ 8~~.1% Depreciation and amortization 2~~,~~146~~820 ~~5.5% 2~~11,~~104~~838 ~~4.6%~~Finished ~~Restructuring~~goods ~~Expense 657 1.7% - 0.0% Postretirement benefit expense 804 2.1% 646 1.4% ------- ------ Operating income (172) (.4%) 3~~20,~~114~~582 ~~6.8% Interest expense~~18,420 ~~net 4,153 10.6% 4,113 9.0% Other 11 0.0%~~ - ~~0.0%~~ ------- ------ ~~Loss from operations before income taxes (4~~$37,~~336)~~882 ~~(11.1%) (999) (2.2%) Income tax expense - - - - ------- ------ Net loss $(4~~39,~~336)~~910 ~~(11.1%) ( 999) (2.2%)~~ ======= ======

4) LONG-TERM DEBT Long-term debt is comprised of the following:

~~Three~~October ~~Months~~31, ~~Ended~~2001 ~~July~~April 3130, (Unaudited) 2001 ------------- -------------- ~~2001~~First ~~2000~~mortgage ~~--------~~notes ~~--------~~$110,000 ~~Tons~~110,000 ~~shipped:~~Revolving 32credit agreement 25,~~004~~225 4530,~~078~~811 ~~Hot~~Railway ~~Rolled~~term ~~Bars~~loan 621,~~505~~500 481,~~387~~500 ~~Rebar~~Railway 16revolving credit agreement 707 718 Equipment notes 1,~~130~~943 182,~~941~~503 ~~Fabricated~~Notes ~~Products~~payable 244 738 -------- -------- ~~110~~139,~~639~~619 ~~112~~146,~~406~~270 ~~Total~~Less ~~finished~~current ~~products~~portion 7138,~~187~~795 1234,~~093~~886 ~~Billets~~ -------- -------- ~~117,826~~$ ~~124~~824 111,~~499~~384 ~~Total tons shipped~~ ======== =======~~= Average price per ton shipped $ 333 $ 368 Average production cost per ton $ 273 $ 290~~

As a result of the Chapter 11 filing, Events of Default, as defined in the related debt agreements, have occurred with respect to all of the Company's secured and unsecured debt. Subsequent to the Petition Date, the secured debt will be classified as a current liability and the unsecured debt will be classified as liabilities subject to compromise. 8 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------------------------------- The following discussion should be read in conjunction with our Consolidated Condensed Financial Statements and notes included in this Form 10-Q. LIQUIDITY On December 7, 2001 (the Petition Date), Sheffield Steel Corporation and its subsidiaries, Waddell's Rebar Fabricators, Inc. and Wellington Industries, Inc. (collectively, the Debtors), filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code. The petition requesting an order for relief was filed in United States Bankruptcy Court, Northern District of Okalahoma (the Bankruptcy Court), where the case is now pending before The Honorable Dana L. Rasure (Case No. 01-05508-R; 01-05509-R; and 01-05510). See footnote 1 to the accompanying financial statements. Although the Company has obtained an interim cash collateral agreement, liquidity will be impacted by the uncertainty of the bankruptcy proceedings, including restructuring and settlement of prepetition obligations, the Company's failure to attain projected operating results and the ability to obtain other financing. As a result of these uncertainties, there can be no assurance existing or future sources of liquidity will be adequate. The Company's failure to achieve its cost reduction initiatives or improve operating performance could also have a material adverse effect on the financial results or liquidity of the Company in the future. In addition, external factors affect the Company's market and related production costs. Unfavorable price movements for outside purchases of scrap, and energy, among other things, could also have a material adverse effect on the financial results or liquidity of the Company. Management has restricted capital spending to maintenance levels and is working on several initiatives to improve operating cash flow. This statement must be qualified by general steel economic conditions and our ability to realize operating efficiencies. We are into our weakest shipping season, which generally begins in November and extends through February. Our new reheat furnace allows certain opportunities for production efficiencies, lower costs, and selected growth, but these must be attained and we are dependent on general steel conditions to sell additional production. Management believes that a plan of reorganization, as it is being developed and subject to approval of the Bankruptcy Court, and the Collateral Agreement, will provide sufficient liquidity to allow the Company to continue as a going concern; however, there can be no assurance that the sources of liquidity will be available or sufficient to meet the Company's needs. The consolidated financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 9 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES RESULTS OF OPERATIONS The results of operations are dependent on the level of construction, infrastructure spending, oil and gas, agribusiness, and general economic activity in the U.S. Our sales are seasonal with the third fiscal quarter generally being weaker than the rest of the year. The major cost components of our products are steel scrap and other raw materials, energy, labor, warehousing and handling, and freight costs. The following table provides information regarding the historical results of operations (in thousands) for the quarters ended October 31, 2001 and 2000:

~~Exhibit~~THREE ~~No.~~MONTHS ~~Description~~ENDED ~~Page~~OCTOBER ~~No.~~31, ------------------------------------------------------------------ 2001 2000 --------------------------------- ------------------------------ 10OPERATING RESULTS: Net Sales % of Sales Net Sales % of Sales ---------------- -------------- -------------- ------------- Sales $37,963 100.430% ~~First~~45,769 ~~Amended~~100.0% ~~and~~Cost ~~Restated~~of ~~Forbearance~~sales ~~Agreement~~31,672 ~~dated~~83.4% ~~September~~36,952 1280.7% ------- ------- Gross Profit 6,291 ~~2001~~16.6% 8,817 19.3% ~~Between~~Selling ~~Sheffield~~and ~~Steel~~administrative ~~Corporation~~3,456 9.1% 4,080 8.9% Depreciation and ~~Bank~~amortization of2,002 ~~America~~5.3% 2,108 N4.A6% Postretirement benefit expense 804 2.1% 10646 1.444% ~~Twelfth~~Restructuring ~~Amendment~~Expense to657 ~~Receivable~~1.7% ~~and~~- ~~Inventory~~0.0% ~~Financing~~------- ~~Agreement~~------- Operating income (628) (1.7%) 1,983 ~~dated~~4.3% 26Interest ~~September~~expense, net 4,049 10.7% 4,148 9.1% Other (income) expense (16) 0.0% 4 0.0% ------- ------- Loss from operations before income taxes (4,661) (12.3%) (2,169) ~~2001~~(4.7%) ~~between~~Income ~~Sheffield~~tax ~~Steel~~expense ~~Corporation~~- ~~and~~- ~~Bank~~- of- ~~America~~------- ------- Net loss $(4,661) N(12.A3%) $(2,169) (4.7%) ======= =======

10 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES The following table provides information regarding the historical shipment levels and average selling prices per ton:

THREE MONTHS ENDED OCTOBER 31, 2001 AS COMPARED TO THREE MONTHS ENDED OCTOBER 31, 2000 SALES. Sales for the second quarter of Fiscal Year 2002 were $38.0 million. Shipments decreased in comparison to the same quarter in the prior year, while pricing generally decreased as summarized below: o Steel market conditions continued to be weak in the second quarter of Fiscal Year 2002 due to widespread weaker demand for steel products and the continuing influx of steel imports. In comparison to the second quarter of Fiscal Year 2001, shipments of our hot rolled bar products out of Sand Springs decreased 13% and Joliet shipments decreased 18%. Pricing of hot rolled bar products decreased approximately 8%. o In comparison to the second quarter of Fiscal Year 2001, rebar shipments decreased less than 1% and pricing decreased 6%. Rebar demand continues to be strong, however pricing is down in comparison to prior year due to the continued impact of imports. o In comparison to the second quarter of Fiscal Year 2001, fabricated product shipments decreased 5% the lower shipments were due primarily to weaker markets for our fabricated rebar and fence posts, but volumes were also slightly lower for railroad spikes. Pricing decreased 5%, primarily due to weak fabricated rebar pricing. o In comparison to the second quarter of Fiscal Year 2001, billet shipments decreased by 65%. Shipments of billets decreased as we limited melt shop operations to avoid periods of high electricity costs during August and September. Pricing decreased 1% because billet pricing is related to scrap raw material costs, which are currently very low. 11 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES COST OF SALES AND EXPENSES. Average production cost per ton decreased to $286 in the second quarter of Fiscal Year 2002 from $289 in the second quarter of Fiscal Year 2001 primarily due to decrease in steel scrap raw material costs and despite a more expensive product mix (9,177 ton reduction in billet sales, our lowest cost product). Hot rolled bar and rebar shipments were 7,199 tons lower in the second quarter of Fiscal Year 2002 compared to the same quarter in Fiscal Year 2001. Energy costs were lower during the second quarter of Fiscal Year 2002 as compared to second quarter of Fiscal Year 2001. We have seen gas costs moderate recently and we have seen electric costs moderate towards the end of the second quarter of Fiscal Year 2002 as well. Selling, general and administrative expenses decreased approximately $624 thousand over the second quarter of Fiscal Year 2002 because of tight spending controls throughout the company. Interest expense decreased in comparison to the first quarter of Fiscal Year 2001 due to lower balances on our revolving credit agreement. In the past year, any additions to debt were due to working capital requirements, capital expenditures, and purchases of common stock. SIX MONTHS ENDED OCTOBER 31, 2001 AS COMPARED TO SIX MONTHS ENDED OCTOBER 31, 2000 The following table provides information regarding the historical results of operations (in thousands) for the six months ended October 31, 2001 and 2000:

12 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES The following table provides information regarding the historical shipment levels and average selling prices per ton:

SALES. Sales for the six months ended October 31, 2002 were $77.2 million. Shipments decreased in comparison to the period in the prior year, while pricing was slightly decreased as summarized below: o In comparison to the six months ending October 31, 2001, shipments of our hot rolled bar products out of Sand Springs decreased 19%. Joliet shipments decreased 26% due to market conditions in the domestic steel business and notable weakness in the agricultural equipment industry. Pricing of hot rolled bar products decreased approximately 8% due primarily to product mix and certain competitive pressures also influenced pricing. o Rebar shipments increased 14% due to improved market conditions compared to the six months ended October 31, 2001. Rebar demand continues to be strong, however pricing is down in comparison to the prior year due to the continued impact of imports. Pricing was off 6% from the same period in the prior year. o Fabricated product shipments decreased 10% due primarily to lower volume of fence posts and to a lesser extent, fabricated rebar and railroad spikes. Pricing decreased 4% when compared with same period in the prior year. o Billet shipments were 54% lower compared to the first six months of last year. Due to limited availability of production time as we limited melt shop operations to avoid periods of high electricity costs during August and July. COST OF SALES AND EXPENSES. Average product costs decreased to $279 in the first six months of fiscal 2002 from $290 in the first six months of fiscal 2001 due to decreases in energy costs and lower scrap costs associated with finished goods product mix. Hot rolled bar and rebar shipments were 6,152 tons lower in the first six months of fiscal 2002 compared to the same six months in fiscal 2001. 13 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES Selling, general and administrative expenses decreased approximately $700 thousand over the first six months of fiscal 2001 due to tight spending controls throughout the company. Interest expense decreased slightly in comparison to the first six months of the prior year due to lower balances on our revolving credit agreement and the level of outstanding debt during the quarter. In the past year, any additions to debt were due to working capital requirements, capital expenditures, and purchases of common stock. CASH FLOW ANALYSIS Cash flow provided in operating activities was approximately $7.4 million for the six-month period ended October 31, 2001, as compared with cash flow used in operating activities of approximately $1.5 million for the six month period ended October 31, 2000. Cash flow from operations improved over the prior year primarily as a result of a reduction in inventory and accounts receivable and non-payment of the interest expense on the First Mortgage Notes due 2005. Cash used in investing activities in the six months ended October 31, 2001 was approximately $769 thousand, consisting of capital expenditures for projects to sustain existing operations. For the six month period ended October 31, 2001, cash used by financing activities was $6.8 million consisting of decreased borrowings under the revolving credit agreement and other payments toward equipments notes and other notes payable. Earnings before interest, taxes, depreciation, amortization, and the non-cash portion of the post-retirement expense (EBITDA) was approximately $1.9 million and would have been $2.4 million without the restructuring costs for the quarter ended October 31, 2001, compared to approximately $4.5 million for the same quarter in the prior year. A weak steel economy, recession, imports, and depressed steel prices contributed to the significant decrease in EBITDA. We believe that EBITDA is a valuable measure of our operating cash flow and we consider it an indicator of our ability to meet interest payments and fund capital expenditures. EBITDA does not represent and should not be considered as an alternative to net income or cash flow from operations as determined by generally accepted accounting principles and EBITDA does not necessarily indicate whether cash flow will be sufficient for cash requirements. 14 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES RECENT ACCOUNTING PRONOUNCEMENTS On May 1, 2001, The Company adopted the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement 133"). Statement 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. Statement 133 requires an entity to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the entity's rights or obligations under the applicable derivative contract. The recognition of changes in fair value of a derivative that affect the income statement will depend on the intended use of the derivative. If the derivative does not qualify as a hedging instrument, the gain or loss on the derivative will be recognized currently in earnings. If the derivative qualifies for special hedge accounting, the gain or loss on the derivative will either (1) be recognized in income along with an offsetting adjustment to the basis of the item being hedged or (2) be deferred in other comprehensive income and reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Statement 133 was amended by Statement of Financial Accounting Standards No. 138 ("Statement 138") in June 2000 that amended the accounting and reporting standards of statement 133 for certain derivative instruments and certain hedging activities. Statement 138 also amended Statement 133 for decisions made by the Financial Accounting Standards Board (FASB) relating to the Derivatives Implementation Group process. Adoption of Statement 133, as of May 1, 2001, did not have a material effect on results of operations or financial position of the Company, because the Company does not have any free standing derivatives or embedded derivatives that would be required to be separated from the host contract and accounted for under SFAS 133. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations" (Statement 141), Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (Statement 142), and Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (Statement 143). Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instated tested for impairment at least annually in accordance with the provisions of Statement 142. The Company is required to adopt the provision of Statement 141 immediately and Statement 142 effective May 1, 2002. Goodwill acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142. In connection with the Company's adoption of Statement 142, the Company will be required to perform an assessment of whether there is an indication that goodwill, including equity-method goodwill, is impaired as of the date of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of earnings. 15 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES As of October 31, 2001, the Company has unamortized goodwill in the amount of $5.6 million, which will be subject to the transition provisions of Statement 142. Amortization expense related to goodwill was $150 thousand and $38 thousand for the year ended April 30, 2001 and the six months ended October 31, 2001 respectively. Because of the extensive effort needed to comply with adopting Statements 141 and 142, no estimate is available of the impact of adopting these Statements. The Company will discontinue amortization of goodwill effective May 1, 2002 with the adoption of Statement 142. In August 2001, the FASB issued Statement of Financial Accounting Standard No. 143, "Accounting for Asset Retirement Obligations". Statement No. 143 requires a Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. Statement No. 143 also requires the Company to record the contra to the initial obligation as an increase to the carrying amount of the related long-lived asset (i.e., the associated asset retirement costs) and to depreciate that cost over the remaining useful life of the asset. The liability is changed at the end of each period to reflect the passage of time (i.e., accretion expense) and changes in the estimated future cash flows underlying the initial fair value measurement. The Company plans to adopt Statement No. 143 beginning May 1, 2002. It is too early to determine whether or not adoption of this statement will have a material impact on the Company's consolidated financial statements. In October, 2001 the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (Statement 144). Statement 144 is effective for fiscal years beginning after December 15, 2001, and for interim periods within those fiscal years. The Company is currently assessing the impact of Statement 144 on its financial condition and results of operations. 16 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our earnings are affected by changes in interest rates (primarily the prime rate). At October 31, 2001, we had approximately $29.6 million of long-term debt with variable rates. Therefore, we may have changes in interest expense due to fluctuations of interest rates in the markets. Interest risk can be estimated by measuring the impact of a 10% increase in interest rates. We would incur an additional $268 thousand of interest expense per year on our variable rate borrowing if our debt levels remained approximately the same as at October 31, 2001. Because we experience changes in our debt levels due to operating requirements or changes in the general economic environment that we are unable to predict, this estimate assumes no changes in our financial structure. The fair value of our First Mortgage Notes due 2005 at October 31, 2001, based on the currently offered market price was $22 million versus a carrying value of approximately $110 million. 17 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are not a party to any significant pending legal proceedings other than litigation incidental to our business that we believe will not materially affect our financial position or results of operations. Such claims against us are ordinarily covered by insurance. We can give no assurance, however, that insurance will be available in the future at reasonable rates. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Prior to the Company's filing for protection under Chapter 11 of the U. S. Bankruptcy Code on December 7, 2001, the Company was in default with certain financial covenants of its senior debt agreements and did not make its scheduled semi-annual interest payment of $6.3m due June 1, and $6.3m due December 1, 2001 due under the First Mortgage Notes due 2005 as required. The total arrearage of interest payments is $12.6m. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits See exhibit index. B. Reports on Form 8-K The Company filed a current report under Item 3 on Form 8-K dated December 12, 2001, related to the Company's filing of voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in the Northern District of Oklahoma. 18 SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. SHEFFIELD STEEL CORPORATION Date: December 21, 2001 /s/ James P. Nolan --------------------- ---------------------------------- James P. Nolan, President, and Chief Operating Officer Date: December 21, 2001 /s/ Stephen R. Johnson --------------------- ---------------------------------- Stephen R. Johnson, Vice President and Chief Financial Officer 19 EXHIBIT INDEX

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